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Crescita Therapeutics: Trading Below Net-Net

Crescita Therapeutics is now a net-net stock. With their recent announcement of a one time payment from Taro for $5.2 million Crescita is trading at less that its net-current-asset-value.

On an ever more conservative basis Cresicta is trading at less than net-net-working-capital.

This is my attempt at trying to value Crescita Therapeutics.

(**NOTE**: When I started writing this post shares were trading at $0.53. The price has bounced around a bit and closed at $0.63 on the date I finished the post. When I reference share price I am referencing $0.53)

Previous Crescita Posts:

Disclaimer: I own shares of Crescita Therapeutics CTX.TO

Ben Graham’s Net-Net-Working-Capital Strategy

When Crescita’s 2019 results were released I did a quick calculation on the net-current-asset-value (NCAV) and net-net-working-capital (NNWC) of Crescita. The company was barely trading above NCAV. When COVID-19 struck Crescita hit a low of $.40 CAD.

I found this article helpful as a quick and simple explanation of NCAV and NNWC.

Exploring Graham’s Net-Net Working Capital Strategy

NCAV is meant to give a liquidation value of the company while assigning no value to intangible assets (brand recognition, intellectual property, goodwill).

An even more conservative approach is net-net-working-capital. NNWC is similar to NCAV but discounts the receivables and inventory.

The above article explains it simply: “He (Graham) found that during a liquidation cash and cash equivalents would yield nearly 100% of their appraised value. A company could also convert at least 75% of their accounts receivable and at least 50% of their inventories into cash most of the time.”

Crescita Therapeutics: Net-Net

The reason I revisited Crescita and it’s net-current-asset-value is that on July 28th, 2020, Crescita announced it was receiving $5.2 million ($3.9 million USD) from Taro Pharmaceuticals.

Crescita announced that it had entered into an amendment to the development and commercialization agreement with Taro Pharmaceuticals. Taro is responsible for selling Crescita’s prescription topical anesthetic cream, Pliaglis, in the United States. Taro pays a double-digit royalty to Crescita for U.S. sales of Pliaglis.

The amendment allows Crescita to receive $5.2 million as an adjustment to royalties paid on past sales and an upward modification of future royalties.

$5.2 million is a lot of money for a $9 million market cap company at the time of the announcement. With $9.3 million in cash on the balance sheet as of March 31st, 2020, Crescita just got a whole lot cheaper.

Net-Current-Asset-Value

For these calculations, I will look at Crescita’s NCAV before and after the $5.2 million payment. I am assuming that Crescita is successful in collecting the $5.2 million from Taro. I will also use the fully diluted shares of Crescita in the interest of being conservative.

Net-Current-Asset-Value

Pre Taro Amendment Payment

= (16,284-6,010)/22,288.869

= $0.46 per fully diluted share

Post Taro Payment

=((16,284+5,200)-6,010)/22,288.869

= $0.69 per fully diluted share

So with Crescita trading at $0.53 per share Crescita is trading at a 30% discount to net current asset value. The company is trading at less than liquidation value. This is a company with very little debt ($900,000 convertible debenture) and was cash flow positive in a tough Q1 2020. This is not a company going out of business.

Net-Net-Working-Capital

What about an even more conservative valuation. Using Graham’s formula we will assume Crescita can only collect 75% of it’s receivables and 50% on the book value of it’s inventory.

Net-Net-Working-Capital
Net-Net-Working-Capital

Pre Taro Amendment

= (9,334 + (2,744 x .75) + (3,780 x .50) – 6,010)/22,288.869

= $0.32 per share

Post Taro Amendment

= (14,534 + (2,744 x .75) + (3,780 x .50) – 6,010)/22,288.869

= $0.56 per share

So on an even more conservative valuation Crescita is trading at a slight discount to NNWC. You would think Crescita is a company with nothing but some cash in the bank and no viable assets.

Valuing the Parts of The Business

So what else does Crescita have to offer other than cash on the balance sheet?

