Description

TherapeuticsMD (Long)

Ticker: TXMD

Stock Price: $2.55

Price Target: $8.50

Market Cap:  $700M

Enterprise Value: $660M

Summary

TXMD is a specialty pharmaceutical company focused solely on women’s health. They have three approved drugs, all of which have been launched in the last 18 months and all have substantial upside that is unappreciated by the market.  This lack of appreciation is due to blind spots among existing healthcare investors, who ignore non-sexy markets like contraception and hormones, in favor of oncology and rare diseases. As these opportunities develop and their ultimate potential is appreciated, with think shares could rerate materially, up over 200% from the current share price.  We value TXMD at 10x 2023 earnings of ~$1.00 per share, discounted back to the present and arrive at our $8.50 price target (~235% upside). To put this valuation in context, let’s consider the current valuation of $660M. Using a 3x peak revenue (biotech’s “rule of thumb), that implies expectations of around $220M for peak sales for all 3 products combined.  We firmly believe each of TXMD’s three products have the potential to do at least that much (and in the case of Annovera, much more) - which both reinforces the downside support for the shares, as well as the multi-bagger potential if the company can execute on its opportunity set.

Short interest is very high (37% of float) as the company has implemented a differentiated go-to-market strategy which increases access but resulted in low net pricing until payor reimbursement is secured, causing unpredictability in quarterly results. As gross and net prices converge and revenue growth accelerates, we think the earnings power of this business will become more understandable, causing a material re-rating of the shares.

The Business: Three Franchises

Imvexxy - $150 - $300M Peak Sales Potential

The first to launch and the biggest revenue contributor today, Imvexxy is a vaginal insert for woman suffering from dyspareunia (painful sex). Imvexxy is at a point of inflection today, in part caused by TXMD’s own novel launch path, where they gave the drug away for “free”, while signing up payors afterwards. The net price therefore started at $13 (vs a gross price of ~$200), but TXMD has been successful in their contracting efforts and by Q4 should achieve $50 per script, half-way to their goal of $100 per net revenue per script.  This has driven substantial patient uptake, but only modest revenue ($4.6M last quarter). We believe revenue should grow from $18M in 2019 to almost $100M by 2021 caused by both volume and improving net price realization, with peak sales ultimately of over $200M.

Bijuva - $200-$400M Peak Sales Potential

Bijuva is a very simple product that addresses two key issues: 1) the FDA hates the risks associated with non-approved compounded products and 2) the FDA-approved hormones come in multiple pills, putting a financial and compliance burden on patients.  The female hormone market is very large – although part of the problem for TXMD shareholders is figuring out exactly how large it can be. The drug itself is a bio-identical hormone, a combination of estradiol and progesterone, indicated to ease the symptoms (specifically, hot flashes) that come along with menopause.  This drug already exists, but it does so in 2 more expensive forms: FDA approved separate pills (2 patient copays) or a combo pill made by a compounding pharmacy (cash pay / high out of pocket cost). 

According to TXMD, in addition to the approximately 4 million scripts written for FDA approved pills, there are 12 million per year made by compounders – essentially taking those 2 pills and making them into a single pill, which happens to be exactly what Bijuva is.  So what’s the opportunity for a pill like Bijuva? The benefits are 2 fold and actually mostly accrue to the compounders themselves: 1) it is illegal for compounding pharmacies to make compounded versions of FDA approved medications and 2) the imposition of USP 800 regulations  for “hazardous materials” makes it more costly to make hormones, enticing compounders to join their BioIgnite network. 

What is Bio-Ignite?  It’s TXMD’s strategy to take advantage of the large embedded sales networks of the compounding pharmacists by offering them drugs at wholesale prices – lower gross margin for TXMD, but allowing TXMD to leverage the compounders SG&A to deliver the same operating income / script as selling through their own network.  There are 700-900 high volume compounding pharmacies that they are targeting and they have already signed contracts with pharmacies that write over > 2M bio-identical hormone scripts per year (assuming a $80 ASP, that’s $160M), and they have twice as many pharmacies in the contracting pipeline. A key catalyst driving growth in BioIgnite’s network will be, as mentioned earlier, the implementation of USP 800, which is helpfully summarized with regard to hormones on this slide.

