Merus Labs International Inc.
(MSL-T) C$1.23
Q3/16 Review - Sintrom Manufacturing Transfer Delayed Event
Merus' Q3/16 results and commentary were highlighted by: 1) lower-than-expected EBITDA result; 2) delayed Sintrom-related cost-saving realization; and 3) reduced F2016 guidance. Adjusted EBITDA was $12 million versus TD at $14.1 million and consensus estimates of $13.9 million. Corporate gross basis revenues grew 138% y/y to $32.6 million overall (Exhibit 1), while organic growth was ~24%.
Impact: NEGATIVE
Recent Acquisitions Drive Revenue Growth - The 138% y/y gross basis revenue growth was largely driven by: (i) the UCB Nitrates and Sanofi portfolios acquired in Q2/16 and (ii) one-time Sintrom inventory build-up.
Key Drug Performance - Sintrom sales grew 40% y/y to $9.6 million on a gross basis. This was mainly due to a one-time inventory build-up associated with the planned manufacturing transfer. Management expects Sintrom inventory level to normalize in Q4/16. With respect to Enablex/Emselex, Q3/16 reflected the full impact of the price reduction in Germany. Overall Enablex sales grew 19% y/y due to the combination of: 1) Q3/15 being a weaker quarter and 2) 20% y/y script growth with the new pricing.
Higher SG&A and Nitrates Portfolio COGS Drag Q3/16 EBITDA - SG&A expenses increased $2 million sequentially, associated with the expanded European operations. UCB Nitrates portfolio contributed $11.7 million on a gross basis in Q3/16. Nonetheless, its COGS were higher than expected in the quarter, due to higher purchase price of existing inventory acquired with the portfolio.
Reduced Guidance - Management has lowered its F2016 Adjusted EBITDA guidance to $43mm -$46mm from $47mm-$50mm. Key considerations include: (i) delayed Sintrom-related cost-savings and (ii) higher OPEX (related to European team build-up and other one-time expenses).
TD Investment Conclusion
We continue to view Merus as one of the best positioned among its peers to execute its strategic growth plan. Key considerations include its relatively strong balance sheet and its differentiated European market focus. Strong deal flow across the industry should continue to provide a tailwind into F2017. We are maintaining our BUY rating and $4.00 target price.