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Yesterday morning before the open, Wilmington, Massachusetts-based DUSA Pharmaceuticals Inc. (DUSA) announced outstanding results for the December 2010 quarter, reporting $12 million in revenue and 12c in GAAP and ‘pro forma’ earnings. This is by far their highest-ever quarterly revenue and operating profit, and a strong acceleration in operating performance over recent quarters (see Table 1 below). It is also well above the single analyst estimate of $10.3 million and 4c in earnings.

Table 1

Fiscal
Year

Ending

Quarter Ending

March Quarter

June Quarter

Sept. Quarter

Dec. Quarter

Revenue
(in $ mill.)

Earnings

Revenue
(in $ mill.)

Earnings

Revenue
(in $ mill.)

Earnings

Revenue
(in $ mill.)

Earnings

Dec 2010

8.7

(0.01)

8.7

0.03

8

0.02

12

0.12

Dec 2009

7.1

(0.05)

7.0

(0.02)

6.9

(0.01)

8.8

0.04

Dec 2008

7.9

(0.05)

8.1

(0.01)

5.7

(0.12)

7.8

(0.08)

Dec 2007

6.7

(0.17)

6.9

(0.13)

5.8

(0.10)

8.3

(0.16)

Dec 2006

4.8

(0.26)

6.6

(0.24)

6.1

(0.19)

8.2

(0.19)

The stock closed at $4.08 yesterday (up from $3.20 prior to the news yesterday), after spending the day trading between $3.64 and $4.35. However, as explained below, the stock price still lags the recent improvement in its operating fundamentals, and the company’s 83% gross margin offers great operating leverage to capitalize on the sales momentum into 2011 due to both organic growth and company-specific initiatives.

Company Background

DUSA Pharmaceutical Inc. is a vertically integrated dermatology company that is focused primarily on developing and marketing Levulan photodynamic therapy (PDT) and other products for common skin conditions. Their lead product, Levulan Kerastick 20% topical solution, accounts for $11.2 million of the $12 million in revenue it reported in the recently completed December 2010 quarter; the remaining sales for the quarter were accounted for by their other products, BLU-U at $0.7 million and ClindaReach at $0.1 million.

Levulan is a brand of aminolevulinic acid, a photo-sensitizer which when applied to tissue makes the target cells extremely sensitive to light, and Kerastick is their proprietary applicator that delivers Levulan to the tissue. The BLU-U is the company’s patented FDA-approved Blue Light Photodynamic Therapy Illuminator for exposing the sensitive tissue to blue light. This as in the case of the company’s FDA approved treatment of minimally to moderately actinic keratoses (AKs) of the face or scalp, a pre-malignant condition, helps heal the condition by destroying the target cells. The company’s other dermatology product ClindaReach is available under prescription for the treatment of acne vulgaris, and also BLU-U without Levulan PDT is approved for the treatment of moderate acne.

The Levulan Kerastick 20% Topical Solution with PDT and the BLU-U were launched in the U.S. in September 2000 for the treatment of AKs of the scalp and face, and it remains the only approved PDT treatment currently being actively marketed in the U.S. The treatment is patent protected until 2019, and is also covered under Medicare and has a specific CPT code. Galderma has a competing PDT product but the product is not currently being marketed, and Danish company Leo Pharma is currently conducting Phase 3 trials using photodynamic therapy treatment for AKs with potential launch in 2012. Also, the dermatology field is highly competitive, and a number of companies including QLT Inc. (QLT), Axcan Pharma, Inc. (AXCA), Miravant Medical Technologies (MRVT.PK), and Pharmacyclics (PCYC) are pursuing commercial development of PDT agents that may compete with Levulan.

The company has consistently improved operations, with the December 2010 quarter marking the 21st consecutive quarter of year-over-year quarterly volume growth in the U.S. market, which accounted for over 95% of the company’s sale in the latest fiscal year ending December 2010. Also, while there is currently only one analyst covering the stock, 33 institutions held a combined 9.3 million shares or 39% of the company’s outstanding shares, and are accumulating shares since their holdings increased from 8.6 million shares or 35% in the prior quarter.

Valuation

In the current December 2010 quarter, Kerastick revenues grew 38% year-over-year, driven by a 31% increase in unit volumes and a 5% increase in average selling prices (see Table 2 below). However, even more impressive was the year-over-year 69% growth in BLU-U unit sales, and a 135% increase in units under evaluation at physician offices (90% of which usually convert to sales). This increase in BLU-U unit sales volume and evaluation units is significant as BLU-U unit sales add new customers and thus typically drive Kerastick revenues. This bodes well for an acceleration of sales and earnings growth going forward into 2011.

