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Valeo Pharma Inc. (VPH.C) – THE undervalued biotech play

07/23/2020

If you’re one of the discerning readers who bought Valeo Pharma’s stock since the last article I posted on July 6th, 2020: congratulations you should be making over 38% returns on your investment. 

Better yet, if you had bought Valeo’s stock a month ago, you would have been up close to 184%, which, y’know, is what I’d call an upside on an investment. (Sweet. Congratulations. We aren’t jealous at all!!)

That said, as anyone who watches the Canadian markets closely would tell you, when companies see such a meteoric rise, it is often followed by a period of selling off by shareholders who are eager to cash out on their gains. On our end, I’m here to tell you all why I think that VPH is far from its true-value share price and why. I’m not here to tell you not to make the money straight away – by no means, go ahead – but here’s why I think there’s more money to be made by sitting patiently on Valeo Pharmaceuticals’ stock.

We gave a quick synopsis of Valeo’s plan in our last article about the company:

The Business Model

They find companies that have products in established drug markets, but not in Canada. They develop a partnership with that company to in-license the drug. They commercialize and market the product in the Canadian market.

It’s really that simple. According to President and CEO, Steve Saviuk:

“Valeo Pharma is about creating partnerships, both with International partners and with members of the Canadian Healthcare Industry, to bring innovative products of the highest quality to the market, quickly and efficiently.”

So you don’t need to be an MD, or a scientist, or an expert with a nuanced understanding of the human body and its workings to see the prudence in such a business model. In Valeo’s case, the vision couldn’t be clearer.

We stand by that analysis from before – Valeo’s strength is in keeping their business model simple, avoiding operational bloat, and doing all of it very well. These are all indicators of a good stock, but maybe it isn’t enough to convince you of Valeo’s impending share price increase and hold off on a profitable dump of your stock. Let’s go deeper into the analysis. 

We have a set of indicators we use to assess Biotech and Pharma at the small-cap level. Do they: 

  • Avoid share price dilution that’s common to those industries due to high capex costs? 
  • Operate in an acknowledged and established market for their product(s)?
  • Have a business plan that skirts the risks* associated with early stage research trials?

*trial failures, mistakes – litigious or otherwise, massive losses on investments due to underestimated costs of trial or just-plain-wrong guesses… The early-stage risks taken on by pharmaceutical companies play like a choose-your-fighter screen, and we could go on and on about how the patent system in the US abuses patient coverage costs in order to ensure Big Pharma is willing to take on those risks. 

  • Have a corporate value proposition that stands out from other potential competitors, and come with a team with a proven track record of accomplishment?
    (forgive us the out-of-context Hamilton reference but “follow the money and see where it goes” is stellar investment advice. Keep reading for why.)

VPH more than holds their own against this criteria for expected success in the small-cap market. 

VPH picks partners themselves, and they all have significant records of success in their respective operational jurisdictions. This may seem small, but as a pattern, it bears significance. Not only has VPH’s incredibly qualified team made the decision that their partner lacks risk, either legally or in scientific success, they’ve made the ultimate gesture of faith to their own assessments: a financial commitment.  

It’s been argued (unsuccessfully) that such a stringent partner vetting process may take away from the kind of meteoric upside that comes with investing with a high-risk, high-reward company (you know – the one that seems just a little too good to be true, and is a little too confident with just not enough to back it up?). We’re just going to straight-up say that life’s too short and money’s too hard to come by to spend it on a company that’s going to take on a whole network of risky partners. 

VPH is cautious with its growth, and careful when it makes partnership commitments. That’s a strength in a market that’s easily swept off its feet with promises and no deliverables. Valeo may not partner with one of those fairytale start-ups with a good-faith story (and their subsequent insane share increases), but they’re focussed on spending your money responsibly, and that’s with “an assembly of proven parts” that creates strong and stable returns over a longer period of time. It’s worth waiting for. 

Second, following the money is always sound investment advice. There’s a reason that US investors can and do follow the investing decisions of the biggest hedge funds. In Canada, it works a little differently, and needs a little bit of the digging we’ve done for you. VPH’s management all have their own extensive resumes of corporate success over success – and have each invested themselves financially into the company in such a way that investors can be assured of their intentions to stay long-term. There’s nothing more disconcerting to witness than a board and management team with short lock-ups because it always raises the question of why these people want the option for a quick getaway – and what’s to stop them from taking it and screwing us, the regular investor, over? VPH’s structure comes with a reassurance that Valeo’s plan moving forward will be executed by its management team in a realistic and efficient time frame, and by more-or-less the same smart people with the vision in the first place. (transitions are hard for a reason, we won’t lie)

Last and not least, we want to point out the value in Valeo’s foundations in Canada, and Quebec more specifically. Canada’s hit the world stage recently for the Plague-That-Shall-Not-Be-Named and our federal treatment plans in stark contrast to our neighbours down south, and we are more proud than ever for a publicly funded health care system that makes medical care (and pharmaceuticals!!!) relatively accessible to all. That’s a market that maxes itself out as much as possible. Quebec, in particular, is the Canadian hub for biotech and pharma, which gives Valeo a strong base of experts to draw upon, as well as investors to rely on with industry-proven investment track records. 

Going even further:

VPH is frankly under-valued compared to the competition.

Let me demonstrate with HLS Therapeutics. 


Valeo Pharma vs. HLS therapeutics. 

HLS Therapeutics currently clearly pulls ahead of Valeo when it comes to revenue and share price and has done a tremendous job turning a $3.7 Million loss from previous years into a tidy $154 Thousand profit. 

It is such numbers and comparisons that make the future of Valeo so bright. Almost all of Valeo’s revenue comes from their base of non-branded, generic drugs. The plan for these “base” brands has always been to allow the firm to generate a simple, predictable, steady cash flow from operations. Drugs in this category are not “niche”, so sales and marketing efforts are reduced (they don’t have to educate a market on a new pharmaceuticals need), while profit margins via licensing the drug without upfront trial costs are captured to a greater degree.

The revenues generated from the base brand are expected to grow even more as the operations get more streamlined and those costs decrease. 

However, it is the “growth” line of products that has us genuinely anticipating Valeo’s projected revenues for the upcoming years. The growth line comprises branded products that have proven to be commercially successful across the globe. The introduction of such products in Canada should lead to substantially higher revenues and greater margins for Valeo Pharma – that’s just what early entrants do.

With Health Canada approvals for Yondelis and Ametop in 2020, and Redesca in the batter’s box waiting for its turn, the company’s line up sets it up to be a sure winner. 

I’m a big believer in smart people playing it safe, and we all know how hard it is to do that in the small-cap space. Valeo has proven that they see the risks, and are navigating their ship safely through the dangers of being a public pharmaceutical company under the scrutiny of trigger-happy investors– and honestly, their future (in my opinion) even before comparisons are made, is nothing but bright. 

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