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#Director Purchases
Added a month ago

Two directors participated in the recent entitlement offer.  Moore's purchase was considerable at over $329k.

31 Mar 21: Moore +658,644 for $329,322 @ $0.50

31 Mar 21: Black +23,772 for $13,114 @ $0.50 [50,000]

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#Entitlement offer shortfall
Added 2 months ago

25 Mar 21: 53.8% uptake from retail 2 for 9 entitlement offer at $0.50.  5.36m shares not taken up under the retail entitlement offer will be allocated to sub-underwriters.  Generally, the daily volume if less than 100K so this short fall will take some time work through if the sub-underwriters want to sell these shares on market.

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#Debt or Equity?
Added 3 months ago

The long delayed Marketing Authorisations have now been approved, with the announcement of full approval being granted on 18th February. The initial delay was announced on 3rd December, so the time delay has cost Palla Pharma around two and a half months, during which time the company announced (1st February) that they are chewing through $1-2 million in cash per month. Ouch…

The H1-20 accounts showed PAL had $1.6 million in the bank and a standby debt facility with Washington  H Saul Pattinson of $16 million of which $12.3 million had already been drawn. This gave them liquidity of $5.3 million at 1st July 2020. On 23 September they announced the sale of their legacy manufacturing property in Tasmania for ~$3 million. On 6th November they announced that the standby debt facility with Saul Patt’s was being temporarily increased by $4 million to $20 million (although this temporary relief is due to expire at the end of April 2021). They are not cash flow positive so $12.3 million ($5.3 + $3 + $4) is the extent of their liquidity.

Assuming the announcement on 1st February held true for most of last year and the cash outflow was on average around $1.5 million per month, then they would have approximately 8 months of headroom before running out of cash. This would give them until around about…now!

The full year results for the year gone are being announced on Friday this coming week; I have little doubt they will show a very distressed balance sheet. The foundations are there for a very profitable business, but one with an immediate cash crunch. There is also a stated desire to invest approximately $4 million to increase production (previous announcements call out this has the potential to increase monthly revenue to about $12 million) now that the higher GM MA’s are bankable.

Would love to be a fly on the wall in the meetings ahead of the results announcements.

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#Valuation
Added 5 months ago

Summary

Opiate Manufacturer - 1 of only 6 narcotic raw material (NRM) suppliers globally.  They claim they are the lowest cost producer of NRM globally. Describes itself as 1 of only 3 fully integrated suppliers. Through vertical integration they aim to produce cheap NRM and convert it to manufactured product (tablets, etc.) to capture high GM (as opposed to just selling NRM to manufacturers). 

Focus is on UK market but had some sales into Asia and Africa in FY19 (note their financial year is January to December) and aiming for first sale into South America in Q420. Aiming to sell into France and Spain in FY21.

Positives

  • ~39% of shares are held by long-term holders Washington H Soul Pattinson & Thorney Opportunities and Directors/management hold another ~4%.
  • Through the purchase of Marketing Authorisations (MA’s) PAL can capture greater GM by selling manufactured product straight to distributors. 7 MA’s have been purchased with 2 waiting on regulator approval to sell into the UK.  
  • Have exited a low margin agreement to deliver Active Pharmaceutical Ingredient (API) to a Contract Manufacturing Organisation (CMO); this has opened capacity to focus on the higher margin direct to market approach via MA’s.

Negatives

  • To grow and maintain their low cost NRM position they will need to continue to invest in upstream growing activities or secure access to straw. I assume poppy farming for opiates is fairly regulated globally.
  • Capex of ~$4 million is needed to expand facilities in order to ramp up revenue growth under MA’s. Net debt is relatively high at about $11 million (detailed in half-yearly). They seem to have lots of working capital under a facility with W H Soul Pattinson but only limited cash at time of half-yearly.

Risks

  • Have diversified their growing capability but crop output can cause issues. The H1FY20 presentation discusses poor seed sales (due to weather) impacted Australian growing volumes and FY20 margins.
  • They may need to raise capital to fund the facility expansion and potentially to pay down some debt, however, the company does call out in the half-yearly results that their debt facility will see them through the current strategy and business plans.
  • Higher gross margins rely on the company receiving approval to sell product under their own MA’s. If this approval is not received they must look for other ways to increase gross margin. Sales under MA’s were originally going to begin in the December 2020 quarter and in late November they advised approval had been received, however, in December the company advised further questions had been asked by the relevant regulator and sales would now begin in 2021.
  • The long-term CEO resigned with immediate effect in late December. It was explained that this was due to the personal and family toll of running the business and that he would continue to advise the company during the search for a new CEO.