Crescita Therapeutics Assets
Crescita Therapeutics Assets
  1. Pliaglis: This is the companies most valuable asset. Pliaglis is a topical local anesthetic cream;
  2. Commercial skincare brands: Skin care products largely sold through spas and medispas and e-commerce. Their brands are available in numerous countries across the world;
  3. Prescription Drug Pipeline: CTX-101, CTX-102, are in development in partnership with Ferndale Labatories. CTX-101 has completed two Phase 3 clinical trials for plaque psoriasis;
  4. Drug Delivery Technologies: MMPE and DuraPeel technologies. Crescita out-licenses their technology to other drug makers;
  5. Contract Development Manufacturing: Crescita produces many of their own products and can also be contracted to develop and manufacture other companies products.

Pliaglis

Crescita Therapeutics Pliaglis

Pliaglis is easily the most valuable asset the company owns. Since 2017 Taro Pharmaceuticals is responsible for Pliaglis sales in the United States. In April of 2019 Pliaglis was out-licensed to Cantabria Labs for Italy, France, Portugal and Spain. Crescita will take care of Canadian sales of Plaglis.

Prior to the Taro agreement in 2017 a company called Galderma was responsible for Pliaglis sales worldwide. Galderma was not successful monetizing Pliaglis so the rights to Pliagis were reacquired from Galdmera.

So far Taro and Cantabria have paid Crescita $14 million in upfront and milestone payments to Crescita for sales of Plaglis. This is money Taro and Cantabria paid in addition to the double-digit royalty payments. This doesn’t sound like a worthless asset to me. But how should we value Plaglis as an asset? Let’s look at ongoing royalty payments.

Pliaglis Royalty Revenue

Crescita Therapeutics Pliaglis Royalty Revenue

So since 2017 Pliaglis has generated $7,501,543 in royalty revenue. This is in addition to the $14 million in upfront and milestone payments. Also important to note is Pliaglis is not generating sales from France, Spain, or Portugal. Management expects Cantabria to start sales in these counties at the end of 2020, early 2021.

A few more points on Pliaglis. First, there are an additional 20+ countries that Crescita has yet to be commercialized in. Second, royalty revenue is nearly pure profit. Gross margins are 100%. The company doesn’t breakdown what expenses are dedicated to Pliaglis so let’s assume 15% of Crescita’s SG&A goes to Plaglis related expenses. That equates to $1.27 million in 2019 and $1.33 million in expenses in 2018. I’ll readily admit the 15% is a complete guess but I don’t think it would be more than 15%.

Pliaglis requires very little expense to operate. The second-generation enhanced version is completed and patented in numerous countries around the world. Pliaglis is manufactured by its partners. The expenses for Pliaglis are mostly administrative and finding partners for new countries.

So in 2019 EDITDA for Pliaglis was $1.7 million and $2.9 million in 2018. So what is a $2-3 million EBITDA asset worth that requires no further investment and has only been commercialized in two countries? I won’t even include the $5.2 million one-time royalty payment. I’ll take the midpoint of $2.5 million EBITDA per year.

EBITDA Multiple

  • 5x EBITDA = $12.5 million;
  • 10x EBITDA = $25 million;
  • 15x EBITDA= $37.5 million

I think it is useful to look at the upfront and milestone payments to give an idea of what Pliaglis is worth. Taro paid Crescita $10.265 million for the right to manufacture, sell and pay a double-digit royalty on Pliaglis for U.S. sales. Cantabria paid $3.7 million in upfront payments to sell Pliaglis in four European Union countries. This equates to $14 million.

I think 10x EBITDA is reasonable for Pliaglis considering its potential commercialization around the world. Again, this is a complete guess. Even at 5x EBITDA, or $12.5 million, that’s the entire market cap of the company. If Pliaglis was worth $12.5 million you would think Taro or Cantabria would have purchased it outright. 5x EBITDA doesn’t even give any value to future upfront and milestone payments.

Commercial Skincare

Crescita Commercial Skincare Brands

The true value of the commercial skincare brands I am less certain of. First off are they good products? I did some local research and the reviews of Laboratoire Dr Renaud (LDR) were very good. The brand is recognized as being high quality and has been able to gradually increase prices. For Pro-Derm my wife purchased some products and really liked them.

The biggest problems are the lack of growth from 2018 to 2019 and the lack of profitability. The commercial skincare business is floated by cash generated by Pliaglis.

Crescita Therapeutics Commercial Skincare Revenue
Commercial Skincare Revenue

I’ll be honest I have no idea what the skincare brand is worth. 1x revenue? So around $10 million. Let’s take a look at what Crescita paid for the commercial skincare brands.

