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#2020 AGM Chairman's Address
Last edited a month ago
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#Updates
Added 3 months ago

01-Apr-2020:  Palla Pharma UK Acquisition Update

On 10 February 2020, Palla Pharma Limited (ASX:PAL) announced that it had entered into an option agreement with a major UK customer to acquire its business as part of PAL’s strategy to continue to move further down the opiate supply value chain, with the option expiring on 31 March 2020.  
 
As part of this announcement PAL confirmed it had acquired four (4) marketing authorisations (MA`s) relating to the manufacture of opiate based finished dosage formulations for sale in the United Kingdom. Since then PAL has acquired a further three (3) marketing authorisation which in total accounts for approximately 70% of the acquisition target’s revenue.    PAL has elected not to exercise the option as outlined in February; despite this PAL is in advanced negotiations with the owners and senior creditors and while hopeful of reaching agreement, there remains material differences between the parties with respect to valuation. 
 
These negotiations are expected to conclude imminently, and PAL will provide a further update when a conclusion has been reached. 

--- ends ---

Looks like this deal will probaby fall through.  Pity.  Would have been a game changer for PAL.  However, the bright side is that it demonstrates that PAL is focussed on not overpaying for assets.  The right acquisitions at fair prices is fine, but overpaying is usually a big mistake that will come back to bite you later.  PAL's management appear to be wise to this, and that's good.  I hold PAL shares.

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#Results
Last edited 4 months ago

27-Feb-2020:  Palla Pharma delivers double-digit growth in FY19

Palla Pharma Investor Presentation - FY19 Results & Outlook

Preliminary Final Report and Annual Report

 

Palla Pharma delivers double-digit growth in Revenue and Gross Profit

Palla Pharma Limited (ASX:PAL), a fully integrated opiate manufacturer and supplier to the global pain relief market, is pleased to announce its results for the financial year ended 31 December 2019 (FY19), which delivered record revenues of $54.7 million and gross profit of $17.3 million.

FY19 Highlights (vs FY18)

  • Record FY19 Revenue up 18.4% to $54.7 million (FY18 $46.2 million)
  • Gross Profit up 15.3% to $17.3 million (FY18 $15.0 million)
  • Operating EBITDA up $2.1 million to a loss of $0.3 million (FY18 loss of $2.4 million)
  • Underlying NPAT loss of $5.8 million (FY18 loss of $6.5 million)

Commenting on the result, Managing Director and CEO, Jarrod Ritchie said, “We are pleased to have delivered a strong FY19 result with double-digit revenue and gross profit growth while maintaining a flat indirect cost base.  
 
“We continue to focus on capturing additional margin as we move down the supply chain, this strategy diversifies our distribution channels, expands our customer base, reduces agricultural reliance and importantly; significantly multiplies our earnings growth for every kilogram of opiate sold as we continue to grow volumes across our business.  
 
“We continued our efforts to diversify the supply of poppy straw, focussing on improving straw assay from Northern Hemisphere and developing additional growing areas. With the record straw harvested during FY19 and patent litigation behind us, we now have enough raw material for supply during the entire FY20. 
 
“Following the December year end, we have entered into an option to acquire our largest UK customer as part of our strategy to increase the value we can extract across the whole production cycle. In conjunction with the acquisition option, PAL has acquired six Marketing Authorisation (MA`s) to supply Codeine based tablets in the UK at margins considerably higher than contract tablet manufacturing. This enables Palla Pharma to have a sales presence in the entire opiate supply chain, from the farm gate to opiate based tablet supply to wholesale distributors. 
 
“During 2019 we also undertook a significant balance sheet de-risking by repaying borrowings with the capital raise proceeds to meet the Group’s near-term API growth capital expenditure needs. Reduced debt levels also allowed us to negotiate better terms for the working capital debt facility. Palla Pharma is now in the best position it has ever been to continue to execute on its strategy and gain market share in the global supply of opiate based pain relief products.” 

