I've been very bullish on Imprimis Pharmaceuticals Inc. (IMMY:NASDAQ). In particular, my thinking was that the stock was cheap and would perform very well going into the Eton IPO. This thesis actually played out well as IMMY has dramatically outperformed the market over the last couple months heading into Nov. 13, which is when ETON priced.
At which point, IMMY sold off in a classic case of buy the rumor, sell the news. However, Imprimis also reported earnings on Nov. 13. And, if you listen to the company's earnings call, you'll know that the ETON IPO was only the tip of the iceberg. There's lots more going on at Imprimis that has it set up for another year or more of what could be very positive catalysts.
So, without further ado, here are five things to look for in 2019, each of which could be a substantial value driver for IMMY. The best part is each of these catalysts are, in my opinion, more likely to occur than not, and are the reasons why I continue holding a large position in IMMY despite the recent doubling in the shares.
1. Sales Continue Growing at Strong Double Digits Pace; Margins Improve
"We continue to have line of sight to achieving our $100 million revenue run rate during 2021." ~ CEO Mark Baum
A $100 million run rate in 2021 is the stated goal of the company. Since it just did $10.7 million in Q3 2018, to achieve the goal it will need to grow at a minimum of 7% sequentially for the next 13 quarters. That is quite the target, but the company has been stating that for a while and seems to believe it will achieve it. Therefore, despite only a modest sequential gain in Q3, investors should expect to see more rapid growth in sales for the foreseeable future.
What is driving the growth, and why I think it can be sustained, is the company's switch to a commission only sales group. Over the last year, they went from a "handful" of W2 reps to 25 commission based sales reps. More importantly, the bulk of this increase happened only recently and is just really starting to kick in; sales reps doubled during the third quarter. This is leading to the forecasted acceleration as, according to the CEO, October was "by far" the best month in the history of the company.
"I am optimistic we can achieve an additional 10 plus percentage points of gross margin as we execute on our medium and longer term goals." ~ CEO Mark Baum
Meanwhile, as the company grows sales, it is going to turn out increasingly large profits. Gross margins in Q3 were 61%. If it hits the 70ish percent that management is targeting, Imprimis will exit 2021 with operating margins in excess of its baseline goal of 25%. Putting a reasonable 15 times multiple on this, IMMY should exit 2021 with a valuation of over $375 million for its core business alone, ignoring all the other value creation avenues.
2. MELT…IND and USD
In January, MELT will be meeting with the FDA for a pre-IND meeting. This is a big first step towards developing the pathway to approval of clinical trials, trials that the company expects to start sometime in the latter half of 2019.
Based on the company's history of having dispensed compounded versions of MELT's formulation over 100,000 times, Imprimis is confident that both doctors and patients will prefer this form of pain killer to injectables and opioids. This would be huge for them as the market is massive.
"According to our estimates, there are in excess of 100 million procedures in the U.S. annually that may be appropriate for Melt's drug candidates…the value of these markets in the aggregate is several billion dollars annually, including a billion alone from ocular surgery where we believe Melt's lead drug candidate would be eligible for payment by CMS or the Medicare system." ~ CEO Mark Baum
Assuming the successful approval of an IND, I expect Imprimis to follow its typical pathway of bringing in outside investors to pay for the development of the product. As it has done with Surface and Eton, look for the company to spin off Melt into a partially owned subsidiary, while bringing in $20 million or more directly into Melt.
If it can accomplish both these goals, Melt will likely be worth somewhere north of $20 million in asset value to IMMY. Plus, it will retain some royalties on product sales. With a big addressable market, the value of Melt, not book value but market value, could be worth as much as IMMY's stock alone is today. There's that kind of value creation potential here.
3. Eton INDs
Similar to Melt, Eton Pharmaceuticals is going to be working with the FDA in 2019. However, in their case, they have a much broader pipeline that includes eight products under development and two potential INDs in 2019.
Once again, acceptance by the FDA of these INDs and successful trials should lead to significant value creation from Eton. And, with Imprimis owning 3.5 million shares of Eton, along with royalties on approved products, that success will translate directly into value creation for IMMY shareholders.
4. The debut of Surface
Surface is, after Eton and before Melt, the second spinoff from Imprimis. This one has stayed private so far, having attracted over $20 million in PE money, led by a renowned group. Here's what the CEO had to say about Surface…
"Surface expects to file INDs and start Phase 2 clinical studies during 2019, and is on track to have data readouts from these studies in the first half of 2020 or sooner. Success in any one of these programs next year would likely be a considerable value inflection point."
How this value gets realized is the question. Will Surface remain private, or will it go public? If there is success in their programs, my guess is an IPO follows shortly behind. Similar to Eton, this would be very positive for IMMY.
5. Additional spinoffs
There's nothing better than an established track record of success for helping valuations. With Eton public and both Melt and Surface progressing through development phases, Imprimis has now proven its business model, which means that subsequent spinoffs should generate value to IMMY earlier than prior spinoffs.
In the next year, we can expect Melt to raise money and "leave the roost." Additionally, there are two more, Mayfield Pharmaceuticals and Radley Pharmaceuticals, that are in the works. We can expect to hear more about these two and see positive developments during the course of 2019.
Sum of the Parts is Greater than the Whole
With Imprimis we have a company with quite a few moving parts. There's the core business that is on track to generate over $100 million in high margin revenue within a few years. There are also many different products in development that are leading to potential value creation spinoffs.
There is also a management team that is focused and executing on their game plan. They own stock and are doing the right things for all shareholders. As CEO Baum said…
"One of the reasons why we call our spin-out businesses Project 15 is because $15 stock target is where our Board of Directors has incentivized us to get our stock price, so that we can get all of our equity incentive."
From where I sit, the company is doing the right things to accomplish that goal in the long term. Meanwhile, as the company progresses, 2019 should be a good year with lots of catalysts that show progress towards its goal.
Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see www.tailwindsresearch.com. Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Dan’s formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.
This article was submitted by Tailwinds Research. For more information on Tailwinds Research or on Imprimis, please visit www.tailwindsresearch.com.
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