Crescita paid $8 million for Intega Skin Sciences in 2016. In 2017 the company bought Alyria for $1.7 million-plus future royalty payments to the previous owner. So they paid approximately $10 million for their commercial skincare brands which they have been steadily improving. Revenue has grown at a 50% CAGR since 2016 however revenue growth slowed from 2018 to 2019.

Sales have tripled since Intega was acquired in 2016, let’s say that the commercial skincare brands are worth half of what they paid, so $5 million or .5x revenue.

Rest of the Assets

There is even less concrete information on the rest of Crescita’s assets. Neither is generating standalone revenue yet.

CTX-101 & CTX-102

CTX-101 (formerly MiCal 1) is a treatment for plaque psoriasis while CTX-102 is being developed for an undisclosed indication. Both are being developed by Ferndale Laboratories. Both drugs utilize Crescita’s MMPE drug delivery technology.

CTX-101 generated positive topline results from Phase III trials. The company is entitled to royalties should CTX-101 make it to market. Crescita has used very little of their own capital to progress CTX-101, only participating in funding for Phase III trials.

CTX-102 is only starting a pilot Phase II and is farther away from commercialization then CTX-101.

Since neither is generating revenue lets place zero value on the possible royalties from each drug. It is important to note that revenue from either drug would be a very high margin and require little or no further investment from Crescita.

Drug Delivery Technology

Crescita has three drug delivery technologies; Peel, DuraPeel and MMPE. Pliaglis uses Peel technology. CTX-101 and CTX-102 use MMPE. MMPE appears to be the most valuable technology. Crescita has signed agreements with Tetra Bio-Pharma and Sundial to use MMPE in their drugs.

A quick read-through of Tetra Bio-Pharma and Sundial’s disclosures it doesn’t appear that their products using MMPE are a priority. Tetra is planning on commercializing products that might be using MMPE in Q3.

Again, without much information on the value of the drug delivery technologies let’s assign zero value to them.

Contract Drug Manufacturing

I will also assign zero value to the CDMO business. CDMO has been growing for Crescita but if they were to sell the commercial skincare brands they would not likely continue the CDMO business.

Conclusion

So even with the recent and understandable run-up in Crescita’s share price, it is still trading as a net-net. Post Taro amendment and assuming they collect the $5.2 million from Taro I get an NCAV of $0.69 per fully diluted share count.

So what value do I get with my half-assed, mostly guessing valuation method?

  • NCAV: $0.69 per fully diluted share;
  • Pliaglis: at 5x EBITDA, $12.5 million or $0.56 per fully diluted share;
  • Commercial Skincare Brands, $5 million or $0.22 fully diluted share
  • CTX-101 & CTX-102: $0
  • Drug Delivery Technologies: $0
  • CDMO: $0

I come up with a value of $1.47 per share. I am ready to be corrected but I feel like this is a very conservative valuation. With some confidence, I can say Pliaglis is worth more than $12.5 million but less confident in the commercial products. I also don’t believe that CTX-101, 102, and the drug delivery tech is worthless either.

With Crescita trading at $0.53 per share (now $0.63) that is a 177% return to get to $1.47. Maybe the commercial skincare brands are worthless. Crescita would be worth $1.22. Still very undervalued.

With any invest there is risk. What are the negatives?

  • Restrictive amendment on Pliaglis in the U.S. (this worry was partly eased in my mind with the $1.4 million in Pliaglis revenue to Crescita in Q1);
  • Has the relationship with Taro been harmed because of the recent payment?;
  • Amount of investment needed to scale commercial skincare to profitability;
  • Executive compensation. Upper management is being rewarded quite handsomely;
  • COVID-19. Crescita was already shut down once because it is not an essential service and neither are their products;

I bought a small number of shares at $0.53 and am actively buying more. Crescita is a net-net trading like it is going under. This is a company that is not perfect but far more valuable than it’s current share price. What the company does with the cash on the balance sheet will be critical to the future.


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This Post Has 5 Comments

  1. Tyler

    Good write up Blair.

    While I don’t own Crescita (I sold it when its share price had held up well but others were decimated in the early spring), I know it is worth far more than the current value. With little to no insider ownership (I think, it’s tough to find data) I am positive that it is being looked at as an acquisition candidate for someone.