Opportunities

  • Expansion ($4 million capital outlay) opportunity to expand revenue of manufactured products from $4 million revenue per month to $12 million per month.
  • Looking to grow international sales into other markets; Asia, Spain, France and South America
  • Currently seeking approval on the remaining 5 MA’s to enable direct selling of manufactured product in the first quarter of 2021.

Valuation

  • Reviewing 2019 accounts they made $17.3 million gross profit on $54.7 million revenue for a GM of 32%. Given their operating EBIT of approx $-312k we can back calculate business overheads of roughly $18 million. Very back-of-the-envelope…
  • The company has identified the following revenue catalysts:
    • MA approvals delivering higher margins - GMs of 45% have been called out as product range skews towards selling straight to distributors
    • Capex of $4 million will enable capacity to achieve revenue of $12 million per month ($144 million per annum)
  • So perfect future case has revenue of $144 million at GM of 45% delivering gross profits of $64.8 million. No idea on overheads at the higher production level so I will make a massive assumption and allow overheads to increase by ~40% on 2019 to ~$25 million. The result is an EBIT of around $39.8 million. 
  • It makes for an interesting story:
    • Roughly 126 million shares on issue at share price of $0.75 (24th December 2020) gives a market cap of around $95 million
    • Assuming an EBIT of $39.8 million can be achieved some time in the not too distant future (let’s say 3 years) gives a future earnings to current day market cap ratio of around 2.5x
  • Seems too good to be true right and it probably is; 2.5x is very low. But it does mean margin of safety is good. Even if something in the above analysis turns out to be very wrong and the valuation is 100% off….the multiple is still only ~5x future earnings. If I am 200% off then the multiple is 7.5x future earnings
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#MD/CEO Resignation
Last edited 5 months ago

22-Dec-2020:  Resignation of Managing Director and Chief Executive Officer

The Board of Palla Pharma Limited (ASX:PAL) wishes to announce that Mr Jarrod Ritchie has tendered his resignation as Managing Director and Chief Executive Officer of the Company effective immediately.

Mr Ritchie has advised his resignation is a personal decision related to his desire to strike a better balance between his work obligations and his family commitments.

Mr Ritchie said: “I have spent the last 17 years leading the development of Palla Pharma into a truly global pharmaceutical business. I am exceptionally proud of what my team and I have achieved this far and excited about what the future holds for the business. Unfortunately, the toll of leading, in my very hard charging hands-on-way, what is now a global business has become apparent to me in recent times and, spending the vast majority of this year away from my family, I have decided I have to make some changes for me. I am disappointed to be leaving my team but now is the right time for me and importantly the outlook for the business is extremely positive.”

The Palla Pharma Chairman, Simon Moore, remarked: “We are disappointed that Jarrod is leaving the business, but we understand and respect the reasons for his decision to do so. Palla Pharma has been Jarrod’s baby since its founding and his drive and resilience to overcome any barriers put in the way of its development are a testament to him. The future successes of the Company will be due in no small part to all his efforts to this point. We wish him well for the future.”

The Company will undertake an international search for a Managing Director and Chief Executive Officer to succeed Mr Ritchie and in the interim, the Company’s Chief Financial Officer, Mr Brendan Middleton, will take on the added responsibility of Interim Chief Executive Officer. Mr Ritchie will remain as an advisor to the Company and assist with the transition process to the new Chief Executive Officer.