In our checks with compounders we have found that 1) bio-identical hormones are big components of their businesses (between 25% and 60% of their revenue) 2) USP 800 will impose significant costs on them (capex for carving a new space for “hazardous” drugs and opex in the form of higher cost employees (more certifications/education needed) and 3) the ability to carry an FDA approved product will give them a new call point with doctors, allowing the compounders to market new products while hawking Bijuva.  

TXMD’s revenue opportunity table for Bijuva is below and we model 2023 sales of $166M and peak sales of ~$250M, which we feel is conservative given the TAM.

Annovera - $400-800M Peak Sales Potential

 I’m going to spend the most time on Annovera, a novel contraceptive ring that lasts for one year (13 cycles) without needing to be replaced. This profile (a soft, removable, ring that can be left in or taken out to allow for menstruation) compares favorably among the doctors and patients we have spoken to as compared with the monthly NuvaRing (still a $1B product from MRK, needs to be refrigerated when not in place) and the IUD (which requires a medical procedure to put in and take out). To further expand upon the size of the ring market, NuvaRing generates that $1B in revenue despite only have 50% compliance – at the same annual price Annovera could generate $2B in revenue as they get the full year of revenue in a single prescription.

Most people reading this will say: how can you make money in a pharmaceutical sector where almost every drug is generic?  The answer is simple: The Affordable Care Act.

When the ACA was passed in 2010 it contained a provision called the “contraceptive mandate” which guarantees co-payless (read: free) access to 18 categories of contraception, which means all private and public insurers are required to offer at least one option in each category.

Annovera, being a one-year ring, we believe is sufficiently differentiated from NuvaRing (which has its own category) to warrant a category of its own, thereby entitling it to free access to all women in the United States. Why do we believe this?  Because the FDA has created categories for less differentiated contraceptives than Annovera: there are 3 separate categories of pills: for example “The Combined Pill” and the “Continuous Dose Pill” (which simply has additional active pills instead of sugar pills so you don’t get a period every month) have separate categories.  Annovera is different in both form and duration from NuvaRing, as well has contains a novel progestin from other approved contraceptives. If TXMD doesn’t get the FDA to grant them a 19th category, it might not even matter, because eight states (including some of the most populous states like NY and CA) have already incorporated co-payless contraception into their state regulations, while another 7 require coverage with a co-pay). TXMD can use the state mandates to negotiate for favorable national coverage with commercial payors and will do so if the 19th category is not granted.

Let’s talk about our checks and how that lines up to what the company said.  This is the company's slide from their June investor day. At $1,500 a script (they are guiding Q4, the first quarter of soft launch, to $1,250 - $1,400) and with 35% share of Nuvaring scripts, TXMD will generate $630M in net revenue. 

To diligence this opportunity, we surveyed several doctors who began writing Annovera in September/October during the “soft launch” of the product.  Of the 8 doctors in our initial survey, since they began offering Annovera in their practice, it has garnered 50% market share of their “ring” users, with many patients citing convenience as the main factor in their choice. 

We do not underwrite to TXMD garnering 50% market share in the ring market, but these recent checks seem to signify that at least TXMD’s highlighted 35% share scenario is plausible.  That level of revenue alone, using a conservative 3x peak revenue multiple, would be worth $1.8B alone – over 2x the current TXMD enterprise value.

One item worth discussing is that NuvaRing, which went off patent 3 years ago, could have a generic version coming in the next few years.  While true, the contraceptive market due to the ACA mandate is not price competitive – commercial payors are required to offer one of each option without co-pay and Annovera will be the only one in their category if granted.

2023 Model and Valuation

First, why 2023? 2020 is the first full year of Annovera launch and the start of the Bio-Ignite partnership, so 2023 is basically year 3 of launch, indicative of the near term earnings power of this franchise.  We discount it back, fully tax the earnings, and give the NPV of the NOL in our valuation.

Catalyst

Beat Q4 / 2020 Estimates 

Get 19th Category Designation from FDA

Takeout by big pharma players in women's health (GSK, MRK, PFE)