Newbury Pharmaceuticals Q3: Sales Ramp-up

Research Update

2023-06-14

11:05

Redeye provides a research update following the Q3 report published by Newbury yesterday. We make some slight adjustments to our estimates for operational expenditures, COGS, and net sales. However, we reiterate our fair value range with a base case valuation of SEK8.5 as our outlook on the case remains positive.

Kevin Sule

Contents

Investment thesis

Q3 2023 – Review

Events during the quarter

Financials

Valuation

Key Catalysts

Quality Rating

Financials

Rating definitions

The team

Disclaimer

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Summary of the Q3 report

During the third quarter of Newbury’s financial year 2022/2023, the company recorded an EBIT of SEK-4.2m (-3.4m), with net sales totaling SEK5.7m (0.6m). Although the EBIT came in below our anticipated SEK-3.4m, we are encouraged by the significant ramp-up in sales. Furthermore, Newbury reported a cash position at SEK12.9m. We believe this can fund the company's operations throughout FY 2022/2023. However, we project that the company will perform a capital raise before the end of 2023.

Further regulatory progress

Newbury has successfully obtained national market approvals from the Norwegian Health Authorities for two additional products, namely Solifenacin/Tamsulosin Newbury and Pirfenidone Newbury. Upon the completion of national reviews, we anticipate that approvals in other Scandinavian markets will follow suit. These achievements will contribute to the growing portfolio of market-ready products, creating a positive momentum that will bolster Newbury’s sales growth in the future. We argue that the development of market approvals is a crucial factor that will positively impact Newbury’s financial performance in the forthcoming quarters.

Reiterated base case of SEK8.5 per share

We value Newbury using a discounted cash flow (DCF) model, taking into account various assumptions regarding long-term sales growth and margins. Based on this analysis, we maintain our fair value range of SEK4-14 per share, with a base case of SEK8.5, a bull case of SEK14, and a bear case of SEK4. Consequently, our base case suggests a substantial potential for share price appreciation from current levels. We emphasize that the key factor in validating Newbury’s business model in the eyes of investors and potentially closing the valuation gap lies primarily in achieving increasing sales growth in upcoming quarterly reports.

Key financials

SEKm	2020	2021	2022	2023e	2024e
Revenues	N/A	N/A	N/A	N/A	N/A
Revenue Growth	N/A	N/A	N/A	N/A	N/A
EBITDA	0.00	-5.0	-13.7	-15.5	-0.47
EBIT	-1.0	-5.6	-14.7	-16.8	-2.8
EBIT Margin	nm.	-199%	-266%	-113%	-5.7%
Net Income	-1.0	-5.6	-14.6	-16.6	-3.0
EV/Revenue	N/A	N/A	N/A	N/A	N/A
EV/EBIT	0.0	0.0	-9.3	-6.1	-39.8

Investment thesis

Case

De-risked case with exciting potential

The health care sector is in the midst of a paradigm shift as specialty medicines and precision treatment are replacing traditional treatments at an increasing rate. We believe that Newbury is well-positioned to capitalize on this emerging trend, having proactively built a strong portfolio of specialty and branded products. With the company implementing an active strategy of identifying attractive and undervalued assets, in indications with high medical need and sales potential, we see a potential long-term compounder with rapid growth prospects. As the business model revolves exclusively around in-licensing and advancing candidates through registration and commercialization, the main risks that traditional pharmaceutical companies face are greatly reduced. This provides Newbury the opportunity to be a nimble and flexible organization, able to operate in a cost-efficient manner from an early stage in the build-up.

Evidence

Process already in progress

Newbury has already achieved national market approval of seven products, and have an additional ten pipeline products expected to obtain regulatory clearance during 2023. With a total of 32 products in its portfolio, and more expected to be acquired in the future, we see a stable flow of product launches in the coming years. We argue that this will generate a continuously growing revenue stream as the company strengthens its offering and increases its market uptake.

