Aequus Pharmaceuticals (OTCQB:AQSZF) is a growing specialty pharmaceutical company with an increasing pipeline of commercial products in ophthalmology and transplant, and a development stage pipeline in neurology and psychiatry. My latest article from 4th May 2020 summarized the status of the full Aequus pipeline including the company’s business strategy in detail. For readers not being familiar with Aequus yet, I recommend the latest article as a pre-read. In today’s article, I will provide an incremental update and will focus on the projection of future revenue in order to verify the investment opportunity.
Recap of Investment Opportunity
My thesis of the investment opportunity is based on projected revenue growth coming from already marketed products and new in-licensed products, creating an opportunity to reach operational breakeven in 2020. Considering the extremely small market-cap of currently around 8Mio CAD, it generates a significant upside opportunity for the share price if events and revenue materialize as projected. At the same time, I would like to stress the point that we are talking about a penny stock in the nano-cap range. Aequus is a high-risk, high-reward bet for investors that are willing to accept this level of risk.
My article will explain why I believe that finally – to quote from a famous book and movie – the odds are in the investor’s favor. I will also explain why I decided that now is the moment to increase my investment in Aequus.
Pipeline – Source: Aequus webpage
In my previous article I wrote: “If the Q1/2020 figures, to be published until end of May 2020, confirm the progress of the actual path to breakeven, I will raise the rating to “Very Bullish”.” The company delivered another record quarter in Q1/2020 with 579.5k CAD of revenue and the risks addressed in the previous article seem to be reasonably managed. Therefore, I increase my rating to “Very Bullish” as announced.
Events May 2020 – July 2020
Q1/2020 Financial Report:
Please find the Q1/2020 Financial Report and MD&A at SEDAR.
Source: Q1/2020 Financial Report – page 2
Aequus presented another record quarter of revenue with 579.5k CAD, which is a +8.3% increase compared to the previous record quarter of Q4/2019 and +76% compared to Q1/2019. It confirms the previously anticipated positive impact of the changed dispensing formulary for Tacrolimus in British Columbia. Despite the COVID-19 challenges hitting the globe, I consider this revenue level to be the base for the upcoming accelerated revenue growth, fueled by the expected market entry of the Evolve products within the next 2-3 months.
The quarterly loss of 405.8k CAD is by far the best result in the company’s history (at least in my history log dating back to Q3/2015). It is the result of constant revenue growth and improvements in operational efficiency:
Source: MD&A for Q1/2020 – page 12
Q1/2020 shows us the direction for 2020. Even when blindly extrapolating the quarter’s financial figures to the whole year, ignoring the continuous sales growth of the existing products and the expected market launch of Evolve, it is obvious that 2020 shall be expected to be the best year in the company’s history. Further, below in this article, you’ll find a more detailed projection.
Source: Annual Financial Report – page 4
Cash is a concern for many investors, with around 328.5k CAD left and approaching an empty wallet rather sooner than later in 2020. My guess is that Aequus stretches the cash situation to the limit because they first want to release good news around Evolve. The news should push the share price to regions more attractive for an equity financing.
Alternatively, Aequus might also try to unleash a series of news to push the share price above the 0.32 CAD limit. This would allow the company to force the conversion of the convertible debenture units issued on 2nd May 2019. As a result, the company would get close to 2Mio CAD of cash plus they would get rid of the interest payments of ~200k CAD per year. This would render a regular equity financing round obsolete, which would otherwise have targeted the region of 1.0-1.5Mio CAD, based on my estimation. The dilution of an additional ~16Mio shares caused by the conversion, considering the current 80Mio shares, seems acceptable to me, anticipating the revenue opportunities it would enable.
CEO Insider Transaction:
On 9th Jun 2020, the CEO Doug Janzen bought 200k shares. While some investors consider this amount small, I consider it a strong message. Doug Janzen does not have to buy into the company anymore, he already owns a massive 5.35Mio shares. With such an insider transaction, all he can and needs to do is to send a message, and a clear message he sent. You do not need a crystal ball to anticipate that Evolve must be on the horizon.