[...lots of stuff omitted here - due to 5,000 character limit on straws - but you can access all of the announcement by clicking on the link above]

Trading Update and Outlook

FY19 was a period of transitioning to a more stable supply of raw material, de-risking the balance sheet and developing strong foundations for growth.  The FY20 result will be underpinned by:

  • Revenue and earnings growth with a greater focus on API sales and the use of Norway capacity to increase production of opiate based finished dosage products;
  • Significant revenue and earnings upside, should the UK acquisition proceed; and
  • Improved straw supply in both quality and price from both hemispheres;
  • Full utilisation of increased API capacity, demonstrated in late FY19;
  • API expansion and new product development; and
  • Improvement in working capital and reduction in net debt.

Continued revenue and EBITDA growth are expected with or without the UK acquisition. 
 
Note: When “tonnes” are referred to when describing Poppy Straw, NRM, API or Tablets, this refers to tonnes of opiate equivalent in the product. 

--- click on links above for more ---

Disclosure:  I hold PAL shares.  While not currently profitable, they are certainly moving in that direction at a good clip.  I would expect they will breakeven within the next 12 months based on these results.  They have been (so far) growing the business by reinvesting their gross profits back into increased production capacity.  They have some smart money on the register:  SOL/BKW own 23.18% of PAL, Thorney/TIGA/TOP own 18.65% and Wentworth Williamson own 8.28% of PAL.  Their CEO/MD also holds over 2m shares and their Chairman holds over 3m shares.  Because they are still not profitable, they have to be considered as a speculative investment, but they have some significant competitive advantages, good management, and good backers, with significant barriers to entry (very tight regulation mostly - of the opiate supply chain, plus they already have a fully integrated supply chain set up that is producing and selling product now - something that is very difficult and costly to replicate).  If their planned UK acquisition goes through as expected, it will significantly increase their production capacity, revenue and sales.

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#Updates
Added 5 months ago

10-Feb-2020:  Palla Pharma Investor Update

Due to recent share price fluctuations, industry related media commentary and the rapidly changing nature of the global pain relief market, Palla Pharma Limited (ASX:PAL) provides this update prior to the release of its full year financial results on 27 February 2020.  

Overview:

1. The recent short-term share price drop was dominated by a single shareholder selling a significant block of shares over a short period. The share price has rebounded 10.86% in the last 2 days of trading.

2. After a protracted period of negotiation, PAL has entered into an option agreement to acquire its largest UK customer, a manufacturer of finished dosage Codeine Phosphate.  

3. In conjunction with the option, PAL acquired four Marketing Authorisation’s (MA’s) from the UK customer for supply of Codeine based products into the UK. These MAs will allow PAL to supply meaningfully margin accretive Codeine and Dihydrocodeine based tablets (generic and branded) into the UK from Norway in 2H 2020.  

4. The 2019 total revenue expectation will be reduced due to a French based NRM customer requesting that the supply of product expected in Q4 2019 be delayed and operating issues at two UK based customers in the same period which reduced their product demand.  

5. On 5 February 2020, PAL received regulatory approval (CEP) to manufacture Codeine Phosphate from Morphine NRM in the UK at a CMO site, significantly increasing our API supply capability without further investment.

6. Recent media regarding increased monitoring of opiate pain relief in Australia is not expected to impact PAL business. Opiates remain an essential medicine as referenced by the World Health Organisation (WHO) and we see strong demand for product from existing and prospective customers.

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The announcement then goes into further detail around each of those 6 points.

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#Acquisition/Business Update
Last edited a month ago

26-May-2020:  Palla Pharma UK Acquisition Update    Also, on 19-May-2020 (1 week ago):  Palla Pharma 2020 AGM Update

PAL rose a lot on the back of this - getting as high as 90.5 cps (+27.5%) and closing at 80 cps (+12.68%) compared to the previous day's 71 cps close.  This announcement provides clarity around why Palla Pharma (PAL) have chosen not to proceed with the acquisition of a major UK customer of theirs.  That target company was a significant customer and has (as of today) not received licence reinstatement and as a result has not purchased Codeine Phosphate from PAL as per their supply agreement. 

