Written by Brian Marckx, CFA
 

Pernix Therapeutics Holdings (PTX) reported financial results for the third quarter on November 12, 2010.  Net sales came in at $7.79 million versus our estimate of $5.54 million.  The $2.24 million difference is a result of $4.23 million better than forecast ($11.53 million actual versus $7.30 million estimate) gross sales, partially offset by slightly higher rebate and discount expense as a percent of gross sales, as well as collaboration revenue coming in $212k lower than our figure.  As we noted in our initial report on Pernix, we expected significant difficulty in accurately forecasting short-term revenue due to the highly dynamic nature of the company’s business model along with the fact that management (for competitive reasons) does not disclose sales of individual drugs.  We believe the majority of our revenue miss in the quarter was due to Cedax sales ramping faster than we had anticipated.  As a result we have raised our revenue estimate for the fourth quarter.
 

Medicaid rebates, which spiked during Q2 due to the introduction of Cedax, came in at 15% of gross sales (versus 33% at Q2) during the third quarter.  Management noted on the call that they are beginning to see some benefit from their efforts at reducing their exposure to Medicaid.  Our model assumes that that Pernix’s exposure to these rebates runs in the mid-teens (% of gross product sales) over the next several years – slightly scaling up with the growth of Cedax. 
                       
EPS was $0.10 versus our $0.03 estimate.  Roughly $0.03 of the difference is attributable to the better revenue number, with another $0.04 coming from an $862K gain related to the purchase of Macoven.  Operating expenses as a percent of gross sales were largely in-line with our numbers. 
 

Management also provided a brief business update on the call.  Noteworthy was that the company is in late-stage discussions with a privately held pharmaceutical company for a potential co-promotion deal that would bring on a “best-in-class” pediatrics product.  Management offered little in the way of details on the product, although the implication is that it could offer material revenue contribution.  Pernix expects to close on the deal later this year and launch the product in Q1 2011.  As we noted in our prior report, we expect co-promotions to contribute a larger share of total net sales over the coming years and had expected Pernix to close on a large co-pro deal or drug acquisition before year-end so this recent deal is in-line with our projections. 
 

Relative to the antitussive pipeline product, management mentioned that they are in the process of discussing a joint-venture agreement with an international partner which they expect to have in place during Q4.  Pernix expects to provide an update later this year. 
 

The stock is up about 23% since we initiated on the company in August of this year but remains significantly undervalued in our opinion.  We believe this cheap valuation (just 4.8x our 2011 EPS estimate of $0.79) may largely be a result of the market “not seeing the forest for the trees” with undue concern placed on choppy quarterly results.  Pernix’s competitive advantages rely on the company’s ability to be highly dynamic in an attempt to maximize long-term growth.  Management is clearly focused on maximizing the long-term growth of the company so we have little concern over “adjustments” in the business that may result in irregular short-term results but that benefit long-term success.  We also note that the slim float and Pernix going public just 8 months ago has likely kept the stock off of many investors’ radar screens which has contributed to the cheap valuation and helped create a very attractive entry point.    
 

We have updated our model and now look for full-year 2010 net sales and EPS of $34.1 million and $0.47 (versus $29.8 million and $0.39 prior to Q3).  Our 2011 EPS estimate has moved from $0.75 to $0.79. 
 

We are maintaining our Outperform rating on Pernix and have raised our price target from $6.75 to $7.10, based on 9x our 2011 EPS estimate of $0.79.
 

For a copy of the full research report, please email SCR@ZACKS.COM with the ticker PTX as the title

 
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