Description

Introduction

I believe TherapeuticsMD (TXMD) provides a compelling up/down skew at its current stock price. The company has transformed itself from a developer of drugs for women’s healthcare into a healthcare royalty company through its license agreement with Mayne Pharmaceuticals (“Mayne”). The company’s downside is covered through the minimum payment obligation in the license agreement with Mayne. In a base case, I believe Mayne Pharma can grow the licensed products to modest levels, in which case TXMD has over 100% upside from today’s prices. In more bullish scenarios, in which Mayne is able to unlock the promise of the assets, there is potential for multiples of upside from today’s levels. The company faces a near-term headwind of the uncertainty of the net working capital adjustment with Mayne. I believe this adjustment will result in a modest payment from TXMD to Mayne and, if the payment exceeds the company’s cash on hand, they can tap their subscription agreement with Rubric Capital, their controlling shareholder, for any excess.

Company Overview

TherapeuticsMD is a healthcare royalty company. The company transformed itself from a women’s healthcare company into a healthcare royalty company by selling all its assets to Mayne Pharma (“Mayne”) in December 2022 following a failed attempt to sell itself in the summer of 2022. The company receives royalties on three products: Annovera, Imvexxy, and Bijuva. Annovera is a ring contraceptive that prevents pregnancy for a year. Imvexxy and Bijuva are both used to treat menopause symptoms, with Imvexxy indicated for moderate-to-severe dyspareunia and Bijuva indicated for moderate-to-severe vasomotor symptoms due to menopause. Imvexxy, Annovera, and Bijuva were approved by the FDA in May, August, and October 2018, respectively. TherapeuticsMD launched Imvexxy in the third quarter of 2018, Bijuva in the second quarter of 2019, and Annovera in the third quarter of 2019. The company also had a business called vitaCare, a pharmacy services platform.

In April 2019, the company entered into a $300 million loan facility with Sixth Street Specialty Lending, Inc to refinance its MidCap debt facility. The financing was an initial $200 million with an additional $50 million draw available upon realizing $11 million of revenue from the three products in the fourth quarter of 2019 and a final $50 million draw available for Annovera receiving FDA designation as a new type of contraceptive. On February 18, 2020, TXMD drew the $50 million tranche available for achieving the revenue threshold. The final $50 million draw was pulled by the lender “due to the pause in the successful full launch of Annovera caused by the COVID-19 pandemic.”

The global pandemic significantly impaired the launch trajectory of the company’s products, as the salesforce was unable to meet with prescribers in person. Product sales fell from $13.3m in the fourth quarter of 2019 to $9.8 million in the first quarter of 2020 to $8.3m in the third quarter. In response, the company began aggressively cutting operating expenses and focused exclusively on the Annovera and Imvexxy launches, at the expense of Bijuva, starting in the second quarter of 2020. TXMD also began negotiations with Sixth Street to delay the start of their minimum quarterly revenue covenants. The company also announced it was exploring strategic options for vitaCare.

 The company got back to a good launch trajectory by the fourth quarter of 2020 and continued strong momentum through the first three quarters of 2021, with product sales reaching $23 million. However, the company experienced manufacturing challenges with Annovera starting in the fall of 2021. When the FDA approved Annovera, they required the company to reject manufactured batches that fell outside the release criteria of a specific test. The company filed an sNDA with the FDA in August 2021, seeking the regulator’s approval to revise the test method, which would allow the company to release product batches that had previously failed the test. The FDA issued a CRL in December 2021 and the company tripped their fourth quarter 2021 revenue covenant as they could not manufacture enough Annovera to meet end demand.

In early 2022, TherapeuticsMD announced it was selling vitaCare for $150 million to GoodRX and would use the first $120 million of proceeds to pay down the Sixth Street facility. The company also shifted its entire focus to Annovera, de-emphasizing Imvexxy. The company also started a strategic review, hiring bankers to explore a sale of the company.

Four prospective acquirers explored acquiring the company. EW Healthcare Partners (“EW”) submitted an indication of interest to acquire the company at $18/share in February 2022. As their diligence progressed, and the maturity date of the Sixth Street facility, June 2022, approached, TXMD’s stock fell precipitously. EW revised its offer several times, ending with a final agreed price of $10/share that was announced on May 31, 2022. This was a significant premium to TXMD’s share price of $2.14 on May 27, 2022. The acquisition would be effectuated through a tender offer.

