Small Caps | Dec 22 2011
– QRxPharma signs strategic partnership in US
– Will receive an upfront payment and royalties
– Deal viewed positively by Citi and JP Morgan
– Buy ratings on QRxPharma retained, targets lifted
By Chris Shaw
As development of MoxDuo IR and MoxDuoCR for pain relief has continued, the market has been waiting for QRxPharma ((QRX)) to announce a strategic partnership with a major drug company. This announcement came yesterday, QRxPharma announcing it had signed a deal with Actavis of the US.
For JP Morgan, terms of the Actavis deal were more favourable to QRxPharma than had been expected. An upfront payment of $6 million will be received, while Actavis will then make tiered royalty payments of 10-30%, with a 50% royalty applying to the first $150 million of cumulative net sales following the initial launch.
The key to the deal for JP Morgan is the agreement allows QRxPharma to retain some additional upside, as co-promotion rights for 25% of the US selling effort after the first 12 months will stay with QRX. This is expected to assist in the launch of MoxDuo IV and MoxDuo CR.
Citi is also broadly positive on the agreement, noting the option for Mox-Duo IV expires on January 31 of 2013. This means QRxPharma effectively retains full ownership of MoxDuo CR and MoxDuo IV and of MoxDuo IR outside the US, something Citi expects will offer potential for further licensing deals.
Actavis is seen as a good partner for QRxPharma given previous success in the pain relief market. As well, with around US$75 million in royalties expected in 2013, the agreement reduces the risk of QRxPharma needing to raise additional capital in Citi's view.
The terms of the agreement mean QRxPharma has traded off some upfront cash for larger subsequent royalties, something Citi suggests will provide the company with more leverage to marketplace success and so should generate more long-term shareholder value.
In the view of Citi the 50% royalty on the first $150 million in sales is very high, so this should more than offset what is a low upfront cash payment. The tiered royalty rate is seen as being high at lower thresholds than may normally be expected.
To reflect the agreement, both Citi and JP Morgan have lifted their valuation based price targets for QRxPharma. For Citi the increase is to $3.14 from $2.44, while JP Morgan's target rises to $2.03 from $1.74. These changes reflect increases to earnings estimates, which are most pronounced in FY14 when for example JP Morgan's earnings per share estimates increase by 45%.
Looking ahead, Citi sees the next critical milestones for QRxPharma as an FDA decision on MoxDuo IR expected in June of next year and a subsequent product launch in the following quarter. Success with respect to the FDA decision would add further value in the broker's view.
On the back of the announcement shares in QRxPharma are slightly higher and as at 11.40am today the stock was up 3c at $1.38. This compares to a trading range over the past year of $1.055 to $2.51. Relative to a consensus price target according to the FNArena database of $2.71 the current share price implies upside potential of almost 100%.
Note that RBS still has to update its views and projections post this deal.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