Behind the Scenes:
All eyes are on the long-awaited market launch of the Evolve products and Aequus, currently, leverages their existing network in Canada to be ready from day one. As soon as the announced manufacturing audit certificate is available, expected any day now, Aequus will file for approval with Health Canada. Within 30 days after submission, the company will receive the response from Health Canada. With Evolve being an OTC product already marketed in many countries, I do not expect any surprises and anticipate the market launch immediately after the response from Health Canada.
Furthermore, Aequus is working with Quebec and British Columbia on the reimbursement decision for Vistitan. These processes take time and it is difficult to predict when a decision will be available. I anticipate the decisions to be made before end of 2020 but do not have any additional facts at hand for a more precise estimation.
Impact of COVID-19 on Aequus
In my previous article, I considered Aequus capable of withstanding the COVID-19 pandemic. First, Aequus has taken the opportunity to “integrate existing retail structures with more wide-reaching virtual channels”, as they announced in April 2020. Second, the current business is not directly impacted by the pandemic. Organ transplant patients still require Tacrolimus and glaucoma treatment with Vistitan has to continue as well.
The strong Q1/2020 results gave a first indication of the resilience and I expect Q2/2020 to be in the same ballpark as Q1/2020. There is no reason to assume that revenue would significantly drop due to COVID-19.
Revenue Projections – Approach
Despite the COVID-19 crisis, I consider the pipeline and business strategy sufficiently stable again to resume some projections that I started in early 2019. For companies at weakly regulated venture markets, however, there are usually limited facts available on pipeline or business development. Any projections are, therefore, largely based on speculative assumptions by default. Thus, it is important to be transparent on the underlying assumptions and elements that build the overall projection.
For 2020, we are in a more comfortable position because we can reasonably extrapolate from the previous two quarters and should end up with a sensible projection. For 2021 and beyond, the projection is based on a number of assumptions. One key assumption is that Aequus and Medicom Healthcare jointly enter the US market before mid 2021 with Evolve and the “undisclosed therapeutic”. An unknown variable is the adoption rate for these products in the US market, therefore, I created a low/high projection for low/high sales growth in the US, cautiously mapping and scaling the anticipated dynamics of the Canadian market to the US market, which may or may not work.
Another unknown variable is the impact of a positive reimbursement decision for Vistitan in additional Canadian districts and the potential increase of the revenue share from Sandoz, which has the potential to trigger quite a substantial jump in revenue. This is again reflected in the low/high projections with a rather conservative approach. An additional, highly speculative element is the potential change of the dispensing formulary for Tacrolimus in more Canadian districts. I did not reflect this possibility in the projections although I consider it likely to happen during the projection timelines.
Short-Term Projection (2020)
Short-term, until end of 2020, I expect the following key events:
- Q2 revenue in the same ballpark as Q1, despite COVID-19
- Evolve market launch before end of September (100k-150k CAD for 2020)
- Tacrolimus and Vistitan with continuous growth (+50k CAD for Q3, another +50k CAD for Q4)
- Positive reimbursement decision for Quebec and/or British Columbia for Vistitan
- News on joint venture with Medicom on US market approach
- News on the additional “undisclosed preservative free therapeutic”
Taking the base of 580k CAD of revenue for Q1 and Q2 each, Q3 would allow for ~630k CAD and I would anticipate 750-800k CAD in Q4 based on these events. Therefore, Q4/2020 might allow for an operational breakeven which would be a tremendous milestone in the company’s history.
Total revenue for 2020 projects towards ~2.4-2.8Mio CAD (1.63Mio CAD in 2019) and with a currently estimated need of ~3.5Mio CAD for 2020 (increasing my previous estimation of 3.2Mio CAD), we may see a net loss of around ~1Mio CAD (3.1Mio CAD in 2019).
