Neos Therapeutics, Inc. (NEOS)

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2017 Could Be A Breakout Year For Neos Therapeutics
Dec. 29, 2016 1:00 PM ET|35 comments| About: Neos Therapeutics (NEOS)
ONeil Trader ONeil TraderPremium Research »Follow(3,281 followers)
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Summary

Adzenys continued to grow in November.

Adzenys on track to reach my 2H 2016 net sales estimate.

Q1 2017 should be a strong quarter considering favorable seasonal trends.

Taking a look at a growth scenario through 2020.

2017 could be a breakout year for Neos considering the expected launches of two additional products, Adzenys' continued growth and pipeline expansion.

Neos Therapeutics (NASDAQ:NEOS) updated its presentation to include the November scripts last week. Growth was solid for most of November, with the exception of the Thanksgiving week, which probably reduced the total number of scripts by 200-300 for the whole month. The Thanksgiving week was followed by a strong rebound and weekly scripts reached a new all-time high on December 2.



Source: Neos investor presentation

The growth rate is behind my expectations, but nothing to be concerned about. If the upward trajectory continues in December, total scripts should be in the 7,500-8,000 range, assuming some disruption in late December (due to holidays).

The total number of prescribers has exceeded 3,500 as of late November. There is still significant room for improvement since this number represents a little over 25% of physicians Neos is targeting.



Source: Neos investor presentation

Adzenys' launch is still significantly ahead of the two comparable launches in 2016.



Source: Neos investor presentation

Based on the growth rates in November, Adzenys is on track to meet my $3 million revenue estimate (see previous article) for 2H 2016, as I expect Q4 net sales to be in the $2.3-2.5 million range (Q3 net sales were around $0.7 million). The underlying net sales growth trends are still masked by aggressive couponing and given the improving commercial coverage, gross to net discounts should be lower in the following quarters (and net sales per script higher). Assuming normalized gross to net discounts (Neos expects them to be in the mid-40s to mid-50s), Adzenys' annualized net sales run rate is already around $15 million based on late November weekly scripts. That's not too bad for a company with no prior launches under its belt.

Management was asked about this heavy discounting at the BMO conference two weeks ago, and the answer was that they looked at previous drug launches and found that coverage was the main negative issue. They decided to take away those hassles and said that the uptake early in the launch validates that hypothesis. And reimbursement should be less of an issue in 2017 since Adzenys now has 83% of commercial lives covered, which is in line with competing brands and a pretty good place to be when it comes to next year's growth prospects.

Management also noted on the Q4 call that they are ramping up for January: "The first quarter in ADHD is traditionally a big quarter, so to make sure that where to go and start the year off right, so strategically where we are looking at right now." Additionally, the company is going to focus more on newly diagnosed patients (since almost 80% of prescriptions are switches). Q1 should be a strong quarter for Adzenys and based on the growth rates since launch, Neos seems to be doing the right things when it comes to promotion.

The company also managed to submit the Cotempla and NT-0201 NDAs on schedule, and if all goes well, the sales force should have three products to sell in 2H 2017. I believe Cotempla will have a robust launch (probably better than Adzenys assuming it is approved before the back to school season) since Neos' sales reps will have established relationships with a lot of physicians by then, which should speed up the product's uptake.

Thoughts on valuation

Neos' market cap is roughly $100 million at the moment. The company had $60 million in cash and equivalents at the end of Q3 and $60 million in long-term debt, which means that the enterprise value is currently the same as the market cap. However, based on my projections, the cash on hand should run out in Q3 or Q4 2017 and the company will likely need to raise at least $50-60 million in additional debt (because of the low share price), which would mean that net debt will be around $100 million sometime in 2018, which is the time I think Neos will reach cash flow breakeven. I expect that $50-60 million in new debt will be sufficient to get there. So, assuming the share price stays the same, Neos' EV in early 2018 will be close to $200 million ($100m market cap plus $75-80 million in net debt).

Since the majority of its pharma peers are trading at an EV/sales ratio in the 3-4 range, we can get some idea about Neos' share price over the next few years.



Source: Ycharts.com

I added Supernus (NASDAQ:SUPN) to this group to point out the potential valuation a company with a promising pipeline could have. Neos will announce its next pipeline candidate in 1H 2017 and the company may get recognition for its pipeline too, which would translate into a higher multiple.

Assuming a growth trajectory laid out below, Neos' price could be between $10 and $14 by late 2017 (assuming it trades in the 3-4 EV/sales range on a forward basis) and between $19 and $25 by late 2018. The stock could eventually trade in mid- to high 30's, which I think is not unrealistic in the long run since Neos' share price was close to $30 last year. And these targets are without assuming a growth premium over its peers (which will probably be deserved) and the potential added value from the pipeline.



Source: author's estimates and calculations

This trajectory is one of the reasons Neos is one of my core long-term holdings. If the company can successfully raise cash over the next few months and continue to grow Adzenys' prescriptions, I think the stock could be well on its way to the $10-14 range over the next 6-12 months (assuming stable or mildly positive sector conditions).

Conclusion

Neos continues to execute its growth strategy. Adzenys prescriptions are still growing and should accelerate in Q1 2017 which is a seasonally strong quarter for the ADHD market. 2017 could be a breakout year for Neos with some important catalysts:

Continued growth for Adzenys. We should see growth acceleration in Q1 2017 based on positive seasonal trends in the ADHD market.
New product candidate should be announced in 1H 2017. Management noted that they are open to partnerships.
Removal of the financing overhang through a debt or equity offering (depending on share price movements) in 1H 2017. This is still my main concern and the largest risk apart from Adzenys' uptake (and probably for most current and/or potential investors).
Approval and launch of Cotempla and NT-0201 in 2H 2017.
Author's note: Growth Stock Forum subscribers had an early look at this article, and have access to regular exclusive updates on every stock I am covering. Readers are invited to take a two-week free trial in the Seeking Alpha Marketplace.


http://seekingalpha.com/article/4033276-2017-breakout-year-neos-therapeutics