|Shares Out. (in M):||24||P/E||0||0|
|Market Cap (in $M):||16||P/FCF||0||0|
|Net Debt (in $M):||-5||EBIT||0||0|
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Long: Crescita Therapeutics (TSX: CTX CN)
Note: This is a micro-cap stock with sporadic liquidity at best. It may only be suitable for smaller funds or PA’s. While it is speculative, it also offers a very favorable risk/reward.
Note: All $$ throughout this write-up are in Canadian Dollars (CAD), unless otherwise noted.
Crescita Therapeutics is a Laval, Québec based Dermo-cosmetic company with two distinct divisions, Prescription Skincare Products and Consumer Skincare Products. At the current share price of .69 we think Crescita has the potential to return 150-400% over the next two years. A recently completed rights offering has shored up the balance sheet, and elimiates solvency risk.
The following characteristics make Crescita an attractive investment:
Why does this opportunity exist?
History and Background
Crescita was spun out of Nuvo.
Nuvo Pharmaceuticals is a $32m market cap, $26m enterprise value Company based in Mississauga, Ontario. Nuvo Pharmaceuticals was created when Nuvo Research holders received one share of Nuvo Pharmaceuticals and one share of Crescita Therapeutics for each Nuvo Research share they owned. The spin was completed in March 2016. The idea behind the spin was simple -- Nuvo Pharma was (is) a revenue generating, profitable company. Crescita was a more speculative drug development company.
Shortly after the spin, in September of 2016, Crescita made its first acquistion in the non-RX space with the acquisition of INTEGA Skin Sciences Inc. (INTEGA), a Montreal-based dermatology company which develops, manufactures, sells and markets science-based quality skin care products. INTEGA, financially backed by Knight Therapeutics (TSX:GUD) and Bloom Burton Healthcare Lending Trust, owned the Canadian distribution rights for a number of well-known and established skin care brands, including Laboratoire Dr. Renaud.
Key Benefits of the Transaction: (source: Management)
- Provided Crescita with a revenue-generating, fully integrated commercial skin care business, manufacturing facilities, and the capability to market prescription and over-the-counter (OTC) skin care products through established distribution channels;
- Provided Crescita with distribution rights to well-known and established skin care brands: Laboratoire Dr Renaud, Pro-Derm, Premiology and ISDIN;- Provides Crescita with a commercial infrastructure capable of promoting its prescription drug Pliaglis in Canada;
- Allows Crescita to leverage its topical delivery technologies for the development of potential new OTC and/or prescription skin care products;
- Allows Crescita to leverage its business development capabilities to out-license INTEGA owned brands outside Canada, including the U.S;
Key Benefits of the Transaction: (our opinion)
INTEGA was financially backed by Knight, which is the public vehicle of Canadian billionaire pharma investor Jonathan Goodman. Knight put its President and CFO on Crescita’s Board when the deal closed.
More on Goodman:
The transaction essentially made Knight the largest shareholder of Crescita - in our opinion a vote of confidence in the business. Knight has a $1.1b market cap. Crescita won't move the needle unless it is a major successs.
This segment of Crescita’s business is less material to the story so we are not going to spend a ton of time on it. It is essentially a roll-up of high end skincare brands. In August 2017, Crescita bought another brand, Alyria, for $1.7 million, consisting of a combination of fixed cash installments, of which $0.8 million will be paid in 2017, as well as a royalty agreement based on a threshold of annual net sales of Alyria over a nine-year period starting in 2020. The Alyria deal brought Crescita 200 new customers and was accretive to revenue and gross margins according to management. Today, Crescita’s main brands are sold across 1,700 doors in Canada (to healthcare professionals and professional aestheticians).
All told, the Consumer Skincare business currently does $8-$10m of sales. We think it gets to break even at $12-$13m. There are third parties that Crescita can contract manufacture for that will get them to scale, in addition to organic growth. Crescita operates a 50k sq ft facility in Montreal that also offers third parties significant R&D capabilities. Formulations manufactured by Crescita include cosmetics, natural health products and DIN (Drug Identification Number) products. Crescita produces creams, liquids, gels, ointments and serums and package into tubes, bottles, vials and pumps.
While we are excited about the prospects of the Consumer Skincare Business, the success of this investment, the real opportunity for Crescita will be in the Prescription side of the business.
