Agile Therapeutics: Billion Dollar Buy-Out Is On The Horizon

Summary

• Agile Therapeutics is currently trading substantially below its fair value of $6.36/shr on a stand-alone basis.
• Agile's leading drug, Twirla, is much more valuable in the hands of a Big Pharma company, like J&J, who has the resources and footprint to maximize sales.
• A company like J&J could commercialize Twirla rapidly, exploit synergies, scale both domestically and globally, and potentially achieve upwards of 16%+ market share.
• A buy-out is the best way to maximize value for Agile shareholders and I believe an acquisition nearing $1 billion could occur before end of 2020.

Introduction

Agile Therapeutics (NASDAQ: NASDAQ:AGRX) is a women’s healthcare company focused on patch-based contraceptive options. Their lead product, Twirla, is a once-a-week contraceptive patch containing a combined dose of levonorgestrel and ethinyl estradiol. Twirla was recently approved by the FDA on February 14, 2020 for women with a BMI < 30 kg/m² and is contraindicated in women with a BMI > 30 kg/m².

Twirla endured a long and difficult path to approval, including several CRLs and a scathing set of briefing documents issued by the FDA prior to their AdComm in October 2019. Agile's stock has experienced some gut-wrenching volatility along the way:

Source: Charles Schwab

Agile shares, currently trading at $2.40, appear to be substantially undervalued. In 2019, the hormonal contraceptive market was valued at nearly $7 billion and is expected to grow at a CAGR of 4.2% through 2027. Furthermore, the US market alone is expected to grow at a CAGR of 4.8% reaching $5.2 billion by 2027. 67% of sexually active women use a contraceptive, based on data from the CDC.

Source: Grand View Research

Agile estimates the potential addressable market for Twirla, the CHC pills/ring/patch segment, to be $3.7 billion. This is consistent with independent research reports forecasting similar market size.

Source: Agile Therapeutics

Twirla’s main competitor, Xulane (the generic version of Ortho-Evra, which was discontinued), is a birth control patch manufactured by Mylan. For a bit of historical context, Ortho-Evra, previously manufactured by Johnson and Johnson, was approved in 2002 and rapidly captured nearly 11% of the CHC market. However, after reports in 2004 of seventeen deaths of women aged 17-30 tied to Ortho-Evra, for reasons such as heart attacks, blood clots, and strokes, the FDA issued a safety warning. Market share subsequently plummeted to 1.3%, leading to Ortho-Evra being discontinued. Xulane, the only patch left on the market, has recovered slightly recording sales of $297 million in 2019.

Valuation: Buy-Out

With a substantial market opportunity at hand, but limited ability and resources to tap the US market let alone the global market, Agile's best option to maximize shareholder value is to explore a sale.

Management currently projects Twirla to achieve an eventual footprint of 5-8% of the CHC pills/ring/patch market:

Source: Agile Therapeutics

Twirla in the hands of a Big Pharma acquirer would achieve a footprint that is substantially larger than this.

Xulane remains plagued by the stigma of thrombosis, and thus presents the first major opportunity for Twirla to capitalize on. Twirla releases about half the level of estrogen of Xulane each day, leading to significantly decreased risk of serious side effects such as venous thromboembolism and blood clots.

In the hands of the right acquirer, Twirla would siphon the majority of Xulane's market share, which currently stands at 8% or nearly $300MM per year in sales. They would also be positioned to make a run at the some of the bigger players in the market, including NuvaRing and Lo Loestrin Fe, their second major opportunity.

NuvaRing, manufactured by Merck, recorded $960 million in sales in 2019. However, NuvaRing is invasive requiring insertion directly into the vagina. Among other side effects, vaginal infections, irritation, itching and/or discharge are commonly reported among women who use NuvaRing. Twirla on the other hand, is non-invasive and more comfortable for many women.

Lo Loestrin Fe, manufactured by Allergan, recorded $800 million in sales in 2019. Lo Loestrin Fe is an oral contraceptive taken daily. Thus, when women forget to take the pill, a major concern among oral contraceptives, the chance of unintended pregnancy skyrockets. Twirla has a substantial convenience benefit, as the patch is applied once weekly for three weeks, followed by one week without a patch.

There is evidence of large pent up demand for an effective, non-invasive, convenient and safe women’s contraceptive patch – just look to how quickly demand build for Ortho-Evra prior to the health issues that eroded its market share. With nationwide and global sales forces and marketing teams already in place, and longstanding relationships with doctors and clinicians in the field, a company like J&J could scale Twirla to one of the largest drugs within its segment.

As such, I believe under a buy-out scenario, the right acquirer can achieve at least double Agile’s peak market share estimates, or 16% of the segment:

Source: Eugene Capital Advisors

For these reasons I feel strongly that an acquirer would pay at a minimum $880MM to acquire Agile Therapeutics. This would be a tremendous deal for both the acquirer and Agile shareholder.