Mid-Term Projection (2021)
The projection for 2021 builds on the events for 2020 and anticipates the following key events for 2021:
- With an expected positive decision in place for the Vistitan reimbursement in Quebec and British Columbia (covering around 36% of the 55Mio CAD bimatoprost market in Canada), Vistitan revenue will see a significant boost; furthermore, it will trigger an increase in revenue share from their partner Sandoz (~2.8-3.6Mio CAD in 2021)
- My Evolve sales projection for Canada anticipate a continuous increase, starting with ~150k CAD in Q1 and showing ~300k CAD in Q4 (~0.7-1.0Mio CAD in 2021)
- US launch of Evolve, an ophthalmology market 5-10x bigger than Canada (depending on schedule and B2B relationships, anything from 0.5-3Mio CAD in 2021 seems possible)
- The new “undisclosed preservative free” therapeutic is anticipated to hit the Canadian market (estimated to 5Mio CAD annual peak revenue) and likely also the US market, with a highly speculative revenue ballpark of 0.5-2.5Mio CAD for 2021
- Additional Medicom products may be launched in Canada and/or the US (no data available for projections)
- Additional districts in Canada may issue a new dispensing formulary decision to prioritize Tacrolimus over Prograf (no data available for projections)
This would set the low end of the projection, focusing on a cautious estimation of the already known products and plans, to 4.5-5Mio CAD in 2021. This is already sufficient to celebrate the first profitable year for Aequus. The higher end of the projection seems to be around 7-10Mio CAD for 2021. This would require, however, an early and strong start in the US and at least one additional product to be marketed.
Long-Term Projection (2022)
The projection for 2022 is by nature more speculative and is based on the following assumptions:
- While Vistitan and Tacrolimus have some significant growth potential through additional decisions of Canadian districts, I am setting the revenue for both products to a rather conservative total of 3.0-4.0Mio CAD
- Evolve in Canada should continuously increase the market share to 1.4-1.8Mio CAD and has not reached the anticipated annual peak revenue yet
- Evolve in the US should as well increase the market share quite significantly. With a speculative annual peak revenue of around 15-30Mio CAD for the US, an estimation of 2-5Mio CAD for year 2 after market launch looks achievable
- For the new “undisclosed preservative free” therapeutic, assumed to be marketed in Canada and the US in 2022, all we can do is to extrapolate from the initially announced annual peak revenue figures that seem to be in an area similar to the figures of the Evolve products. Therefore, I set the revenue projection to 1.5-4.5Mio CAD in total for Canada and the US
Focusing on the products above, we get a 2022 revenue projection of around 7.9-15.3Mio CAD.
For 2022, it is likely that more Medicom products are already marketed through Aequus in Canada and also in the US, following the announced plans for the joint venture. No data is available about potential products or the revenue potential.
With Trokendi, Aequus still has the rights on a high-potential product. Based on my recent understanding, there are still some plans to bring the product to market. It is unclear to me if Aequus will be in the position to do so in 2022 and it may depend on the 2021 financial outcome.
Finally, we have AQS-1303 and AQS-1304. For both product candidates, it is not possible to do any reasonable projections due to the lack of information. It is not unlikely, however, that especially AQS-1303 may create a nice surprise for investors sooner or later.
Investment Opportunity and Risks Update
I’d like to point out – as in every article – that we are looking at a non-profitable penny stock in a high-risk sector. It should be obvious that this stock is not for risk averse investors. If you invest in a company like Aequus, you need to be in the position to handle the full loss of your investment in worst case.
To identify our investment opportunity, let us summarize the projections for 2020-2022 and compare it with the current valuation.
Low/High Revenue Projections – Source: Smart Risk Investor Assessment
The diagram summarizes the previous low/high projections for 2020-2022. For the valuation, I assume 96Mio shares (~80Mio plus ~16Mio from the convertible debenture units).
The fair valuation for 2020, extrapolated from the confirmed Q1/2020 figures, is at a share price of ~0.15 CAD. With a current share price of 0.085 CAD (at the time of writing), Aequus seems undervalued with a short-term upside of around +75%.
