Company Overview: Medical Developments International Limited (ASX: MVP) is engaged in identifying new markets and applications for the flagship brand Penthrox®, which is used for Emergency relief of mild to severe pain in adult patients with trauma and related pain. The company remains on track to focus more on the Australian Ambulance services, thereby maintaining its strong foothold in the market with its Penthrox® brand.

MVP Details

International Expansion and Robust Adoption of Penthrox® Aids MVP: Medical Developments International Limited (ASX: MVP) is a healthcare company engaged in the manufacture and distribution of pharmaceutical drugs, and medical and veterinary equipment. In December 2020, the company successfully completed a capital raising program of $24.9 million through a placement, which was aided by new and existing institutional investors in Australia and offshore. Post the capital raise, the company also completed a Share Purchase Plan raising an additional $11.8 million in January 2021. The joint raisings bolster MVP’s balance sheet with the proceeds to be mainly used to hasten the commercialisation of Penthrox® in the EU. Further, the proceed will also be utilised to solidify the depth and breadth of the MVP team and to gain competitive advantage against its peers in carrying out few clinical studies.

The company reclaimed its marketing and distribution rights from Mundipharma in ~27 European countries, out of which majority of Marketing Authorisations have already cleared regulatory protocols. The company remains on track to build its preliminary sales and distribution network for its key product, Penthrox®. This, in turn, will aid the company to safeguard a smooth transition of sales activities in the European markets and to sell in its own right starting from March this year.

It is worth mentioning that, more than 170 hospitals have now authorised to use Penthrox®. Currently, over 700 customers are using the product in the UK and Ireland. The company has also entered into a distribution deal with Medis in five Central European markets (i.e., Czech Republic, Slovakia, Slovenia, Hungary, and Croatia). Further, the company’s partner, Galen, continues to make good progress in the UK and the Republic of Ireland. MVP’s strategic alliance with Galen has also been extended into new markets with a deal to cover the Nordic region. Notably, in 1HFY21, the company witnessed a rise of 30% in its in-market sales, with the UK being the key growth driver.

Looking forward, the company expects to build the Penthrox® brand and product alertness across the continent and grow the same as the ideal solution for patient suffering from trauma distress. The company is also focusing on the development of Key Account Manager in France and Belgium. MVP targets to launch Penthrox® brand in both Germany and Spain in later 2021. Both markets represent key growth opportunities.

Hybrid Model (Source: Company Reports)

1HFY21 Key Performance Highlights: During the period, the company reported gross revenues of $12.8, up 14% year over year. The year over year increase was primarily due to higher revenue from the hand back by Mundipharma of the Penthrox® Europe distribution rights. Net loss after tax came in at $1.1 million in 1HFY21. Despite COVID-19 led uncertainties, the company expects growth for its Respiratory business subsequent to an initial order in the US from Walmart. The company expects to unveil a new spacer into the Australian market in 2HFY21, under the Breath-A-Tech® brand. Notably, the product has already been recognized by My Chemist Warehouse Group, Australia’s largest pharmacy chain. In 1HFY21, the company’s operating expenses went up 56%, on the back of higher ‘expanding geographic sales for Penthrox® and Medical Devices along with high investments in distribution infrastructure. Further, higher marketing expenses as a result of growth in Penthrox® and Breath-A-Tech® sales in Australia also elevated total operating expenditure. The company also increased investment in R&D, to achieve its growth plan.

1HFY21 Key Highlights (Source: Company Reports)

Key update: On 5 March 2021, the company appointed Ms. Mary Sontrop as a Non-Executive Director of the Company, with immediate effect. 

Top 10 Shareholders: The top 10 shareholders together form around 28.29% of the total shareholdings, while the top 4 constitutes the maximum holding. Williams (David John) is the entity holding maximum shares in the company at 13.35%. M & G Investment Management Ltd. is the second-largest shareholder, with a holding of 5.09%, as also highlighted in the chart below: 

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

Key Metrics Balance Sheet, and Liquidity: The company exited 1HFY21 with $44.99 million of total current assets, up from $25.96 million reported at the end of 30 June 2020. Cash balance at the end of the period amounted to $33.46 million, while total equity amounting to $67.01 million as on 31 December 2020. Total debt stood at ~$3.25 million, at the end of the period. Net cash outflow from operating activities came in at $3.78 million, while net cash outflow from investing activities stood at $2.49 million. In 1HFY21, gross margin stood at 77.8%, higher than the 1HFY20 figure of 67.6%. In the same time span, the company had a current ratio of 4.03x, higher than 1HFY20 figure of 3.74x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.05x, lower than the industry median of 0.13x.

Liquidity and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks VHT is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, stiff competition from peers, and COVID-19 related uncertainties remains a potential concern. Further, Further, higher marketing expenses as a result of growth in Penthrox® and Breath-A-Tech® sales in Australia also elevated total operating expenditure. MVP continuously monitors the forecast and actual cash flows to manage the liquidity risk. 

Future Expectations: Despite the continuing challenges faced by second wave of coronavirus outbreak in key markets, the company expects a solid 2HFY21 sales performance owing to recovery of the marketing authorisations in Europe, direct hiring of key account managers in France and Belgium, the signing of new contracts, and introducing MVP field personnel in Australia. The company is taking necessary steps to finalise further distribution partnerships for Penthrox and Respiratory Devices for new countries and develop new devices to increase the use and accessibility of its core product portfolio. Germany and Spain offer key growth opportunities where MVP is focusing to launch its products in FY21. MVP is also focusing on adding resources to control Penthrox distribution directly. The company expects additional Key Account Manager to be allocated by the end of FY21. The operational plans such as ambulance services, allocation of KAM team, sales force, etc. for Germany, Spain and Italy are underway. To conclude, a healthy balance sheet and capital raising program will help the company to attain its long-term objectives of expanding the business via delivering continued growth in shareholders’ returns.

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: Currently, the stock is trading below the average of its 52-week’s high and low level of $8.76 and $4.98, respectively, proffering an opportunity for share accumulation. The stock of the company has corrected by ~6.4821.35% in the past three months. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering a robust performance in the sales of Penthrox® in the EU, partnership synergies and an increase in cash on the balance sheet as of 31 December 2020. For this purpose, we have taken peers Starpharma Holdings Ltd (ASX: SPL), Suda Pharmaceuticals Ltd (ASX: SUD), to name a few. Considering decent top 1HFY21 top performance, MVP optimistic outlook on focusing on adding resources to control Penthrox distribution directly, higher demand for its key products and services, decent liquidity position, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $5.45, down by ~1.802% as on 28 April 2021.

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

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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