HLS Therapeutics Inc. (TSX: HLS) is a Canada-based specialty pharmaceutical company, actively engaged in the acquisition and commercialization of branded pharmaceutical products in the North American markets. 

Key highlights

• Improved revenues: For 9MFY21, the company reported 11% growth in its revenues from products sales to USD 37.37 million as compared to USD 33.80 million in pcp. The major increases came from its Canadian sales which grew to USD 25.36 million in 9MFY21 vs USD 21.73 million in pcp. This was majorly on account of the improved revenues from the Canadian Vascepa franchise from acquiring extensive private payer coverage, the favorable recommendation for reimbursement from the public market health technology assessment organization, etc., and further support came from 6% appreciating in the Canadian Dollar. The growth from the US segment sales remains constant to USD 12.01 million in the reported period from USD 12.0 million in pcp.

Total Revenues (Expressed in Thousand of USD)

Source: Company Filing

• Improved Cash flows from operations: The company reported a significant increase in its cash flows from operations to USD 12.45 million for 9MFY21 as compared to USD 3.49 million in pcp. The improved cash flows from operations are because of reduced non-cash working capital. This is a key positive for the company to manage its working capital and to smoothly run the business operations.

• Royalty Income: The group reported royalty revenues streams of USD 6.94 million in 9MFY21 as compared to USD 5.82 million in pcp. The increase in royalty income was from the acquisition of a diversified portfolio of royalty interest on global sales of four different products, done in FY20, which had supported the revenues in 9MFY21.

• Strong profit margins: The company outperformed in terms of profitability metrics in Q3FY21 by reporting Gross margins of 92.2% vs the industry margins of 31.2%. The EBITDA margins for a similar period were at 46.7% as compared to the industry median of 13.3%.
  

Risks associated with investment

The company is primarily exposed to various operational risks such as credit risk, liquidity risk, and market risk. Further, the company revenues and profitability could sway widely on change of any unfavorable regulatory approvals. Any deviations from the performance of Vascepa will also drastically affect the company's financials. 

Financial overview of Q3FY 2021 (Expressed in thousands USD)

Source: Company Filing 

• The company reported an increase of 14% in its total revenue to USD 15.06 million vs USD 13.12 million in pcp. The product sales grew by 13% to USD 12.83 million in the reported period vs USD 11.37 million in pcp. The major increase was from the Canadian Vascepa franchise which pushed the sales from the Canadian region to USD 8.6 million in Q3FY21 as compared to USD 7.38 million in pcp. Also, for the reported period the group stated the royalty revenues to USD 2.22 million vs 1.75 million in pcp.

• The Operating expenses declined slightly to USD 8.13 million in Q3FY21 as compared to USD 8.60 million in pcp. The group recorded a decline in General & Administrative expenses to USD 2.26 million vs USD 3.70 million in pcp.

• For Q3FY21 the company narrowed its Operating loss to USD 0.33 million as compared to Operating losses of USD 1.75 million in pcp.

• The company reported a net loss of USD 1.97 million in Q3FY21  which is higher than a net loss of USD 1.73 million in the previous comparable period.
  

Valuation Methodology (Illustrative): EV/ Sales multiples Based

Analysis by Kalkine Group 

Stock recommendation 

The company delivered a positive return of 5.08% in past one month and 5.57% in the last three months. The group reported an increase in its revenues from the Royalty stream as well as its other two operating regions, namely Canada and USA. The strong cash flows from operations are a key positive for the company to sustain its business operations including working capital management. We have considered Knight Therapeutics Inc., Joint Corp, Castle Biosciences Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing market price of CAD 15.85 on March 9, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 9, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.