ETON - Eton Pharmaceuticals: Fading The Rally

2023-09-11 15:29:20 ET

Summary

• Eton Pharmaceuticals, Inc. is a small specialty pharmaceutical company whose main product ALKINDI SPRINKLE is gaining market share.
• The stock has doubled since reporting second quarter results one month ago.
• Can the rally continue? An investment analysis follows in the paragraphs below.

One of the keys to happiness is a bad memory ."? Rita Mae Brown.

It has been just over a year since we last revisited with Eton Pharmaceuticals, Inc. ( ETON ). The stock has had a large spike up recently, making it a good time to follow up on this small biopharma concern. An updated analysis follows.

Company Overview:

Eton Pharmaceuticals, Inc. is a small specialty pharmaceutical company headquartered just outside of Chicago in Deer Park, IL. It has several drugs on the market, but the company's main product on the market is called ALKINDI SPRINKLE, which is a replacement therapy for adrenocortical insufficiency in children under 17 years of age. The stock currently trades just over five bucks a share and sports an approximate $125 million market capitalization.

Eton employs the 505((B))(2) regulatory pathway to improve the formulation, delivery, and/or safety of approved drugs. Utilizing this pathway reduces the cost and time of bringing new products to market.

Eton's product portfolio is broken down into two distinct categories. First are "royalty products" that are handled by partners that have established sales forces. Eton gets paid milestone payouts as well as royalties on sales. Such products include EPRONTIA, an FDA approved liquid formulation of Topiramate .

The rest and most important part of Eton's product portfolio and pipeline is made up of Orphan Drug Products. Eton sells these products directly under its own label. These assets have the greatest potential to positively impact margins and earnings, obviously. Key products here include ALKINDI SPRINKLE and Carglumic Acid tablets as well as the recently launched Betaine Anhydrous .

ALKINDI SPRINKLE is the company's most important product. This asset was acquired in 2020, the same year it received FDA approval as a replacement therapy for Adrenocortical Insufficiency in children under 17 years of age. Adrenocortical Insufficiency affects some 10,000 children in the United States. Eton co-promotes this drug with Tolmar Pharmaceuticals, leveraging their existing sales force in exchange for royalty payments. Tolmar also helps sell Carglumic Acid and Betaine, but its main focus is to continue to gain traction marketing ALKINDI SPRINKLE.

Eton Pharmaceuticals' pipeline suffered a setback in late June when the FDA rejected the company's marketing application for its dehydrated alcohol injection as a treatment for methanol poisoning. The company has several other products in development. Probably the most important of these is ET-400, aimed at the pediatric adrenal insufficiency population. Leadership believes ALKINDI SPRINKLE and ET-400 (providing it is approved) should quickly ramp up to $50 million in peak sales combined. ET-400 (anticipated launch sometime in 2024) will be sold alongside ALKINDI SPRINKLE as a new liquid dosage form of hydrocortisone. This should help further penetrate the market and the company anticipates having roughly four percent of the 10,000 individuals affected by Adrenocortical Insufficiency to be on its regiment by year-end.

Leadership also sees the eventful contribution from Betaine as between $10 million to $20 million a year. Management is aiming for 10 approved commercial products on the market by 2025.

Second Quarter Results:

Eton Pharmaceuticals posted its second quarter numbers on August 10th. The company delivered GAAP earnings of 18 cents a share as revenues rose more than 60% from the same period a year ago to $12 million. This translated into net income of $4.6 for the quarter compared to a loss of $1.6 million in 2Q2022. Net product sales and royalty income came in at $6.5 million, a 175% increase from 2Q2022 and up 23% sequentially from the first quarter of this year. It was the 10th straight quarter of sequential product growth for Eton Pharmaceuticals.

The company also received $5.5 million during the quarter from the sale of their remaining milestone and royalty interests in ZONISADE®, EPRONTIA®, as well as Eton's lamotrigine product candidate. Based on sales growth, management boosted full year guidance to $30 million of net product sales for FY2023.

Analyst Commentary & Balance Sheet:

The company gets little in the way of any coverage from Wall Street. H.C. Wainwright reiterated its Buy rating and $10.00 price target on ETON last month. That is the only analyst firm rating I can find on the company so far in 2023.

Just under seven percent of the outstanding float in the shares are currently held short. There has been no insider activity in the stock for nearly a year now. Eton Pharmaceuticals ended the second quarter of this year with approximately $21 million in cash and marketable securities on its balance sheet after posting a net profit of $4.6 million for the quarter. The company has just under $7 million of long-term debt.

Verdict:

The company lost 36 cents a share in FY2022 on $21.25 million. The one analyst firm that has projections posted has Eton losing 30 cents a share in FY2023 on just over $30.5 million in sales. They see a 26 cent a share loss in FY2024 as revenues shoot up just north of $50 million.

The sale of some assets helped Eton Pharmaceuticals, Inc. achieve profitability in the second quarter of this year. However, it appears the company is several years away from consistent earnings. Given that and the fact the stock has now more than doubled since second quarter earnings came out, I would not chase the current rally. If the shares fell back below four bucks a share, I might start to accumulate a small position as the company does seem to be showing decent progress growing sales and its product portfolio.

The advantage of a bad memory is that one enjoys several times the same good things for the first time ."? Friedrich Nietzsche.

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