Crescita Therapeutics (TSX: CTX) is a publicly-traded, Canadian commercial dermatology company with a portfolio of non-prescription skincare products and prescription drug products for the treatment and care of skin conditions and diseases and their symptoms. The company owns multiple proprietary drug delivery platforms that support the development of patented formulations that can facilitate the delivery of active drugs into or through the skin. The company owns a portfolio of non-prescription skincare products and has one FDA approved prescription product, Pliaglis that is licensed to Cantabria and Taro Pharmaceuticals for the U.S. market.
I own shares of CTX.TO.
Crescita Therapeutics Stats
- Crescita Therapeutics: CTX.TO, CRRTF (OTC)
- Price: $0.89 (Canadian Dollars)
- Issued and Outstanding Shares: 21,016,059
- Fully Diluted: 25,362,134
- Market cap: $18.7 million
- Cash: $11.7 million
- Debt: $4.4 million
- Enterprise Value: $11.5 million
- CEO Serge Verreault
- Insider Ownership: 11.3%
Crescita Therapeutics is a commercial dermatology company. Four key assets make up the company: skincare brands, drug delivery technologies, contract development and manufacturing, and their prescription business line. Prescription drug Pliaglis is responsible for making the majority of their money through royalty and milestone payments. In contrast, the skincare business produces good revenue but is not cashflow positive.
Crescita has a very strong balance sheet with $11.7 million in cash and only $4.4 million in debt. As a result, Crescita is in an excellent position to execute on its growth strategy and increase its market penetration.
Crescita Therapeutics Company History
Crescita Therapeutics was incorporated on March 1, 2016, after it was spun-out from Nuvo Research. As a result of the spin-out Crescita retained the following assets:
- Their best asset, prescription drug Pliaglis;
- Two drug delivery technologies: Multiplexed Molecular Penetration Enhancer (MMPE) and DuraPeel;
- A partnership with Ferndale Laboratories for development of two prescription drugs MiCal1 and MiCal2
- A drug called WF10;
- $35 million in cash to execute their business plan.
Nuvo Pharmaceuticals is also a publicly-traded company. While Crescita focuses on skincare and skin related products Nuvo has a portfolio of pain relief and allergy drugs. Nuvo is also developing new drugs. At the time of the split, Nuvo had three commercial products. In 2018 Nuvo had revenues of $20 million but was not profitable. Nuvo (NRI.TO) currently trades for $0.43 and a market cap of $4.9 million.
In July of 2016, Crescita discontinued WF10. Along with WF10 Crescita sold off their Immunology Group. Although the sale of WF10 did not provide any meaningful money it did greatly reduce Crescita’s cash-burn.
On September 1, 2016, Crescita completed a business altering acquisition. The company purchased INTEGA Skin Sciences. INTEGA provided the company with access to non-prescription skincare brands. INTEGA was purchased by Crescita for $8.0 million, $5.9 million was paid through the issuance of 2.4 million shares at $2.44. The company also took on debt from Knight Therapeutics.
In addition to the skincare brands, Crescita obtained a manufacturing facility that is now their headquarters in Laval, Quebec. The acquisition gave Crescita a non-prescription skincare business to build from. The purchase of INTEGA provided Crescita a sales staff it could utilize in the future to sell new skincare products and Pliagalis when ready to be sold in Canada.
The most recent, and most important, developments for Crescita has been the commercialization of Pliagalis. Agreements were signed with Taro Pharmaceuticals and Cantabria to sell Pliaglis in their respective territories. These deals provided Crescita with substantial upfront payments which have greatly bolstered Crescita’s balance sheet.
Crescita is made up of four distinct business lines. Let’s take a look at each business line and what it contributes to the company.
