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Vernalis — Update 25 May 2016

Vernalis — Update 25 May 2016

Vernalis

Analyst avatar placeholder

Written by

Vernalis

Cash cushion for cough cold growth

Equity fund-raising

Pharma & biotech

25 May 2016

Price

45p

Market cap

£236m

£/$1.43

Net cash* (£m) at 31 December 2015 *Post pro forma equity issue in May 2016

92.5

Shares in issue

525.1m

Free float

64%

Code

VER

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.6)

(18.2)

(33.6)

Rel (local)

(10.7)

(22.9)

(25.9)

52-week high/low

86.5p

43.0p

Business description

Vernalis is a UK speciality pharma company with an FDA-approved, prescription-only cough cold treatment, Tuzistra XR; an FDA-approved amoxicillin, Moxatag; and a late-stage US cough cold pipeline of four products. Vernalis also has an early- to mid-stage R&D pipeline of CNS and cancer projects. Its primary focus is on commercialising Tuzistra XR in the US.

Next events

FY16 results (estimated)

September 2016

CCP-07 NDA filing

2016

CCP-08 NDA filing

2016

Moxatag launch

2016

Analyst

Lala Gregorek

+44 (0)20 3681 2527

Vernalis is a research client of Edison Investment Research Limited

The issue of 80m new shares at 50p/share has raised £40m (gross), which enables Vernalis to focus on executing its operational plan and removes uncertainty over whether it is sufficiently funded through to sustainable profitability in FY19 (on our new forecasts). Near-term investment into the commercial cough cold platform will underpin future sales growth. Ongoing initiatives to improve physician awareness, stocking and formulary coverage should increase Tuzistra’s XR market share in the longer term.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

14.1

(4.7)

(0.8)

0.0

N/A

N/A

06/15**

19.9

(6.9)

(1.0)

0.0

N/A

N/A

06/16e

11.3

(25.8)

(5.4)

0.0

N/A

N/A

06/17e

17.3

(24.5)

(4.5)

0.0

N/A

N/A

Note: PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **18-month reporting period, 12 months thereafter.

Use of proceeds

With £40m of new funds and end-FY15 cash of £54m, Vernalis has sufficient working capital for a “conservative risk-adjusted roll-out plan” for Tuzistra XR, forthcoming Moxatag re-launch and the planned roll-out of the other four products in the cough cold franchise (two of which remain on track for NDA filing by end-2016). The proceeds will also facilitate increased promotional activity, if appropriate.

Focus on execution

The commercial focus for Vernalis’s 80-strong salesforce is working on improving physician awareness of Tuzistra XR to drive prescription growth, as well as ensuring patients can fill their Tuzistra XR scrip. Accessibility to Tuzistra XR both physically (through pharmacy stocking) and financially (by gaining formulary coverage and minimising out-of-pocket expenses) are critical factors for facilitating the latter. Incremental improvements should help Vernalis increase market share and facilitate continued prescribing of Tuzistra XR into the next cough cold season.

A more certain foundation going into year two

The first two years of Tuzistra XR launch are critical in laying the foundations for the cough cold franchise. Vernalis is focused on addressing all the major factors affecting its potential market share and rate of Tuzistra XR uptake. However, limited revenue visibility remains at present, reflecting the early stage of the Tuzistra XR launch and the mild 2015/16 cough cold season. We have decreased our near-term forecasts to better reflect a more gradual revenue build. The second year on the market should provide better insight into Tuzistra XR’s ultimate sales potential.

Valuation: DCF valuation of £393m (75p per share)

Increased cash (£92.5m: £54m at-end December 2015 plus assumed net proceeds of £38.5m), offsets the impact of moderating our cough-cold and Moxatag revenue trajectory over the next two years, increasing our DCF valuation to £393m (from £384m previously). However, due to the dilution impact of the 80m new shares, this translates to a lower per-share value of 75p vs 86p/share previously.

Valuation

We have updated our DCF valuation to incorporate the impact of the fund-raise and a more gradual build of cough cold revenues over the next two years. We also expect a slower Moxatag sales trajectory given the new uncertainty over routine supply. Vernalis has sufficient launch stocks, with launch remaining on track for summer 2016. An update from management is anticipated at prelims in September.

Based on pro forma net cash of £92.5m (£54m of cash at-end December 2015 plus assumed net proceeds of £38.5m) and 525.13m shares outstanding, our DCF valuation increases to £393m (from £384m previously). Due to the impact of dilution, the per-share value falls to 75p per share (from 86p per share). Our underlying assumptions are presented in Exhibit 1.