--- ends ---

[I sold my PAL shares this morning on this news, at very close to breakeven.  I'm wary of these sudden departures of company leaders, with zero notice, and no replacement ready to step in, regardless of how much positive spin they use when announcing it.  A CFO is not usually CEO or MD material, and while Brendan Middleton (CFO and now interim CEO) may do an OK job, he's unlikely to be the inspirational and driven leader that they most likely need after the year they've just had.  I'll keep PAL on my watchlist and I'll likely step back in when the fog clears a bit.  I'm just wondering if there's some more bad news to come.  PAL has always shown a lot of promise, but they just have not delivered on that promise yet, and I don't think this resignation helps with that at all.  There are always other opportunities.  I've purchased a small tranche of Service Stream (SSM) shares today.  I said I'd wait until they stopped falling,  I haven't.  They are still falling.  I also rang the company and got an answering service - and left a message.  I want some clarrification around whether they have indeed actually LOST any nbn work (in NSW & Vic) or just gained more work elsewhere - which is how I read their announcement.  However, regardless of whether they have lost some work or not, they have stated that they now have ongoing nbn work in EVERY mainland state in Australia, and on that basis I believe this sell off is either overdone or else entirely unjustified.  Either way, they look like an opportunity to me, however I'm only taking a small position initially ($5K) as I want more clarrification around the nbn work and why the market is dumping their shares before I take a larger bite.]

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#Value
Added 5 months ago

Source    Company    Palla Pharma        
                
Current Price    $0.820            
PE Ratio    1.58        based on below calculation    
Div    $0.00            
Div Yield    0.00%            
P/OCF    -        Has a negative ratio because expenses greater than income currently, however income projected to significantly increase    
Fair Val Est St George    $0.964            
ROE    -        Negative return on equity as has not turned a profit - will be high once return on equity moves towards profit margin as projected    
BV yr start                
BV yr finish    $0.49            
Years between    0            
Average change in BV    0.4        Based on the projected profit flowing through to the balance sheet    
Dividend 10yrs    $0.00            
Div growth rate    0            
Discount rate    10.00%            
DCF Divs10    $0.00            
BV10    $14.17            
NPV BV10    $5.46            
Intrinsic V    $5.46            
                
High margin of safety    1    Large        
Probable outcomes    1    
-Bankrupt - 10% There is a probability that the business can't follow through will revenue guidance and it continues to not make a profit, and will eventually go bankrupt
-Slow growth - 30%        
-High growth - 60%        
Competitive advantage    1    Vertically integrated, lowest cost of narcotic opioid drugs on the market, demonstrated by large projected margins        
Low leverage    0.5    Debt is lower than assets. Current assets are 1.5 times as much as total debt and as such is not highly geared. Total borrowings are 13m, with a annual repayments of 5%, being 650k.        
Strong Management    1    Soul Patts owns 20% of the company and the Soul Patts CEO sits on their board. The CEO owns a significant amount of company shares. CEO has a good track record of turning the company around taking it to making a profit        
Circle of competence    0.5    Do I understand the business - based on readings I generally understand the business. Need to learn more though.
    
Low Risk High Uncertainty    0.5    High uncertainty business due to growing nature and currently not making a profit. But based revenues guidance it is projected the company will move into profit into 2021. Making it a low risk business        
5.5/7        
Qualitative Score    78.57%            
                
Based on this intrinsic value and the projected PE ratio, this share is grossly undervalued and has a large margin of safety                
                
Workings                
Based on revenue increasing to 12m per month as per projections in 1YH20 results presentation, this extends to 144m per year. This is projected to happen in 2022                
With gross profit margin increasing to 47% as per 1YH20 presentation, leads to 67.68m gross profit                
Minus 12m of other expenses as per 1YH20 results presentation, leads to NPAT of 55m.                
55m / 125.8m shares on offer = $0.44 / per share

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#Company Presentations
Last edited 6 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.

Edit:  TPE is now PAL.  I hold PAL shares.

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#Broker/Analyst Views
Added 6 months ago

6-Nov-2020:  CCZ Equities Research: Palla Pharma (PAL): "Marketing authorisation progress points towards a profitaPAL 2021"

OK, I see what you did there...

Analyst:  Chris Macrow, cmacrow@ccz.com.au, +61 2 9238 8222.