In September of 2016, Crescita Therapeutics acquired INTEGA Skin Sciences. In this acquisition, Crescita obtained four skincare brands, a manufacturing facility and a sales team to market and distribute additional skincare brands. The benefits of the transaction were described as:
Crescita purchased INTEGA for $8.0 million. $5.9 million was paid using Crescita shares issued at a price of $2.44. Knight Therapeutics was a shareholder and backer of INTEGA and as a result, obtained a large portion of Crescita when the deal was finalized. Crescita also took on some debt from Knight with an interest rate of 9%.
This was a pivotal acquisition for Crescita. It provided them with a manufacturing facility and four skincare brands. The use of shares to pay for the acquisition, in hindsight, appears to have been an excellent choice. They issued 2.4 million shares at $2.44. This was a lofty valuation for a company that had only $3.5 million in revenue and lost $14.8 million in 2016.
The overall quality of the transaction is hard to judge. Premiology and ISDIN were two of the four skincare brands acquired, however, both were discontinued. Laboratoire Dr. Renaud has been declining in sales since Q2 2018, however, it did see a recent domestic sales uptick. The real valuable asset in this acquisition I believe was the manufacturing facility and a sales and manufacturing team. The manufacturing facility allows Crescita to buy new brands and then manufacture them in house. They can also do contract work for other skincare brands. Crescita can diversify its revenue stream and maximize the asset. They moved all their operations to the Laval Quebec facility pictured below.
In August of 2017, Crescita made its second skincare purchase. They obtained Alyria from Sanofi Consumer Health. The company paid $1.7 million in installments and a royalty agreement from 2020-2029. Crescita described the benefits of the acquisition as follows:
Skincare Brands Performance
Currently, Crescita’s skincare line is unprofitable. The skincare business has grown at a 20% compounded annual growth rate since 2016. To calculate this number I doubled 2H16 numbers to give a full-year comparison (they acquired INTEGA at this time) and estimated a 10% annual growth rate for 2H19. The growth rate has slowed mostly due to slowing growth in their largest brand, Laboroatoire Dr. Renaud (LDR). In comparison, Crescita’s contract development and manufacturing operations (CDMO) grew by 64% in 2018.
Crescita has been investing in the LDR line. On November 8th, 2018, Crescita announced the launch of five product innovations. The innovations were lead by VP of Strategy and Quality Innovation Isabelle Villeneuve. When the five product innovations were launced Villeneuve had only been employed by Crescita for six months. One of the product innovations also incorporated Crescita’s MMPE technology. In Q1 2019 domestic LDR sales increased 9.6% compared to Q1 2018. I hope this is an indication that the product innovations were successful and VP Villeneuve can have similar success in the future.
In the second quarter of 2019, Crescita launched Dermazulene in China. Dermazulene was responsible for most of the skincare segment growth of 34.4% in Q2 2019. LDR is also exported and sold through distributors in South Korea and Malaysia giving some global exposure to the brand.
The skincare segment has consistently grown gross margin since the INTEGA acquisition. 2016: 22%, 2017: 40%, 2018: 46.4%, 1H19: 48.2%. If this can continue and revenue growth can continue at a 10-15% rate the skincare line should have a revenue number of around $10.5 million in 2019 and $11.5 million in 2020. I also expect Crescita to make an acquisition in the next twelve months to add a brand to their skincare business.
Overall the skincare business is growing and global expansion is encouraging. Gross margin has improved. This shows me there is some strength in their brands and their pricing has been sustainable, or, costs of goods sold have come down. Crescita is beginning the process to transfer the production of Alyria to its facility. Producing Alyria in house should add to gross the overall gross margin of the skincare line. The transfer is anticipated to be completed in fiscal 2020. Revenue growth and gross margin are the two major indicators I will watch in the skincare business.
Contract Development and Manufacturing Organization
One of the most important assets from the INTEGA acquisition is the 50,000 square foot manufacturing facility. Crescita offers a one-stop-shop for skincare brands. They are able to assist with research and development and can even offer their delivery technologies to enhance product effectiveness. Crescita uses their facility to manufacture the majority of LDR and Pro-Derm. The main growth of product sales revenue in 2019 has come from CDMO revenue. The margins on the CDMO business have not been specified however they are lower than the 50% margins on the skincare business.