The rest of this write up will focus on the biggest opportunity for Crescita, namely its Prescription Skincare Business and the US re-launch of its FDA approved product, Pliaglis.
Pliaglis has a long and complicated history...
June 2006: Initially approved by the FDA
Early 2008: Promotion and distribution agreement for Pliaglis was inked in 2008 between ZARS Pharma and Galderma.
Late 2008: Voluntarily removed from the US market by Galderma in 2008 because of manufacturing issues at Galderma's contract manufacturer.
(note: Galderma is a pharmaceutical subsidiary specializing in the research, development and marketing of dermatological treatments and a wholly owned subsidiary of Nestlé since 2014.)
2011: Nuvo acquiresd ZARS. ZARS had licensed worldwide marketing rights to Pliaglis to Galderma
December 2015: Nuvo reacquired Pliaglis development and marketing rights for the U.S., Canada and Mexico with the goal of reevaluating the marketing strategy for the product and determining the optimal way to reenter the market to allow the product to reach its full potential. Pliaglis was already approved for sale in all three countries (US, Canada, Mexico) and was currently being marketed and sold by Nuvo's global licensee, Galderma S.A. (Galderma), in the U.S and Canada. During a transition period, Galderma continued to market Pliaglis in the U.S., Canada and Mexico while it paid Nuvo a royalty on sales.
Sept 2016: Pliaglis goes to Crescita in the spin.
Over the last 10+ years, nobody has focused on Pliaglis - Gladerma did a horrendous job in marketing the product and its been neglected forever. There were supply problems and a lack of focus. Nuvo had a slightly similar turnaround story with Pennsaid, a nonsteroidal anti-inflammatory drug that the Company transitioned from Mallinckrodt (~1k prescriptions a week) to Horizon Pharma (Nasdaq: HZNP) (~10k prescriptions a week). Nuvo ended up selling the US rights to Pennsaid to Horizon in 2014 for $45m USD.
What is Pliaglis?
Pliaglis is a prescription cream.
According to the Company, Pliaglis, is the strongest topical anesthetic ever approved by the FDA. It has a Lidocaine and Tetracaine (7%/7%) formulation and utilizes a proprietary phase-changing, topical cream Peel technology.
Historically, Pliaglis has been used by dermatologists for specific procedures in an office setting.
The product's official description is as follows:
PLIAGLIS is a combination of lidocaine, an amide local anesthetic, and tetracaine, an ester local anesthetic, indicated for use on intact skin in adults to provide topical local analgesia for superficial dermatological procedures such as dermal filler injection, pulsed dye laser therapy, facial laser resurfacing, and laser -assisted tattoo removal.
The “technology” behind Pliaglis has to do with the thin film barrier that it forms on the skin after application. This film, which forms a patch around 5 - 10 minutes after application, creates an anesthetized surface that the doctor can use for procedures such as tattoo removal or skin tag excision. The product can be used multiple times depending on the procedure. For example, tattoo removal is usually done in 6 sessions spread out over the course of one year. It is estimated that the effects of the patch can last for up to 9 hours.
The closest comparable to the active ingredients in Pliaglis in the topical anesthetic market is Lidoderm, a treatment for post-herpetic neuralgia, a painful condition caused by shingles. Lidoderm is distributed by Endo Pharma (Nasdaq: ENDP).
Recently, the FDA approved a Sorrento Therapeutic product that contains 36 mg of lidocaine (18 mg per gram adhesive) in a non-aqueous base: ZTlido. ZTlido is a non-opioid painkiller patch for nerve pain related to shingles. ZTlido, which Sorrento added as part of its 2016 acquisition of majority stake in privately-held SCILEX Pharmaceuticals Inc, was also approved for postherpetic neuralgia (PHN). Analysts expect U.S. sales of ZTlido to peak at $1.1 billion in 2025.
Crescita Signs Deal with Taro Pharma
A major milestone for Crescita was the licensing of Pliaglis to Taro Pharmaceutical on April 25, 2017. The agreement granted Taro the exclusive rights to sell and distribute Pliaglis and its 2nd generation formulation (Flexicane) in the United States.
The deal was done for the following consideration:
Note that Crescita will still own the rights to Pliaglis in Canada. ROW is still owned by Galderma (note that the largest ROW market is Italy where Galderma sells roughly $3m worth of product).
The deal with Taro is a game changer. Taro reported $870m USD in sales in 2017. We don't see why Taro would bother with Pliaglis unless they thought there was a real opportunity to grow sales.
