AFT Pharmaceuticals — Growth in the face of a challenging environment

AFT Pharmaceuticals (NZX: AFT)

Last close As at 03/12/2024

NZD2.81

−0.04 (−1.40%)

Market capitalisation

NZD295m

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Research: Healthcare

AFT Pharmaceuticals — Growth in the face of a challenging environment

AFT Pharmaceuticals recently reported its results for FY21. Operating revenue grew strongly by 7% year-on-year to NZ$113.1m, driven mainly by 11% growth in Australia, despite the impact of COVID-19 across the business (especially lower licensing income and higher costs, including freight). Reported group operating profit was NZ$10.7m compared to NZ$21.2m in the same period a year ago (NZ$11.4m if a one-time FY20 gain of NZ$9.8m is excluded). Importantly, AFT is guiding to operating profit of NZ$18–23m in FY21.

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Written by

Healthcare

AFT Pharmaceuticals

Growth in the face of a challenging environment

Financial update

Pharma & biotech

26 May 2021

Price

NZ$4.70

Market cap

NZ$492m

NZ$0.72/US$

Net debt (NZ$m) at 31 March 2021

35.2

Shares in issue

104.7m

Free float

27.5%

Code

AFT

Primary exchange

NZX

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

15.6

6.4

2.6

Rel (local)

18.6

5.4

(8.4)

52-week high/low

NZ$5.51

NZ$3.85

Business description

AFT Pharmaceuticals is a specialty pharmaceutical company that operates primarily in Australasia but has product distribution agreements across the globe. The company’s product portfolio includes prescription and over-the-counter drugs to treat a range of conditions and a proprietary nebuliser.

Next events

Additional Maxigesic launches

2021

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

AFT Pharmaceuticals is a research client of Edison Investment Research Limited

AFT Pharmaceuticals recently reported its results for FY21. Operating revenue grew strongly by 7% year-on-year to NZ$113.1m, driven mainly by 11% growth in Australia, despite the impact of COVID-19 across the business (especially lower licensing income and higher costs, including freight). Reported group operating profit was NZ$10.7m compared to NZ$21.2m in the same period a year ago (NZ$11.4m if a one-time FY20 gain of NZ$9.8m is excluded). Importantly, AFT is guiding to operating profit of NZ$18–23m in FY22.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(NZ$)

DPS
(NZ$)

P/E
(x)

Yield
(%)

03/20

105.6

3.4

0.03

0.0

N/M

N/A

03/21

113.1

8.2

0.07

0.0

67.1

N/A

03/22e

130.9

20.3

0.17

0.0

27.6

N/A

03/23e

151.0

33.2

0.23

0.0

20.4

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Maxigesic IV licensed to Hikma in the US

In April 2021, AFT announced a licence and distribution agreement for Maxigesic IV with Hikma Pharmaceuticals, the third largest US supplier of generic injectable medicines by volume, with US$2.3bn in total sales in 2020 (US$1.0bn of this was from injectables). The terms of the agreement include up to US$18.8m in upfront, regulatory and commercial milestones and a profit share.

Maxigesic launched in 43 countries

Maxigesic tablets are now sold and launched in 43 countries, up from 34 at the end of September 2020. The tablets are registered in 49 different countries and licensed in over 125. Maxigesic IV is launched in three countries but registered in 21, with over 100 licensing agreements.

Australia drives growth

Australia accounts for over 60% of group sales and grew 11% to NZ$68.3m despite significant disruptions due to COVID. The OTC channel (62% of total Australia revenue) was most hindered by COVID-19 lockdowns and restrictions but still grew 9%. The hospital channel grew 13%, partly due to higher antibiotic sales, while the prescription channel grew 21% with the launch of new products.