  • Recommendation: BUY
  • Target Price: 124cps (down from 137cps) 
  • Market Capitalization: $88m
  • Index: N/A
  • Share Price: 70cps
  • Sector: Health care

Palla Pharma (PAL):  Marketing authorisation progress points towards a profitaPAL 2021

  • UK Marketing Authorisation (MA) progress:  PAL have completed the validation trials to support the application to the UK medicines regulator (MHRA) to manufacture and sell 30mg Codeine Phosphate/500mg Paracetamol tablets and caplets under the recently acquired MA. The MHRA confirmed in writing on 3 November 2020 that a valid MA variation application has been received. Under the regulatory process the MHRA has 30 days from 3 November 2020 to raise any concerns with the application, if nothing unfavourable is raised within 30 days the MA variation will be deemed to be accepted and PAL can begin selling 30mg Codeine Phosphate/500mg Paracetamol MA tablets and caplets into the UK market at a very attractive estimated gross margin of ~50%. The ability to sell finished dosage MA products into the UK market should result in a strong revenue and EBITDA uplift in FY21. Revenue for every kg of Codeine Phosphate sold in tableted form is approximately 2.4 times higher than that sold as an Active Pharmaceutical Ingredient. PAL have flagged that a $4m monthly revenue opportunity exists once they receive MHRA approval to commence sales, this monthly opportunity will grow to $12m per month should PAL spend $4m expanding their tabletting capacity. PAL expect gross margins can improve to 50% once most of their sales are made under MAs. PAL will make further submissions in Q1FY21 to the MHRA for the variation of the remaining 4 MAs.
  • FY20 outlook:  PAL expects to see stronger revenue, gross profit, and EBITDA results in 2H20 vs 1H20. PAL flagged that the delay in commencement of sales finished dosage products under MAs (early December vs PAL expectations to begin sales in early October) and lower than expected NRM sales will result in a negative EBITDA performance for 2H20. PAL expects to be EBITDA positive from Q1 FY21. CCZ forecasts have been adjusted to incorporate PAL’s updated FY20 outlook.
  • Investment thesis:  PAL is a business in transition recently undergoing short-term pain. PAL’s significant loss of low margin non-opiate tableting revenue in FY20 is a necessary step towards PAL becoming a profitable business. CCZ thinks it is likely that PAL will leverage the recently acquired MAs from early December 2020 to grow high-margin sales as it captures the last phase of the farmer to pharma opiate supply chain. We expect strong earnings growth in the forward years as PAL increases production across the portfolio. CCZ view the commencement of MA sales as a turning point for PAL. Trading at a FY21PE of 10x and FY22 PE of 5x CCZ view PAL as a very strong buy!

--- click on the link above for the full CCZ report on PAL ---

[I hold PAL shares and they are on my Strawman.com scorecard also.  I have also posted a few straws here about them - see here: https://strawman.com/reports/PAL/]

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#H1 2020 Report
Last edited 8 months ago

31-August-2020:  1H20 Results Release Briefing   and   1H20 Results Presentation   plus   Appendix 4D and Half Year Financial Report

The market didn't like this one.  PAL was sold down -11% today on this half year (first half 2020) report.

Half Year Results

  • 1H20 WAS A TRANSITION PERIOD THROUGH WHICH THE COMPANY POSITIONED ITSELF FOR HIGHER GROWTH
  • EXPECT SIGNIFICANTLY ACCELERATED GROWTH IN 2H20 ONWARDS AFTER SHORT TERM REBASING OF BUSINESS
  • GROSS PROFIT UPLIFT EXPECTED FOLLOWING FIRST MARKETING AUTHORISATION PRODUCT SALES IN Q4 2020
  • PLANNED NON-OPIATE CMO EXIT AND MAJOR CUSTOMER LOSS OF LICENCE LARGEST IMPACT ON 1H20 RESULTS
  • JULY/AUGUST 2020 API SALES 50% of 1H20 VOLUME

Palla Pharma Limited (ASX:PAL), a fully integrated opiate manufacturer and supplier to the global pain relief market, announced its results for the half year ended 30 June 2020 (1H20), which saw the company make strong progress in transitioning from supplying lower-margin non-opiate products to higher-margin opiate-based products via the recently acquired Marketing Authorisations (MAs).