Exhibit 1: Vernalis rNPV valuation summary

Source

rNPV (£m)

rNPV/share (p)

Assumptions

US Rx cough cold portfolio

557.8

106.2

Net of $12-14m of per product milestones due to Tris. 30% COGS (including Tris royalty payaway). Aggregate sales >$500m by 2024; UK tax rate of 21% from 2021.

Tuzistra XR (£415m rNPV): Peak sales of $240m; launched September 2015.

CCP-07 (£53.7m rNPV): peak sales of $65m; launch 2018; 75% success probability (PoC achieved).

CCP-08 (£49.8m rNPV): peak sales of $65m; launch 2018; 75% success probability (PoC achieved).

CCP-05 (£19.6m rNPV): peak sales of $65m; launch 2021; 65% success probability.

CCP-06 (£19.6m rNPV): peak sales of $65m; launch 2021; 65% success probability.

Moxatag

22.1

4.2

Peak sales of $20m; launch 2017. Undisclosed royalties/milestones payable to Pragma

NCE pipeline

8.7

1.7

Tosedostat (£1.4m rNPV): peak AML sales $150m; launch 2020; 15% success probability; 5% royalty.

RPL554 (£4.9m rNPV): peak COPD sales $200m; launch 2019; 25% success probability, 6% royalty.

Servier 1 (£0.5m rNPV): peak cancer sales $150m; launch 2023; 10% success probability, 5% royalty.

V81444 (£1.9m rNPV): peak immunoncology sales $200m; launch 2022; 15% success; 7% royalty.

Frova royalty stream

5.8

1.1

Europe: royalties of 25%, patent expiry Dec 2015, generics have entered some markets but not others, pricing and volume pressure seen overall. US: minimum sales level not reached.

Total pipeline rNPV

594.4

113.2

R&D

(42.8)

(8.2)

Includes offset for research collaborative funding.

SG&A

(241.4)

(46.0)

Includes cost of US sales infrastructure (included in R&D before Tuzistra launch).

Capex

(9.6)

(1.8)

Tangible assets (intangible capex, ie milestones paid to Tris, captured in cough cold portfolio rNPV).

Cash

92.5

17.6

Reported net cash at end-December 2015 plus net proceeds of the £40m equity issuance.

Valuation

393.1

74.9

Source: Edison Investment Research. Note: Assumes WACC of 12.5% for all products with the exception of Tuzistra XR and Frova at 10% WACC, 525.1m shares outstanding and £/$ rate of 1.43.

Financials

In addition to updating our model to reflect the fund-raise, we decrease our FY15/16 Tuzistra XR revenue forecasts from £1.26m to £700k on the basis of prescription data trends to date and implied stocking levels at end-December 2015. Given the limited revenue visibility that remains at present – reflecting the early stage of the Tuzistra XR launch – we now also assume a more gradual sales ramp during FY17 and FY18. Moxatag forecasts have also been trimmed in FY17 and FY18 following confirmation that sole source supplier Suir Pharma has been placed in provisional liquidation. Vernalis has Moxatag launch stocks, but we would expect promotional efforts and therefore sales to be more muted until routine supply is re-established.

Based on our updated Tuzistra XR and Moxatag sales estimates for FY17 and FY18, the launch of CCP-07 and CCP-08 in FY18 (coupled with the expectation of higher spending on cough cold promotion in that year) and the timing of success-based milestone payments to Tris ($46m or c £32m in aggregate), we now expect that Vernalis will reach sustainable profitability one year later, in FY19.

Our April 2016 report, Establishing a firm foundation, previously highlighted a potential short-term funding requirement in 2018 should Tuzistra XR sales fall short of our expectations; the £40m raise removes this uncertainty by providing an ample cash cushion on current forecasts (summarised in Exhibit 2 overleaf). We have updated our financial model to reflect the proceeds of the equity raise and the increased number of shares. Assuming net proceeds of £38.5m, pro forma net cash is £92.5m, with end-FY16e cash boosted to c £73.3m.

