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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>AFT Pharmaceuticals<br>On Script With a New Deal</h2>
<p></p>
<h3>RESEARCH&nbsp;INSIGHTS</h3>
<p>AFT has ticked off another milestone with the signing of an agreement for its&nbsp;Maxigesic&nbsp;IV product (patented intravenous formulation for post-operative pain relief) in the US. This is a positive for AFT, with meaningful upfront payments but it will take time for the full benefits to be realised, with long term outcomes (and the revenue/earnings path) contingent on its partner’s success in selling and distributing the product. AFT trades on elevated forward multiples; albeit this drops quickly assuming it executes on our strong near-term growth expectations. With the range of justifiable long-term outcomes wide, we expect&nbsp;AFT's&nbsp;share price to be driven by news flow in the near-term, which we expect will be positively skewed.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/203/325/original/image_96840361331619656432022.png?1619656433" class="editor-image img-responsive" data-smartkarma-image-id="203325"></figure>
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<h3>What's changed?</h3>
</div>
<div id="m_-5130471793398713632igbfus-2">
<ul>
<li><strong>Earnings</strong>:&nbsp;We make modest upgrades to our medium-term forecasts, reflecting higher license income vs our prior assumption following the US&nbsp;Maxigesic&nbsp;IV agreement. This is partially offset by a modest lift in costs, after revisiting our assumptions.</li>
</ul>
</div>
<div>
<h3>Key agreement details</h3>
</div>
<div id="m_-5130471793398713632i2ux2">
<ul>
<li><strong>High quality partner</strong>:&nbsp;AFT has signed an exclusive licence and distribution agreement with&nbsp;Hikma&nbsp;Pharmaceuticals US, a global pharmaceutical company and material player in the US generic medicine market.&nbsp;Hikma&nbsp;is the third largest supplier of generic injectable medications by volume in the US, and has existing relationships with hospitals.</li>
<li><strong>US market opportunity is large</strong>:&nbsp;The agreement is AFT’s first secured in the US. The market opportunity is extensive, with the post-operative pain management market estimated at c.US$745m in 2019, where even a modest share would be lucrative. The US market primarily uses&nbsp;paracetamol&nbsp;for entry-level pain, through to&nbsp;opioids&nbsp;for higher-level pain. There is a growing body of research&nbsp;focussed&nbsp;on the negative effects of&nbsp;opioid&nbsp;use and the "crisis" or "epidemic" in the US, with alternatives being sought which may bode well for&nbsp;Hikma/AFT. It will take time before commercial sales and is contingent on FDA approval.&nbsp;</li>
<li><strong>Attractive deal for AFT</strong>:&nbsp;AFT will receive upfront, regulatory and commercial milestone payments of up to US$18.8m (NZ$26.1m representing NZ 25cps), and&nbsp;royalties&nbsp;from in-market product sales. Success is highly&nbsp;dependent on its partner and will take time. However,&nbsp;with minimal further direct investment required from AFT, margins/returns are high from this stage forward.</li>
</ul>
</div>
<div>
<h3>What does the earnings path look like?</h3>
</div>
<div id="m_-5130471793398713632iad7s">
<p>The revenue/earnings path is highly dependent on third parties, albeit Maxigesic IV is likely to be ready for commercial sale in the US in c. 18 months. Milestone payments will be staged, including (1) US$3.6m upfront; i.e. 1H22, (2) US$3.9m post regulatory approval from the US FDA. This is estimated to take 12–15 months, although it is unclear if a facility inspection is required which may be difficult with COVID-19 restrictions. (3) A further US$11.3m if/when various revenue milestones are reached, which we expect will be spread over the medium to longer-term (c. 3–10 years). AFT also receives a profit share of in-market sales. We have no visibility on contract terms, but royalty payments typically have high margins (c. 45%).</p>
</div>
<div>
<div>
<div><strong>Chelsea Leadbetter</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

AFT Pharmaceuticals On Script With a New Deal

RESEARCH&nbsp;INSIGHTS
AFT has ticked off another milestone with the signing of an agreement for its&nbsp;Maxigesic&nbsp;IV product (patented intravenous formulation for post-operative pain relief) in the US. This is a positive for AFT, with meaningful upfront payments but it will take time for the full benefits to be realised, with long term outcomes (and the revenue/earnings path) contingent on its partner’s success in selling and distributing the product. AFT trades on elevated forward multiples; albeit this drops quickly assuming it executes on our strong near-term growth expectations. With the range of justifiable long-term outcomes wide, we expect&nbsp;AFT's&nbsp;share price to be driven by news flow in the near-term, which we expect will be positively skewed.


What's changed?



Earnings:&nbsp;We make modest upgrades to our medium-term forecasts, reflecting higher license income vs our prior assumption following the US&nbsp;Maxigesic&nbsp;IV agreement. This is partially offset by a modest lift in costs, after revisiting our assumptions.



Key agreement details



High quality partner:&nbsp;AFT has signed an exclusive licence and distribution agreement with&nbsp;Hikma&nbsp;Pharmaceuticals US, a global pharmaceutical company and material player in the US generic medicine market.&nbsp;Hikma&nbsp;is the third largest supplier of generic injectable medications by volume in the US, and has existing relationships with hospitals.
US market opportunity is large:&nbsp;The agreement is AFT’s first secured in the US. The market opportunity is extensive, with the post-operative pain management market estimated at c.US$745m in 2019, where even a modest share would be lucrative. The US market primarily uses&nbsp;paracetamol&nbsp;for entry-level pain, through to&nbsp;opioids&nbsp;for higher-level pain. There is a growing body of research&nbsp;focussed&nbsp;on the negative effects of&nbsp;opioid&nbsp;use and the "crisis" or "epidemic" in the US, with alternatives being sought which may bode well for&nbsp;Hikma/AFT. It will take time before commercial sales and is contingent on FDA approval.&nbsp;
Attractive deal for AFT:&nbsp;AFT will receive upfront, regulatory and commercial milestone payments of up to US$18.8m (NZ$26.1m representing NZ 25cps), and&nbsp;royalties&nbsp;from in-market product sales. Success is highly&nbsp;dependent on its partner and will take time. However,&nbsp;with minimal further direct investment required from AFT, margins/returns are high from this stage forward.



What does the earnings path look like?


The revenue/earnings path is highly dependent on third parties, albeit Maxigesic IV is likely to be ready for commercial sale in the US in c. 18 months. Milestone payments will be staged, including (1) US$3.6m upfront; i.e. 1H22, (2) US$3.9m post regulatory approval from the US FDA. This is estimated to take 12–15 months, although it is unclear if a facility inspection is required which may be difficult with COVID-19 restrictions. (3) A further US$11.3m if/when various revenue milestones are reached, which we expect will be spread over the medium to longer-term (c. 3–10 years). AFT also receives a profit share of in-market sales. We have no visibility on contract terms, but royalty payments typically have high margins (c. 45%).



Chelsea Leadbetter
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



AFT Pharmaceuticals: On Script With a New Deal