Maxam Capital Management Ltd. is an independent and employee owned fund management firm based in Vancouver, BC. Maxam is the manager of the Maxam Diversified Strategies Fund, an opportunistic and event-driven long-short fund.
Maxam seeks to invest in securities where it believes it has identified both value and a catalyst. By focusing on both of these qualities for each of our holdings we endeavour to build a diversified portfolio with attractive upside potential and limited downside risk.
The Maxam team utilizes a value-oriented and bottom-up approach to security selection, targets investment opportunities across the market capitalization spectrum and is sector-agnostic (albeit with typically low exposure to the volatile energy and materials sectors). Maxam has the flexibility to utilize a variety of investment techniques and strategies, including: long positions, short positions and merger arbitrage.
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The Maxam Diversified Strategies Fund recently received two awards at the 2017 Canadian Hedge Fund Awards, 3rd place for Best 5 Year Return, and 1st place for Best 5 Year Sharpe Ratio.
Value with a Catalyst: Medicure Inc.
Maxam believes that Medicure Inc.’s current share price represents attractive value with limited downside risk. Befitting Maxam’s approach, we also believe that the company has numerous potential future catalysts that may lead to substantial upside for the share price.
As a U.S-focused specialty pharma company with an established revenue stream from its lead drug Aggrastat, Medicure is progressing the development of a pipeline of products, and is actively seeking acquisitions of related pharmaceutical products to drive long term value creation.
Medicure currently generates revenue through the sale of Aggrastat, a platelet inhibitor used to reduce the rate of thrombotic cardiovascular events, to U.S. hospitals. Sales of Aggrastat have grown from under $5 million in 2013 to approximately $30 million annually today – gaining market share at the expense of competing drugs Integrilin and Reopro.
In 2014, Medicure secured a fixed-price multi-stage option to acquire Apicore, a New Jersey based developer and manufacturer of specialty Active Pharmaceutical Ingredients (“APIs”) and pharmaceuticals. With two FDA approved facilities, Apicore specializes in the manufacture of difficult to synthesize, high value and other niche API’s for many U.S. and international generic and branded pharmaceutical companies.
In July 2017 Medicure exercised the final portion of its option to acquire Apicore. Medicure funded the majority of the US$59 million transaction value with debt financing, thereby avoiding significant shareholder dilution. A few short months later in October 2017, Medicure announced that they had reached an agreement to sell Apicore for net proceeds of US$105 million.
In our view this transaction has not only created significant value for Medicure shareholders, but has also established a solid base for future value creation.
Medicure’s fully diluted market capitalization at the current share price of $7.46 is $133 million. After the company receives the full net proceeds of US$105 million from the Apicore sale, we estimate the balance sheet will hold approximately $66 million in cash and no debt. When including potential proceeds of over $8 million from in-the-money options and warrants, we calculate an enterprise value for the company of $58 million. Pro forma net cash will be approximately $4.20 per share, over 50% of Medicure’s market capitalization.
Despite seeing some increased pricing pressures on Aggrastat sales during the most recent quarter, we believe the product can generate $8 million of EBITDA in 2018. This implies a current EV/EBITDA valuation for Medicure of roughly 7x. Given the low capital intensity of the business and no interest expenses, conversion to free cash flow should be high. Twelve months out, we expect approximately $0.35 per share in cash to be generated from Aggrastat and another $0.05 per share from interest income, equating to a double digit free cash flow yield on enterprise value.
In our view, Medicure’s attractive valuation – based on just the Aggrastat business – and its substantial net cash balance provides significant downside protection from the current share price level.
Value is great; however, we also want to find catalysts associated with our investments to help ensure we don’t get stuck in a value trap.
Medicure has indicated that they have two new products launching in the first half of 2018, and another two products in 2019. We believe Medicure’s experienced sales force will be able to successfully capitalize on their existing relationships with U.S. hospital customers to generate sales. Additional product sales through an established sales infrastructure should provide meaningful bottom line margin expansion.
In addition to the new products in the pipeline, Medicure’s cash balance affords management the opportunity to create value in numerous ways. In our view, their four core options are (i) acquisitions, (ii) product development, (iii) share buybacks, and/or (iv) dividends. We believe their priority will be to build out the product portfolio, a strategy they have been successful with.
Medicure trades at an attractive valuation, has no debt, and will hold cash representing over 50% of pro forma market capitalization following the final receipt of the Apicore transaction proceeds.
Medicure’s management is very aligned with shareholders as evidenced by CEO and founder Dr. Albert Friesen owning more than 15% of the company. Worth noting is that the top four shareholders own more than 50% of basic shares outstanding, by our math.
In summary, we believe that Medicure’s current share price represents a significant investment opportunity – one that affords solid downside protection, and the potential for significant share price appreciation.
Maxam Capital Management Ltd.
Dami Oloidi, Associate
Travis Dowle, President
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