AFT Pharmaceuticals — Growth underpinned by international momentum

FY24 (12 months ending March 2024) was another solid year for AFT, with its impetus on international expansion reflected in growing traction from these markets. Total group revenues were NZ$195.4m, 24.8% y-o-y growth over FY23 (NZ$156.6m), and were ahead of our estimate of NZ$187.5m. Reflecting the seasonality in the business, the H2 performance was sequentially stronger (NZ$111.8m in revenue, 33.7% growth over H124 and 23.0% over H223). FY24 top-line performance was driven by a strong contribution from the Asian and international markets (combined growth of 108% y-o-y to NZ$38.5m; +70% excluding licence income) and steady 13.6% growth from the domestic Australasia market (to NZ$156.9m). The growth was supported by the receipt of NZ$8.5m from licensing income from international markets (NZ$0.9m in FY23), which included NZ$6m in a milestone payment from US distribution partner Hikma (following the launch of Maxigesic IV in the country in February 2024) and another c NZ$2m from its Italian licensee in H124. Globally, product sales and royalties increased to NZ$186.9m, a 20% jump year-on-year. Domestic markets (Australia and New Zealand) continue to remain the company’s largest contributor to sales, although their share declined to 80.3% of total group revenue versus 88.2% in FY23, reflecting the results from the company’s internationalisation efforts.

Gross margins were down 1.4pp to 45.2% (46.6% in FY23) due to some price discounting (because of overstocking), stock write-offs and change in sales mix in domestic markets (stronger sales from lower-margin products), which offset the flow-through benefits from the higher licensing payments (which have a 100% margin). Operating profit was recorded at NZ$24.2m, at the upper end of the guided range of NZ$23–25m, and a 23.2% increase on the FY23 figure of NZ$19m. Operating margin was 12.4%, mildly below the previous year figure of 12.6%. This was a result of continued investment by the company in sales and marketing activities (related to marketing and launch efforts) as well as in its R&D development programmes. Selling and distribution expenses increased by 23.8% y-o-y to NZ$45.3m, with increased marketing push (particularly in H124). R&D expenses grew 43.3% to NZ$8.1m, with the announcement of several new R&D programmes during the period (discussed in more detail later). This included NZ$3.2m in R&D-related employee emoluments and NZ$4.9m spent specifically on development activities (+63.7% over the corresponding expense of NZ$3.0m in FY23). The total development-related R&D expense was c NZ$12m for the year, including capitalised R&D of over NZ$7m. General and administrative expenses were broadly flat at NZ$11.2m (NZ$11.1m in FY23).

Net profit for the year was NZ$15.6m, a 46.5% increase over the previous year, with lower financial expenses offset by higher tax payouts. Operating cash flows improved materially to NZ$28.9m (NZ$11.6m in FY23), supported by higher net profitability and a favourable working capital position. The stronger balance sheet supported the announcement of a second consecutive dividend payout by the company of 1.6c per share or c NZ$1.7m, payable in July 2024. This is a c 45% rise over the FY23 DPS payout of 1.1c and translates to a payout ratio of c 10%. In addition to the dividend payout, the company was able to reduce indebtedness, with a repayment of NZ$5m of the outstanding NZ$33.2m loan from the Bank of New Zealand during the year. Net debt at the end of FY23 was NZ$16.2m (vs NZ$30.6m at end-H124), which allowed the company to go below its 1x EBITDA gearing target. FY24 EBITDA was NZ$26.2m, up 22% from the FY23 figure of NZ$21.4m.

Revenue from Australia, which accounted for 55.4% of FY24 group revenue, grew 15% y-o-y to NZ$108.2m, led by a mix of organic and new product growth. The over-the-counter (OTC) channel, representing 70.3% of segmental revenue, grew at a solid rate of 24% y-o-y, driven by strong demand across all seven core therapeutic categories (eyecare, pain management, dermatology, gastrointestinal, vitamins, allergy and hospitals). AFT’s Maxigesic and liposomal vitamins were leaders in their respective segments. The other two channels – hospital and prescription – recorded low single-digit decline of -2.0% and -4.0% y-o-y, respectively. Operating profit for the region fell to NZ$15.5m (versus NZ$19.3m in FY23), with operating margin declining to 14.3% from 20.5% in FY23. This was primarily due to increased marketing spend associated with new product launches along with some price discounting, estimated by management to normalise in FY25.

