|Shares Out. (in M):||174||P/E||NM||NM|
|Market Cap (in $M):||486||P/FCF||NM||NM|
|Net Debt (in $M):||-97||EBIT||-38||-35|
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TherapeuticsMD is a promotional penny stock masquerading around as a specialty biotech company. TherapeuticsMD's true value is likely 60% to 70% lower than the current market price and the catalysts for a price correction are present in the form of share sales by insiders and the company. This article will provide the following: a) a brief summary on the history of the company to illustrate the behavior of the management team, b) a side-by-side comparison of the bull case and the bear case, c) thoughts on biotech valuation and d) some closing comments.
Penny Stock 101
The story of TherapeuticsMD starts off like many other penny stock frauds. In 1907, there was an obscure Utah based company called Croff Mining, which changed its name to Croff Oil in 1952 and operated oil and gas leases until 2008. In 2008, the company (now called Croff Enterprises) ceased to have any operations and became a shell company.
Like most penny stocks, the company then went through several name changes and business combinations. In 2009, the shell company merged with a small healthcare company called America's Minority Health Network (AMHN) and the shareholders of AMHN took control of the company. The new entity was then funded day-to-day with small, expensive private financings. The company subsequently defaulted on these loans and merged with another small company called Spectrum Health Network in a reorganization in 2010. Lastly, in 2011, the company transferred the assets of its Spectrum subsidiary to its former creditors in exchange for satisfaction of their debt claims, merged with a new private company called VitaMedMD, did a 100:1 reverse stock split, issued 58 million to the shareholders (current management) of VitaMed and changed the name of the company to TherapeuticsMD. In essence, the current management team obtained their large share position in the company through a series of mergers with worthless penny stocks.
Again, following the penny stock playbook, the company then sought to put out promotional press releases and duped retail investors to bid up their thinly traded shares. In September 2012, the company had a $350 million market cap despite having only $154 thousand in cash (and over $5 million of debt) with virtually no revenues and no R&D spending.
TherapeuticsMD Business Mission: Enrich insiders with related party transactions
At this point, the company's main business objective was enriching insiders and management's business associates. The company would fund itself by issuing nominal amounts of debt to associates of the management team, who in return would receive millions of shares or warrants at a fraction of a penny, which would then be transferred to other investment vehicles and discretely sold into the public markets for a large gain.
For example, in 2011, a colleague of the management team, Robert Smith, provided a $105 thousand convertible note to the company which was later converted into 10 million shares with Smith's investment vehicle, Energy Capital, receiving 7.75 million shares. In September 2012, Smith sold 969k of the shares at approximately $3.45 yielding him $3.3 million alone on his $105 thousand loan to the company - not a bad 3,000% return.
Likewise, another colleague, Steven Johnson, also provided $105 thousand loan to the company, for which he later received 10 million shares and sold 1.1 million shares at over $3.00 per share.
The details of these and numerous other insider transactions are buried in the 2011 and 2012 annual reports' sections on related party transaction and on the insider filing reports, which clearly no retail penny stock investors has read.
Lastly, the company is based in Boca Raton, FL and its blue chip auditors at Rosenberg Rich Baker Berman & Company raised "substantial doubt about the company's ability to continue as a going concern."
The Holy Grail: Capital raise from Jefferies provides enough of a runway for the company to operate for a couple of years while insiders sell - at virtually any price
Up until earlier this year, the company was likely worthless and would have flamed out on its own like myriads of other penny stocks. But TherapeuticsMD was able to obtain the Holy Grail of penny stock promoters: an equity capital raise from a Wall Street bank.
In March 2013, TherapeuticsMD convinced Jefferies to underwrite a $50 million equity offering for the company. Interestingly, the stock was trading at $3.58 before the company announced the proposed offering on March 7th yet the management team showed no price sensitivity in issuing the shares at $1.70 on March 15th for a 48% discount.
Jefferies then initiated research coverage on the company with a Buy and $4 price target, causing the shares to recover much of their long ground to their current $2.60 range.
Like many other frauds, one thing both bears and bulls can agree is that the equity raise was accretive. TherapeuticsMD was likely worth zero before the transaction and is now potentially worth its net cash - at best -after the equity raise.
This background on TherapeuticsMD was provided to illustrate the nature of the management team, their philosophy towards shareholders and their intentions with regard to their current business objective: women's hormone replacement therapy.
TherapeuticsMD is now positing itself as a niche, specialty pharmaceutical company with three products focused on hormone replacement.