Valuation: NZ$644m or NZ$6.15 per share

We are increasing our valuation to NZ$644m or NZ$6.15 per share from NZ$629m or NZ$6.02 per share, mainly due to rolling forward our NPV. This was partially offset by lower near-term operating profit forecasts due to slower than expected sales in the rest of world region. The company reported NZ$3.2m in cash and NZ$38.4m in debt at the end of the year. Cash was negatively affected by a NZ$10.9m build in inventory to help weather COVID-19 disruptions.

FY21 results

AFT has reported revenue of NZ$113.1m for FY21, the period ending 31 March 2021. This represents a 7% increase over the prior year. Revenue in Australia was up 11% to NZ$68.3m and now represents 60.4% of group revenue. The OTC channel, which represents approximately 62% of revenue for Australia, grew 9% and was hindered by COVID-19 lockdowns and other restrictions. Maxigesic sales were especially affected although this was offset in part by strong growth in and sales of hand sanitizer and face masks. The hospital channel grew by 13% and was helped by antibiotic sales in response to the pandemic. The prescription channel grew 21% thanks to new product introductions. However, some products in this category, such as penicillin, were hampered due to a decline in visits to general practitioners (GPs) for non-COVID-19-related purposes. Despite these challenges, operating profits for Australia rose to NZ$7.9m from NZ$7.3m in FY20

New Zealand revenue was up a little over 1% at NZ$30.5m, representing 27% of group sales. The OTC channel fell 3% from FY20 to NZ$16.8m due to COVID-19 restrictions and reduced GP visits. The hospital channel grew 20% to NZ$4.8m due to strong antibiotic sales. The prescription channel grew by 2% to NZ$8.9m. Note this is a significant turnaround compared to the 9% contraction in sales we had seen in H121. That reduction had been due to restrictions on visits to GPs and governments preventing pharmacists from dispensing more than 30 days of medicine. The operating loss (including head office costs) for this region improved from NZ$205,000 last year to NZ$69,000 in FY21.

Asia revenue fell by 10% to NZ$4.4m. The OTC segment benefited from COVID-19 related stockpiling of Maxigesic in Singapore, while the hospital and prescription channels declined due to a transition to higher-margin products. This transition helped increase operating profit from NZ$0.1m in FY20 to NZ$1.5m in H121. Importantly, e-commerce sales have commenced in China and sales are expected to begin in South Korea in the near future.

Exhibit 1: 2021 results by region

NZ$000s

Revenues FY21

Revenues FY20

Operating profit before tax FY21

Operating profit before tax FY20

Australia

68,266

61,428

7,919

7,278

New Zealand

30,526

30,108

(69)*

(205)*

Asia

4,411

4,930

1,450

93

Rest of world

9,902

9,131

1,408

14,040**

Total

113,105

105,597

10,708

21,206

Source: AFT Pharmaceuticals. Note: *New Zealand profit before tax includes head office expenses. **Rest of world profit before tax includes a non-recurring gain of NZ$9.8m; without this gain profit before tax for this region would have been NZ$4.3m.

Rest of world revenues grew by 8% to NZ$9.9m, a significant recovery from the 16% decline seen in the first half of FY21, which was due to an 88% reduction in licensing income thanks to delayed deal-signing as a result of COVID-19-related travel restrictions. For the full year FY21, licensing income was down 44% to NZ$2.1m due to the restrictions, but this was offset by a 47% increase in sales of products and royalties to NZ$7.8m. This increase was somewhat hampered due to supply disruptions in India where Maxigesic tablets are manufactured. The company has added manufacturing capability in China and will have additional manufacturing available soon in Europe, all of which should reduce the risk of supply disruptions. Sales were assisted by orders shipped to Germany, Belgium, Luxembourg, Ireland and Switzerland. Operating profit fell to NZ$1.4m in FY21 from NZ$14,040 (NZ$4.3m excluding a non-recurring gain of NZ$9.8m) mainly due to the drop in high margin licensing income.

