AFT Pharmaceuticals — Margins improving

AFT Pharmaceuticals (ASX: AFT)

Last close As at 27/03/2024

NZD3.05

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NZD320m

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Research: Healthcare

AFT Pharmaceuticals — Margins improving

AFT Pharmaceuticals recently reported its H119 results. Operating revenue grew 4.1% compared to H118 and was negatively affected by the divestment of relatively low margin hospital products in New Zealand and Australia. Gross profit, however, grew 24.1% as gross margins improved to 46.7% from 39.1% a year ago thanks to reduced exposure to lower-margin products as well as high growth in the higher margin over-the-counter (OTC) segment. Sales outside of New Zealand and Australia, which are primarily driven by Maxigesic, grew 72.7% and now represent 10.2% of sales compared to 6.1% in H118.

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Written by

Healthcare

AFT Pharmaceuticals

Margins improving

Financial update

Pharma & biotech

30 November 2018

Price

NZ$2.20

Market cap

NZ$214m

NZ$0.68/US$

Net debt (NZ$m) at 30 September 2018

34.5

Shares in issue

97.3m

Free float

21.6%

Code

AFT

Primary exchange

NZX

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

(2.7)

(0.9)

(10.6)

Rel (local)

(4.4)

6.9

(14.3)

52-week high/low

NZ$2.7

NZ$2.2

Business description

AFT Pharmaceuticals is a specialty pharmaceutical company that operates primarily in Australasia but has product distribution agreements across the globe. The company’s product portfolio includes prescription and over-the-counter drugs to treat a range of conditions and a proprietary nebuliser.

Next events

Additional Maxigesic launches

2018/2019

IV Maxigesic filing

2019

Analysts

Maxim Jacobs

+1 646 653 7027

Briana Warschun

+1 646 653 7031

AFT Pharmaceuticals is a research client of Edison Investment Research Limited

AFT Pharmaceuticals recently reported its H119 results. Operating revenue grew 4.1% compared to H118 and was negatively affected by the divestment of relatively low margin hospital products in New Zealand and Australia. Gross profit, however, grew 24.1% as gross margins improved to 46.7% from 39.1% a year ago thanks to reduced exposure to lower-margin products as well as high growth in the higher margin over-the-counter (OTC) segment. Sales outside of New Zealand and Australia, which are primarily driven by Maxigesic, grew 72.7% and now represent 10.2% of sales compared to 6.1% in H118.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(NZ$)

DPS
(NZ$)

P/E
(x)

Yield
(%)

03/17

69.2

(18.5)

(0.19)

0.0

N/A

N/A

03/18

80.1

(12.9)

(0.13)

0.0

N/A

N/A

03/19e

91.2

(2.2)

(0.02)

0.0

N/A

N/A

03/20e

109.5

10.0

0.10

0.0

22.0

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong underlying growth in Australia continues

Revenue in Australia was up 6.9% in H119 compared to H118 and was negatively affected by the hospital product divestments. The hospital segment as a whole was down 10% whereas OTC products grew 17% and the prescription channel grew 10%. The company expects newly launched hospital products to replace the lost revenue around the end of FY19 or early FY20 but at higher margins.

Maxigesic continues to grow globally

Maxigesic is sold and launched in 15 countries (with key recent launches in Malaysia and Ireland) and distribution agreements are in place in a total of 128 (Russia, South Korea, Taiwan and Hong Kong being recent additions). Launches in several countries such as France, Mexico, Spain, Portugal and the Nordics are expected by the end of FY19.

IV Maxigesic expected to be filed in 2019

The company has a meeting with the FDA in which the regulatory agency asked for more clinical data prior to approval, although the company expects to be able to complete this quickly with a filing expected in the 2019 calendar year. We continue to view IV Maxigesic as a big opportunity as Mallinckrodt sells an IV formulation of paracetamol/acetaminophen in the US at a $350m annual run rate. Licensing discussions with US partners are ongoing.

Valuation: NZ$478m or NZ$4.91 per share

We are maintaining our valuation of NZ$478m or NZ$4.91 per share as the impact of lower revenues due to divested products and a higher level of net debt was cancelled out by improved profitability and rolling forward our NPV. We continue to expect the company to be EBITDA breakeven for FY19.

H119 results

AFT recently reported operating revenue of NZ$38.0m for H119, ending 30 September 2018. This represents a 4.1% increase over H118 and would have been larger had it not been for the divestment of relatively low-margin hospital products that were being sold in Australia and New Zealand. Importantly, gross profit grew 24.1% as gross margins improved to 46.7% from 39.1% a year ago thanks to reduced exposure to lower margin products as well as high growth in the higher margin over-the-counter (OTC) segment. What is especially impressive is that despite revenue growing by NZ$1.5m compared to H118, cost of sales fell by NZ$2.0m over the same period. This greatly affected the profitability of the company with the operating loss (before items such as interest and other gains/losses) falling from NZ$6.7m in H118 to NZ$0.1m in H119.

