Equity Research
Specialty
Pharmaceutical
Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ, US$1.61; TSX:ARZ, C$2.17)
Bloom Burton Securities Inc.
David Martin PhD, MBA
Analyst
416-642-8865 [email protected]
Antonia Borovina, PhD
Associate
416-640-7582 [email protected]
Prasath Pandurangan, MBBS, PGDM, CFA
Associate
[email protected]
Rating:
BUY (was Accumulate)
Risk:
Speculative
12 month Price Target:
US$5.00
April 10, 2017
Upgrading ARLZ to BUY (Speculative) Following Sharp
Sell-Off - Zontivity the Key Reason to Own at this Level
Last Wednesday, Aralez announced prudent cost cuts, but ARLZ stock went
down…..a lot, dropping 25% over Wednesday and Thursday - that on top of a
69% decline from its peak last fall.
Following the sell-off, we believe the long-term risk/reward has become
attractive, and as a result, we are raising our rating to BUY (was
ACCUMULATE), Speculative Risk. Maintaining price target of $5.00 based on
probability-weighting of DCF valuations for base case, upside and downside
scenarios.
Highlights
Price
$1.61
Implied Return
210.6%
Fiscal Year End
31-Dec
52 Week Range
$1.48-$6.80
Shares Outstanding (MM)
65.7
Market Cap. (MM)
$105.8
Avg. Daily Volume (MM)
1.13
Yes, Yosprala’s anemic launch precipitated the cost cuts, but we already
knew Yosprala was doing poorly. There are other business risks too: Aralez
partner Horizon (NASDAQ:HZNP; unrated) is nearing the end of patent
litigation for Vimovo (ARLZ 2016 revenues: $20 MM – we estimate a 30% risk
that ARLZ will face a generic Vimovo in 2017); Veterans Affairs may exit a
supply agreement for Toprol (which, we estimate, would reduce Aralez’s
annual revenues for that product from ~$100 MM to $70-$80 MM); Zontivity
may fall flat.
And yes, ARLZ has a load of debt ($274 MM at YE-2015). However, none is
due until 2022, and with the announced cost cuts, we believe the company
can reach positive cash flow if the Zontivity re-launch is successful. The
company has deep-pocketed backers who hold both equity and debt, and
who have experienced multiple prior successes with the Aralez management
team. We believe this group is likely to have the patience to see the Zontivity
story play out.
If we consider a worst case scenario (Vimovo generic in 2017; VA drops
Toprol; Zontivity peaks at $20 MM annual sales), we estimate the liquidation
value of the company’s assets to be $261 MM which, after subtracting the
$245 MM of forecast YE-2017 net debt, doesn’t leave much for equity holders
($0.25 per share by our calculation – our downside valuation scenario).
But, we think Zontivity (vorapaxar) is a hidden gem – it is the only second
generation platelet inhibitor with positive outcome data and approval for
peripheral arterial diseases (PAD), which affects ~8.5 MM people in the United
States. Our base case model forecasts peak Zontivity sales of $363 MM in the
U.S. and Canada in 2023 (10% penetration in the severe PAD population),
which supports a base case DCF valuation of $4.98 per ARLZ share.
An upside scenario (Zontivity peaking at 15% penetration) generates a 2023
sales estimate of $545 MM, and an upside DCF valuation of $9.17 per ARLZ
share. This does not include the possibility that, as cardiologists become
more comfortable with Zontivity, the drug could also see increased use in
triple therapy in patients with acute coronary syndrome. And, although it
seems a stretch right now, Yosprala might get a boost as Zontivity opens
doors to more cardiologists.
This report is priced as of last trading day close.
All values in US$ unless otherwise noted.
We plan to keep an eye on the Vimovo litigation, and the VA decision, but
with ARLZ at $1.61, we believe that downside risks around those events are
mostly/all priced-in, with upside likely if the Zontivity re-launch goes as
planned. Based on the announced cost cuts, sharpening our pencil on
Zontivity, and continued disappointing sales of Yosprala, we have made
adjustments to our model (changes indicated in Exhibit 1 – next page).