Maxigesic tablets are now sold and launched in 43 countries, up from 34 at the end of September 2020. The tablets are registered in 49 different countries and licensed in over 125. Maxigesic IV has been launched in three countries but registered in 21, with over 100 licensing agreements. Importantly, the US rights to Maxigesic IV were licensing in April to Hikma Pharmaceuticals. Terms of the agreement include US$18.8m in upfront, regulatory and commercial milestones as well as a profit share. Of these milestones, US$3.6m will be earned following the signing of the agreement and filing for FDA approval. An additional US$7.5m in payments will be due upon reaching certain milestones leading up to and including the first commercial sale. The remainder of the milestones will be based on sales targets in the US. Also in the US, FDA approval for the Maxigesic tablet new drug approval application is pending as the manufacturing facility needs to be inspected. FDA inspections have been complicated due to travel restrictions.

Exhibit 2: Maxigesic product country totals by status

Maxigesic tablets

Maxigesic IV

Maxigesic oral solution

March 2021

September 2020

March 2021

September 2020

March 2021

September 2020

Licensed

125+

125+

100+

80

100+

100+

Registered

49

44

21

3

Sold in

43

28

3

Source: AFT Pharmaceuticals

With regards to the NasoSURF nasal drug delivery device (intended for medications aimed at a patient’s sinus areas), engineering batches have been successfully completed and development work on a specific dose form has begun. Clinical studies are planned for late in calendar year 2021. The 120-patient Pascomer Phase II/III clinical study is continuing to enrol patients, although there have been delays in recruitment due to COVID-19. As a reminder, Pascomer is a topical treatment for facial angiofibromas. Study enrolment is expected to complete in the 2021 calendar year. In March, AFT announced a commercialisation and development agreement with Desitin Arzneimittel (which has an over 100-year history) covering the EU as well as Switzerland, Norway and the UK.

Valuation

We are increasing our valuation to NZ$644m or NZ$6.15 per share from NZ$629m or NZ$6.02 per share, mainly due to rolling forward our NPV. This was partially offset by lower near-term operating profit forecasts due to slower than expected sales in the rest of world.

Exhibit 3: DCF sensitivity table (NZ$/share)

Terminal EBIT margin

 Terminal revenue growth

30%

34%

36%

40%

45%

-2.0%

4.13

4.48

4.66

5.01

5.45

-1.0%

4.36

4.74

4.93

5.31

5.79

0.0%

4.63

5.05

5.26

5.68

6.20

1.0%

4.95

5.42

5.65

6.12

6.70

2.0%

5.37

5.89

6.15

6.68

7.33

3.0%

5.89

6.49

6.79

7.39

8.14

4.0%

6.59

7.29

7.64

8.34

9.21

5.0%

7.58

8.41

8.83

9.67

10.72

Source: Edison Investment Research

Financials

We have decreased our revenue estimate for FY22 to NZ$130.9m from NZ$139.4m mainly due to delays in additional licence agreements and launches of Maxigesic in the rest of world. We have also lowered our SG&A estimate for FY22 by NZ$1.2m to NZ$37.2m and our R&D estimate by NZ$0.1m to NZ$3.5m due to slightly lower run rates. After these changes, our FY22 operating profit estimate is now NZ$22.5m compared to NZ$28.2m previously. Note that the company is targeting an operating profit range of NZ$18m to NZ$23m for FY22. We are also introducing FY23 forecasts, including NZ$151m in sales (up 15% from our FY22 estimate) and NZ$35.1m in operating profit (up 56% from our FY22 estimate).

The company reported NZ$3.2m in cash and NZ$38.4m in debt at the end of the year. Cash was negatively affected by a NZ$10.9m build in inventory to mitigate the business impact of COVID-19-related supply and freight difficulties (net cash generated from operating activities fell from NZ$14.9m in FY20 to NZ$0.8m in FY21). We believe AFT will be able to pay down the debt from operating cash flow and does not need additional long-term financing (though some short term facilities may need to be used for working capital needs).

