ETON - Eton Pharmaceuticals Has Some Potential As A Speculative Play

2023-03-20 04:55:13 ET

Summary

• The addition of a new sales force could be a catalyst that drives the performance of the company in the near term.
• Expectations are sales will increase with little impact on expenses because of offsetting factors.
• With the recent jump in its share price, it looks to me like the company is poised for a correction, which could be an opportunity to take a small position.

The share price of Eton Pharmaceuticals, Inc. ( ETON ) has been on a tear since hitting its 52-low of $1.95 per share on September 2022, more than doubling to its 52-week high of $4.50 per share on March 16, 2023. It has since pulled back but is still trading at 2x what it was from its 52-week low.

In its latest earnings report the company beat by $0.03 with EPS but missed on revenue by $0.62 million.

With the company exiting its co-promotion deal with Tomar Pharmaceuticals because of rapid growth of Alkindi Sprinkle, it has taken total control of its sales force by hiring 12 experienced rare disease specialists that are already in the field, according to management.

In the initial stages of the launch the agreement made sense because of the expertise of Tomar and the additional cost savings to the company. Now that product sales have taken off, the company feels justified in making the changes.

In this article we'll look at some of its latest earnings numbers, the potential of its new sales team, and some of the expectations management has for other products.

Some of the numbers

Revenue in the fourth quarter of 2022 was $8.5 million, compared to revenue of $6.1 million in the fourth quarter of 2021, up 39 percent year-over-year. Revenue for full year 2022 was $21.25 million, compared to revenue of $21.83 million for full year 2021.

Product sales and royalty revenue in the reporting period was $3.5 million, compared to $1.1 million in the fourth quarter of 2021, up 220 percent. Sequentially, product sales and royalty revenue increased 9 percent, with the slowdown attributed to the impact of the timing of product orders from its specialty pharmacy, along with a seasonal decline in new patients starts. Management said it expects the growth rate to jump in the first quarter of 2023. Product sales and royalty revenue for full year 2022 was $11.25 million, down from $2.83 million year-over-year.

With licensing revenue, that came in at $10.00 million for full year 2022, compared to $19.00 million for full year 2021.

Gross profit in the quarter was $6.4 million, compared to gross profit of $5.7 million year-over-year.

Net income in the reporting period was $0.9 million, or $0.04 per diluted share, slightly down from net income of $1.00 million in the fourth quarter of 2021, or $0.04 per diluted share. The company had a net loss of -$(9.00) million for full year 2022, or -$(0.36) per diluted share.

Cash and cash equivalents at the end of calendar 2022 was $16.3 million, compared to cash and cash equivalents 0f $14.4 million at the end of calendar 2021.

The company held long-term debt of $5.4 million at the end of calendar 2022.

A look at the new sales force

As mentioned above, with the growth of Alkindi Sprinkle, the company felt it would be more beneficial to build a new sales force that would focus solely on ETON products. The prior co-promotion sales force, according to management, didn't have the product at the top of their priority list because of less attractive commissions.

When asked about the new sales force and its focus, management said it'll be approximately 80 percent focused on Alkindi Sprinkle, with the remaining 20 percent focus on Betaine and Carglumic Acid. With a low number of call points at this time, ETON doesn't think it'll dilute the marketing efforts of its sales time at this stage of growth.

Even so, the new sales force has already driven strong results in Carglumic Acid so far in 2023, with the marketing of Betaine just around the corner.

As for its top product Alkindi Sprinkle, management believes it'll be able to accelerate growth significantly with the new sales team. If it's able to execute on its strategy, it could surprise to the upside in the year ahead, although with the jump in its share price, some of that is already priced in, in my opinion.

Concerning the addition of the new members of its sales team, the company believes it'll only have a "minor" impact on SG&A expenses, which is guided to be under $20.00 million for full year 2023. The reason given for the offsetting expenditures was:

lower legal costs, reduced marketing spend from some initial launch related expenses that will not repeat in 2023, the elimination of the copromotion commission paid to our marketing partner and the elimination of expenses that were associated with supporting products that were divested in 2022.

This was a smart move that makes sense, and if the company is able to deliver on the new strategy, again, it could surprise to the upside in regard to performance.