As the slide says above the CDMO business grew 64% in 2018 and continues to grow in 2019. Currently only 25% of the facility is being utilized. The CDMO business is a welcome diversification of revenue and one of the pillars of growth for Crescita.
Topical Delivery Technologies
The company has patents on two drug delivery technologies: DuraPeel and Multiplexed Molecular Penetration Enhancer (MMPE). Crescita already deploys the DuraPeel technology within Pliaglis. Crescita has signed various licenses for their MMPE technology although it doesn’t appear they are generating revenue yet.
- MiCal1: Crescita retained the MMPE technology when it was spun-out of Nuvo. Nuvo had already signed an agreement with Ferndale Laboratories for the use of MMPE in two of their drugs under development, MiCal 1 and MiCal2. MiCal1 has progressed to Phase 3 trials for treatment for plaque psoriasis. Crescita was not responsible for funding the development of these drugs until very recently. The company agreed to participate in the funding of the Phase 3 trials;
- MiCal2: MiCal2 is the same agreement as MiCal1 with Ferndale Labs. MiCal2 uses MMPE technology to treat an unspecified dermatological skin condition. While MiCal1 is in Phase 3 MiCal2 has only completed Phase 1.
- On March 21st, 2017, Crescita licensed out their MMPE technology to a major U.S. based company. The licensee is responsible for developing three products. The products will be used for prescription treatments for skin diseases. Similar to the MiCal deals Crescita does not have to fund research and development costs. In the words of then CEO Dan Chicoine, “the Company stands to gain an attractive return if the development activities of our licensing partner are successful.”
- On October 15th, 2018, Crescita announced that they had conducted a study regarding their technologies and CBD. Crescita concluded that DuraPeel and MMPE are 6x and 14x more effective to deliver CBD when compared to the control formulation.
- On February 4th, 2019, Crescita announced an agreement with Tetra Natural Health. The agreement involved incorporating MMPE technology into Tetra’s dermatology portfolio. Tetra also began a discussion to contract Crescita’s manufacturing facilities.
Technology Revenue Outlook
Many of these developments are years away. A quick google search tells me that from Phase 3 to commercialization takes three to five years if successful. Crescita uses MMPE technology in some of its products and is continuing to look for other opportunities. Revenue from a prescription drug collaboration is still a long way off. Revenue from the Tetra collaboration may be closer. Health Canada has approved some of Tetra’s dermatology products indicating they may be closer to market.
Crescita’s MMPE technology, and to a lesser extent DuraPeel, has garnered interest from various organizations. I don’t give these agreements much value at this time since revenue is so far off. Many things can change but it does give me confidence that MMPE is a valuable asset.
Prescription Drug Pliaglis
Pliaglis is the real star of this company and possibly worth the market cap alone. Pliaglis is a topical local anesthetic cream that provides safe and effective local dermal analgesia on intact skin prior to superficial dermatological procedures. It is applied to intact skin for 20 to 30 minutes prior to superficial dermatological procedures such as dermal filler injections, non-ablative laser facial resurfacing, or pulsed-dye laser therapy. The drug is also used to prep for laser tattoo removal.
Pliaglis has had a spotty and confusing track record. The FDA approved Pliaglis in 2006 and then it was licensed to Galderma for worldwide sales. Galderma then voluntarily removed Pliaglis from the market in 2008 due to its own manufacturing issues. This required Galderma to again submit for approval which they received from the FDA in 2012 and launched in the U.S in 2013.
Crescita retained Pliaglis from the spin-out from Nuvo. The above slides give a history of Crescita’s management of Pliaglis. Crescita reacquired the worldwide rights back from Galderma in two separate transactions. As a result, Crescita was able to properly manage Pliaglis and maximize their best asset.
