Pernix Therapeutics—Whipsaw Action Creates Buying Opportunity
This report won’t be incredibly long as I want to make sure this is published for our readers before the open on April 30th. Elite Investments is initiating a Strong Buy on Pernix Therapeutics Holdings, Inc. (NASDAQ: PTX) as of the close on April 29th, 2015 at $6.86 per share with a 12 month price target of $14. Importantly, the current extreme retracement has created an opportunity for long term investors to initiate or add to positions under or around $7.
The chart below is a weekly perspective going back to December 2012:
The stock has lost nearly half its value since early March but found strong technical support near $6 per share this week. The stock has put in a bullish hammer pattern on the daily chart and clearly on the weekly thus far as well. The stock is oversold but not extremely so with a relative strength (RSI) reading of 28 and MACD is stretched on the downside. There is also a serious gap just under $10 that I expect to be filled eventually.
There have been a lot of institutional investors shaken out of the stock this month on analyst downgrades, poor guidance from management, a not so cheap drug acquisition, and a large financing. However, Pernix is growing aggressively and speed bumps are to be expected at this stage of their development. Pernix acquired 3 companies in the past 18 months including Hawthorn, Cypress, and Somaxon Pharmaceuticals. More substantially, they have purchased 2 established drugs in Treximet (pain-migraines) from Glaxo Smith Kline (GSK) and Zohydro (pain-extended release hydrocodone) from Zogenix.
Even though shares traded to a new 52 week high just under $13 in early March into the Zohydro acquisition announcement, the stock cooled as the street digested the details. It is safe to say that various investors were not impressed with the price tag, which is concerning when you’re banking on a company growing primarily through acquisitions. The biggest risks in a company like this revolve around management’s ability to integrate acquisitions swiftly and smoothly. Our buying opportunity today was ignited by a guidance warning on April 15th alongside a $120 million convertible senior note offering to finance the Zohydro acquisition.
To put this setback into perspective it is helpful to review Q4 2014 results for Treximet, which was the main reason for the warning on guidance for 2015 sales. The company showed 125% year over year revenue growth to $53.8 million, $1 million ahead of estimates, and Treximet was the main contributor at $38.5 million in sales. Silenor sales (sleep aid with terrific potential but building from a small base) almost doubled from $2.9MM in Q4 2013 to $5.6MM. The company is forecasting sales for Q1 2015 in the $32-35 million range (compared with $19 million in 2014) and net sales for 2015 in the $220-240 million range (potentially a double from $119 million in 2014). So, we’re still looking at very significant growth rates despite the lowering of guidance.
“Results in the quarter were mainly impacted by lower Treximet® (sumatriptan/naproxen sodium) prescription volume, a reduction in channel inventory related, in part, to the lower prescription volume, adjustments to gross-to-net discounts, and delays in the delivery of Treximet patient samples to our field sales force.”
But they seem quite confident they can build momentum back into Treximet quickly:
“We expect Treximet to respond positively to our promotional efforts as the sampling launch commences in full force, similar to the success we achieved in re-launching Silenor. With the pending acquisition of the Zohydro ER franchise, we are building a strong portfolio of three strategically promoted brands, each in large markets, with significant growth potential. We are confident in our ability to build value for our shareholders from our current products and future portfolio additions,” stated Doug Drysdale, Chairman and CEO of Pernix.”
So, even though this news has slashed earnings estimates on the street from 90 cents 60 days ago to 43 cents now for 2015, I’m looking into 2016. The average analyst estimate is $1.22 per share with the highest being $1.70 per share. Pernix beat estimates in Q4, stumbled in Q1, and I would not be surprised if they end up beating lowered expectations substantially in the 2nd half of 2015. Even if they don’t and miss 2016 estimates by 10%, at a modest 13 times earnings, we hit our target of $14. The bottom line is that investors who look out 12 to 18 months conservatively on this play have significant upside potential.
Not to mention, what if Pernix starts to hit their stride, acquires another established drug, and can move the needle to $1.50-$2.00 per share in earnings next year? Then we’re looking at a billion dollar plus enterprise value with a share price in the $20’s, or perhaps low $30’s. It is not inconceivable and it is nice to know that there is potential to knock it out of the park with Pernix. Sentiment has been subdued greatly in the past 45 days yet the fundamental story is intact. Several key investors such as Aisling and Bracebridge Capital have filed fresh 13G/D’s and other smart money such as Janus Capital continue to make a very substantial bet, owning nearly 15% of the shares outstanding.
We’re in good company in this stock and also have Piper Jaffray and Oppenheimer recently attracted to the story, initiating with outperform/overweight ratings. In addition, Needham maintains a $12 price target, as well as, bullish views at Avondale and Cantor Fitzgerald.
In summary, be greedy when others are fearful and accumulate near long term support between $6-7 per share. Traders will likely get a 20% bounce into the mid $8’s but I’m more interested in PTX as a core holding for at least a double in the next 12 months. Long term investors can safely buy up to $7.50 and accumulate on pullbacks. For continued updates on Pernix and selective new special situations and investment themes, sign up for our free E-Letter below.
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Ownership disclaimer: Our editor, Eric Muschinski, owns shares in PTX and may choose to buy or sell at any time without notice
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