MERUS LABS INTERNATIONAL INC T.MSL

CIBC's Q1/17 Preview

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Merus Labs International Inc

Q1/17 Preview Note

What's The Event

Merus reports its Q1/17 earnings results on the morning of Wednesday, February 15. Conference call details and timing have not been released.

Our fiscal Q1/17 expectations:
* Revenue: $28.5MM (Street: $27.4MM ), an 80% increase Y/Y due to the UCB and Sanofi acquisitions and growth in Sintrom, offset by declining Vancocin sales.
* Adjusted EBITDA: $10.6MM (Street: $10.2MM), a 24% increase Y/Y due to increasing sales, offset by a 163% increase in sales, marketing and general expenses.
* EPS: -$0.03 (Street: -$0.03).

As a reminder, the Sintrom manufacturing technology transfer, previously slated to complete in Q3/17, was most recently delayed until an expected completion of Q4/17. Merus is projected to incur an additional $1.5MM in costs sometime in H1/17, relating to the transfer. Furthermore, 2017 EBITDA guidance was reduced from $57MM to $44MM-$48MM to capture the effects of (i) the delayed transfer, and (ii) one to two quarters of foregone tech transfer savings at $2MM per quarter, due to the delay.

Implications

We believe 2017 will be a year of transition. Currently, Merus remains a portfolio of products that are expected to erode at mid- single digits. The acquisition of meaningful growth assets is needed to change the company's profile and provide future upside to the stock price. While management has stated it is in active discussions to acquire such assets, we did not get the sense that there was anything close to being finalized when this was mentioned on the last quarterly call. We will be looking for an update on Merus' business development efforts when it reports Q1/17 financials.

What's Changed

We roll forward our valuation to 2018E EBITDA (from 2017E) but maintain our rating and price target of Neutral and $1.50.