TherapeuticsMD Inc (TXMD)

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TherapeuticsMD: Privatization Deal Expected To Meet With Shareholder Pushback
Jun. 16, 2022 2:43 PM ETTherapeuticsMD, Inc. (TXMD)

https://seekingalpha.com/article/4518823-therapeuticsmd-privatization-deal-shareholder-pushback

Summary
TherapeuticsMD’s $177 million buyout deal with EW Healthcare largely undervalues the biotech.
TherapeuticsMD is close to stimulating the commercialization of Annovera which may increase its value as a standalone company in the long run.
Shareholders were informed of a 50:1 reverse stock split at the end of Q1 2021 just a few days before the buyout was announced.
Investors are in support of the acquisition due to TherapeuticsMD's poor financial position but insist on better terms including an expanded bidding process.
Reaching an agreement in laboratory!
skynesher/E+ via Getty Images

News about the pending acquisition of TherapeuticsMD (NASDAQ:TXMD) by private equity firm EW Healthcare Partners has surprised the market. Over the past month, the share price has ticked higher by more than 200% after it trailed by 84.54% in the one-year analysis. Some investors have appreciated this acquisition with analysts viewing it as an opportunity for TXMD to increase the development and marketing of new products for women. Still, a lot needs to be unpacked now that TXMD will become a privately-held company upon the closure of the deal.

Thesis
The $10 per share compensation that TherapeuticsMD stockholders are set to receive in the $177 million deal with EW Healthcare may elicit fierce opposition seeing the company is already undervalued. As a going concern, the company had decried the growth of the net loss incurred in Q1 2022 with TXMD indicating its desire to raise additional capital to repay the principal balance of its financing agreement from April 2019. Still, the company needs to rethink the return on investments for shareholders seeing it is on the verge of commercializing ANNOVERA after the US FDA approved its supplemental New Drug Application (sNDA).

Below the 52-week High
Investors supporting this transaction will argue that the $10-a-share buying price for the Boca Raton-based company will be close to 5 times the 52-week low attained in May 2022 where it clocked $2.14. But at the same time, the price is close to 7 times less than the 52-week high of $67 reached by the same stock in 2022.

On another front, it can be argued that the company is nearing the commercialization of ANNOVERA. To control the manufacturing challenges, TXMD filed a supplemental New Drug Application (sNDA) with the FDA back in August 2021. This would allow the company to modify the testing specifications and allow heightened consistent ANNOVERA supply once approved. After rejecting the application in December 2021, the company responded to the CRL in January 2022 with an adjustment to the manufacturing testing limits according to the FDA's requirements. TXMD expected the FDA's approval of the NDA by the end of Q2 2022, but then the approval came at the beginning of the quarter.

We must remember that the NDA application is the channel through which TXMD will formally propose that the FDA approve ANNOVERA for sale and marketing in the US. What we are looking at here is TXMD's plot to lock shareholders out of the increased revenues expected from this increased commercialization. It must be noted that ANNOVERA's disaggregate revenues have been higher than its peers IMVEXXY and BIJUVA.

Annovera's large revenue share in TXMD
TherapeuticsMD 10-Q

ANNOVERA contributed more than 44% of the company's revenue in Q1 2022 and is scheduled to produce more upon TXMD's NDA approval. This aspect will contribute to the growth of the share price in the long run. Still to be noted is that as of June 2020, Annovera had 66% of nationwide unrestricted access for patients with commercial insurance in the US. Further, it had 44% unrestricted access in 38 states and Washington D.C. The Annovera birth control ring is the only long-lasting birth control method that a pharmacist can prescribe to a woman and dispense on site. A look at the global hormonal contraceptive market size shows that it is expected to grow to $21.52 billion by 2025. It was forecast to grow from $16.16 billion in 2020 to $18.1 billion in 2021 (at a CAGR of 12%).