Supportive Analysis

The financial year 2021/2022 (split fiscal year) saw the company enter its commercial phase with the market launch of its first product (Icatibant Newbury) on the Scandinavian market. The company recorded sales of SEK4.6m in Q4 2021/2022 as Icatibant Newbury won its first tenders. We expect Newbury to experience an accelerated growth in sales over the coming years, in parallel with the company rolling out an increasing number of products on the market. We estimate sales of SEK175m by FY 2025/2026e, indicating a CAGR of c137% for the period 2021/2022–2025/2026e. We argue that the company is well-positioned to rapidly expand on the Scandinavian pharmaceuticals market and, primarily, anticipate the vast number of expected market launches in 2024 to catapult sales.

Challenge

Regulatory risks

The future success of Newbury and its ability to generate yearly growth in revenue will largely depend on obtaining regulatory market approvals from the Scandinavian authorizations. There is a risk that the company’s application for market approval could be denied, or require supplements, which may delay planned sales or increase costs. However, we judge this as a relatively low risk due to the nature of the candidates, being high quality generics based on already approved originals.

Challenge

Patent protection risks

Newbury is highly dependent on the patent expirations of its products’ original counterparts. While the company closely monitors the intellectual property rights of the original medicines, there is a risk that an original receives extended patent protection. This could, in turn, cause delays to the launch of a specific product for the company. However, patent extensions like this are quite rare and unlikely to be granted near the expiration date.

Valuation

Long-term value with multiple potential catalysts

Our 2022-2037 DCF model using a 13% WACC indicates a base case valuation of SEK8.5 per share (Bull: SEK14; Bear: SEK4), based on a sales CAGR of c137% for the period FY 2022/2023–2025/2026 and a +25% EBITDA margin towards the end of our forecast period. We argue that increasing sales growth in quarterly reports, regulatory approvals, and potential new license deals and partnerships will constitute the key catalysts coming up.

Q3 2023 – Review

Q3 results

Net Sales for Q3 were SEK5.7m (0.6m).

COGS were SEK-3.5m (-0.3m), above our estimation of SEK-2.8m.

OPEX was SEK-6.2m (-4.1m), slightly above our estimation of SEK-6.0m.

EBIT was SEK-4.2m (-3.4m), below our estimation of SEK-3.4m.

Free cash flow was SEK-8.2m (-5.5m).

Cash position at the end of Q3 was SEK12.9m (38.7m), accordingly.

Source: Redeye Research, Company Data

Events during the quarter

Further regulatory approvals

During the quarter, Newbury successfully obtained national market approvals from the Norwegian Health Authorities for two additional products, namely Solifenacin/Tamsulosin Newbury and Pirfenidone Newbury.

In May 2023, Newbury announced the Marketing Authorization (MA) of Solifenacin/Tamsulosin Newbury 6 mg/0,4 mg modified release tablets in Norway as the first country in a dual country (with Denmark) registration procedure. The product is a fully bioequivalent version of Urizia MR Tablets, 6mg/0,4mg. Urizia is a niche product indicated for treating urinary tract symptoms associated with Benign Prostatic Hyperplasia (BPH) in men who are not adequately responding to treatment with monotherapy.

This was closely followed by the announcement of the MA of Pirfenidone Newbury 267 & 801 mg film-coated tablets in Norway. Pirfenidone is a medicine used to treat adults with mild to moderate idiopathic pulmonary fibrosis (IPF). IPF is a long-term disease in which fibrous scar tissue continuously forms in the lungs, causing persistent cough, frequent lung infections, and severe shortness of breath. Newbury’s product has been developed based on the reference brand Esbriet.

Upon the completion of national reviews, we anticipate that approvals in other Scandinavian markets will follow suit. Following the MA’s, Newbury will proceed to launch these products within the respective markets as soon as regulatory exclusivities and patents allow for it. These achievements will contribute to the growing portfolio of market-ready products, creating a positive momentum that will bolster Newbury’s sales growth in the future.

We argue that the development of market approvals is a crucial factor that will positively impact Newbury’s financial performance in the forthcoming quarters. Newbury now has more than 10 products registered and expects to launch several more products in Scandinavia during 2023. Accordingly, we believe that the company will be able to reach its goal of having launched 7-8 products by the end of the year.

