Reopening and public access to bring the pulse back
Investment recommendation
HLS is a specialty pharma company focused on bringing innovative central nervous system (CNS) and cardiovascular (CVD) therapeutics to North America. We have a C $30.75/sh target on the stock and HLS is our top pick. In February 2020, right before the pandemic hit, HLS launched anchor drug Vascepa as the first and only drug in Canada indicated to reduce the risk of cardiovascular events beyond cholesterol- lowering therapy. The stock is down 16% YTD, we believe due to the pandemic’s prolonged impact on launch initiatives. We expect this to ameliorate next year as patients return to in-person care and upon Vascepa achieving public reimbursement. Based on guidance, we forecast Vascepa’s net sales will peak at US$240M by 2026, which equates to 9.5% patient penetration. In a blue-sky scenario, we believe it could win up to 25% of the market (similar to statins). We estimate this represents peak sales of over US$600M and incremental value above our PT of ~C$36.75/sh.
Investment highlights
Reopening thesis: We forecast 2021 net sales of $6.4M. This is materially lower than the $17.9M we were forecasting at this time last year. Evidently, the effects of the pandemic have weighed on the launch of Vascepa for much longer than initially expected. For instance, as recently as July 2021, only 56% of physician visits were happening in person. This is detrimental to a new drug’s launch because physicians are 50% more comfortable initiating a new therapy with a patient in-person versus virtually (MD Analytics). For investors who believe the pandemic will finally be under control, it should follow that in-person care resumes and Vascepa’s sales inflect next year (we model $48.0M in net sales).
Public reimbursement: Vascepa has achieved over 90% private payer coverage. However, of the up to 2M Canadians in-label, management estimates ~50% are covered by the provincial plans. Since physicians don’t normally know what kind of coverage a patient has, achieving broad reimbursement is a key driver of physician adoption and script growth. Public reimbursement typically comes within 18-24 months of a drug’s launch. For Vascepa, this would be sometime before February 2022. As part of the initial launch, HLS hired 23 field personnel to target the ~2,500 high prescribing specialists in Canada. In preparation for public access, it recently engaged Pfizer to promote Vascepa to the nation's ~12,000 primary care physicians.
Methodical buildout: This is not management’s first rodeo. HLS’ founders were the key figures who spearheaded Biovail’s turnaround. We believe this was the ideal team to build a specialty pharma company from scratch. HLS began by establishing a foundational cash flow by acquiring the commercial rights to Clozaril and the US royalty rights to Absorica. It then sought a pre-registration asset, which it could launch and grow organically. Vascepa fit this bill. The drug was already sold in the US to treat very high triglycerides, but Phase 3 results for the 10-fold larger cardiovascular protection market were still pending. The data turned out better than expected and Vascepa was approved in 2019. Finally, in true specialty pharma fashion, later additions to
HLS’ portfolio (i.e., Perseris, MyCare and Trinomia) are all expected to drive operating leverage by utilizing the existing CNS- and CVD-focused salesforce.
Valuation
HLS trades at ~10.0x our 2022 EBITDA estimate, a small premium to North American specialty pharma peers at ~9.0x. This is because 2022 represents only the third year in Vascepa’s launch, which has thus far been constrained by the impacts of the pandemic. To capture our forecast growth, we value HLS using a five-year DCF (13% WACC). Our C $30.75/sh PT represents ~19.0x 2022E adjusted EBITDA.