In the home market of New Zealand, revenue grew by 10.7% y-o-y to NZ$48.7m, led by demand for the company’s existing as well as new products. The OTC channel, which accounts for 55.1% of the segment’s sales, had the strongest growth, increasing by c 16% to NZ$26.8m. Growth in revenue from the hospital and prescription channels were relatively subdued at 6.8% and 3.1%, respectively. Operating profit, excluding group head office costs, was down to NZ$7.3m from NZ$8.1m in FY23. Similar to Australia, this reflects the increased marketing spend on product launches and brand building for Maxigesic products (Maxigesic sponsored One New Zealand Warriors as its official pain relief partner). Including head office-related expenses, the segment reported an operating loss of NZ$2.3m versus NZ$0.8m in FY23.

We highlight that AFT launched 18 new products in domestic markets in FY24 including extensions of its Ferro range, preservative-free eye drop range and hospital injectable products. This is slightly lower than the expected launch of 20 new products (guided in the H124 earnings release), with management attributing this to delays in receiving regulatory approvals. With these launches, the total number of product offerings in Australasia markets stands at more than 150. Furthermore, with the FY24 release, the company has increased the number of new launches planned in Australasia during FY25–26 to 61 from 53 guided earlier.

Similar to H124, revenue growth for the full FY24 was driven by growth in AFT’s overseas market, which benefited from the waning pandemic-related headwinds. Revenue from Asia (5.5% of FY24 group revenue) rose 56.9% y-o-y to NZ$10.7m, with solid growth across all channels. The hospital channel, representing 67.9% of segmental revenue, grew 34.6% y-o-y, driven by stronger-than-expected demand for Maxigesic IV in the South Korean market, where it received regulatory approval in September 2021. The OTC channel (23.9% of segmental sales) also reported impressive 155.8% y-o-y growth, supported by growing traction from the company’s e-commerce initiatives (primarily in China), although we note that this growth comes from a lower base. While AFT’s e-commerce presence in China has helped generate sales growth in Asia, the approval of its Crystaderm antiseptic cream in November 2023 by the National Medical Products Administration (NMPA) should allow the company access to the offline retail and hospitals segments, which account for 75% of the OTC market in China, and this is therefore a much larger opportunity. Operating profit in Asia improved substantially to NZ$2.5m in FY24 from NZ$0.8m in FY23, with the operating margin rising from 11.3% in FY23 to 23.4% in FY24.

The international segment was the best performing during this period, with revenues increasing by a solid 137.9% y-o-y in FY24 to NZ$27.8m, helped by growing momentum in product sales as well as the receipt of licensing income this year. Product sales and royalties rose materially by 78.1% yo-y to NZ$19.3m, driven by growth in Maxigesic sales. Maxigesic is now available in 73 countries in various formats (versus 61 in FY23) including in the US, Belgium, Kenya, Singapore, South Africa and some Eastern European countries. Licensing income was up significantly, to c NZ$8.5m (from c NZ$0.9m in FY23), and included milestone payments from its licensee in the US Hikma Pharmaceuticals (c NZ$6m related to the launch of Maxigesic IV in the US) and its licensee in Italy (NZ$2.0m). The strong top-line performance and benefit from the licensing income flowed down, with the segment reporting operating profit of NZ$8.6m (versus NZ$0.4m in FY23). With several launches of Maxigesic planned in the coming months, including the Maxigesic Rapid launch in the US and Maxigesic IV launch in Canada, we expect momentum to stay strong for this market. We also note that the AFT UK business is now well established with the launch of Combogesic tablets and IV in FY24, and the company plans to launch about 40 products in this market in the future. Our estimates do not currently reflect the UK opportunity, which therefore offers further upside to our valuation.

