ProMetic Receives $4.8 Million Order from Octapharma
ProMetic announced Friday that it has received a $4.8 million purchase order from Octapharma. The order is for ProClear, PLI’s proprietary prion capture resin (i.e. removes impurities) that has been incorporated into Octapharma’s manufacturing process. We believe this purchase order is significant for a couple of reasons:
a) Business Model Proving Out: Our underlying view of ProMetic is that given its products are part of an approved manufacturing process, its revenues will grow with its partners’ drug sales. Recall that Octapharma received US regulatory approval of Octaplas in January 2013. This has opened another geographic market for its product. Coupled with good existing internal growth, we believe Octapharma is just selling more products. As ProClear is part of its regulatory approved manufacturing process, PLI’s sales to Octapharma will grow with drug sales. ProMetic has indicated that it expects sales to Octapharma to grow "significantly" y-o-y. In our view, given the underlying growth of the drug and new geographic markets, we would think that ProMetic sales to Octapharma could double y-o-y in FY13 and then double again in FY14. As such, Octapharma represents a "case study" of how PLI’s sales will grow with its partners. As more partner drugs receive regulatory approval, the more Octapharma-like growth ProMetic will have.
b) Improves Visibility for Record Year: Given PLI’s revenue base ($17 million in FY12 excluding license revenue), a ~$5 million purchase order is significant. Management has already given 1H13 guidance of $11 million in revenue. Given the majority of this order will likely be 2H13, we have good comfort that FY13 will be a record revenue and EBITDA year for ProMetic.
Strong Product and Service Revenue Growth in FY13
ProMetic’s revenue is segmented into three: license sales, service revenue and product sales. While license revenue is self-explanatory, service revenue will foreshadow future product sales as the partner drug works its way through the clinical trial stage and then should significantly increase as the drug is approved and its sales start to ramp. As the number of approved partner drugs increase, PLI’s revenue should start to see exponential growth. While we believe FY14 will be the year that we will see that, we believe we are definitely seeing the seeds of such growth in 1H13. To get a clearer understanding of how product and service revenues are growing, we should strip-out the license fees:
1H13 Product and Service Revenue v/s 1H12
($000s) Q1/FY13 Q1/FY12 % Change Q2/FY13e Q2/FY12 % Change Service and Product Revenue $4,445 $1,059 320% $6,555 $2,784 135%
Source: Company Reports and Beacon Securities Ltd
Risk-Return Improved With Therapeutic Division
While we have made no valuation assumptions on ProMetic’s therapeutic division, there has been a lot of industry activity that should indicate that investors should start to ascribe some value to it. A recent acquisition by Johnson & Johnson of Aragon Pharmaceuticals for up to US$1 billion is an example. Aragon’s lead compound, which is targeted at prostate cancer, is in Phase 2. ProMetic’s therapeutic drug 4050 (targeting Fibrosis) will be entering Phase 1 this year and has already achieved several positive data points. While certainly realizing that there is a significant value difference between Phase 1 and 2 companies, we also think this "free option" to investors positively skews the risk-return proposition, especially given the strong underlying growth of its "filtration" business.
With this purchase order, ProMetic has once again shown its ability to sign transactions that have the ability to provide significant shareholder value. In our view, PLI has 3 distinct sources of revenue:
a) Partner with pharmas who are interested in improving existing drugs (i.e. Octapharma);
b) Partner with pharmas who are creating new drugs (i.e. NantPharma);
c) Technology transfers whereby PLI will license its PPPS technology (i.e. CNBG). It is in this category that the transaction with SBB will benefit through access to SBB’s global distribution platform. This clearly saves PLI potentially millions of dollars by not having to build-out its own distribution network.
While we saw the seeds of success being sown in 2012, deals such as this purchase order and others are continuing to be sown in 2013. We believe investors will start to reap the rewards in 2014 and beyond as revenues and earnings grow significantly. As the market starts to anticipate that harvesting, the stock price will rise accordingly.
While the market’s immediate reaction to this transaction was muted, we believe that this purchase order is a continuation of recent positive announcements including:
the orphan-drug designation to Plasminogen,
The "free" equipment for the Laval plant from Sartorius;
Strong y-o-y growth in product and service revenues;
In our view, these developments, coupled with the therapeutic division, limit downside risk on the stock. We continue to believe a current share price of $0.33 represents an excellent risk-return and as such, we maintain our Buy recommendation and 12-month target price of $1.00.