Only 30.6% of shares were validly tendered and the EW acquisition failed on July 12, 2022. The company did a financing deal with Rubric Capital Management (“Rubric”) in August 2022, that allowed the company to extend the maturity of the Sixth Street facility. Justin Roberts, a member of Rubric’s investment team, joined the company’s board of directors on August 23, 2022. In December 2022, the company signed a license agreement with Mayne Pharma for Annovera, Imvexxy, and Bijuva (“the products”) for a $140 million upfront payment and ongoing royalty and milestone payments. In connection with the transaction, TXMD fired all its employees except Marlan Walker, their former General Counsel, who they promoted to CEO.

The company’s sole assets today are $4.3 million of cash and the Mayne License Agreement. Under the terms of the agreement, Mayne will pay TXMD $5 million if net sales of the products exceed $100 million in a calendar year, $10 million if net sales of the products exceed $200 million in a calendar year, and $15 million if net sales of the products exceed $300 million in a calendar year. Mayne also pays TXMD a royalty on all net sales of the products up to $80 million and 7.5% on net sales above that level. Mayne also agreed to pay TXMD a minimum royalty of $3 million per year for 12 years, adjusted for inflation at an annual rate of 3%. In May 2023, TXMD entered a subscription agreement with Rubric, under which the company agreed to sell Rubric five million shares of common stock in separate draw-downs at TXMD’s election. The company has sold Rubric approximately 1.2 million shares under the agreement, with 3.8 million shares remaining.

In the calendar year 2023, Mayne realized net sales of the products of approximately $55 million, with sales of Annovera, Imvexxy, and Bijuva of $28 million, $19 million, and $8 million, respectively. Mayne Pharma transformed itself in 2022 into a spec pharma company by selling non-core businesses. They have three segments: women’s health, dermatology, and international. The women’s health business consists of the licensed products and Nextstellis, an oral contraceptive. Mayne is actively investing in its women’s health business and reported growth across all products in their H1FY24 results (H2CY23) in February.

Net Working Capital Settlement

Mayne and TXMD are currently in a dispute about the amount TXMD owes Mayne based on the calculation of payer rebates and wholesale distributor fees. In February 2024, Mayne sent TXMD its calculation of the allowance for these two categories, which “differed significantly” from TXMD’s calculation of the same. As of the third quarter of 2022, the last quarter end before the acquisition, TXMD had $16.8 million of rebates recorded in accrued expenses and other assets and $4.5 million of wholesale distributor fees recorded in accrued expenses and other current liabilities. TXMD and Mayne will resolve the dispute through BDO, as mandated in the transaction agreement.

The final category where Mayne can seek additional payment from TXMD is for the allowance for returns. TXMD currently believes there will be no payment required for this category, but Mayne has two years from the closing date, December 2024, to provide an estimated cost of returns. TXMD had $3.4 million of sales returns and coupons accrued as of the third quarter of 2022.

Valuation

Base case. My base case valuation assumes that Mayne grows the licensed products at 10% through the end of each of the patent lives and TXMD reduces cash operating expenses to $2 million by CY25. With these assumptions, and assuming no further draw on the Rubric subscription agreement, TXMD is worth approximately $4.50/share, a 122% premium to today’s price.

Bear case. My bear case assumes that Mayne Pharma fails to grow the licensed products, leading to TXMD only receiving the minimum royalty payments, and the net working capital settlement requires a $5 million payment from TXMD to Mayne, funded through cash on hand and a draw on the Rubric subscription agreement. In this case, TXMD is worth approximately $1.87/share, an 8% decline from today’s price.

Bull Case. The bull case valuation assumes that Mayne grows the licensed products to the potential anticipated by the multiple parties that have been interested in the assets over the past six years. In this scenario, Annovera, Imvexxy, and Bijuva reach peak sales of $250 million, $100 million, and $100 million, respectively, the year before patent expiry. In this scenario, TXMD is worth approximately $13.96/share, a 588% premium from today’s price.

Summary Valuation

Catalyst

Growth of royalties.