Management expects sales growth momentum to continue in the near term, driven by the ongoing roll-out of Maxigesic and its line extensions (across several dose formats), gaining traction in Asia and international markets, the launch of new products in Australasia and a robust product development pipeline. With the company nearly achieving its target of NZ$200m rolling 12-month revenue in FY24, it is now turning to the next target of NZ$300m annual revenue. Furthermore, AFT aims to generate FY25 operating profit in the range of NZ$22–25m (excluding any licensing income payments).

While we expect the domestic Australasia market to continue to make material contributions to the company’s growth in the medium term (61 new products to be launched between FY25 and FY26), international efforts will likely be underpinned by the growth of the company’s Maxigesic range of products, its flagship, non-opioid pain-relief medicines (proprietary formulation combining acetaminophen with ibuprofen, two popular non-opioid analgesics). The product is now available in 10 dose forms/line extensions in 73 countries (up from 61 at the end of FY23) with patent protection to late-2030s in certain formulations (such as IV and rapid-dissolving tablets).

A key milestone during FY24 was the US launch of Maxigesic IV by partner Hikma (marketed as Combogesic IV in the country), marking AFT’s first foray into the lucrative US market. In March 2024, Hikma expanded its licensing agreement with AFT to commercialise Maxigesic IV in its domestic Middle East market (Saudi Arabia, Iraq and Jordan), further extending the drug’s market outreach. Maxigesic IV is a double-strength formulation of the oral version (1,000mg paracetamol and 300mg ibuprofen) and is specifically targeted at hospitals for the treatment of post-operative pain. The drug has seen a strong uptake in European countries and South Korea and we expect the market reception in the US to be of strategic importance to the company. The Phase III study, on which the US approval was based, demonstrated that Maxigesic IV offered a faster onset of action and higher pain relief than paracetamol IV and ibuprofen IV alone, making a strong case for the drug as a non-opioid alternative to available treatments, in our view. The treatment landscape for pain relief has been limited although we note the recent FDA acceptance of the rolling New Drug Application for Vertex Pharmaceuticals’ NaV1.8 inhibitor, VX-548 (suzetrigine), for the treatment of moderate-to-severe acute pain. There has been significant market buzz around a potential US approval with peak sales estimated at upwards of US$1bn. We believe this reflects the significant commercial opportunity for an effective pain management treatment, such as Maxigexic IV, in the hospital setting.

We see the next significant catalyst for AFT to be the launch of Maxigesic Rapid in the US market. The rapid-release version, which was approved by the FDA in March 2023, uses the same paracetamol+ibuprofen combination, at 65% strength of the original tablet form, and is based on the company’s patented rapid-release technology. AFT is currently evaluating the optimal distribution arrangement for the rapid formulation and a launch is planned for FY25. In February 2024, the company secured a long-term supply agreement with Microsize (a US-based pharmaceutical manufacturer) to supply micronised active pharmaceutical ingredients, critical components in the formulation of its Maxigesic Rapid pain relief medicine. Management expects the partnership will enable AFT to secure sufficient supply to meet the demand in several markets including the US and the EU. We expect a successful launch to be followed by introduction of other dose formats in the US market.

In addition to growing its Maxigesic footprint, AFT had also been investing in expanding its presence in international markets through the establishment of subsidiaries and business hubs in the UK, EU, Canada, the US, South Africa, Singapore and Hong Kong. While Maxigesic IV and tablets have since been launched in the UK, management has indicated that it has also been bolstering the company’s product portfolio by opportunistically acquiring other product licences in the UK and EU (AFT recently acquired six product licences from an insolvent German firm). In the UK, as previously noted, the company has identified 40 own and licensed products to be launched in the country in the near future. AFT also plans to launch Maxigesic IV in Canada through its Canadian subsidiary.