    Take someone like Knight, which is close to Crescita (has owned the stock, has loaned it money, and the CFO is on the board). Knight could pay $1.00 tomorrow, and it would get the rights to Pliaglis in 20 countries, many of which it has operations in. It could almost immediately start selling it in Canada. It would get the small pipeline of the old MiCal drugs. Most of the purchase would be covered by acquired cash. Then it could sell the factory and the CDMO if it wanted. I bet just those could bring in a couple million. And then you could run the skincare (in a much larger organization so it would scale and have lower attributable overhead) or sell it. All in all someone could be buying the rights to Pliaglis in a bunch of countries for basically nothing, and would still have cash coming in from Taro and Cantabria every year.

    You could replace Knight with any other pharma you want. Point is, even at a big premium to today’s prices, Crescita would be hugely accretive to any number of companies. A company like that won’t stay public long.

    I almost talked myself into buying again, but there are a few things I don’t like – what’s going on with that Taro payment, I hate the skincare stuff, the cannabis stuff is tough for me to get behind and it has distracted management at least a bit, is the reason they don’t have any other outlicensing agreements for Pliaglis because they are negotiating too hard/not trying hard enough/or is it just not as valuable as I think? – I’m pretty sure though that you’ll wake up one day to find your shares are being acquired.

  2. Blair

    Thanks, Tyler, as always I greatly respect your opinion.
    Commercial skincare brands definitely need some scale to reach profitability. The company has plenty of manufacturing capacity to service much larger orders. I guess they need more time to accomplish this.

    Insider ownership is 11.3% as of last November. Half of that is Chairman Chicoine. He is at a point in his life where he won’t be buying any more. It is disappointing that CEO Verault hasn’t bought any shares even when it reached $0.40.
    The company will likely tell you they were in a blackout but that’s always a convenient excuse.

    I also agree with cannabis developments. After reading through Sundial and Tetra Bio-Pharma the products that might use MMPE seem to be an afterthought for them. I gave these assets zero value so any additional revenue generated by them is gravy.

    I will be closely watching the European and Canadian progress of Pliaglis. As per management, there were many things that needed to be put in place before Spain, Portugal and France sales commence at the end of the year. Any Pliaglis sales are critically important to the bottom line.

    As for the $1.00 acquisition price I sure hope it’s more than that. That would mean Pliaglis is worth less than $10 million based on the cash on the balance sheet. Maybe it’s not worth as much as I think it is but the payments made by Taro and Cantabria make me believe differently.

    1. Tyler

      Thanks for the insider info. That 11.3% confirms my point, I don’t think anyone could push back on a low ball acquisition offer. I don’t think $1.00 is a likely price for an acquisition, I’m not making any guess, I simply chose a round number that still offers a large premium to today’s price, as well as a premium to the price Crescita has been for most of its public life (other than a few nice weeks).

      Pliaglis is absolutely worth more, at $1 I think someone would be getting paid to take Pliaglis’s rights (after considering selling the rest of the assets, the cash flow from the royalties, and the NCAV). The math is obviously less spectacular, but even at $1.50 (or more, who knows), Crescita would be an incredible acquisition for anyone who could better monetize Pliaglis. Knight makes the most sense because it could start sales in Brazil and Canada very quickly (since it is already sold there) and would get the rights in Mexico and maybe a few more LATAM countries it operates in. Crescita would probably be worth $2+ to Knight, though Knight would be unlikely to pay that much. Even at $1.50 Knight wouldn’t be paying much for the rights.

      I think the most relevant thing I can say is that as a Knight shareholder I am disappointed Knight hasn’t acquired Crescita, and if Knight announced it was paying $1.50 for Crescita I would be ecstatic.

      I think with the low insider ownership, Cresicta could probably be bought for $1, and that would be a steal for the buyer. I think depending on the acquirer much more than $1 would still be a steal.

  3. Angelo Dallas

    Crescita Reported Second Quarter 2020 Results on Wednesday August 12, 2020.

    Anything to add to the analysis post Q2 release?

    1. Blair

      I’ll work on a post for Q2 shortly. I’ve been slow at getting them finished so I’ll try and be more timely.
      Thanks for checking in.

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