Crescita’s pipeline contains a second generation Pliaglis product as well as two other products, MiCal1 and MiCal2 (Plaque Psoriasis treatments). The MiCal products are fully funded by a research partner (Ferndale) and we ascribe no value to them, nor will we discuss their chances of success in this write-up. The second generation Pliaglis product is called Flexicane. Taro will submit new formulation to FDA. It has a similar formulation to Pliaglis and won’t need a phase III trial.
In January 2018, Crescita announced a Rights Offering to raise $3.7 million. Certain significant shareholders (including Knight Therapeutics Inc. and funds advised by Bloom Burton & Co.), directors and management of Crescita committed to $2,060,000 of the offering. The purpose of the RO was to solidify the Balance Sheet contemporaneous with Taro’s relaunch of Pliaglis. The offering was done at $0.53c
Post rights offering and including the most recently published financials, the capital structure looks like this:
s.o. (fully diluted) : 23.5m
price: 69c (as of this writing)
market cap: $16.2m
enterprise value: $11m
Post RO, the largest holders of Crescita are:
Knight Therapeutics (TSX: GUD) (Goodman): 13.5%
Dan Chicoine (Executive Chairman): 4.79%
Gregory Orleski (Former Intega CEO) 3.94%
Serge Verreault (President & CEO): 3.0%
The stock languished post the RO – as there seemed to be a seller in the market every day. While speculative, Draper Jurvetson held 10% of Crescita at the time of the spin. DJ was a Nuvo holder. This was from an old fund that was way past its life. Perhaps this fund started to dissolve and DJ was a seller - this may have driven the shares down below the rights offering price.
What Makes this Investment Work?
The thesis behind this investment is predicated on the following assumptions.
Crescita's Consumer Skincare business (50% gross margins) will grow organically via branded product and third party manufacturing sales to breakeven or better by year end. This business will eventually cover the overhead costs of the entire Company.
Pliaglis US re-launch with Taro (taking place Q2/Q3 2018) is a success.
Significant royalty and milestone payments from Taro occur in Q3/Q4 2018.
Taro accelerates sales of Pliaglis in 2019 and a more formidable royalty stream develops.
Should the Consumer Skincare business cover most of cash overhead, the Company’s revenue and bottom line will be entirely driven by Pliaglis and its corresponding royalty to Crescita as 100% contribution margin. Our bet is that sales of Pliaglis under Taro can grow substantially.
We think that Crescita can achieve $5-$10m in royalty payments in 2019, all of which would fall to the bottom line as profits. In Italy, where gross sales of Pliaglis are around $3m USD, the product is not heavily promoted and it is not reimbursed.
In Q1, Crescita recognized $1.4m of royalty payments related to the re-launch of Pliaglis. We don’t think that you can run rate this number, as the re-launch likely resulted in larger amounts of product purchased (for promotion, inventory etc).
Consumer Skincare did $2.2m in revenue.
Adjusted EBITDA was positive 91k.
We ignore any potential milestone payments from Taro – these would be a pure “bonus”. We also assume a net cash position 1-2 years out but do not give any credit for that in the valuation. We are aware that the range of outcomes is wide.
Here is what we envision for the earnings power of Crescita 1-2 years out:
50% Gross Margin
= $7.5m Gross Profit
Less ($7.5m) in total Company SG&A and R&D
= EBITDA neutral
$5m - $10m per year
= total EBITDA: $5 - $10m
Value: $40 - $80m
Shares (fully diluted) 23.5
Value per share: $1.70 - $3.40
Today you are paying $11m or what we think is around 1x sales for the whole enterprise.
Management and the Board voted very heavily with their wallets when they bought most of the recent rights offering. Clearly they are optimistic about Taro's ability to drive Pliaglis sales and their own ability to grow the Consumer business to break even. There are too many large players here (Knight, Taro, Endo/Sorrento in the space) to warrant such a low option price for what could be a big idea. If Pliaglis fails to achieve decent volumes, we think the brand portfolio and existing sales base (not to mention the other development prescription products) is probably worth at least $5-$7m. Remember the Company is not burning much cash.
Taro achieves robust Pliaglis sales in the U.S. re-launch.
Royalty revenue flows to Crescita as Consumer Skincare ramps sales to break even.
Company gains credibility as a Dermo-cosmetic platform.
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