We also see the impending launch of Crystaderm antiseptic cream in the Chinese market (expected in CY24) as another key event for the company. While selected AFT products are available for Chinese consumers through e-commerce, The NMPA approval allows launch in the offline retail and hospital segments, which together account for 75% of the Chinese OTC market. We expect this launch to be followed by other product launches in China as AFT established its footprint in the country.

AFT continues to invest in its R&D pipeline (total R&D-related expenses were NZ$12.0m in FY24, steady from NZ$11.8m in FY23) and we expect these new additions to support longer-term growth. As of 31 March 2024, AFT had seven projects in its development portfolio across different therapeutic areas such as dermatology, eyecare, pain management and drug delivery. Three of these projects have been added over the last year including two in partnership with Hyloris Pharmaceuticals – HY-090, a locally acting novel molecule targeting Burning Mouth Syndrome (pain), and HY-091 targeting vulvar lichen sclerosus (dermatology) – and one in partnership with Massey Ventures and the Gillies McIndoe Research Institute to develop a treatment for keloid scars (dermatology). We note that the company is already undertaking a development project in collaboration with the institute to treat strawberry birthmarks. All these projects hold significant global sales potential if successfully developed, in our view, and support management’s ultimate objective to expand its global footprint and achieve its long-term goal to have international markets represent 35% of sales. Exhibit 2 presents a snapshot of AFT’s R&D projects.

Based on the FY24 performance and operating profit guidance for FY25, we have adjusted our FY25 revenue and expense estimates and have also introduced FY26 projections. Based on the FY24 revenues, international growth trend and domestic market stability, we have increased our FY25 revenue estimate to NZ$232.4m, from NZ$223.5m previously. In terms of segmental forecasts, we have upgraded our estimates for New Zealand (NZ$53.6m vs NZ$50.4m previously) while keeping the revenue projections for Australia broadly stable at NZ$126.6m. The major upgrade in our estimates is to international (RoW) markets, where we now project revenues of NZ$36.1m vs NZ$29.7m previously to reflect the solid FY24 performance. Note that this does not reflect any contribution from licensing or milestone payments. For Asia, we have marginally reduced our revenue estimate to NZ$16.0m from NZ$16.9m previously. For FY26, we project sales of NZ$278.3m to account for potential incremental contributions from Maxigesic IV and Rapid in the US and Crystaderm in China. Management has revised its rolling revenue target to NZ$300m, which we expect it to achieve by early FY27.

Given the change in sales mix in FY24, we have conservatively reduced our FY25 gross margin expectations to 45% (down from 46.9% previously). For FY26, we estimate gross margin of 46.9%. We have also raised our operating expense estimate for FY25 to NZ$80.6m from NZ$74.9m previously, to reflect management guidance for operating profit. We now project an operating profit of NZ$23.9m in FY25 (NZ$28.3m previously). This translates to an operating margin of 10.2% versus 12.7% previously. We expect margins to start improving in FY26 and estimate an operating profit of NZ$41.4m in FY26 (margin of 14.9%).

We value AFT using a discounted cash flow (DCF) valuation methodology, projecting free cash flows over a 10-year explicit forecast period (FY25–34e) and thereafter ascribe a terminal growth value (assuming conservative 2% ongoing top-line growth). We have incorporated the recent FY24   performance into our model and have made the aforementioned revisions to our forecasts based on current trends, management guidance and operational visibility. In addition to our near-term forecasts, we have also made certain changes to our longer-term top-line estimates (in particular trimming the estimate of peak operating margin to 34% from 36% previously), to reflect our opinion of the business potential and expected operating and financial performance.

After incorporating these changes, rolling forward our model and adjusting for the latest net debt position, our valuation for AFT shifts to NZ$725.5m or NZ$6.92/share, from NZ$698m or NZ$6.65/share previously. Note that our net debt estimate is pro-forma for the planned dividend payout of NZ$1.7m in July 2024.