1H20 Result overview (vs 1H19)

  • 1H20 Revenue down to $12.3 million (1H19 $27.3 million)
  • Gross Profit down to $1.7 million (1H19 $9.4 million)
  • Operating EBITDA loss of $(6.7) million (1H19 $0.3 million)
  • Underlying NPAT loss of $(9.1) million (1H19 loss of $(2.3) million)

Commenting on the result, Managing Director and CEO, Jarrod Ritchie said, “As we previously communicated to the market, this year’s sales and earnings will be heavily skewed to 2H20 as we transition from a producer of lower-margin non-opiate products to highermargin opiate-based products sold via Palla owned Marketing Authorisations (MAs) acquired during 1H20. Profitability in 2H20 will also be favourably impacted by the continued reduction in indirect overhead costs from the early exit of the legacy non-opiate supply agreement.

“Regulatory validation and the transfer of the MAs manufacturing license to our Norway facility is going very well. We expect strong sales of higher-margin opiate-based tablet and caplets to commence in the final quarter of 2020.

“As advised at the AGM, while 1H20 revenue was expected to be lower, FY20 revenue will be modestly lower to flat year on year (YOY) with a significant uplift expected in revenue and gross profit through FY21 and FY22, driven by MA sales, once approved and higher API sales. Further, in the near term we expect a significant gross profit uplift in FY20 driven by high margin MA related sales in Q4 2020.”

Result overview

The 1H20 revenue decline to $12.3 million was impacted by the planned early exit from a nonopiate based supply agreement, lower poppy seed sales volumes due to reduced (weather related) domestic poppy straw growing area, and lower API volumes due to a major UK customer losing its manufacturing license which had committed contracted volumes to the company.

Gross Profit of $1.7 million was impacted by timing of the planned early exit from the legacy non-opiate based supply agreement, reduced poppy seed margin contribution due to a reduction in domestic growing area, increased focus on offshore poppy straw supply, and significantly lower Active Pharmaceutical Ingredients (API) volumes due to the prolonged manufacturing license suspension of a major API customer. With the non-opiate based supply agreement ended, the indirect overhead cost base was able to be reduced by approximately 20 percent for the half, resetting the cost base ahead of the higher-margin MA sales commencing in Q4 2020.

The Operating EBITDA loss of $(6.7) million was impacted by the decline in revenue and gross margin, partly offset by indirect overhead cost reduction. The company continues to strengthen its foundation for the future as it continues to focus on completing its strategic shift to downstream, margin accretive FDF supply. Regulatory approval is nearly complete for two of the seven acquired MAs.

The company is well positioned to benefit from the operational leverage with higher margin MA sales to start in Q4, supported by reduced manufacturing complexity and increased plant utilisation , reduced headcount and a lower cost base due to the early exit from legacy lower margin non-opiate based supply agreement.

Imminent supply of Palla generic FDF (using our own MAs) finally enables PAL to combine the cost effectiveness of NRM Supply from Victoria (Australia), the ability to convert to API and FDF in Norway, which will further enable access to new markets providing a future earnings growth engine for the business.

Continued operations at Victoria and Norway facilities

The company’s Melbourne and Norway facilities continued to operate under various ‘Permitted Industry’ exemptions as manufacturers of pharmaceutical product. In March 2020, the company implemented strict COVID-19 safe operating procedures at both facilities, including the provision of additional PPE, staggering shifts and breaks, and adherence to physical distancing requirements in shared working areas. To date this has proved effective in keeping the workforce safe.

While we have seen both positives and negative effects from COVID-19, in specific areas there has been an overall business disruption with regard to shipping costs, efficiency of interactions with customers, slowness in receivables and in some country specific examples (Italy) an inability to obtain co-excipients such as paracetamol which has delayed H1 API orders into H2 2020.

Demand however remains strong as Codeine based products have been included in the UK governments list of essential medicines with increased prices being observed in the UK market.

The company continues to hold higher than normal inventory levels across all aspects of the business to mitigate supply line interruptions during the pandemic. Elevated inventory levels are expected to decrease over the next six months, freeing up working capital.

Validation batches passed, stability trials started for first MA in Norway, targeting sales in Q4 2020

Palla Pharma Norway is well progressed with the validation of the acquired 30/500 CoCodamol product MAs. All three validation batches have been completed with analysis of the validation batches for both the tablets and caplets, meeting the required specifications.

Co-Codamol 30/500mg Tablets and Caplets have been packed and have commenced stability trials.