Table 2

Revenue Breakdown by Segment

Quarter

Dec ‘10

Sept ‘10

June ‘10

Mar ‘10

Dec ‘09

Sept ‘09

June ‘09

Mar ‘09

PDT Segment Revenue

$11.9

$7.8

$8.4

$8.3

$8.5

$6.7

$6.4

$6.7

Kerastick Revenue

$11.2

$7.5

$8.0

$7.8

$8.1

$6.2

$5.9

$6.1

Unit Sales

85,122

53,724

61,778

61,422

64,904

53,622

49,815

51,947

Unit Pricing

$132

$140

$129

$127

$125

$116

$119

$117

BLU-U Revenue

$0.7

$0.3

$0.4

$0.5

$0.4

$0.5

$0.5

$0.6

Unit Sales

91

39

63

77

54

59

58

81

Unit Pricing

$7,500

$7,550

$6,950

$6,350

$7,100

$7,700

$8,300

$7,900

Non-PDT Segment Revenue

$0.1

$0.2

$0.3

$0.4

$0.3

$0.2

$0.5

$0.5

Total Revenue

$12.0

$8.0

$8.7

$8.7

$8.8

$6.9

$6.9

$7.2

The company has announced a 7% price increase effective January 1 of 2011, and typically raises its prices every year which introduces "beat the price increase" volatility in quarterly sales, and that combined with a seasonally strong December quarter and a seasonally weak September quarter make quarter-over-quarter comparisons not very meaningful. However, taking out the quarterly noise, Kerastick revenues grew at 31% in 2010, 31% in 2009, and 33% in 2008 over the corresponding prior years. With the acceleration in BLU-U unit sales and evaluation units, overall company revenue can be assumed to accelerate to grow at least 35-40% in 2011. This is also based on the 15% organic growth in Kerastick revenues at existing customers and the growth in new customers resulting from BLU-U sales.

The company has the potential to increase Kerastick revenue for the foreseeable future which at under $35 million in 2010 captures only a sliver of the overall $700 million market for the treatment of AKs in the U.S., which includes many other treatment regimens besides photodynamic therapy. And to this end the company is hiring five additional sales personnel to accelerate the adoption of Kerastick PDT for the treatment of AKs. Also, in addition, the company is working on a shorter-incubation trial to expand the label indication and usage, and possible future indications for PDT therapy include other skin conditions such psoriasis and also the treatment of skin cancers.

Due to the operating leverage in the company’s business model (see Table 3 below), this may translate into an even stronger growth to bottom-line earnings in FY 2011 and beyond.

Table 3

Quarter

Dec ‘10

Sept ‘10

June ‘10

Mar ‘10

Dec ‘09

Sept ‘09

June ‘09

Mar ‘09

Total Revenue

$12.0

$8.0

$8.7

$8.7

$8.8

$6.9

$6.9

$7.2

Gross Margin

$10.0

$6.4

$6.9

$6.9

$7.0

$5.6

$5.5

$5.2

Expressed in Percentage

83%

80%

80%

79%

81%

80%

79%

73%

Operating Expenses

$7.2

$6.3

$6.6

$7.2

$6.4

$5.9

$6.5

$6.7

Expressed in Percentage

60%

78%

76%

82%

73%

85%

94%

94%

Operating Income

$2.8

$0.1

$0.3

$(0.3)

$0.6

$(0.3)

$(1.0)

$(1.5)

Expressed in Percentage

23%

1%

3%

(3)%

7%

(5)%

(14)%

(22)%

Net Income

$2.9

$0.0

$0.2

$(0.4)

$0.4

$(0.4)

$(0.9)

$(1.6)

Earnings Per Share

$0.12

$0.00

$0.01

$(0.02)

$0.02

$(0.02)

$(0.04)

$(0.07)

As illustrated, gross margins are extremely high at 83% in the December 2010 quarter and have been rising sequentially with the increase in the company’s revenues. Operating expenses meanwhile are rising much slower than the increase in the revenue, thus translating into much stronger growth in operating and net income and in earnings per share.

The company has gross net-operating-losses carry-forwards of $92 million, $55 million of which are usable with a maximum of $3 million usage per year, so it will most likely pay no or minimal taxes in 2011 and in the near future. Assuming say 35%-40% sales growth for FY 2011, it is possible then that the company may generate $50-52 million in annual revenue and generate between 50c and 55c in annual earnings. This was determined assuming gross margins do not keep increasing above 83%, a 7% increase in inflation-adjusted SG&A costs, and a $1 million additional increase in SG&A from the hiring of 5 additional sales personnel in 2011 to fuel the company’s growth.

The company has almost $20 million in cash and marketable securities or over 80c per share, with no debt. With the projected strong 35%-40% growth in the company’s revenues and even stronger earnings growth in 2011, they should trade at least at 15 forward PE which would give it a valuation well north of $8, twice the $4.08 price at which at traded at the close-of-business yesterday. And this does not even take into account the value of NOLs which would be worth at least $2 to a potential acquirer.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix by Edgar Online.

Disclaimer: Material presented here is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion.

Source: DUSA Pharmaceuticals: A Growth Stock That Looks Like a Value Stock