Pharmaxis Ltd

Company Overview: Pharmaxis Ltd (ASX: PXS) is pharmaceutical research company with approved products in various markets globally, and a drug discovery program dedicated to finding new treatments for patients in areas of high unmet clinical need in inflammatory and fibrotic disease. The company operates its business through two reportable segments – (1) Mannitol business, which is covering the clinical development, manufacture and sale of Bronchitol and Aridol globally, and (2) New Drug Development, which includes the drug discovery and early-stage clinical development of the group’s new drug candidates. The company possesses a highly productive drug discovery engine built on its expertise in the chemistry of amine oxidase inhibitors, with drug candidates in clinical trials. The company has also developed two respiratory products (Aridol and Bronchitol) which are approved and generating revenue for the company.

PXS Details

Strengthened Cash Position to Support Business Growth: Pharmaxis Ltd (ASX: PXS) is engaged in the research, development and commercialisation of healthcare products for fibrotic and inflammatory diseases. The market capitalisation of the company stood at ~$34.15 million as on 5^th February 2021. The company commenced its business with a major focus on cystic fibrosis as well as some very early pre-clinical work on other conditions. Since then, the company has created a global reputation in fibrotic and inflammatory conditions, and now the business is well-positioned to build out Pharmaxis as a global leader in this field. During the year ended 30^th June 2020 (FY20), the company’s objectives included the development of the Systemic LOX inhibitor program towards the commencement of clinical proof of concept studies and to achieve progress on its remaining amine oxidase pipeline assets.

The company commenced FY21 in a decent position to build value in its clinical assets, bank cash from its manufacturing and partnering activities; and continue the work to place the business as a global leader in fibrotic and inflammatory conditions. For 2H FY21, the company is focused on its first collaborations to progress PXS-5505 into clinical trials in other myeloproliferative diseases and/or cancer indications. In addition, the company is expecting cash receipts from royalties on US Bronchitol sales.

During the December 2020 quarter (Q2 FY21), the company achieved a milestone by receiving payment of US$7 million from its US licensee Chiesi Farmaceutici S.p.A. This follows the recent approval for Bronchitol® (mannitol) for the treatment of cystic fibrosis from US Food Drug Administration. In addition, the company expects to receive further US$3 million in Q1 2021 from Chiesi on the shipment of commercial launch stock by the company. During the December 2020 quarter, the company recorded revenue amounting to ~$2.4 million as compared to ~$1.5 million in Q2 FY20. This growth was primarily supported decent sales of Bronchitol and Aridol.  In addition, PXS reported a turnaround in NPAT to ~$5.026 million from loss of ~$4.563 million in Q2 FY20. The company recorded cash flow from operating activities of ~9.4 million, which was supported by receipts from customers of ~1.6 million and ~5.0 million from Government grants and tax incentives. At the end of the quarter, the company had a cash balance of $18.249 million.

Q2FY21 & 1HFY21 Income Statement (Source: Company Reports)

Decent Growth in Bronchitol Sales: During Q2 FY21, the company received a decent set of sales numbers from Bronchitol and Aridol. With respect to the USA, PXS received approval from US Food and Drug Administration on 30th October 2020 as add-on maintenance therapy to improve pulmonary function in cystic fibrosis (CF) patients 18 years of age and older. The company has scheduled its US launch for Bronchitol in 1H 2021. In addition, the company shipped a large order of $1.365 million to Russia with further order anticipated before the end of FY21. The company’s sales in Western Europe were only 2% lower against Q2 FY19 in spite of disruptions caused by the COVID-19 pandemic, in-market unit sales of Bronchitol by Chiesi in the UK, Germany, Italy and the Nordics. Bronchitol sales in Australia were 21% higher against the previous quarter. PXS recorded total Aridol sales of $5.22 million against $6.07 million in Q2 FY20.

Bronchitol and Aridol Sales (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 30.35% of the total shareholding while the top 4 constitute the maximum holding. BVF Partners L.P. [Activist] and Australian Ethical Investment Ltd are holding a maximum stake in the company at 19.46% and 4.95%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: During FY20, the company recorded a gross margin of 88.4%, which is higher than the industry median of 71.8%. In addition, PXS also witnessed improvement in its key margins (EBITDA, Operating and Net Margin) within the past few years. On the liquidity front, current ratio for the year stood at 3.59x as compared to the industry median of 1.62x, which indicates that the company is well-placed to address its short-term obligation against the broader industry. On the leverage side, debt to equity stood at 5.7x against the industry median of 0.08x.

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Ended FY20 in Good Financial Shape: During the year ended 30^th June 2020, PXS reported revenue and other income of ~$13 million, which was in line with FY19 results. During the year, the company had an operating loss after tax of $13.9 million against $20.1 million in FY19 and net operating cash outflows of $13.2 million. PXS closed FY20 in good financial shape with a cash balance of around $34 million on a proforma basis. This included the cash to be received from Chiesi for the FDA approval and US product launch of Bronchitol.

Key Risk: Like any other pharma business, the company is also sensitive to the highly regulated environment. Failure in receiving new approval could act as a major barrier to revenue growth. In addition, the company’s growth could be disrupted by economic and competitive uncertainties and contingencies pertaining to the business. The business is also exposed to key financial risk, which includes market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Also, the failure in clinical trials could act as a major headwind for business.

What to Expect: Looking forward, the company expects Bronchitol sales in the US market to play a major contribution to its product’s global sales. The company also anticipates profit growth through its launch making the Pharmaxis mannitol business cash flow positive from FY21. In addition, the company is expecting to receive feedback from the global advisory committee on the development of fast-tracking Duchenne muscular dystrophy clinical trials in 2H FY21. PXS possesses a strong pipeline of assets, which is aided by funding and collaborations with industry, government, and academia. The company is likely to release its 1H FY21 results on 11th February 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: In the span of the past few years, the company has bolstered its cash position and increased sales creates headroom for cash runway to 2H 2022 with potential cost savings and further opportunities to extend. In the last one and three months, the stock of PXS has corrected by 7.44% and 12.12%, respectively. As a result, the stock is trading towards its 52-week low level of $0.053, offering a decent opportunity for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price which is offering an upside of low double-digit (in percentage terms). We have applied a slight premium to peer average EV/Sales (NTM trading multiple) to arrive at our implied target multiple on the back of increased sales, strengthened cash position and encouraging outlook. On the technical analysis front, the stock has a support level of ~$0.064 and a resistance level of ~$0.285. Thus, considering the decent sales growth in Q2 FY21, a turnaround in the bottom line, future opportunities, expected US launch, current trading levels, and key risks associated with the business, we give a ‘Speculative Buy’ recommendation on the stock at the current market price of $0.087 per share, up by 1.162% on 5^th February 2021.

PXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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