However, despite this reduction in expected Codeine Phosphate sales volume in H1, PAL expects to supply the same API (Active Pharmaceuticals Ingredients) volume in 1H 2020 as it did in 1H 2019 through other existing and new customers.

The best news however is while exploring the possible acquisition, PAL acquired seven Marketing Authorisations (MA's) from the Target.  These seven MA`s accounted for about 70 per cent of the Target’s revenue and all involved an opiate as a major excipient. 
 
PAL has transferred the ownership of the MA`s from the Target to Palla and is well progressed in transferring manufacturing to PAL`s Norway site, where it has freed up additional tableting capacity by terminating non-opiate CMO (Contract Manufacturing Organisation) arrangements.  
 
PAL expects the validation and MHRA (UK Medicines & Healthcare products Regulatory Agency) approval of manufacture in Norway will be complete in the September quarter, whereupon PAL will commence manufacturing and supply of these opiate-based tablets into the UK. 
 
They said today, "We expect that earnings in 2H 2020 will be significantly stronger than 1H 2020, as we finalise the transition of our sales profile from a volume-based commodities to higher value products. We expect a material uplift in full year earnings compared to 2019 as a result.  
 
"In addition to the above opiate marketing authorisations being transferred to PAL`s Norway site, PAL expects to obtain fast track approval for the registration of a new Paracetamol generic for the UK market in the September quarter. PAL uses paracetamol as a co-excipient and would supply this product into markets when commercially attractive to do so. 
 
PAL will provide a more detailed trading update and outlook at the AGM on May 28, 2020."

--- click on the link above for the rest of this announcement ---

I do have a small position in PAL.  They are a small Australian company who have a vertically integrated and fully licenced narcotics manufacturing and supply business.  They have significant competitive advantages, there are very high barriers to entry in this heavily regulated area of pharmaceuticals, and PAL have SOL (Washington H Soul Pattinson) as cornerstone investors.  SOL own 23.18% of PAL, via Brickworks (BKW), so both BKW & SOL are listed as 23.18% holders of PAL, however the holding is one position, not two.  BKW is considered a controlled subsidiary/entity of SOL, so any substantial positions taken by BKW are also deemed to have also been taken by SOL.

I believe that PAL are close to an inflection point, being a move into profitability, and this announcement that they are not going to spend a lot of money to buy one of their largest UK customers, but have instead bought the best of their IP, is a very positive move in that direction.

As they are not yet profitable, they still have to be considered speculative and risky, hence my smaller position size.

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#Broker/Analyst Views
Added 5 months ago

31-Jan-2020:  CCZ Equities Research:  Palla Pharma (PAL):  More codeine phosphate at higher margins:  No pain more gain

  • Recommendation: BUY
  • Target Price: 123cps
  • Market Capitalization: $126m
  • Index: N/A
  • Share Price: 100cps (31-Jan-20) (7-Feb-20: 90cps)
  • Sector: Health care 

Excerpts:

  • Initiating Coverage: Palla Pharma (PAL) is a fully integrated opiate manufacturer. PAL contracts farmers in Australia and Eastern Europe to grow opium poppies, these poppies are harvested and then dried to create poppy straw and poppy seeds. Poppy seeds are then sold as a by-product, and poppy straw is processed into narcotic raw material (NRM) in PAL’s Melbourne factory via their unique water based, solvent-free extraction technique. PAL’s Norwegian factory then produces opiate based active pharmaceutical ingredient (API) from NRM. API is then converted a tablet form known as a finished dosage formulation (FDF). FDF outputs include codeine phosphate, co-codamol and nonopiate pain relief such as paracetamol and ibuprofen. The company started in 2004, and ASX listed on 2015.
  • PAL considers itself to be the lowest cost producer of NRM and opiate based API globally:  Their key competitive advantage exists due to their unique water based, solvent-free technique used to produce NRM. NRM is 70-80% of the input cost of opiate based API/FDF products. This process is protected by trade secret and ensures PAL is wellplaced to gain market share in an industry that competitors are exiting (9 licensed manufacturers in 2015 down to 6 in 2019). PAL are one of only 3 fully integrated opiate suppliers in the world.
  • 4x revenue growth possible by 2021:  PAL’s production target in 2021 of 200 tonnes of opiates is almost 5x it’s 2018 production of 41 tonnes. Revenue for 2018 was $46.2m. Achieving this production target would represent a market share of 17% of INCB’s addressable global opiate market of 1,175 tonnes (~1/6 of the 6 producer market).
  • Significant inventory improvement benefit likely through FY20:  As high codeine inventory is converted to finished product and sold, PAL anticipates significant reduction in inventory levels. PAL announced in December 2019 that they have negotiated an early exit of the contract to produce non-opiate tablets. This will release tabletting capacity to allow them to focus on the much more profitable production of opiate based tablets.
  • Investment thesis:  Despite prior headwinds of changing product mix, production facilities integration, plus cashflow and legal issues, PAL still achieved a strong +58% 3yr sales CAGR to $55m in 2019. We expect strong earnings growth in the forward years as PAL further increases production across the portfolio. At 7.1x FY22 PE and before accounting for the upside from a potential FDF marketing authorisation purchase, PAL warrants a BUY rating.
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#Company Presentations
Last edited 7 months ago

30-May-2019:  TPE 2019 AGM Presentations & Outlook

About TPI Enterprises Limited  

TPI Enterprises Limited (ASX:TPE) is one of three licensed poppy processors in Australia, and the only Australian-owned company.  It is one of only three companies globally that is vertically integrated from poppy growing through to tableting production.  TPI Enterprises has developed an innovative, efficient and environmentally-sustainable extraction and purification manufacturing process which allows the company to deliver a highly competitive pricing platform. The company’s strategy is to secure access to regulated downstream narcotics markets to leverage its reliable, cost-competitive upstream raw material capability.

TPI ENTERPRISES: INVESTMENT THEMATIC

  • Morphine and codeine remains the “gold standard” for acute and chronic pain management globally
  • Significant unmet demand in developing countries with 92% of global supply consumed by only 15% of the global population
  • One of six licensed producers of morphine and codeine globally, and one of only three fully integrated suppliers of opiates from raw material through to packaged Finished Dosage products
  • Disruptive technology: lowest cost Narcotic Raw Material producer globally based on trade secret extraction process
  • Globally diversified poppy straw supply chain with diversified dual hemisphere supply sourcing strategy
  • Strong revenue growth: $22 million in 2017, $46 million in 2018 and expecting $60+ million in 2019 
  • Achieved EBITDA positive 4QFY18 whilst continuing to position the company for growth
  • Highly experienced management team with significant industry experience

SUBSTANTIAL SHAREHOLDERS

  • Washington H. Soul Pattinson, 19.9%
  • Thorney Opportunities, 17.0%
  • Wentworth Williamson, 7.2%

CAPITAL STRUCTURE

  • Share Price (29 May 2019) $1.19
  • Fully Paid Ordinary Shares 81.1m
  • Share Appreciation Rights 1.3m
  • Market Capitalisation (29 May 2019) $96.5m
  • Net debt (31 Dec 2018) $21m

TPI ENTERPRISES AT A GLANCE

  • Fully integrated opiate manufacturer from farm gate to tablet production.
  • Lowest cost Narcotic Raw Material (“NRM”) and Active Pharmaceutical Ingredient (“API”) production capability based on novel water-based extraction technology.
  • Rapidly growing global supplier of pain relief, cough and plans for anti-addiction active pharmaceutical ingredients.
  • Significant contract manufacturer of Finished Dosage Formulation (“FDF”) tablets via Contract Manufacturing Organisation (“CMO”) supply agreements.
  • Founded in 2004 and headquartered in Victoria, Australia with production facilities in Victoria, Australia and Kragerø, Norway. 

 

Disclosure:  I hold TPE shares.

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