By Beth Senko, CFA
READ THE FULL INNV RESEARCH REPORT
Innovus Pharmaceutical (INNV) commercializes and markets OTC and consumer health products. The Company’s portfolio focuses on sexual health, urology, allergies, pain and brain health across a range of OTC pharmaceuticals, nutritional supplements and disposables. In the past year, the Company has introduced seven new products. Innovus has a strong pipeline and a very active direct marketing effort.
INNV sells 32 products and expects to add four to five more by year-end. Innovus’ products primarily target customers over the age of 50. The Company markets to customers through newspaper/print advertising, direct mail, retail and online through both its own websites and aggregators such as Amazon.
In our view, the Company resembled an advanced start up until six months ago when it started to formalize operational processes in support of rolling out its Beyond Human multi-pronged marketing approach across all product lines. We anticipate that the additional experienced staff and internal metrics will enable the Company to improve its story to investors, manage growth, and ultimately increase investor confidence in the company and its business strategy.
Financials: Rapid top-line growth, strong gross margins – operating leverage ahead
Historic results largely reflect startup investment and only recently sales. The opportunity for Innovus is significant; however with relatively limited sales data and few data points on the long-term prospects of its comprehensive marketing program, there is uncertainty as to how revenues and spending will ramp up over the next few years. In addition, the Company is close to breakeven, so a modest swing in spend will have an outsized effect on earnings. Quarterly updates are likely to be the primary catalysts for the share price.
Our model has revenues of $56.0m by 2021, including $54.2m of product sales, a compound average annual rate of 71% from 2017 revenues target of $8.8m. There is certainly room for upside to our numbers depending on the timing of new product introductions (especially the Company’s pending OTC generic PDE5 inhibitor agreement). Our operating margin for 2021 is 18.9%, while our net margin is 14% on a 20% tax rate.
Sensitivities and risks: Execution is key
It is still early to know how successful INNV’s multi-pronged marketing program, with its emphasis on growing subscription-based revenues to leverage marketing expenditures, will be. Early trends are quite favorable. In our view, INNV needs to show that it can maintain its strategic focus and meet clear, pressure-tested, operating targets in order to reduce financing costs and gain a stable, buy-and-hold investor base. Sensitivities in our financial and valuation outlook are largely execution dependent including:
• New product acquisitions/launches
• Addressable market and product lifecycle
• Subscription persistency
• Marketing spend
• Financing costs
• Regulatory changes
Valuation: Significant upside on modest assumptions
We value Innovus Pharmaceutical primarily using DCF techniques in large part because we expect much of the value in the Company will be unlocked over the next three to five years. The Company’s recent results suggest a strong recent track record of product introductions and healthy gross margins of 80%+.
A 10-year DCF with a WACC of 15% on our forecast compound average annual revenue growth of 71% from 2017-2020 fading to terminal growth of 2% and a terminal EBIT margin of 15% yields a value of $0.42 per share.
For reference, a peer group of nutraceutical companies trades on an average year one consensus P/E of 26.3x and one-year consensus price-to-sales of 12.6x. Innovus currently trades at 0.9x our 2018 revenue estimate.
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By Beth Senko, CFA