Exhibit 4: Financial summary

NZ$000

2020

2021

2022e

2023e

March

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

PROFIT & LOSS

Revenue

 

 

105,597

113,105

130,917

151,042

Cost of Sales

(57,332)

(64,364)

(68,349)

(73,720)

Gross Profit

48,265

48,741

62,567

77,322

EBITDA

 

 

12,522

11,813

23,613

36,195

Operating Profit (before amort. and except.)

 

 

11,708

10,994

22,794

35,376

Intangible Amortisation

(286)

(286)

(286)

(286)

Exceptionals

9,784

0

0

0

Other

0

0

0

0

Operating Profit

21,206

10,708

22,508

35,090

Net Interest

(8,329)

(2,821)

(2,476)

(2,137)

Profit Before Tax (norm)

 

 

3,379

8,173

20,318

33,239

Profit Before Tax (reported)

 

 

12,877

7,887

20,032

32,953

Tax

(185)

(105)

(2,804)

(9,227)

Profit After Tax (norm)

3,194

8,068

17,514

24,012

Profit After Tax (reported)

12,692

7,782

17,228

23,726

Average Number of Shares Outstanding (m)

97.3

103.3

104.7

104.7

EPS - normalised (c)

 

 

3.3

7.1

16.7

22.9

EPS - (reported) (NZ$)

 

 

0.12

0.07

0.16

0.23

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

45.7

43.1

47.8

51.2

EBITDA Margin (%)

11.9

10.4

18.0

24.0

Operating Margin (before GW and except.) (%)

11.1

9.7

17.4

23.4

BALANCE SHEET

Fixed Assets

 

 

31,716

37,230

42,526

47,862

Intangible Assets

26,984

32,720

37,918

43,116

Tangible Assets

315

305

403

541

Investments

4,417

4,205

4,205

4,205

Current Assets

 

 

55,336

67,902

72,432

88,231

Stocks

22,734

33,654

37,019

40,721

Debtors

25,969

31,039

22,410

24,170

Cash

6,119

3,209

13,003

23,340

Other

514

0

0

0

Current Liabilities

 

 

(25,102)

(32,102)

(23,003)

(24,411)

Creditors

(22,993)

(26,404)

(23,003)

(24,411)

Short term borrowings

(2,000)

(5,161)

0

0

Other

(109)

(537)

0

0

Long Term Liabilities

 

 

(44,695)

(36,442)

(32,442)

(28,442)

Long term borrowings

(41,200)

(33,200)

(29,200)

(25,200)

Other long term liabilities

(3,495)

(3,242)

(3,242)

(3,242)

Net Assets

 

 

17,255

36,588

59,513

83,240

CASH FLOW

Operating Cash Flow

 

 

21,999

4,292

25,475

32,140

Net Interest

(6,936)

(3,437)

(2,476)

(2,137)

Tax

(185)

(105)

(2,804)

(9,227)

Capex

(6,562)

(6,231)

(6,400)

(6,440)

Acquisitions/disposals

0

0

0

0

Financing

3

11,673

0

0

Dividends

(566)

(188)

0

0

Net Cash Flow

7,753

6,004

13,794

14,336

Opening net debt/(cash)

 

 

34,834

37,081

35,152

16,197

HP finance leases initiated

0

0

0

0

Other

(10,000)

(4,075)

5,161

0

Closing net debt/(cash)

 

 

37,081

35,152

16,197

1,860

Source: company reports, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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General disclaimer and copyright

This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: TMT

EQS Group — FY21 focus on whistleblowing

EQS is making good progress on building a substantial presence in both corporate compliance and investor relations, growing its SaaS and annual recurring revenue streams. With a platform approach that allows for cross- and up-selling, this is a scalable business model in growing markets, driven by digitisation and regulation. The implementation of whistleblowing regulation in the EU during 2021 gives a clear opportunity for the group to extend its client base. The cost of grasping that opening is weighing on short-term profitability but enhances medium-term prospects.

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