In April of 2017 Crescita signed an agreement with Taro Pharmaceuticals for the exclusive right to sell Pliaglis in the United States. The agreement included:
|(i)||an upfront, non-dilutive payment of US$2.0 million;|
|(ii)||up to US$5.75 million in non-dilutive development and sales milestone payments; and|
|(ii)||tiered royalties on net sales of products licensed under the Agreement.|
In addition to Pliaglis, Taro was granted the right to sell an enhanced version of Pliaglis. The deal with Taro was immediately successful. It has resulted in Crescita collecting all of the upfront $2 million payment and $4 million of $5.75 million in development and sales milestones. In comparison to Galderma, Taro has been able to quickly ramp sales. In 2018 I calculated Crescita collected $4.2 million in royalties from Pliaglis sales.
Effective April 1st, 2019, Crescita reacquired the rest of world rights from Galderma. To reacquire the rights Crescita paid $1.274 million in termination fees and other transaction-related costs.
On April 25th, 2019, Crescita announced an agreement with Cantabria for the rights to sell Pliaglis. Cantabria is responsible for selling Pliaglis in four countries: Italy, France, Spain, and Portugal. Terms of the agreement were:
(i) an upfront payment of €2.5 million (approximately $3.8 million CAD), one-half payable upon signing the Agreement and the remaining half payable following the first commercial sale of Pliaglis by Cantabria Labs or its affiliates;
(ii) double-digit royalties on the net sales of Pliaglis in the Territories; and
(iii) milestones related to the launch and sales performance of Pliaglis in France, Spain and Portugal. The upfront payments alone provided Crescita with $2.7 million in positive cash flow. Crescita will receive double-digit royalty on sales.
Again we see another double-digit royalty agreement and a large upfront payment.
Taro Pharmaceuticals is a $2.9 billion company while Cantabria Labs is a private company that operates in eighty countries. Taro had $669 million in revenue in 2018 and generated $280 million in net income. This is not a small company and I feel that their interest in Pliaglis is a very strong sign. Pliaglis is approved in twenty-six countries, many of which Cantabria already operates in. It seems logical that Cantabria would be a possible partner for sales in other countries.
Let’s look at Pliaglis performance since Crescita’s was spun out of Nuvo. Crescita has collected $11.6 million in milestone and upfront payments from Taro and Cantabria. They paid $1.27 million to purchase the worldwide rights back for a total of $10.3 million. The question I continually see investors ask is how much of Crescita’s revenue is repeatable. Below I’ve calculated and estimated Pliaglis’s revenue from royalties only:
In Q2 2019 Crescita earned $1,242,000 in royalty revenue, a 278% increase over Q2 2018. For 2H19 I used a 20% CAGR for growth and factored in an $823,000 quarter for an inventory fill for Cantabria. To get the inventory fill number is used Q1 2019 $1.4 million (Taro inventory fill quarter) and deducted 56% (Italy, Spain, France, Portugal have 56% of the population of the U.S.A.) This gives Pliaglis an estimated royalty revenue run rate of $5.18 million for 2019 and a 27% CAGR since Crescita was spun out. Based on the speed of the agreement I estimate that Cantabria will move quicker than Taro did filling their inventory channels however I am guessing which quarter that occurs in.
Galderma either did nothing to promote Pliaglis or did not recognize it’s value. The numbers are clear. Since Taro began selling in the United States Pliaglis royalties have been much stronger than Galderma’s. With Cantabria in the mix, we should see an increase in royalties as they begin selling Pliaglis in their four countries.
This is not accounting for Crescita’s launch of Pliaglis in Canada in 2H19 and very little revenue growth from Cantabria.
CORRECTION: In my initial post I incorrectly used the $1.7 million in guaranteed minimum royalty payments. This number does not convert into cash flow and accounting for the contract value. My estimates for 2019 were way off as a result ($8.5 million compared to $5.1 million). This does not change my opinion about the value of Pliaglis and its potential for very profitable growth. This was a big error on my part. I remember reading Note 12 on the financials however didn’t understand it which lead to the incorrect estimate. Thanks to Mathieu Martin for pointing it out.)
