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Q4/FULL YEAR 2010 RESULTS

Pernix (PTX) reported financial results for the fourth quarter and full year ending December 31, 2010 on March 31, 2011. Fourth quarter net sales came in at $12.2 million versus our estimate of $13.1 million. While gross sales of $21.0 million handily beat our $18.8 million estimate, this was more than offset by significantly higher than modeled rebate and discount expenses.

Pricing adjustments, utilized to discount to prices of competing products and for promotion of new product launches, have varied significantly from quarter to quarter. We expect this to be the case going forward as well, largely influenced by product mix, product introductions, and competitor pricing - both branded and generic. Medicaid rebates as a percent of gross product sales, also largely influenced by product mix and somewhat erratic, was 20% in Q4, versus our estimate of 15%.

EPS was $0.07 in Q4 versus our $0.14 estimate, the difference a result of the lower net revenue figure, and a 49% income tax rate (versus 28% estimate), slightly offset by operating expenses coming in 2.5% lower than our estimate.

For the full-year 2010 net sales and EPS were $33.2 million (up 19%) and $0.40, compared to $27.9 million and $0.44 in 2009.

Cash flow from operations was $2.6 million and $4.7 million for the three and twelve month periods ending December 31, 2010. Pernix exited 2010 with $8.3 million in unrestricted cash and equivalents. The $5 million guidance line was fully drawn but the $5 million revolver remained untapped ($1MM was subsequently drawn on the revolver in January 2011).

BUSINESS UPDATE

CEDAX

While Pernix does not provide sales of individual drugs, management continues to indicate that the Cedax launch has met or exceeded their initial expectations. Pernix rolled out a double-strength formula in January 2011 which management implied has already been a tremendous success.

Natroba

Natroba, the high-potential lice product, is still expected to launch in Q2 2011, concurrent with the summer camp season. Co-pro partner ParaPRO will only have a handful of reps detailing Natroba, affording a huge opportunity for Pernix Pernix reps, which will be pushing Cedax and the cough-cold line in Q1, will switch their main focus to Natroba coming into the summer months. We expect the combination of Natroba's efficacy (and benefits in application) and Pernix's sales acumen to result in a rapid and steep sales ramp. Natroba, with its peak season in the warmer months, should also afford some offset to the seasonality in revenue of the cough/cold products.

Theobromine

In a surprise announcement, Pernix revealed in March 2011 that they are shopping rights to theobromine, the new antitussive development candidate that management has been so excited about. The move is apparently solely motivated by significant interest in the compound by several potential acquirers. JP Morgan was brought on to lead sale of the candidate, which is expected to be handled through an auction process. Management expects that if a deal does get done, it would likely happen in 2H 2011. We will update our model accordingly if and when the a deal is announced.

FDA Action

In early March 2011 FDA announced its intention to remove certain unapproved prescription cough/cold medicines from the market, including Brovex and Aldex, both significant contributors to Pernix's revenue over the last few years. Pernix, in anticipation of the agency's action, had been converting their legacy products over to OTC monograph. Pernix has already had significant success with Pediatex, which was converted from prescription to OTC, and does not expect any adverse impact to their other products as a result of the FDA's recent announcement. Management noted on the Q4 call that this may, in fact, weed out some of the competing products, actually creating more opportunity for their own cough/cold products.

OUR 2011 OUTLOOK

As we have indicated since initiating coverage of Pernix in August 2010, the dynamic nature of the company, coupled with lack of insight into individual product sales, creates challenges in forecasting sales and earnings. This is evidenced by Pernix crushing our Q3 2010 revenue and EPS estimates but then falling significantly short on both in Q4. We have updated our model following Q4 results to incorporate some recent trends relative to discounts and rebates as well as more specific income tax guidance. We continue to expect very robust revenue growth during the current year.

Revenue

We look for Pernix to post net revenue of $57.3 million in 2011 on gross sales of $87.3 million. The net revenue estimate implies annual growth of approximately 73%. Revenue should benefit from a full-year's worth of sales of Cedax (aided by the double-strength formula launch in January), Natroba launch near mid-year and additional generic introductions through Macoven. Pernix continues to actively seek additional co-pro's, licensing deals and product acquisitions - any of which could potentially provide some upside to our estimate.

EPS

We have moved our 2011 EPS estimate to $0.60, from $0.76 prior to Q4 2010 results. The change almost entirely a result of increasing provisions for rebates/discounts and moving income tax expense from approximately 34% to 38%. Depending on the actual level rebates/discounts, our EPS estimate could prove conservative.

Price Target

We model EPS to grow at a 36% CAGR through 2014. Using the industry-average long-term PEG of 0.67, it implies a valuation of approximately 24x 2011 EPS. We look for Pernix to post EPS of $0.60 in 2011, implying a value of roughly $14.5 per share. We are moving our target price from $15.5 to $14.5 per share.

Source: Pernix Remains Way Too Cheap