Exhibit 1. Aralez Financial Summary: Historical and Bloom Burton Estimates
2015A
1,3
2016A
2017E
2018E
Product net rev (MM)
Yosprala
$0.0
$0.0
$0.5
$1.1
Vimovo
$21.4
$20.0
$12.0
$8.0
Toprol XL
$0.0
$0.0
$58.8
$56.2
Zontivity
$0.0
$0.0
$2.4
$43.2
Tribute Products
$23.7
$25.4
$23.6
$23.9
$45.1
$54.3
$97.2
$132.5
$121.4
Total Revenue (MM)
previous
EBITDA (adjusted; MM)
$45.1
2
previous
$54.3
$97.3
($46.7)
($13.5)
$16.4
($46.7)
($18.4)
($8.5)
EPS (f.d. -GAAP)
EPS (f.d. -adjusted)
2
2017
1QE
($1.74)
($1.13)
($0.67)
($1.09)
($0.58)
($0.12)
2QE
3QE
4QE
Revenues (MM)
$22.3
$23.3
$25.3
$26.3
EBITDA (adjusted; MM)2
($3.8)
($3.6)
($3.2)
($3.0)
($0.32)
($0.30)
($0.26)
($0.25)
EPS (f.d. -GAAP)
1
FY2015E - Proforma combined POZN, TRX
2
Excludes non-cash items, transaction related expenses
3
Historical TRX financials translated (CDN/USD=0.75)
Source: Company documents; Bloom Burton estimates
Zontivity Re-Launch
Peripheral arterial disease is a common circulatory problem, affecting approximately 8.5 MM people in the United
States. It is characterized by reduced blood flow to the limbs due to narrowed arteries. PAD remains asymptomatic
or undiagnosed in about half of affected individuals. Antiplatelet drugs are considered standard of care, with
estimates suggesting that 39% of PAD patients are currently taking aspirin or clopidogrel (Pande et al. 2011,
Circulation, 124(1): 17-23). However, one third of treated PAD patients have severe disease which is poorly managed
despite treatment with current drugs.
Zontivity is considered a second generation antiplatelet drug used to reduce thrombotic cardiovascular events in
patients with a history of heart attack in combination with daily aspirin and/or clopidogrel. Setting Zontivity apart
from other second generation antiplatelet drugs, it is also approved for treating patients with PAD. Furthermore,
based on our discussions with cardiologists, the perception is that Zontivity works faster and better in PAD than
competing drugs. In the 26,449-patient Thrombin Receptor Antagonist in Secondary Prevention of Atherothrombotic
Ischemic Events–Thrombolysis in Myocardial Infarction 50 (TRA 2°P TIMI 50) pivotal clinical trial in patients with a
history of heart attack or PAD, Zontivity added to aspirin and/or clopidogrel produced a significant 17% relative risk
reduction over 3 years for the combined events of CV death, heart attack, stroke, and urgent coronary
revascularization. In the 3,787-patient PAD subgroup, addition of Zontivity to standard of care yielded a 42% relative
risk reduction in incidence of acute limb ischemia.
When Merck (NYSE:MRK; unrated) launched Zontivity in 2014, it targeted the broad secondary prevention market
including acute coronary syndrome (ACS), with limited success. Cardiologists we interviewed indicate there is a
reluctance to prescribe Zontivity for these patients since most are already on two antiplatelet drugs (among aspirin,
clopidogrel, ticagrelor and prasugrel) and adding a third was perceived as too high of a risk. They felt that severe
PAD is a more attractive indication because most patients are currently on antiplatelet monotherapy and Zontivity
shows compelling efficacy in this indication. Additionally, the docs suggested that once cardiologists get comfortable
with the safety profile of Zontivity in PAD, they will likely prescribe it more for severe ACS patients, once patients are
at a lower risk for bleeding (eg. recovered following surgery).
Aralez is planning a phased re-launch of Zontivity in the U.S. starting in April 2017 targeting the severe PAD market.
We estimate Zontivity could achieve net revenues of $363 MM by 2023 in the U.S. and Canada in our base case
scenario (assuming 10% market penetration; Exhibit 2), $545 MM in our upside scenario (assuming 15% market
penetration) and $20 MM in our downside scenario (assume no growth).