Next steps that will enable sales in Q4 2020 are:

  1. Satisfactory stability trials and submission of Data to the Medicines and Healthcare Regulatory Agency (MHRA)
  2. Approval by the MHRA of Palla Norway as an approved manufacturing site.

Pricing continues to increase in the UK market for opiate-based products due to supplier shortages

The price of Codeine/Paracetamol 30mg / 500mg has increased significantly since Q2 2018 – from £2.50 to over £4.00 per 100 pack according to the IQVIA data from the UK pharmacy network and hospitals.

Utilising its full packaging capacity at Norway facility the revenue generated per month is expected to exceed approximately A$4 million at original pricing levels. Palla plans to expand capacity in 1H 2021 to allow for additional demand, resulting in expected total revenue per month of approximately A$12 million after capital expenditure of approximately A$4 million.

Multi-year opiate based FDF CMO contract extension

During the half-year period a multi-year opiate based Finished Dosage Formulation (FDF) CMO contract was extended to supply 270 million Codeine Phosphate tablets to a major UK customer. The contract extension equates to a minimum of eight tonnes of Codeine Phosphate equivalent and represents approximately four months packaging capacity.

Diversifying NRM raw material sourcing and ensuring uniformity in poppy straw quality

Australia had reduced growing area last season due to adverse weather events in NSW and a heightened focus on diversification of straw supply to offshore supply sources. The company continues to increase poppy straw sourcing from Northern Hemisphere sources and continues to focus on improving local expertise with increased farmer and aggregator engagement through the company’s on-the-ground agricultural expertise in Europe.

Debt recovery legal proceedings commenced seeking payment of outstanding invoices from major UK customer

The company has filed a claim in the High Court of Justice Business and Property Courts of England and Wales. The company is confident in its claim as all product supplied was ordered and delivered as per product specifications and expects to recover the amount owing in full. Despite this, a trade receivables impairment loss charge of $1.0 million was recognised during the period.

Strategy update and Outlook

As previously communicated, the company expects a significant revenue and earnings skew to 2H20 as first MA sales start in Q4 2020.

The company is well positioned to rapidly grow revenue and earnings in 2H20:

  • MA validation is on track, with three validation batches completed, meeting the required specifications
  • MA sales start after certification of Palla Norway as an approved manufacturing site by MHRA
  • At full capacity, ~A$4 million monthly revenue opportunity exists for MA sales at early 2018 tablet/caplet prices.
  • Manufacturing can commence (without sales) to build inventory prior to approval
  • Elevated prices for Codeine/Paracetamol 30mg/500mg tablets/caplets due to supply shortages provide further margin upside. At least two of the four major customers have supply issues into the UK market at present meaning Palla will not have to lower prices to enter the market.
  • A$12 million monthly revenue opportunity following $4 million capex spend
  • FY20 revenue is expected to be modestly lower to flat YoY with a significant uplift expected in FY21-22
  • Gross profit uplift expected in FY20 driven by high-margin MA-related sales in 2H20
  • Continue targeted improvement in working capital and reduction of net debt.

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

 

About Palla Pharma Limited:

Palla Pharma Limited (ASX:PAL) is a vertically integrated opiate manufacturer from poppy straw growing through to tableting production. Palla Pharma has developed an innovative, efficient, and environmentally sustainable opiate manufacturing process based on a unique water-based extraction technology. The company is one of six licensed opiate producers globally, and one of three fully integrated suppliers from opiate extraction through to tableting production delivering on its strategy to secure access to regulated downstream narcotics markets by leveraging its production cost advantage.

 

[I often hold PAL, but I am not holding PAL shares currently;  They are however on my Strawman.com scorecard.]

[The largest shareholders of PAL shares are SOL/BKW.  The investment is in the Brickworks (BKW) investment portfolio, however BKW is considered to be a controlled entity of Washington H Soul Pattinson (SOL) so SOL also have a notice lodged for 23.18% of PAL, same as BKW, but it's the same stake, not a different stake.  The second largest shareholder is Thorney Opportunities Fund (TOP, a.k.a. TIGA Trading) - who hold 18.65%, and Wentworth Williamson also hold 8.28% of PAL - so there is plenty of "smart money" on the register.]

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#Acquisition/Business Update
Last edited 12 months 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 one year 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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