Exhibit 1: H119 results by segment

NZ$000s

Revenues (H119)

Revenues (H118)

Loss before tax (H119)

Loss before tax (H118)

Australia

21,601

20,206

(519)

(171)

New Zealand

12,566

14,113

(2,862)

(2,294)

Asia

1,118

618

(152)

(371)

Rest of World

2,760

1,627

(731)

(3,737)

Total

38,045

36,561

(4,264)

(6,573)

Source: AFT Pharmaceuticals

Revenue in Australia was up 6.9% in H119 compared to H118 and was negatively affected by the hospital product divestments, which led to the hospital segment being down 10%. The company expects newly launched hospital products to replace the lost revenue around the end of FY19 or early FY20 but at higher margins. OTC products grew 17% thanks in part to Maxigesic doubling, while the prescription channel grew 10%.

New Zealand revenue was especially weak, declining 11.0% due both to the hospital product divestitures as well as no longer having the sole supplier contract for Metoprolol. The OTC segment was one highlight, growing 9%. Another was that gross profit in New Zealand improved by 23%. Sales outside of New Zealand and Australia, which are primarily driven by Maxigesic, grew 72.7% and now represent 10.2% of sales compared to 6.1% in H118.

Maxigesic launch update

Maxigesic is now sold and launched in 15 countries – Australia, New Zealand, Brunei, El Salvador, Israel, Iraq, Ireland, Italy, Malaysia, Malta, Nicaragua, Serbia, Singapore, United Arab Emirates and the UK. There are distribution agreements in place in a total of 128 (Russia, South Korea, Taiwan and Hong Kong are recent additions) with a key focus on signing distribution agreements in the US, Canada, Germany and parts of South America, such as Brazil, with discussions beginning or already underway in those countries.

Pipeline update

IV Maxigesic is getting closer to filing. Following a pre-NDA meeting with the FDA, the company believes it needs to do some additional clinical work on the product although it expects to be able to complete this quickly with a filing expected in the 2019 calendar year. The company has also submitted the data from the IV Maxigesic pivotal study to a major journal for publication, which should help increase its profile. We continue to view IV Maxigesic as a big opportunity as Mallinckrodt sells an IV formulation of paracetamol/acetaminophen (just one component of the paracetamol/acetaminophen and ibuprofen combination that is Maxigesic) in the US at a $350m annual run rate with the potential for meaningful upfront payments from any licensing agreement. AFT also recently licensed Maxigesic IV for the South Korean market to Kyongbo Pharm with registration expected in the coming months and sales expected to begin in FY20. AFT expects to launch IV Maxigesic in Australia in the same year.

With regards to NasoSURF, human factor studies for the product have led to some redesign work and clinical studies are now expected to commence in FY20 (previously FY19). On Pascomer, clinical studies are being planned and alternatives to fund its clinical development are being investigated.

Valuation

We are maintaining our valuation of NZ$478m or NZ$4.91 per share as the impact of lower revenues due to divested products and a higher level of net debt was cancelled out by improved profitability and rolling forward our NPV. Importantly, while we have kept our terminal growth assumption unchanged, we have increased our terminal EBIT margin estimate from 34% to 36% due to the significant increase in the gross margin during the quarter.

Exhibit 2: DCF sensitivity table (NZ$/share)

Terminal EBIT margin

Terminal revenue growth

30%

34%

36%

40%

45%

-2%

3.26

3.55

3.70

3.99

4.36

-1%

3.44

3.76

3.92

4.24

4.64

0%

3.66

4.01

4.18

4.53

4.97

1%

3.92

4.31

4.51

4.90

5.39

2%

4.25

4.69

4.91

5.35

5.90

3%

4.68

5.18

5.43

5.93

6.56

4%

5.24

5.83

6.12

6.71

7.44

5%

6.04

6.74

7.09

7.79

8.67

Source: Edison Investment Research

Financials

We have decreased our revenue estimates from NZ$99.6m to NZ$91.2m for FY19 and from NZ$120.7m to NZ$109.5m for FY20 mainly due to hospital product divestments in Australia and New Zealand, although part of the decrease is due to more conservative estimates for rest of world sales as registrations are taking longer than expected. We have also decreased our SG&A expense estimates for FY19 by NZ$2.0 and for FY20 by NZ$2.7m due to a lower than expected run rate. Additionally, we have reduced our R&D expense estimates by NZ$1.2m for FY19 and by NZ$1.5m for FY20 as R&D expenses have fallen faster than expected. Our FY19 EBITDA estimate is broadly unchanged (essentially breakeven) but our estimate for profit before tax has been reduced mainly due to finance costs and the other gains/(losses) line item.