At a price of $880MM, Agile would receive the equivalent of 3X their future peak sales estimate (a fair multiple because Twirla has only a single indication, and currently produces no sales):

Source: Eugene Capital Advisors

The acquirer would pay the equivalent of 1.5x their sales estimate of $592MM, a tremendous deal especially when taking into consideration the further upside (in the right hands, could Twirla supplant NuvaRing as the biggest player in the space, putting revenues near the $1 billion mark?), the future domestic and global market growth potential, and synergistic opportunities.

On a per-share-basis, a buy-out at $888MM looks as follows for shareholders:

Source: Eugene Capital Advisors

Thus, under a buy-out I anticipate shareholders receiving at least $10.18/shr, reflecting 324% upside.

Valuation: Stand-Alone Basis

If Agile does not pursue a buy-out, Twirla is still poised to grab a chunk of the $3.7 billion CHC pills/ring/patch addressable market.

However, as things currently stand, I think the upper range of Agile's market share projections are a major reach. Agile has no sales force (and only 12 total employees), have conducted no marketing, and have no established relationships with clinicians and doctors. They will struggle to scale globally. Even once they begin putting together a sales/marketing team, taking on the big, established players already in the market (Mylan, Merck, Allergan, etc) will be an uphill battle for a small company with no existing footprint.

However, I think Twirla can capture 5% market share, leading to the following fair value per share:

Source: Eugene Capital Advisors

Even at only 5% penetration, the fair value per share of $6.36 per share represents nearly 165% upside to today’s price of $2.40.

I would revise my estimates if Agile releases an aggressive, game-changing plan to achieve the upper range the addressable market. Agile is hosting a conference call on Tuesday, May 5, and could potentially lay out their plan in detail during the call.

Interesting Evidence Pointing To A Buy-Out

Aside from the fact that a buy-out works from a financial standpoint for both Agile and its acquirer, there are several additional factors that lead me to believe Agile is positioning itself for a buy-out:

• Their office building was listed for sale (see the listing here) and their lease runs out in November 2020. Agile's most recent Form 10K does mention that they are "currently seeking new facilities or considering expanding existing facilities." However, the timing of the lease expiration lines up perfectly with a buy-out. And, if they are truly on the verge of ramping up commercialization efforts, where is the urgency in finding a new space?
• No evident attempt to hire sales or marketing staff nearly 3 months after approval. Agile's LinkedIn page shows no current job postings, and searches on popular sites such as monster.com turn up nothing either - very odd for a company with an approved drug, gunning to scale their drug nationally while taking on several of the biggest players in pharma. Also, Agile currently operates a staff of only ~15 full-time employees (22 show on LinkedIn, but several are board members and interns)

Source: LinkedIn

• Management, specifically CEO and CFO, have vast experience in buy-outs/M&A. Their CFO, Dennis Reilly, who took the reins on August 5, 2019, was involved in three buy-outs in the last three companies he worked at, including one company which was sold to Johnson and Johnson. (See this Press Briefing for a brief run-down of his background)
• Plush cash position on the balance sheet. This point can be debated both ways, as a strong cash position is extremely important in a non-buyout situation as well, where Agile will burn significant cash as they commercialize Twirla. However, I think this is evidence of a buy-out because Agile's strong cash position puts them in a much stronger position at the negotiating table.

Risks

The fact that Twirla is now an approved drug curtails the major source of risk associated with the stock in the past. Risks now primarily involve Twirla’s commercial viability, and the prospect of being rejected by doctors, clinicians, and patients as a viable contraceptive option. However, based on Twirla’s trial results and the general sentiment of doctors, I find this scenario highly unlikely.

Additionally, a buy-out is uncertain and may never occur, but investors have a strong margin of safety in that Twirla is already approved. The drug will generate sales whether or not Agile is bought out, and shares will eventually reflect the revenues created.

As for cash, Agile recently secured a $35 million loan facility from Perceptive Advisors and closed on a $45 million equity raise on February 25, 2020. Agile now has a flush balance sheet, taking the risk of additional dilution off the table, at least for the foreseeable future.

Conclusion

AGRX shares are substantially undervalued. Even if management does not pursue a buy-out, Twirla sales should achieve at least 5% market share. This leads to a price target of $6.36 per share, or 165% upside from today's share price.

The more likely scenario is a buy-out, as it is the best way to maximize shareholder value. By acquiring Agile, a large player, such as J&J, could quickly commercialize Twirla, benefit from synergies, scale Twirla domestically and globally, and leverage existing relationships with doctors and clinicians that would lead to substantially higher market share/peak sales for Twirla than Agile could achieve alone.

If a buy out were to occur, I could not see Agile being purchased for less than $888MM, or $10.18 per share. This represents 324% upside to today's price.

Analyst’s Disclosure: I am/we are long AGRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.