Exhibit 2. Base Case Market Forecast for Zontivity in Severe PAD
Patients with PAD
PAD patients on aspirin or clopidogrel monotherapy
Proportion with high severity PAD
Zontivity peak market share
Zontivity annual price per patient ($US)
Net revenues (2023)
U.S. PAD Severe Market
8.5 MM
2.9 MM
1.0 MM
10%
$3,600
$344.7 MM
Canadian Severe PAD Market
900 K
300 K
100 K
10%
$1,800
$18.8 MM
Source: Bloom Burton estimates
Benefit for Yosprala?
The cardiologists we interviewed also believe there is a niche opportunity for Yosprala in secondary prevention
patients taking daily aspirin, but who are at a high risk of GI ulceration (due to increased age, previous history of
ulcers, etc.). A key challenge for Aralez has been “getting in front” of cardiologists to discuss the benefits of Yosprala.
Although incremental, the drug improves compliance (single pill instead of aspirin and omeprazole separately) and
improves the timing of drug delivery (aspirin released at gastroprotective pH level), although both benefits are
largely theoretical. Aralez has succeeded in securing reimbursement that for many patients (mainly at Tier 3 level),
which combined with assistance programs, results in an out-of-pocket cost that should not be prohibitively higher for
patients, compared to generic aspirin and omeprazole. We believe once Zontivity is re-launched, it should generate
cardiologist interest, and allow Aralez sales reps to discuss Yosprala as a second positioned product.
Vimovo Litigation
Horizon is defending Vimovo in the New Jersey District Court against ANDA filers Dr. Reddy's (NSE:DRREDDY;
unrated), Mylan (NASDAQ:MYL; unrated), Lupin (NSE:LUPIN; unrated) and Actavis, subsidiary of TEVA (NYSE:TEVA;
unrated) - Actavis 'settled' but terms of the ‘settlement’ have not been disclosed, and the settlement itself is under
dispute. Essentially, the dispute is about the validity ('anticipation' and 'obviousness' based on 'prior art') of Vimovo
patents (U.S. Patent #s 6926907 and 8557285). The case is in the post-trial phase with closing arguments scheduled
for May 17, 2017. Our reading of the arguments so far is that neither side is an overwhelming favorite but the odds
seem to favor Horizon/Aralez simply because the burden of proof is on the ANDA filers (who need to present 'clear
and convincing' evidence) and because multiple inter partes review (IPR) petitions were denied by the IPAB (under a
lower standard of proof - 'balance of probabilities'). Additionally, apart from the right of appeal, there are multiple
other OB-listed Vimovo patents which are being litigated in separate cases (in more preliminary stages) which could
potentially delay generics in the event of an unfavorable outcome in the present case.
Our base case model applies a 50% probability to future Aralez revenue forecasts for Vimovo. If Reddy’s prevails and
launches a generic version of Vimovo during 2017, our base case DCF valuation drops by $0.50. Similarly, the
valuation gets a $0.50 bump-up if Vimovo remains patent protected through 2023 when formulation patents expire.
If it all Goes Bad – Downside Scenario
Our downside scenario assumes that Reddy’s launches a generic version of Vimovo in 2017; that the VA switches to
another supplier of Toprol XL; that Yosprala peaks below $2.5 MM in annual sales and that the Zontivity re-launch
falls flat. Exhibit 3 shows our downside revenue and valuation estimates for these programs based on multiples which
we believe are appropriate (note: the 2017 revenue estimate for Toprol XL adjusts for transition costs which are
expected to end in 2017).