The company reported a cash position of NZ$7.4m at the end of H119 after drawing down an additional US$5m from the Capital Royalty Group (CRG) facility in August and owe US$27.8m in the US denominated debt (which grew by NZ$3.1m due to US dollar strength during H119), that is due 31 March 2020. The company is working with CRG to expand and extend the current facility.

Exhibit 2: Edison forecast changes

NZ$m

2019e

2020e

Old

New

Old

New

Revenue

99.6

91.2

120.7

109.5

PBT, normalised

0.04

(2.22)

9.86

10.04

EPS, normalised (NZ$)

0.00

(0.02)

0.10

0.10

Source: Edison Investment Research

Exhibit 3: Financial summary

NZ$000

2017

2018

2019e

2020e

March

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

PROFIT & LOSS

Revenue

 

 

 

69,205

80,071

91,225

109,547

Cost of Sales

(43,207)

(45,880)

(49,301)

(53,946)

Gross Profit

25,998

34,191

41,924

55,601

EBITDA

 

 

 

(15,125)

(10,479)

1,647

11,933

Operating Profit (before amort. and except.)

 

(14,982)

(10,353)

1,749

12,035

Intangible Amortisation

183

214

180

180

Exceptionals

0

0

0

0

Other

2,245

741

1,912

2,008

Operating Profit

(12,554)

(9,398)

3,841

14,222

Net Interest

(3,531)

(2,527)

(3,968)

(2,000)

Profit Before Tax (norm)

 

 

 

(18,513)

(12,880)

(2,219)

10,035

Profit Before Tax (reported)

 

 

 

(16,085)

(11,925)

(127)

12,222

Tax

(58)

(58)

76

0

Profit After Tax (norm)

(18,571)

(12,938)

(2,143)

10,035

Profit After Tax (reported)

(16,143)

(11,983)

(51)

12,222

Average Number of Shares Outstanding (m)

97.1

97.2

97.3

97.3

EPS - normalised (NZ$)

 

 

 

(0.19)

(0.13)

(0.02)

0.10

EPS - normalised (c)

 

 

 

(19.12)

(13.30)

(2.20)

10.31

EPS - (reported) (NZ$)

 

 

 

(0.17)

(0.12)

(0.00)

0.13

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

37.6

42.7

46.0

50.8

EBITDA Margin (%)

N/A

N/A

1.8

10.9

Operating Margin (before GW and except.) (%)

N/A

N/A

1.9

11.0

BALANCE SHEET

Fixed Assets

 

 

 

4,171

8,291

11,333

14,053

Intangible Assets

2,548

5,118

7,619

10,120

Tangible Assets

386

330

421

640

Investments

1,237

2,843

3,293

3,293

Current Assets

 

 

 

54,060

48,312

50,847

59,824

Stocks

18,718

24,412

26,294

29,259

Debtors

19,362

16,954

16,434

18,287

Cash

15,980

6,946

8,120

12,279

Other

0

0

0

0

Current Liabilities

 

 

 

(15,019)

(18,489)

(14,410)

(15,892)

Creditors

(15,019)

(18,489)

(14,410)

(15,892)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

 

(23,426)

(30,654)

(41,938)

(41,938)

Long term borrowings

(23,426)

(30,654)

(41,938)

(41,938)

Other long term liabilities

0

0

0

0

Net Assets

 

 

 

19,786

7,460

5,833

16,047

CASH FLOW

Operating Cash Flow

 

 

 

(15,473)

(8,319)

761

9,161

Net Interest

(3,531)

(2,527)

(3,968)

(2,000)

Tax

(58)

(58)

76

0

Capex

(1,598)

(2,853)

(2,874)

(3,002)

Acquisitions/disposals

0

(3,002)

(702)

0

Financing

9,042

877

0

0

Dividends

0

(412)

0

0

Net Cash Flow

(11,618)

(16,294)

(6,707)

4,159

Opening net debt/(cash)

 

 

 

(4,894)

7,446

23,708

33,818

HP finance leases initiated

0

0

0

0

Other

(722)

32

(3,403)

0

Closing net debt/(cash)

 

 

 

7,446

23,708

33,818

29,659

Source: Edison Investment Research, company accounts

General disclaimer and copyright

This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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StatPro Group — New divisional structure sets path for growth

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