Juniper Pharmaceuticals Distress Play

Pharmaceutical companies. When I think of biopharma, the first word that pops into my head is, “stressful”. I’m right, to an extent. Pharmaceutical companies, especially those in the small cap / micro cap space live and die by drug approvals and pipeline passes. Failure to pass a drug test or failure to bring a product to market sends most biopharma’s down into the depths of their price history, with companies falling 50 – 60% on average after the rubble has been cleared. But yes, even in those depths can one find value, albeit contrarian deep value. When I look for Graham Net Nets, I’m not looking at the hottest sector, much the opposite. I want to find the industry that is going through the ringer (a la Retail). However, biotechnology hasn’t been in the depths of the markets. It has experienced stress with the new health care reform and drug pricing regulations. So, off I went to try to find some value in biopharma, and along came Juniper Pharmaceuticals.

Business Operations

Juniper Pharmaceuticals (JNP) is a women’s health therapeutic company focused on developing therapeutics that address unmet medical needs in women’s health. It offers technical services to the pharmaceutical and biotechnology industry. Taking a more in-depth look, It has developed CRINONE, a progesterone bioadhesive vaginal gel designed for progesterone supplementation or replacement as part of an assisted reproductive technology treatment for infertile women with progesterone deficiency. The Company supply’s CRINONE to Merck KGaA internationally, and sold the rights to CRINONE to Allergan, plc in the United States. The operating business segments are product and service. The product segment oversees the supply chain and manufacturing of CRINONE. The service segment includes pharmaceutical development, clinical trial manufacturing, and advanced analytical and consulting services provided to its customers (Juniperpharma.com).

3 Business Segments

JNP breaks down its revenue structure into three segments: Product Sales, Service Revenue, and Royalties. Taking a closer look at the allocation of these segments, I wanted to make sure that not one specific segment was overweighted compared to the others. Obviously product sales would be the majority, given the nature of the business, however, I wanted to see some diversity along their cash generating segments.

Product Sales

JNP has agreements with both Merck and Allergan. According to their most recent 10 – K, the agreement with Merck, “for the sale of CRINONE outside the United States was renewed for an additional five-year term, extending the expiration date to May 19, 2020.  We are the exclusive supplier of CRINONE to Merck KGaA. Merck KGaA holds marketing authorizations for CRINONE in over 90 countries outside the United States.” This is a good sign that they will have stable revenue streams from their dealings with Merck until 2020.

Looking to Allergan the deal seems to be a bit more complex. “we were eligible to receive royalties until July 2, 2020 equal to a minimum of 10% of annual net sales of CRINONE by Allergan for annual net sales up to $150 million, 15% for sales above $150 million but less than $250 million, and 20% for annual net sales of $250 million and over. Royalties under the Purchase and Collaboration Agreement were payable until the latest of (i) the last valid claim, (ii) expiration of regulatory exclusivity or (iii) the 10th anniversary of product launch. In November 2016, we entered into an agreement with Allergan, to monetize future royalty payments due to us. Under the agreement, we received a one-time non-refundable payment of $11.0 million in exchange for which Allergan will no longer be required to make future royalty payments to us.”

The last part of that is a red flag, which is where our stop losses come into play. Instead of receiving a constant stream of revenue from royalties with Allergan, JNP structured the deal so that Allergan paid an upfront cost in full to license and sell JNP’s drug. Not sure if this is a strategic move on JNPs part, or if Allergan has better dealmakers on their team. Still unsure.

Service Revenues

Back in 2015, JNP struck a deal with Massachusetts General Hospital (MGH) in which JNP licensed its patent rights for its IVR technology. The structure of the deal goes as follows, “Pursuant to the terms of the license agreement, we have agreed to reimburse MGH for all costs associated with the preparation, filing, prosecution and maintenance of the licensed patent rights and have agreed to pay MGH a $50,000 annual license fee on each of the first five-year anniversaries of the effective date of the license agreement, and a $100,000 annual license fee beginning on the sixth anniversary of the effective date of the license agreement and on each subsequent anniversary thereafter. The annual license fee is creditable against any royalties or sublicense income payable in each calendar year.”