The +200% hike in the share price over the past month, is proof of the market's appreciation of TXMD's acquisition. The company's finances are not yet out of the woods. As of Q1 2022, it incurred a net loss of $49 million with current liabilities exceeding its current assets by $180.4 million. Further, its total liabilities also exceeded its total assets by $140.6 million. Its financial agreement entered into in April 2019 was due on June 1, 2022. With only $30.4 million in cash, it is evident that the company's cash position is a matter of concern.

The cash used in operations and CapEx used in the 12 months leading to March 31, 2022, stood at $135.8 million. With only $30.4 million in cash, the company had only 2 months to deplete the resources. TXMD's book value per share has also remained in the negative territory since December 2020. It rose from -$10.89 in December 2021 to -$16.22 by March 2022 showing that it is highly insolvent. Therefore, this acquisition was more than necessary, but it has fallen short of expectations.

Still, investors need to understand how it got here and whether there is more to the deal than the $177 million buyout at $10 a share.

Aspects of the Acquisition
In my opinion, EW Healthcare has largely underpaid in the TXMD acquisition deal. Despite having a market cap of $88.03 million, the company's debt stands at $212.12 million and its enterprise value (EV) is $269.76 million. Some pre-market analysis shows that the share price jumped up to $40 pre-market (not just once) with a break-even of $56.

Moreover, announcing the acquisition in less than 2 months to the acquisition seems almost sinister. Yes, we get it the company does not have the money to last that long, but the management must have known of this crisis and somehow issued a warning on time. With the product development pipeline, some investors were even expecting the break-even price to rise to $90 just slightly above the 52-week high of $67.

Well, the argument may appear as an exaggeration, but investors who had placed long-bets stand to lose quite some money if the deal pulls through. How about inviting many bids and allowing shareholders to rake in the highest value.

Further, as of May 6, 2022, TXMD conducted a reverse stock split (in the ratio of 50:1) following the $49.0 million net loss in Q1 2022 that had $5.69 per basic and diluted common share. It fell against the $39.4 million or $5.67 per basic and diluted common share for Q1 2021. The corresponding shares were reduced from 600 million shares to 12.0 million to give effect to this stock split.

Lawsuits
Several law firms such as M&A and Bragar Eagel & Squire have filed lawsuits in connection with TXMD's breach of fiduciary duties and violation of the federal securities laws. This violation is in regards to the acquisition and privatization by EW Healthcare Partners. The class-action suits may be successful or not especially since the deal is expected to close in July 2022. But of special consideration is that all parties are in agreement that EW Healthcare is paying too little for this acquisition.

This deal reminds me of the Bayer's (OTCPK:BAYZF) Monsanto takeover back in 2018 which has been described by analysts as the worst deal ever. The $63 billion buyouts were followed by $10 billion in write-downs and litigation. EW Healthcare's deal with TXMD may lead to a huge upset of this firm once it is ruled in favor of shareholders. Still, among the big pharmaceutical companies, Merck & Co.'s (MRK) planned takeover of Acceleron Pharma towards the end of 2021 at $11.5 billion was largely opposed. Litigants argued that the payout undervalued the biotech that had a clear path to substantial value creation.

Bottom Line
TherapeuticsMD's deal with EW Healthcare is a classic example of biting the hand that one is fed upon. It is true, that the company is in dire need of a buyout. The high net losses, debts, and overall liabilities against assets are telling. Still, commercialization of Annovera is soon to be stimulated especially after the FDA approves TXMD's sNDA. Without considering the financial strain faced by the company at the moment, there is a substantial value to be created if the company decides to pursue this revenue stream. The $177 million deal undervalues the company, and it is even inadequate to pay off debts let alone buy out the company. Additionally, there are several lawsuits filed against this acquisition that should be considered. Our recommendation is to hold on to this stock with the hope that TXMD will be forced to review the deal or allow for more bidders to strengthen this acquisition. With less than 2 months to go until the completion of the deal, we await to see the results.