Exhibit 2: Financial summary

£'000s

2013

2015

2016e

2017e

2018e

Year end 30 June (from 2015) previously December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

14,084

19,882

11,299

17,336

41,850

of which: Cough/cold portfolio & Moxatag

0

0

699

7,692

32,168

Frova royalties

6,684

6,648

2,600

1,843

1,382

Collaborative income (R&D funding and milestones)

7,150

13,022

7,600

7,500

8,000

Other

250

212

400

300

300

Cost of Sales

(2,244)

(1,373)

(1,252)

(3,401)

(11,380)

Gross Profit

11,840

18,509

10,048

13,934

30,471

Sales, General & Admin

(3,299)

(8,635)

(26,059)

(27,948)

(33,111)

Research & Development

(14,416)

(22,563)

(12,020)

(12,659)

(10,339)

Other

180

611

225

0

0

Operating Profit reported

 

 

(5,695)

(11,835)

(27,806)

(26,673)

(12,979)

Intangible Amortisation

(1,349)

(571)

(782)

(909)

(1,591)

Exceptionals

1,608

243

2,630

0

0

Share-based payment

(876)

(1,855)

(876)

(876)

(876)

EBITDA

 

 

(4,652)

(8,855)

(28,341)

(24,522)

(10,150)

Operating Profit (norm)

 

 

(5,078)

(9,652)

(28,778)

(24,888)

(10,513)

Net Interest

420

2,733

2,988

366

199

Other financial income

(999)

(157)

0

0

0

Profit Before Tax (norm)

 

 

(4,658)

(6,919)

(25,790)

(24,521)

(10,313)

Profit Before Tax (as reported)

 

 

(6,274)

(9,259)

(24,818)

(26,306)

(12,780)

Tax

2,273

2,858

1,306

630

1,998

Profit from discontinued operations

0

0

0

0

0

Profit After Tax (norm)

(2,385)

(4,061)

(24,484)

(23,891)

(8,315)

Profit After Tax (as reported)

(4,001)

(6,401)

(23,512)

(25,676)

(10,782)

Average Number of Shares Outstanding (m)

442.1

442.3

451.0

525.1

525.1

EPS - normalised fully diluted (p)

 

 

(0.8)

(1.0)

(5.4)

(4.5)

(1.6)

Dividend (p)

 

 

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

84.1%

93.1%

88.9%

80.4%

72.8%

EBITDA Margin (%)

-33.0%

-44.5%

-250.8%

-141.5%

-24.3%

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

-36.1%

-48.5%

-254.7%

-143.6%

-25.1%

BALANCE SHEET

Fixed Assets

 

 

7,730

15,066

23,202

33,372

41,837

Intangible Assets

6,292

12,895

19,635

29,824

38,023

Tangible Assets

1,438

1,637

2,032

2,013

2,278

Other

0

534

1,535

1,535

1,535

Current Assets

 

 

83,298

71,509

77,474

45,305

28,114

Stocks

130

0

1,888

1,864

3,118

Debtors

4,443

7,017

2,554

3,800

9,173

Cash

76,918

61,258

73,280

39,890

16,072

Other (tax and derivatives)

1,807

3,234

(248)

(248)

(248)

Current Liabilities

 

 

(4,501)

(5,215)

(5,024)

(7,824)

(9,004)

Creditors

(3,384)

(3,373)

(2,899)

(5,699)

(6,879)

Other creditors

0

(5)

(61)

0

0

Short term borrowings

0

0

0

0

0

Deferred income

(962)

(1,688)

(1,101)

(1,101)

(1,101)

Provisions and other current liabilities

(155)

(154)

(1,024)

(1,024)

(1,024)

Long Term Liabilities

 

 

(4,283)

(4,254)

(2,593)

(2,593)

(2,593)

Long term borrowings

0

0

0

0

0

Deferred income

(156)

(744)

(2,105)

(2,105)

(2,105)

Provisions and other long-term liabilities

(4,127)

(3,510)

(488)

(488)

(488)

Net Assets

 

 

82,244

77,106

93,059

68,259

58,353

CASH FLOW

Operating Cash Flow

 

 

(3,486)

(12,135)

(28,266)

(22,942)

(15,597)

Net Interest

446

353

232

366

199

Tax

1,929

1,887

4,548

630

1,998

Capex

(646)

(1,005)

(266)

(347)

(628)

Purchase of intangibles

(1,976)

(7,474)

(3,500)

(11,098)

(9,790)

Acquisitions/disposals

0

0

(2,386)

0

0

Financing

0

13

38,814

0

0

Dividends

0

0

0

0

0

Other

0

1,644

0

0

0

Net Cash Flow

(3,733)

(16,717)

9,177

(33,390)

(23,818)

Opening net debt/(cash)

 

 

(81,555)

(76,918)

(61,258)

(73,280)

(39,890)

HP finance leases initiated

0

0

0

0

0

Exchange rate movements

(904)

1,057

1,000

0

0

Other

0

0

1,845

0

0

Closing net debt/(cash)

 

 

(76,918)

(61,258)

(73,280)

(39,890)

(16,072)

Source: Edison Investment Research, Vernalis accounts

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