Company Overview:  Pharmaxis Ltd (ASX: PXS) is a clinical-stage drug development company, which is targeting fibrosis and cancer indications with first in class or best in class small molecule drugs in markets of high value. The company operates into two segments- (1) the mannitol respiratory business, which covers the clinical development, manufacture, and sale of Bronchitol and Aridol globally, (2) New Drug Development, which involves the drug discovery and early-stage clinical development of its 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

Recent Capital Raising to Support Trials and Future Growth: The company is in a decent position to finance its focused clinical program, underpinned by the recent oversubscribed placement of $7.2 million to institutional and sophisticated investors finished on 24 November 2021. In addition, the company is likely to raise further ~$2.0 million via Share Purchase Plan (SPP), which was closed on 15 December 2021. The company has decided to use the funds raised from placement and SPP for financing its trials as well as for working capital purposes. Looking forward, the company would be focused on attaining its sales targets for approved products and would also manage its cost base.

Q1FY22 Operational and Financial Highlights:

• Despite the challenges posed by the COVID-19 pandemic, the company has continued an uninterrupted supply to local and global customers.
• The company reported receipts from the customers of $3.49 million and net cash outflow from operating activities of $1.94 million against $680k in the June 2021 quarter.
• At the end of Q1FY22, the company had cash & cash equivalents of $16.13 million as compared to $18.71 million as on 30 June 2021.

Financial and Operational Highlights for FY21:

• For the year ended 30 June 2021, the company recorded total revenue amounting to $23.67 million against $13.02 million in FY20. This included sales of $6.7 million, which comprised Bronchitol sales of $5.2 million and Aridol sales of $1.4 million.
• During FY21, the company witnessed an improvement in operating losses to $3.0 million against a loss of $13.9 million in FY20.
• PXS recorded net operating cash inflows of $3.1 million against an outflow of $13.2 million in FY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Business Developments:

• PXS has received approval from US-FDA for Investigational New Drug application (IND) for a trial of PXS-5505 in hepatocellular carcinoma (HCC) patients in the month of November 2021.
• As announced on 13 October 2021, the commenced dosing in phase 2 clinical trial, which studied its drug PXS-5505 in patients with the bone marrow cancer myelofibrosis.
• The company has sold distribution rights for Bronchitol and Aridol sales in Australia to Bioimpact Pty Ltd, a wholly owned subsidiary of BTC health Ltd effective from 1 July 2021 and received distributor appointment fees of A$2 million in July 2021. However, the company continues to manufacture and supply Aridol and Bronchitol to BTC Health from its factory in Sydney.
• For the three months ended 30 September 2021, the company recorded Bronchitol and Aridol sales of $2.95 million and $0.32 million, respectively.  

Top 10 Shareholders: The top 10 shareholders together form around 34.61% of the total shareholding, while the top 4 constitute the maximum holding. BVF Partners L.P. [Activist] and Karst Peak Capital Limited are holding a maximum stake in the company at 14.79% and 9.75%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: PXS recorded a gross margin of 94.9% in FY21 as compared to 67% of industry median. It reported a current ratio of 3.21x against 2.40x of the industry median. On the leverage side, the company witnessed improvement in debt-to-equity ratio to 2.22x in FY21 against 5.70x in FY20.

Margin and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Failure in Clinical Trials: The company’s operational and financial performance could be impacted by a failure in an ongoing trial.
• Regulatory Risk: PXS is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties. etc.
• COVID-19 Disruptions: The company’s business could also be affected by the uncertainties in relation to evolving COVID-19 pandemic, and as a result, its operational and financial health could be hampered.

Outlook: The company believes that the Mannitol business may provide growth in EBITDA to $10 million in the next five-six years. The company is aligning with its specific corporate strategy to deliver non-dilutive cash and cost savings from commercial stage mannitol business. PXS is also optimistic about the opportunities to extend cash runways, such as potential cost savings from rationalization across mannitol business and pipeline supported by grants and R&D tax credit. For CY22, the company remains on track to carry on with the safety and efficacy data regarding its PXS-5505 phase 2a myelofibrosis study. Also, it aims to focus on studying LOX topical drug phase 1c & establishing scars with security and effective data.

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

Source: 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: The stock of PXS has been corrected by 27.58% in the past three months. The stock is trading below its 52-week low-high average of $0.071 - $0.150, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median EV/Sales multiple, considering the COVID-19 led uncertainties and losses in business, etc. For the purpose of valuation, peers such as Vita Life Sciences Ltd (ASX: VLS), Mayne Pharma Group Ltd (ASX: MYX), AFT Pharmaceuticals Ltd (ASX: AFP), and others have been considered. Considering the expected upside in valuation, decent liquidity position, improving leverage, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.105 as on 17 December 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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