This could potentially be an area where JNP could make up for the future lost revenue from their bad deal with Allergan, and to bring more diversity to their streams of revenues. If JNP can manage to sign more hospitals to license their technology, it provides them with multiple streams of revenue within one stream of their multiple streams of revenue (boy did that sentence feel like Inception).

Royalty Revenues

Royalty revenue comes in the form of royalties from patents, licenses, or products. JNP receives royalties mainly from their licenses and products.

Revenue Percentage Breakdown

In 2016, JNP generated 50% of their revenues from sale of products, 24% of revenues from sales of services, and 26% from sale of royalties. Looking back to 2015, JNP generated 60% of revenues from products, 30% from services, and 10% from royalties. Finally, going back to 2014 JNP generated 55% of revenue from products, 26% from services, and 19% from royalties.

Notice the trend in relying less and less on the sale of the products. However, this information means nothing without some numbers to back it up.

Operational Results ($ are in Thousands)

From 2015 – 2016, JNP increased their product revenue by $4,320, increased their service revenues by nearly $2,000, and increased their royalties by $10,000. All in all JNP realized an increase in revenue of $16,286, or 43%. Because of this, JNP realized a 79% increase in Gross Profit. After accounting for operational expenses, JNP was able to bring home a net income gain of $5,951 for 2016 compared to -$1,496 from the previous year.

This must be taken with a grain of salt though, as expressed in the report with JNP recognizing, “Royalty revenues increased $10.6 million, or 282%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, driven by the one-time payment from Allergan of $11.0 million representing all future royalty amounts payable.  No further royalty payments will be made by Allergan. Royalties for 2015 are based solely on Allergan’s sales of CRINONE.” How will they fair when Allergan isn’t paying them royalties anymore? I don’t know.

JNP is experiencing a nice trend in their Earnings Per Share. Since 2012, JNP has increased its EPS every single year, from $0.26 in 2012, to $0.55 last year. JNPs EBITDA per share has also increased every year for the last five years, currently standing at $0.66 / share.

Enterprise Value

Conversely with its earnings, JNP has decreased its Enterprise Value each year over the last four years. After reaching a peak in 2015 of $100.0M, the EV for JNP in 2016 was $42.21M.

Balance Sheets ($ in Thousands)

JNP increased their total assets by $7,000 from 2015 – 2016, while at the same time only increasing their total liabilities by $4,000 roughly. Cash led the way with an increase of roughly $7,000 compared to 2015, a nice sized does.

Looking at the liabilities side, JNP was able to pay down some of their Notes Payables, from $238 to $204. Total Stockholders Equity increased $3,000.

Cash Flow Statements

Looking back 3 years, JNP increased its net cash provided by operating activities from $6,929 in 2014, to $11,186 in 2016. JNP is using more money in investing activites than it has over the last three years, pouring nearly $4,000 in. Cash and Cash Equivalents have increased since 2014s high of $16,762, with 2016 coming in at $20,994.

Because of the increased cash flows, JNP has been able to increase its FCF/share every year for the last five years. FCF/share currently sits at $0.70/share.

Valuation

Using a Discounted FCF projection model, JNP has an intrinsic value of $5.89 per share. Using Earnings Power Value, which takes into consideration present cash flows, instead of future projected cash flows, has JNPs fair value at $4.87. JNP is also trading roughly 2.5 times NCAV, which makes its valuation better than 81% of companies in its industry on an NCAV basis.

Looking at Graham Number, which is an extremely cautious valuation metric, it is trading at a 30% discount to its Graham Number, and an 18% discount to its sales.

With a ROIC of 21.60%, the current price offers great Margin of Safety for this investment. There are many obstacles in front of JNP, but because of the price, and because of its assets, and how cheaply it is trading relative to those assets and revenues, I think JNP is a good play here.

Yesterday (4 / 10), I placed an order on my paper account at $4.13. Unfortunately I set my stop losses pretty close and was just filled at $4.05, however I am reconsidering my stops as the value increases as the price goes down.

Will be doing more TA research on a good entry point, not sure where the bottom is yet, so I would hesitate to get in until a confirmation of a uptrend is happening in the markets.

All in all, I only risked 1% of my capital on the trade, and was presented with a 12.5:1 risk reward ratio, which is what I like to see.

Will keep watching this stock.