Q4 Earnings: Medicure

I didn’t love everything I read in Medicure’s fourth quarter results.  So much so that I reduced my position.  Here’s why.

With the acquisition of Apicore, Medicure took on much more debt than they previously had.  In order to acquire Apicore they added about $60 million of debt.  The debt isn’t cheap, at 9.5% plus 400,000 warrants that they issued for shares at $6.50 (they say in the MD&A that the effective interest rate is 12%).   With a market capitalization of $100 million, the additional debt is not inconsequential.

The debt isn’t crippling, but it makes it crucial that Apicore performs in an accretive manner.  But from the disclosures provided by Medicure, it’s not clear to me just how accretive Apicore is.

The Apicore deal closed December 1^st, 2016, and the one month numbers were excellent, sales of $7.8 million and gross margins of $4.5 million (after adjusting for inventory at the time of the acquisition).  But on the conference call the company said that December is by far the strongest month for Apicore and that we should not expect that level of results over the full year.  In the financial statement Medicure disclosed that had Apicore been part of Medicure for the full year, net income would have actually been lower, which is a bit worrisome:

On the other hand, in the quarterly presentation Medicure gave color around additional EBITDA from Apicore had they been consolidated for the full year 2016.  It is significant (around $6 million).  But I don’t know how to reconcile that with lower the net income?

Its not so much that I think that Apicore is going to be dilutive to earnings.  I doubt that.  It’s just that the company hasn’t made it clear what to expect so it’s difficult to forecast going forward.

The other development that gives me pause is that there has been a move to 2-6hr infusions of Aggrastat.  Basically physicians are using Aggrastat for shorter durations.  This helps them limit side effects and they are seeing acceptable efficacy.  The company described this as a positive development because A. Aggrastat is the only glycoprotein inhibitor (GPI) that has shown efficacy at the shorter infusion time, and B. the reduced side effect profile will lead to usage by physicians previously wary of using GPIs.  I quote/paraphrase the comments around this from the call below:

Only about 15-20% of physicians use a GPI.  This used to be 75%.  The reason for decline is bleeding risk.  Because Aggrastat doesn’t have a minimum infusion time, it is better positioned for physicians that don’t use or minimize use of GPIs

While it may end up being positive, I can’t help but think that in the short run this is a headwind for Aggrastat demand.  Physicians are going to be using less Aggrastat, that seems like the bottom line here until these other factors catch up.

The final thing that I didn’t love about the disclosures is I found some mistakes in it.   For example, on page 25 of their MD&A the total debt does not add up from the constituent pieces.  Similarly, on page 24 their operating income isn’t right in their EBITDA reconciliation (though the actual EBITDA end result is fine).

Nevertheless there are positives.  With the acquisition of Apicore, Medicure has a number of generics on the horizon that will generate growth.

In March Medicure announced FDA approval for tetrabenazene, which is a generic form of a drug used for Huntington’s disease called Xenazine.  Xenazine had over $300 million in sales in 2015, so if the generic can take a decent percentage of that it could be material.  They also filed an abbreviated new drug application (ANDA) for a generic in December and have two others in the development stage.  In total there are 15 ANDA’s in the pipeline.

So there is quite a bit of potential for growth.  But it could still be a number of quarters off.  Meanwhile the stock has an enterprise value of over $150 million and trailing EBITDA of $15 million, so it’s not particularly cheap.  I do like the growth pipeline though.  I’m just not sure at this point, so I took some off.