Pliaglis is approved in twenty-six countries. It is currently only commercialized in the United States, Italy, France, Portugal and Spain. Crescita is planning a launch of Pliaglis in Canada in the second half of 2019 using its own sales force. Their current partners, Taro and Cantabria, are international companies with operations all over the world. It seems logical that Taro or Cantabria would sign additional agreements with Crescita to sell Pliaglis in these countries. On July 24th, 2019, CEO Serge Verreault commented that they are negotiating out-licensing deals for Pliaglis for other countries. The business team is focusing on the largest markets especially in Europe.
Pliaglis is clearly the star of the show right now for Crescita. It is currently producing the vast majority of their cash flow while Crescita builds out its skincare and CDMO business lines. The royalty revenue of Pliaglis has grown 27% since the spin-out from Nuvo and generated $10.3 million in net upfront and milestone payments. I anticipate CEO Verreault and his team will be able to out-license Pliaglis to other major countries within the next twelve months which should keep Pliaglis sales growing.
Crescita Therapeutics Valuation
With an enterprise value of $11.5 million Pliaglis and it’s newer formulation Flexicaine are worth the enterprise value alone. In the past twelve months, Crescita Therapeutics has earned $4.2 million in royalty revenue alone. Crescita is trading at 2.7x enterprise value to repeatable royalty sales from Pliaglis. Royalty revenue from Pliaglis sales has grown 27% since the spin-out with a long runway ahead in the form of new licensing deals for other countries.
The skincare line is currently burning cash but has earned $9.8 million in the past twelve months. It is growing at a 20% CAGR since the INTEGA acquisition in 2016. I find the skincare business hard to judge. It appears to be a very competitive industry however I think their distribution model does have some advantages. Crescita brands are sold through spas and medispas. I think this gives Crescita the ability to maintain margins and keep its products at premium price points. If they were to enter a place like Shoppers Drug Mart in Canada I don’t know if they could maintain their price point due to increased competition. I am in the middle of doing some on-ground research on Crescita’s skincare brands which I will add in another post.
As far as I can tell the drug delivery technologies are not producing revenue. MMPE provides some optionality and possible high margin revenue in the future, however, with the exception of MiCal1 the rest are longshots. MMPE and a CBD collaboration could produce revenue in a shorter time frame as there is a lot of money being poured into CBD at the moment.
Consolidating Crescita’s revenue (product sales + repeatable royalty revenue) Crescita made $14 million in repeatable revenue. Crescita trades at 0.82x enterprise value to repeatable revenue.
On a company-wide basis, milestone payments included, Crescita earned $8.60 million in EBITDA in the past twelve months. With an enterprise value of $11.5 million, Crescita is trading at an enterprise value to EBITDA of 1.3x.
In my opinion, Crescita is trading at a discount. Pliaglis is worth the enterprise value of the company alone and possibly more. Taro and Cantabria paid $5.8 million in upfront payments for the right to sell Pliaglis. The market may not be giving much value to the skincare and CDMO business lines. Crescita has an experienced management team and is working on expanding the skincare line globally. Dermazulene was only launched in China in Q2 of 2019 leading me to believe additional revenue can be generated in China. I also anticipate an acquisition to broaden their product offerings and increase customer count, similar to what they did with Alyria.
As with any company, there are risks associated with Crescita. I see the three main risks to the company as Knight Therapeutics large ownership position, Pliaglis coming off patent, and the competition in the skincare business.