Exhibit 3. Valuation of Aralez Downside Scenario
Toprol (2017)
Tribute (2017)
Zontivity (5th year)
Yosprala (5th year)
Net Sales Multiple
$67.4
2.0
$23.6
3.0
$20.0
2.5
$2.4
2.5
Total
less (2017E net debt)
equity value
per share
Value
$134.9
$70.7
$50.0
$5.89
$261.4
$245.0
$16.4
$0.25
Source: Bloom Burton estimates
Base Case and Upside Scenarios
Our base case and upside scenario valuations are based on DCF analysis (13% cost of equity; 0% terminal growth). In
both cases, we apply a 50% probability of genericization to future revenue forecasts for Vimovo (+/- $0.50 per share
depending on outcome), and we assume the VA will drop branded Toprol XL, but will start buying authorized generic
Toprol XL which is distributed by Par Pharmaceuticals, subsidiary of Endo International (NASDAQ:ENDP; unrated)
with Aralez sharing profits 50:50. The key variable driving the delta between base case and upside valuations is
penetration of Zontivity at peak (10% base case; 15% upside).
Exhibit 4. Probability Weighting of Aralez Valuation Scenarios
Scenario Valuation
Probability
Base Case
$4.98
50%
Upside
$9.17
25%
Downside
$0.25
25%
Total
Source: Bloom Burton estimates
PWV
$2.49
$2.29
$0.06
$4.85
We apply probability weighting to the scenario valuations, and arrive at a risk-adjusted valuation for ARLZ shares of
$4.85, which we round up to $5.00. With ARLZ stock closing at US$1.61 on Friday, our target price for ARLZ stock
infers a risk-adjusted return of >200%. BUY (Speculative Risk).
Bloom Burton Forecast Income Statements for Aralez Pharmaceuticals
Income Statements (US$)
NET REVENUES
Tribute
Yosprala
Toprol-XL
Zontivity
Total product revenues
Other Revenues
Vimovo royalty
Total Revenues
Cost of sales
Gross Profit
OPERATING EXPENSES
Selling, general and administrative
Research and development
Change in fair value of contingent consideration
Impairement of intangible assets
Amortization
Total operating expenses
PROFIT (LOSS) FROM OPERATIONS
Non-operating income (expenses)
Interest expense
Interest income
Other
Non-operating income (expense)
PROFIT (LOSS) BEFORE TAXES
Taxes
PROFIT (LOSS) AFTER TAXES
EPS
EPS (fd)
2016A
2017E
23,554,100
521,326
58,750,000
2,388,729
85,214,155
$ 23,945,800
$ 1,148,482
$ 56,239,848
$ 43,183,636
$ 124,517,766
2019E
$ 23,945,800
$
1,508,542
$ 53,592,856
$ 81,570,183
$ 160,617,380
2020E
$
$
$
$
$
25,432,000
100,000
7,800,000
703,125
34,035,125
$
$
20,000,000 $
54,270,000 $
12,000,000 $ 8,000,000 $
7,600,000 $
7,220,000
97,214,155 $ 132,517,766 $ 168,217,380 $ 267,751,287
$
$
11,765,000 $
42,505,000 $
48%
20,423,384 $ 41,138,743 $ 49,837,898 $ 74,496,382
76,790,771 $ 91,379,023 $ 118,379,482 $ 193,254,906
44%
44%
44%
44%
$ 118,548,000
$
8,832,000
$
750,000
$
4,368,000
$
12,591,000
$ 145,089,000
$ (102,584,000)
$
$
$
$
$
2018E
$ 23,945,800
$
1,905,028
$ 51,078,213
$ 183,602,245
$ 260,531,287
$
$
$
$
$
$
$
97,377,401
3,000,000
23,400,000
123,777,401
(46,986,629)
$ 84,392,718
$ 1,000,000
$
$
$ 23,400,000
$ 108,792,718
$ (17,413,695)
$ 78,677,740 $ 80,914,946
$
1,030,000 $
1,060,900
$
$
$
$
$ 23,400,000 $ 23,400,000
$ 103,107,740 $ 105,375,846
$ 15,271,743 $ 87,879,060
$
(6,141,000) $
$
$
$
5,683,000 $
$
(458,000) $
$ (103,042,000) $
$
(64,000) $
$ (102,978,000) $
$
(1.67) $
$
(1.74) $
(26,875,000)
(26,875,000)
(73,861,629)
(73,861,629)
(1.13)
(1.13)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Source: Company documents; Bloom Burton estimates