Current Products and expectations

Sales for Alkindi Sprinkle have been gaining momentum, and it'll be interesting to see the impact of the new, in-house sales team on growth. The bar has now been raised, so the company must perform with its top product in order to continue momentum.

Management said initial results have looked good and believes it should increase its adoption rate and market share going forward. It could also be helped by a new direct-to-customer initiative that the company expects to produce more engagement among its patients in 2023.

In regard to Carglumic Acid, it had solid growth in the quarter, according to management, with a steady growth in new patient starts and adds so far in the first quarter of the year.

The company also believes it can be as commercially successful with Betaine as it has been with Carglumic Acid. It's early in the game with Betaine because the company acquired it in the latter part of 2022 and is going through the process of relaunching it under its own branded label. Optimism for the product comes from Betaine having the same prescriber base as Carglumic Acid does, and physicians are reportedly already showing strong interest in the product.

According to the company, inventory for launch has already been manufactured, and is being labeled and tested in preparation for release to the market. Management said it should be available for release sometime in April 2023.

The company estimates the current market size for Betaine to be from $10.00 million to $20.00 million annually, which should generate sizable revenue in the years ahead if it gains a foothold in the market.

Pipeline

Dehydrated alcohol injection

The first product in the pipeline in regard to having the potential to be approved the quickest, is its dehydrated alcohol injection. Near the end of the fourth quarter of 2022 the company submitted an NDA response to the FDA, and the FDA accepted it for review, and was assigned a PDUFA date of June 27, 2023.

ETON is now working with a partner for the purpose of making preparation for launch if the product is approved for commercialization.

The company sees the size of the dehydrated alcohol injection market being over $70.00 million annually and has the goal of winning 40 percent market share.

ET-400

ET-400 is a product being developed to compete in the pediatric adrenal insufficiency segment of the market. ETON has already had its registration batches for the product manufactured and is looking to submit the NDA in the latter part of 2023.

Pediatric adrenal insufficiency represents an addressable market of over $100.00 million.

The strategy of the company, if it's approved, will be to market it alongside Alkindi Sprinkle. The combination of the two are estimated to generate over $50.00 million in annual sales for the company in the not-too-distant future, again, assuming it's approved.

ZENEO hydrocortisone autoinjector

The company didn't say much about this product other than to state it was also important to the adrenal insufficiency community.

It is current in the development stage by its partners and is expected to be ready for NDA submission some time in 2024.

ET-600

Recently ETON acquired ET-600, which is designed to treat a rare pediatric endocrinology condition.

It also has the same prescriber base as Alkindi Sprinkle does and should be a strong fit for the company, not adding much in the way of additional expenses.

Management stated that physicians have already said there is a demand for the product. ETON believes the product will be one that is quick and efficient, with the NDA submission possibly coming in approximately a year, i.e., within the first half of 2024.

Conclusion

Management has the goal of having 10 commercial products brought to market by 2025 and will work to achieve that via its existing pipeline and acquisitions.

The primary focus for acquisitions will be for products that area in the late stage of development, or already approved. The thought there is to have products that can drive revenue growth very quickly or immediately.

I think ETON has the potential for long-term growth, but its rapid upward move in its share price makes it a little pricey in my view. That's supported by its P/E GAAP ((FWD)) of 65.00, as measured against the sector median of 26.00, higher by 150.03 percent, and Price/Book ((FWD)) of 7.56, compared to the sector median of 1.91, higher by 295.97 percent.

With the addition of a new sales team and no meaningful increase in expenditures associated with it, the company does appear to be positioned for decent growth, even if nothing in its pipeline gets approved in the near future.

The question that investors will have to answer is whether or not this is mostly priced in at this time. My thought is that much of it is, but the company could surprise to the upside if the sales team outperforms, and expenses remain subdued.

I consider ETON a speculative play that may be worth taking a small position in because of expected growth within its existing product line and the possibility of at least one of the products in its pipeline being approved. For now, there are no visible catalysts I see that would drive the performance of the company in a strong way in the near term, but if the share price corrects, which I think it might, it could offer a good opportunity to get an attractive entry point that lays the foundation for a profitable cost basis.

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