Knight Therapeutics Ownership
When Crescita acquired INTEGA a large portion of the acquisition was paid for using stock. Knight Therapeutics owned a large position in INTEGA and as a result, now owns a large position in Crescita. Knight is a Canadian specialty pharma company with a $1 billion market cap. They own 1.9 million shares of Crescita (9.2% of Crescita). Knight has been selling Crescita shares consistently since July of 2019. All of Knights’ selling has occurred at $1.00 or higher. On the July 24th conference call, Executive Chairman Chicoine commented that he did not think Knight viewed Crescita as a long term investment. He believed that Knight would continue to reduce their position over time. If Knight continues to reduce their ownership stake this could keep a lid on Crescita’s share price.
While Knight may be holding down the top end of the share price Crescita is holding up the bottom. Crescita announced it would buy back 1,000,000 in the next twelve months. This should provide stability to the low end of their share price of around $0.80-.85.
Pliaglis comes off patent at the end of this year and in 2020 for the rest of the world. CEO Verreault addressed the issue on their conference call. They do not anticipate any decrease in sales and no indication that a generic will be coming onto the market. On July 16th Crescita was granted a patent in the United States for the enhanced formulation of Pliaglis. The enhanced version of Pliaglis has patent protection to 2031. Taro plans to replace standard Pliaglis with the new formulation and has been participating in its approval process with the FDA.
If a generic were to come to market it usually takes two years before it is approved and there are none proposed at this time. I view the large upfront payments by Taro and Cantabria as a strong sign that Pliaglis is safe from generic competition. Why would Cantabria pay $3.7 million in upfront payments less than two years before the patent expires if they thought it would be an issue.
I am no expert on the skincare market but I do feel like consumer preference changes rapidly. In their risks, Crescita acknowledges this. They must continually invest in their products and formulations to remain relevant. As a result, net revenues tend to decline as the product formulation ages. With the proliferation of social media marketing Crescita warns that this could lead to increased spending on marketing with little increase in sales.
On the other hand, research conducted by Technvaio on global professional skincare estimates a 7% CAGR. I would classify Crescita’s brands as professional skincare. Their products are sold directly through spas and medispas and often utilized by professionals for skincare treatments. With their expertise in formulations and R&D, I hope Crescita can continue to evolve its skincare brands and capture a larger portion of a growing market.
Crescita Therapeutics Conclusion
- A very strong balance sheet with $7.3 million in net cash;
- Announced a share buyback for 1,000,000 shares;
- Cash flow positive business;
- Undervalued Pliaglis asset with a long runway for additional growth;
- Underutilized manufacturing facility;
- Experienced management team;
- Skincare brands growing at 20% a year in a growing industry;
- Patented MMPE and DuraPeel technology;
- Overall compelling valuation at an EV/EBITDA of 1.4x last 12 months.
- Large insider ownership by Knight Therapeutics who have been selling off their stake;
- Skincare brands that are growing however not producing profits;
- Pliaglis coming off patent in 2019 and 2020;
- Very competitive market conditions for skincare brands;
- Significant and continual R&D expenses to re-formulate skincare products.
Overall I think Crescita Therapeutics is a very solid company with an excellent, but short, record of execution. They have been able to grow revenues from multiple business lines with further growth to come. Galderma mismanaged Pliaglis for years. Crescita recognized this and brought in new partners and renegotiated deals that provided the company with instant cash flow. Agreements for sales of Pliaglis in the rest of the world give Crescita an avenue for further cash flow that they can reinvest into other business lines to diversify their revenue base. The skincare line could go either way. It may turn out to be a positive cash flow producing business or it may burn up cash produced by Pliaglis royalties.
Trading at 1.4x EV/EBITDA and .86x repeatable sales (revenue minus upfront and milestone payments) Crescita appears very cheap for a growing business.
What I Will Be Watching
In addition to overall revenue growth and net income, I will be paying attention to:
- Gross Margin on Skincare line;
- Repeatable royalty revenue from Pliaglis;
- CDMO growth rate;
- New licensing deals for Pliaglis
Crescita Therapeutics Part II
In Part II I will look more in-depth into Crescita Therapeutics management. I have also been conducting some research on Crescita’s products in my local market to see what local professionals think about the products.
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