Company Overview: Pharmaxis Limited (ASX: PXS) is an Australia based pharmaceutical research company, which is engaged in the development of drugs for inflammatory and fibrotic diseases along with a focus on myelofibrosis. 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
Well-Positioned to Finance Next Stage of Drug Discovery Work: Pharmaxis Limited (ASX: PXS) is primarily engaged in the development of drugs for inflammatory and fibrotic diseases. Despite the lockdowns and global restrictions due to COVID-19 pandemic, the company continued its drug discovery research, partnering discussions and manufacturing activities without material disruption and with zero COVID-19 positive cases. Recently, the company achieved a milestone by receiving approval from the FDA for Bronchitol®, a drug developed through three large scale global clinical trials. It will be sold by its US licensee Chiesi Farmaceutici SpA with product, which is manufactured, packaged and exported by Pharmaxis from its Frenchs Forest facility. With this development, the company expects Bronchitol® to generate cash of ~US$10 million. In addition, the company is well-positioned to finance the phase 2 clinical trial in myelofibrosis on the back of cash generation from Bronchitol®, manufacturing margin and royalty revenues from the sale of Bronchitol® in the US (and globally).
As at 30 June 2020, the company had cash and cash equivalents of $14.8 million with total debt of $8.15 Mn. During the year, the company witnessed a decent growth in revenue and is on track to improve its cash flows with the support of product sales and royalties. The company will commence the myelofibrosis study in the upcoming quarter with significant focus on the outcome of the Bronchitol NDA filed by its US licensee Chiesi. The company is currently progressing two lysyl oxidase (pan-LOX) programs. The Phase 1c/2 clinical trials of both the programs are expected to start in 2021. Hence, we presume that the company has a decent long-term outlook on the back of decent liquidity position to fund the ongoing development of its innovative medicine with high patient need, strong product pipeline with multiple near-term opportunities, ongoing trials, and recently received FDA approval of Bronchitol for adult Cystic Fibrosis patients.
Cash Position (Source: Company Reports)
Decent Improvement in Top-line and Bottom-line: For the year ended 30th June 2020, the company reported sales amounting to $7.0 million as compared to $5.7 million in FY19. This included Bronchitol sales of $5.2 million and Aridol sales of $1.8 million. The company recorded revenue from the sale of goods of $7.02 million, reflecting a rise of $1.35 million from FY19. In addition, total revenue from ordinary activities amounted to $13.02 million. Net loss for the year stood at $13.94 million as compared to a net loss of $20.05 million in 2019.
Q1 FY21 Financial Highlights: During the quarter ended 30th September 2020, the company recorded total revenue of $1.0 million as compared to $2.2 million as on 30th September 2019. Despite the COVID-19 pandemic, in-market unit sales of Bronchitol by Chiesi in the UK, Germany and Italy for Q1 FY21 were broadly at the same level as compared to the prior corresponding period. In addition, Bronchitol sales for the 12 months ended 30 September 2020 witnessed a rise of 2% over 2019. Net loss after tax for the period amounted to ~$4.98 million against ~$5.75 million of September 2019 quarter. During the three months period, the company negotiated an accelerated timeline on payment of the initial tranche of a US$10 million Bronchitol launch milestone. Under the initial tranche, US$7 million is now payable by Chiesi upon US approval of Bronchitol by the FDA and the remaining US$3 million is payable on shipment by Pharmaxis of commercial launch stock, which has been scheduled for the first quarter of 2021. PXS closed September 2020 quarter with a cash balance of ~ $10 million.
On 14th October 2020, the company received an R&D tax incentive of $5,048,452 with respect to FY20. The company added that R&D tax incentive happens to be a significant source of non-dilutive funding for its development of new drugs, which is providing a 43.5% cash payment in relation to eligible research expenditure.
Key Financials (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Pharmaxis Limited. BVF Partners L.P. is the largest shareholder in the company, with the percentage holding of 19.48%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Decent Position to Pay Short-Term Obligations: During FY20, gross margin of the company stood at 88.4% as compared to the industry median of 68.4%. On the liquidity front, current ratio stood at 3.59x against the industry median of 1.67x. This indicates that the company is in a decent position to settle its short-term obligations against the broader industry. Quick ratio for the year was 3.20x, which is higher than the industry median of 1.56x. On the leverage side, Debt to equity of PXS stood at 5.70x as compared to the industry median of 0.13x. Asset to equity ratio of the company stood at 24.75x versus the industry median of 1.87x.
Key Margins (Source: Refinitiv, Thomson Reuters)
Funding from Australian Government: In the month of September 2020, the company received funding of $1 million from Australian Government to significantly progress work on its drug discovery for the treatment of the devastating genetic disorder Duchenne Muscular Dystrophy (DMD), which is a genetic disorder distressing thousands of Australians. The company was selected for funding after a highly competitive review conducted by an independent expert evaluation committee as part of the Biomedical Translation Bridge (BTB) program.
Key Risks: The company’s business is sensitive to numerous risk such as rising competition from peers, downturn in the industry in which it operates. In addition, the company’s growth could be disrupted by economic and competitive uncertainties and contingencies pertaining to the business. In addition, the company’s business is also exposed to key financial risk, which includes market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Also, the failure in clinical trials could act as a major headwind for the business.
What to Expect: The company commenced FY21 in a decent position to (a) build value in its clinical assets, (b) bank cash from its manufacturing and partnering activities, and (c) continue the work to position the business as a global leader in fibrotic and inflammatory conditions. Looking forward, the company is focused on securing new partnering arrangements for programs currently in its drug development pipeline and restructuring the business in order to realise cost savings as well as to bring forward the value of future sales.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)
Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: For achieving growth in FY21, the company is planning to commence a fully financed Phase II clinical trial in Myelofibrosis in the upcoming quarter. In the last one and three months, the stock of PXS has corrected 18.18% and 8.16%, respectively. As a result, the stock is trading towards its 52-week low levels of $0.053, offering decent opportunities for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). On a technical analysis front, the stock has a support level of ~$0.076 and a resistance level of ~$0.17. Therefore, considering the recent approval from FDA for Bronchitol®, decent liquidity position, future plans for Phase II trials in Myelofibrosis, current trading levels, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.090 per share, up by 2.272% on 4th December 2020.
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PXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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