Dundee Securities: Next Deal Will Be an Important One for Merus Labs

Following the release of Merus Labs’ (TSX:MSL) third-quarter results this week, the market wasn’t overly impressed. Merus Labs missed expectations for its Q3 financials, reporting a net loss of roughly $1.6 million compared to a net loss of just $171,666 for the same quarter in 2014.
Revenues rose from $7,184,909 to $9,505,483 year-over-year, while the company’s EBITDA increased from $3,763,487 to $5,837,103 over the same period. However, as pointed out by Dundee Securities in a note Wednesday, those numbers still missed broader expectations. “Revenue, EBITDA and EPS missed across the board,” the firm states.
Dundee explains that the miss was driven almost entirely by the revenues recognition policy for Enablex, a drug used to treat overactive bladder syndrome. “Underlying Rx are tracking just fine in-country but heavy inventorying in FQ2 by the company’s new German distributor (Phoenix) led to lighter loading in FQ3 — and revenue is recorded at the time of shipment,” Dundee notes. “This is expected to normalize moving forward but certainly came as a surprise to the entire street with actuals missing consensus by a wide margin.”
“Our in-market prescription trends are tracking as expected for Emselex and Sintrom. However, two major factors impacted the lower than expected Q3/15 financial results; 1) foreign exchange fluctuations and 2) wholesaler inventory level adjustments,” said Merus Labs CEO Barry Fishman in a statement.
Dundee also notes that Merus Labs only learnt about its inventory issue 10 days ago, suggesting that its “outsourced business model” could be partly to blame. “The market penalized MSL yesterday, down 18% as most investors believed management should have known and telegraphed the issue sooner.” Fishman plans to hire a financial professional in Europe to better keep an eye on things, according to the firm.

Despite those lackluster results, Merus Labs has still gained over 30 percent year-to-date, and analysts see more positive news on the horizon for the company.
Merus Labs’ self-described “opportunistic” strategy involves plenty of M&A — as Jonathan Ratner of the Financial Post has put it, the company “acquire[s] mature drugs that may be under-promoted by big pharma.”
Certainly, the arrival of Fishman as CEO has helped on that front. Canaccord Genuity analyst Neil Maruoka told Ratner that since Fishman became head of Merus Labs last year, he’s managed to secure a hefty M&A pipeline of over 15 products. Most recently, Merus Labs acquired the rights to Salagen and Estraderm from Novartis Pharma (NYSE:NVS) for US$29.5 million in May.
Still, Dundee stressed that the next deal will be “an important one” for Merus Labs, noting that the Novartis deal was “relatively small” relative to the company’s $60-million bought deal financing completed in April. “Expectations are high with a $250 MM preliminary base shelf prospectus filed on 9-July-15, and investors looking for a ‘transformational’ deal in the $100-$200 MM range,” the firm said.
“[O]ur acquisition pipeline remains robust with over a dozen products in active discussions with combined annual EBITDA over $150M,” said Fishman in Monday’s release. “We continue building momentum, evaluating both proprietary and auction process acquisitions of various sizes.”
Overall, Dundee Securities has cut its price forecast for Merus Labs by 30 cents (now $3.60), but is keeping its “buy” rating for the company. The company’s share price fell roughly 15 percent, to $2.58, on Tuesday morning, and continued to fall as low as $2.30. At close of day on Wednesday, Merus Labs’ share price was up 5.26 percent, at $2.60.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.