Is Tetra-Bio Pharma’s (TBP) High Valuation Justified?

Tetra-Bio Pharma [stock_market_widget type="inline" template="generic" color="default" assets="TBP.V" markup="(TSXV: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has received two Drug Identification Numbers (DINs) from Health Canada under its TERPACAN line of products.

While researchers and investors have known about the medicinal benefits of cannabinoids for a significant period of time, Canada now has its first official over-the-counter cannabinoid-based product. This is a significant milestone for TBP and the industry as a whole.

As usual, the news broke first in FinTwit last night, leading to a 33% end-of-day run-up for a company that had generated no revenue as of last quarter. As of this writing, TBP is up another 15% today at $0.65 per share.

Considering the company currently has zero revenue as of 2019 Q3 financials, we wanted to look closer at what exactly is required to justify their current valuation.

Target Markets

The markets targeted by these first two drugs are for treating hemorrhoids and back and muscle pain. With a DIN number, this should open the door for insurance companies to include these drugs under their coverage, a big plus for TBP.

Looking at Canada, the hemorrhoid market has reached $22 million according to TBP, and is growing at a CAGR of 3%. In contrast, the back and muscle pain has reached $432 million with a CAGR of 1%.

Obviously entering these markets is substantial, especially for a company with zero revenue. However, they are highly competitive, and no information is provided on product pricing and how that compares to alternative products.

We wanted to take a look at possible valuation scenarios to help investors determine whether the news has been overblown, or whether TBP is a value buy at these levels.

Value Buy or Sky High Pricing?

Looking first at these two markets within Canada, the following two graphs illustrate TBP’s price to sales per market share. An EBITDA margin of 30% was assumed based on the average of the top ten “Big Pharma” companies.

P/S Ratio by TBP Market Share

Source: Capital 10X Estimates, YCharts.com.

EV/EBITDA Ratio by TBP Market Share

Source: Capital 10X Estimates, YCharts.com.

These markets are highly competitive, with large players already entrenched in the space. Considering TBP would need between 5-7% market share depending on the valuation metric to justify their current stock price, we believe the market has already priced in entry into the U.S. or additional significant sources of revenue.

The following graph illustrates the per-share price using industry average pricing metrics.

Share Price by TBP Market Share

Source: Capital 10X Estimates, YCharts.com

Given TBP has provided a timeline on entry into the US, we wanted to re-evaluate their valuations assuming they start selling into the much larger U.S. hemorrhoid ($119 million) and back and muscle pain relief ($2.6 billion) markets.

P/S Ratio by TBP U.S. and Canadian Market Share

Source: Capital 10X Estimates, YCharts.com.

EV/EBITDA Ratio by TBP U.S. and Canadian Market Share

Source: Capital 10X Estimates, YCharts.com.

As expected, the market share required to justify TBP’s current share price is substantially lower. However, breaking into the U.S. market in a meaningful way would be incredibly challenging, and would require a substantial infusion of capital. This would likely require an equity raise, which would ultimately change TBP’s capital structure and subsequent valuation.

At current levels, investors can see what market share would be required to justify their valuations based on Pharma industry averages.

Share Price by TBP U.S. and Canadian Market Share

Source: Capital 10X Estimates, YCharts.com.

Additional Unknowns

At this point in time, we don’t know the margins on the products, nor do we know which cannabinoid suppliers will benefit from any sales generated from TBP.

Another key factor will be timelines. Going from R&D to commercial production can take time depending on the scaling approach they take (contract manufacturing vs. in-house production).

Finally, while the potential of entering the U.S. market is lucrative, there can be no guarantees when the government will provide them with the National Drug Code required to sell over-the-counter products in the U.S. At this time, TBP has stated they are aiming for a late 2020 launch.

With other drugs in the pipeline, TBP investors should be excited that the company has proven they have the capability of moving drugs through the R&D process and into the consumer-markets.

However, investors considering buying into TBP should reflect on what is required to justify their current stock price. If you feel the company is well-positioned to gain market share in Canada and the U.S., they may be a buy. Alternatively, if they bring on additional revenue streams, the story could be attractive.

At Capital 10X, we believe that at the current valuation the unknown timelines mean too much additional risk to become investors at these levels.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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Derwood Wilkinson
Derwood Wilkinson
January 18, 2020 10:45 pm

Can anyone find specific information in regards to these supposed cannabinoids in TBP’s ‘Terpacan’ OTC product??

Personally, I am thinking if there are any cannabinoids contained in these hemorroid and back & muscle pain products, it is very minuscule trace amounts.

And just because these products have a DIN, they are also only ‘OTC’ topical products. Most insurance plans never cover the cost of OTC items. (i.e. Milk of Magnesia has a DIN as well.)