The projection for 2021 indicates a fair share price of 0.25-0.45 CAD (+195-430%), the projection for 2022 indicates a fair share price of 0.4-0.8 CAD (+360-840%). Again, this is only considering the known products and we know that more products are likely to be added to the revenue stream within the next 6-18 months.
Share Price Valuation – Source: Smart Risk Investor Assessment
The valuation is not necessarily a prediction of the future share price. If the stock market continues to ignore Aequus, the company may stay undervalued. Usually, when there is an investment opportunity, however, investors will show up. For “forgotten” speculative venture stocks that deliver on a successful turnaround, they often also get pushed way beyond a fundamental valuation by traders, based on my experience. In case Aequus manages to successfully enter the US market during the first half of 2021 and continues to maintain a promising pipeline for the upcoming 12-18 months, as anticipated, I would not be surprised in 2021 to see share prices significantly above the assessed valuation. The stock market by nature trades the expectations, and sometimes the dreams, of investors for the future.
Of course, my valuation attempt is flawed, in both directions actually:
- We ignored the risks
- We only considered known products (considering the “undisclosed therapeutic” a known product because it has been communicated officially); Aequus and Medicom announced more Medicom products to be marketed in Canada and US through Aequus in future (not mentioning specific products or timelines)
- We ignored the existence of Trokendi, a 20Mio CAD annual peak revenue product that will get back into the game as soon as Aequus finds a way to pay for the related milestone fees to Supernus
- We ignored the existence of AQS-1303, a potential 300Mio CAD annual peak revenue product (US market) that has quite some potential for out-licensing or partnering
- We ignored the AQS-1304 cannabis project and I will continue to do so as long as I don’t see more tangible information
In any case, we need to accept the speculative nature of such projections in the venture market. So, it is even more remarkable that for our +75% upside projection for 2020, nothing out of the ordinary has to happen. Basically, the repetition of Q1/2020 in the following three quarters will be sufficient to materialize the required revenue and I see very limited risks why this should not happen.
Therefore, my conclusion for Aequus is that the moment is now, and I increased my investment these days. The chart indicates that the stock has bottomed out and I see many catalysts ahead. Combining the prospects with the current undervaluation of the company, I see a significant upside of at least +75% within the next few months.
Still, we shall not forget about the risks associated with the valuation and thus also to the investment.
Risks – Cash:
As mentioned before, cash is a concern for many investors. With around 328.5k CAD left at the end of Q1/2020 you may wonder how much further they will be able to stretch the cash without any financing.
I am personally not concerned about any form of financing. The required cash amount to proceed operationally is low, less than 1.0Mio CAD until reaching profitability at the end of 2020. With the opportunities ahead, there are reasonable options to get the cash, in my opinion, be it with a small equity funding or with some out-licensing or partnering deals e.g. for AQS-1303 or Trokendi. Still, as long as the wallet is nearly empty, it shall be considered a risk.
Risks – Tacrolimus agreement:
The agreement with Sandoz for Tacrolimus expires on 31st Dec 2020 and a renewal has not been announced yet. Aequus cannot afford to lose the revenue of this product before they entered the US market together with Medicom.
Negotiations are in progress and I am confident to see a positive result before Q4/2020. Now that both Tacrolimus and Vistitan got some remarkable traction in Canada, it would not make sense to me for Sandoz to change horses.
Risks – US business:
The schedule and revenue opportunities are still pretty vague around the planned joint venture with Medicom to enter the US market. While some initial press releases implied first potential revenue from the US already in 2020, I consider 2021 more realistic. In addition, there is not much known about products and the business model. We know that Evolve shall be the first product to be marketed in the US and that they will focus on business-to-business relations in order to limit the amount of resources to manage the US business. We also know that these things simply take time and only time will tell if and when the joint venture will come to life.
Good news is that Aequus does not need the US business for breakeven and profitability. It is required, of course, to materialize the projected valuation for 2021 and 2022.
Disclosure: I am/we are long AQSZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