(26,875,000)
(26,875,000)
(44,288,695)
(44,288,695)
(0.67)
(0.67)
(14,875,000)
(14,875,000)
396,743
396,743
0.01
0.01
$
$
$
$
$
$
$
$
$
(14,875,000)
(14,875,000)
73,004,060
10,479,377
62,524,683
0.95
0.95
Bloom Burton Forecast Balance Sheets for Aralez Pharmaceuticals
Balance Sheets (US$)
ASSETS
Current
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Other non-current assets
Total assets
LIABILITIES
Current
Accounts payable and accrued liabilities
Accrued expenses
Contingent consideration
Other current liability
Total current liabilities
Contingent consideration
Long term debt (secured facility; contingent consideration)
Deferred tax liability
Other non-current liability
Total liabilities
SHAREHOLDERS’ EQUITY
Capital Stock
Additional paid-in capital options and warrants
Accumulated other comprehensive income
Deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
2016A
2017E
2018E
2019E
2020E
$64,943,000
$20,405,000
$4,548,000
$2,435,000
$92,331,000
$7,316,000
$340,194,000
$76,694,000
$842,000
$517,377,000
$29,432,721
$16,425,250
$5,002,800
$2,435,000
$53,295,771
$6,816,000
$316,794,000
$76,694,000
$842,000
$454,441,771
$24,138,937
$12,246,513
$5,503,080
$2,435,000
$44,323,530
$6,316,000
$293,394,000
$76,694,000
$842,000
$421,569,530
$59,204,456
$12,858,838
$6,053,388
$2,435,000
$80,551,683
$5,816,000
$269,994,000
$76,694,000
$842,000
$433,897,683
$156,853,652
$13,501,780
$6,658,727
$2,435,000
$179,449,159
$5,316,000
$246,594,000
$76,694,000
$842,000
$508,895,159
$8,833,000
$32,141,000
$10,430,000
$5,870,000
$57,274,000
$60,685,000
$274,441,000
$3,273,000
$2,218,000
$397,891,000
$9,716,300
$32,141,000
$10,430,000
$5,870,000
$58,157,300
$60,685,000
$274,441,000
$3,273,000
$2,218,000
$398,774,300
$10,687,930
$32,141,000
$10,430,000
$5,870,000
$59,128,930
$60,685,000
$274,441,000
$3,273,000
$2,218,000
$399,745,930
$11,756,723
$32,141,000
$10,430,000
$5,870,000
$60,197,723
$60,685,000
$274,441,000
$3,273,000
$2,218,000
$400,814,723
$12,932,395
$32,141,000
$10,430,000
$5,870,000
$61,373,395
$60,685,000
$274,441,000
$3,273,000
$2,218,000
$401,990,395
$352,336,000
$4,816,000
($237,666,000)
$119,486,000
$517,377,000
$352,336,000
$14,859,100
($311,527,629)
$55,667,471
$454,441,771
$352,336,000
$25,303,924
($355,816,324)
$21,823,600
$421,569,530
$352,336,000
$36,166,541
($355,419,581)
$33,082,960
$433,897,683
$352,336,000
$47,463,663
($292,894,899)
$106,904,764
$508,895,159
Source: Company documents; Bloom Burton estimates
Important Disclosures
This Research Report is issued and approved for distribution by Bloom Burton Securities Inc. (“Bloom
Burton”), a member of the Investment Industry Regulatory Organization of Canada.
This Research Report is provided for informational purposes only and is not an offer to sell or the
solicitation of an offer to buy any of the securities discussed herein in any jurisdiction where such offer or
solicitation would be prohibited. The securities mentioned in this Research Report may not be suitable for
all types of investors. This Research Report does not take into account the investment objectives,
financial situation or specific needs of any particular investor. Recipients of this Research Report should
not rely solely on the investment recommendations contained herein and should contact their own
professional advisors to determine if an investment is suitable for them.
