Valeo Pharma Inc. (VPH:TSX; VPHIF:OTCQB) gained coverage by Echelon Capital Markets, which initiated it with a Speculative Buy rating, reported analyst Stefan Quenneville in a March 8 research note.
"With stable core assets and a scaled sales infrastructure, recent and future product additions are set to meaningfully grow the company's top line and drive significant operating leverage," Quenneville wrote.
What the Company Does
Valeo Pharma acquires, licenses, and sells pharmaceutical products in Canada, with a focus on respiratory, allergy, ophthalmology, specialty, and hospital products, Quenneville noted. The company does not develop or manufacture drugs.
Currently, Valeo has 13 commercial assets. In the past two years, it added to its portfolio six drugs "that we expect to comprise about 90% of the company's revenues by the end of the fiscal year 2024 (FY24)," noted Quenneville.
These newer growth drivers are: Redesca, Canada's first low molecular weight heparin biosimilar; Enerzair and Atectura Breezhalers, asthma drugs; Allerject, a next-generation, single-use epinephrine autoinjector; and Xiidra and Simbrinza, ophthalmology drugs.
Valuation is Justified
Echelon assigned Valeo a CA$1 per share target price, which implies an 82% upside from where the Canadian specialty pharma is currently trading, at about CA$0.55 per share.
Quenneville explained that the target reflects "a premium to the average of Valeo's Canadian specialty pharma peers but a discount to larger, better-capitalized U.S. peers." He indicated the target is warranted, given the pharma's "high expected sales growth, clear line of sight to adjusted EBITDA-positive operations and access to attractive new products stemming from its strong sales force in key therapeutic areas."
Important Points to Know
Quenneville presented the elements of Echelon's investment thesis on Valeo.
First, the Quebec-based company's current and projected sales growth are "industry-leading," as described by Quenneville. Of note, Valeo increased revenues from CA$7.5 million ($7.5M) in FY20 to CA$28M in FY22. They are expected to be CA$63M in FY23, reflecting 125% year-over-year growth.
"Together, the top six growth products have potential peak revenues of CA$200M-plus and should drive Valeo's topline above this level in FY28," wrote Quenneville.
Second, this sextet of drugs comprises another revenue stream in addition to Valeo's existing, stable, cash-flowing base of established products.
Third, Valeo has an 85-person sales team and has largely built the operating infrastructure needed to allow for and support further growth, Quenneville pointed out, ultimately resulting in "meaningful operational leverage going forward."
Fourth, as Valeo continues to scale up, so do the potential opportunities available to it for licensing "more impactful products," Quenneville wrote. Specifically, the pharma might be able to in-license more ophthalmology drugs from Novartis, which owns 21 approved and six pipeline products, given the latter plans to sell this line of business.
"Potential accretive product additions using [its] CA$22.5M cash balance and/or US$10M from unused credit facility could provide upside to our [Valeo] estimates," added the analyst.
Given its current trajectory, Quenneville noted, the Canadian pharma is on track to achieve adjusted EBITDA-positive operations by early FY24.
Share Ownership
Company insiders, including members of management and the board of directors, own the majority of Valeo stock, at 60.3%. Of that total, CEO and Vice Chairman Steve Saviuk has a 31.9% stake. Chairman of the Board Richard Mackay's interest is 14.6%.
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Disclosures For Echelon Capital Markets, Valeo Pharma Inc., March 8, 2023
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ANALYST CERTIFICATION
Company: Valeo Pharma Inc. | TSX:VPH
I, Stefan Quenneville, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