Financials

Net sales for the period amounted to SEK5.7m (0.6m), indicating a significant y/y and q/q sales growth. We expected sales in Q3 to increase, having won multiple tenders during the period, and due to continued international B2B sales activities. However, sales came in above our expectations of SEK4.5m as the growing portfolio of market-ready products begins to be reflected in the sales figures. We believe the company is well-positioned to continue its commercial ramp-up, supporting further sales growth in the upcoming quarters.

Newbury reported a Q3 EBIT of SEK-4.2m (-3.4m), which was slightly lower than our expectations of SEK-3.4m. While the company presented net sales above our estimations, this was offset by slightly higher operating expenses at SEK-6.2m (SEK-4.1m) and COGS at SEK-3.5m (SEK-0.3m) compared to our estimated SEK-6.0m and SEK-2.8m, respectively. Accordingly, we have made some slight upwards adjustments to our future estimates for cash burn.

Source: Redeye Research, Company Data

Newbury reported a quarter-end cash position of SEK12.9m, below our expectations at SEK15.2m. As previously stated, our belief is that Newbury could perform a capital raise during 2023 to avoid ending up in a financially precarious situation. Therefore, we factor in a share issue in the year’s second half in our valuation model. We see a share issue in the range of SEK25-30m (before the deduction of transaction costs) as reasonable. Furthermore, we still expect Newbury to achieve positive operating cash flow in FY 2023/2024, following the launch of multiple pipeline products and the expected entrance into the Finnish market.

Valuation

We value Newbury using a DCF valuation model based on several assumptions regarding sales growth, margins, etc. We reiterate our fair value range, which is set at SEK4-14 per share with a base case of SEK8.5. Accordingly, our base case valuation suggests a significant upside potential from current share price levels. Furthermore, our optimistic bull case valuation is SEK14, and our more pessimistic bear case valuation is SEK4.

Source: Redeye Research

Summary of the changes to our valuation of Newbury:

We slightly increase our estimates for cogs and operating expenditures.

We slightly increase our estimates for net sales.

Key Catalysts

▪ Regulatory approvals
Newbury has several candidates expected to gain regulatory approvals in the coming 12 months. We believe these approvals could act as minor short-term catalysts for the stock.
Timeframe: 3–12 months
Impact: Minor

▪ License deals
The company intends to expand its portfolio with further candidates continuously. We argue that potential announcements of favorable partnerships and licensing deals for exciting new products could affect the share price.
Timeframe: 3–18 months
Impact: Moderate

▪ Quarterly reports
We believe that increasing sales in quarterly reports could validate the Newbury business model in the eyes of investors. Quarterly reports are essential for our analysis of the company’s prospects, and we see sales development as a key catalyst for the share.
Time frame: 3–12 months
Impact: Moderate to major

Quality Rating

People: 3

We are encouraged in seeing the founder, Karl Karlsson, as a large shareholder and executive chairman in the company. The fact that Karlsson has “done it before”, while CEO, Lars Minor, has vast experience in the pharmaceuticals industry having spent over 20 years in different positions at LEO pharma, bolsters our confidence in the executive abilities of the Newbury management and Board.

Business: 3

Newbury’s business model revolves around in-licensing proprietary product rights and exclusively focusing on registration and commercialization of the pharmaceuticals. We believe that this enables the company to operate in a cost-efficient manner from an early stage in the company build-up while maintaining satisfactory margins due to moats in the form of extensive know-how, legal and exclusivity.

Financials: 1

While Newbury is currently operating at a loss, we see potential for rapid sales growth in the coming years. We model positive cash flow from operations in 2023/2024 and onwards.

Financials

Rating definitions

The team

Disclaimer

Disclosures and disclaimers

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Contents

Investment thesis

Q3 2023 – Review

Events during the quarter

Financials

Valuation

Key Catalysts

Quality Rating

Financials

Rating definitions

The team

Disclaimer

Download article