Bull Case and Bear Case: Spoiler Alert - there is virtually zero chance of clinical success given the company's lack of scale and expertise and the head-start that the competition has on the market
The bull case for TherapeuticsMD is somewhat simple and best described in the recent Jefferies intiation report:
Jefferies believes that the company's three drug products will generate $170 million in sales in 2018 from zero currently and $550 million by 2023, with EPS growing to $0.34 in 2018 and $1.67 by 2023. Discounting back the $1.67 per share in 2023 to today yields a value of $4.00 per share. Simple enough.
The bear case questions whether a poorly capitalized company, run by people with a history of checkered behavior can turn $50 million into a half-billion revenue stream, especially when faced with fierce competitors with far more resources and a substantial head-start.
With virtually zero revenues, zero legacy R&D, enough cash to last just one year and a management team that acquired their shares for virtually no cost and have demonstrated no sensitivity as to where they sell- the odds seem stacked against TherapeuticsMD.
As if the task for TherapeuticsMD wasn't challenging enough on its own, last week, the FDA gave approval to Hisamitsu Pharmaceutical of Japan for the first non-hormone drug to treat hot flashes, one of the major symptoms of menopause and one of the key markets being targeted by TherapeuticsMD. Hisamitsu entered this market through its 2009 acquisition of Noven Pharmaceuticals. A comparison between TherapeuticsMD and Hisamitsu is illustrative of the challenges TherapeuticsMD faces as it tries to live up to the false promises that brought it here so far:
Therefore, it appears that the bull case from Jefferies may need to be thoroughly re-evaluated.
Valuation: Valuation is excessive and an additional capital raise will be a catalyst to the downside
Even if TherapeuticsMD were to be valued as a legitimate biotech company and not as a potential fraud, its value would still be substantially below the current market price. The comp group that Jefferies uses consists of 10 specialty pharma companies. Two of the ten actually generate earnings so we can focus on the eight that generate losses and therefore are "R&D" stories. One crude way to look at these stocks is on a "replacement value" based on their cumulative 5 year trailing R&D spending. On that basis, these eight biotech stocks trade at 2x their "legacy" R&D investments, meaning that they have spent on average $150 million in R&D over the past 5 years to justify their $350 million enterprise values. TherapeuticsMD, on the other hand, has an enterprise value of over $350 million with legacy R&D of just over $5 million for a ratio of 68x. Even ignoring the fact that a large, well-financed, competitor has a head-start on their target market, TherapeuticsMD is still massively overvalued.
Assuming that TherapeuticsMD uses their entire $39 million cash balance on R&D over the next year (Jefferies assumes R&D of $24 million and SG&A of $19 million in 2013 for a total of $43 million), the company will have spent $46 million in cumulative R&D and will need to tap the capital markets again to fund the business. At that point - assuming the R&D spending is equal in value to the legitimate peer group and warrants a 2x multiple - the enterprise value would be ~$90 to $150 million, depending on the treatment of the warrants and other potentially dilutive securities, with a per share value of $0.70 to $0.90 . . . some 60 to 70% lower than the current market price.
The most telling sign about the value of the company may be coming from one of the informed insiders - director Cooper Collins. Collins is the 33-year old CEO of Pernix Therapeutics - the successor of a merger with penny stock Golf Trust of America of 2008. Collins' company purchased 2.6 million shares of TherapeuticsMD on October 5, 2011 for $0.38 per share for a total investment of $1 million. Collins recently sold the 2.6 million shares for $1.75 per share - an impressive 145% annualized return . . . except for the fact that TherapeuticsMD was trading for $3.00 per share at the time.
The fact that a young, informed insider would sell his entire ownership position at a 40% discount to the current market price indicates what the true value of TherapeuticsMD is. Similar to the Jefferies offering where the management team was entirely insensitive to price, TherapeuticsMD is going to be selling stock - both primary and secondary shares - at any price until there are no remaining buyers and then the stock will take its rightful place in the penny stock graveyard.
 The merger consideration was effectively zero. AMHN shareholders received 13.7 million shares of Croff which traded only twice during the month of July 2009, once at $0.17 and once at $1.50.
 As the company stated in a recent filing: "In light of this public offering, we have re-evaluated our ability to continue as a going concern. Accordingly, we are of the opinion that the substantial doubt regarding our ability to continue as a going concern has been mitigated."
 $42 million to be exact.
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