The information contained in this Research Report is prepared from sources believed to be reliable but
Bloom Burton makes no representations or warranties, express or implied, with respect to the accuracy,
correctness or completeness of such information. All opinions and estimates contained in this Research
Report constitute Bloom Burton's judgment as of the date of this Research Report and are subject to
change without notice. Past performance is not necessarily indicative of future results and no
representation or warranty is made regarding future performance of the securities mentioned in this
Research Report. Bloom Burton accepts no liability whatsoever for any direct or consequential loss
arising from any use or reliance on this Research Report or the information contained herein. This
Research Report may not be reproduced, distributed or published, in whole or in part, without the
express permission of Bloom Burton.
This Research Report is intended for distribution in the United States only to major U.S. institutional
investors (as such term is defined in Rule 15a-6 of the U.S. Securities Exchange Commission) and is not
intended for the distribution to or the use by any person or entity that is not a major U.S. institutional
investor. Bloom Burton analysts are not registered and/or qualified as research analysts with FINRA
and/or the New York Stock Exchange. Any U.S. Person wishing to effect transactions in any of the
securities discussed herein should do so through a qualified salesperson at a U.S. registered brokerdealer.
The research analyst(s) for this Research Report is compensated based in part on the overall revenues of
Bloom Burton, a portion of which are generated by investment banking activities. Research analysts do
not receive compensation based upon revenues from specific investment banking transactions. Bloom
Burton may have had, or seek to have, an investment banking relationship with companies mentioned in
this report. In addition to 1% ownership positions in covered issuers which must be specifically disclosed,
Bloom Burton, or its affiliates and their respective officers, directors and employees may from time to
time acquire, hold or sell securities mentioned herein or have a position in options, futures or other
derivative instruments based thereon. Although Bloom Burton makes every effort possible to avoid
conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on
this Research Report when evaluating whether or not to buy or sell the securities of subject companies.
Bloom Burton presently maintains an e-mail list of persons, who have previously expressed an interest in
receiving our research, or whom Bloom Burton has identified as having a potential interest in investments
relating to the healthcare industry. All research materials including updates and changes to previous
rankings are disseminated to these parties and to third party news sources via e-mail. Staff is prohibited
from calling or otherwise providing any person with advance notice of research materials. Bloom
Burton's research dissemination policies and procedures are also available on its website
at www.bloomburton.com.
Each research analyst who authored this Research Report and whose name appears herein certifies that:
(i) the recommendations and opinions expressed in this Research Report (including the rating assigned)
accurately reflects his or her personal views about any and all of the securities or companies discussed
herein; and (ii) no part of his or her compensation was, is or will be, directly or indirectly, related to the
provision of specific recommendation or views expressed herein.
Company Specific Disclosures
1. Bloom Burton & Co. or its affiliates have provided investment banking services for Aralez
Pharmaceuticals Inc. during the 12 months preceding the date of issuance of the research report or
recommendation.
2. Bloom Burton has managed an offering of securities by this issuer in the past 12 months.
3. The research analyst responsible for this report or recommendation may hold securities discussed in
the report indirectly through Bloom Burton Canadian Healthcare Fund, LP which is indirectly affiliated
with Bloom Burton & Co.
Recommendations and Risk Rankings
Each company on which Bloom Burton provides research coverage is assigned a recommendation and
risk ranking, as set out below:
Recommendation Categories
Buy – Expected to materially outperform the sector average over the next 12 months.
Accumulate – Expected to outperform the sector average over the next 12 months or longer.
Hold – Expected to perform similar to the sector average over the next 12 months.
Sell – Expected to materially underperform the sector average over the next 12 months.
Risk Rankings
Average – Volatility and risk expected to be comparable to the broader market; revenue and earnings
have predictability; no significant cash flow and/or financing concerns over next 12 months.
Above Average – Volatility and risk expected to be greater than for the broader market; below average
revenue and earnings predictability; may have negative cash flow, low market cap or float. Stock may not
be suitable for all classes of equity investors.
Speculative – High volatility and risk expected; potential for balance sheet concerns, low public float.
Stock may be suitable for only a small subset of equity investors willing to take on the risks of a high risk
investment.
Distribution of Ratings as of April 2017
Rating
BUY
ACCUMULATE
HOLD
SELL
Total
Number
8
4
3
1
16
Percentage
50%
25%
19%
6%
100%