TherapeuticsMD: Hanging On A Thread

Summary

• My worst fear was realized with the poor sales trajectory, challenging payor coverage and a total shift in business strategy.
• COVID-19 situation has further exacerbated the problem resulting in the suspension of "conservative" guidance.
• Even under an optimistic scenario, the company will be facing stretched cash balance.
• The company will have to dilute and renegotiate with TPG to avoid a default.
• TXMD is no longer the company I have initially invested in. I recommend existing investors to sell the news and potential investors to stay away.

"Know what you own, and know why you own it." - Peter Lynch

TherapeuticsMD (Nasdaq: TXMD) has been a company I had covered since 2017 when it popped into my radar when it received a complete response letter ("CRL") for Imvexxy. I did my research and realized the letter was issued inappropriately and the company will be able to get Imvexxy without another trial. On that front, I was spot on and the stock price did reverse substantially.

I continued to hold on and even added to my share count basis on 3 main thesis: 1) huge unmet need in the market, 2) ability to gain comprehensive coverage and 3) sensible go-to-market strategy. However, in recent months, I've been seeing cracks in my thesis and have subsequently sold out at a substantial loss.

Overblown market potential sizing

Chart 1: Imvexxy and Bijuva monthly script trend since launch

Source: TXMD's monthly presentations

Imvexxy has done decently in terms of script count, gaining ~9% market share within 1.5 years. However, this was only achievable on the back of aggressive couponing strategy, which the company has pivoted from (elaborated further latter).

If one looks at the total market for VVA script of ~5.8 million at a net price of $100, achieving 25% market share will lead to net revenue of $144 million. This is a far cry from the $230 million estimate from management which requires total VVA script to grow by 60%. Not saying it's impossible, but it's very rare and unlikely to see such growth rates in a matured market.

Bijuva, the purported star product of the company, had an underwhelming launch. Despite the highly touted partnership with compounding pharmacies and a market of 16 million scripts (>2.5x bigger than Imvexxy total script), Bijuva script remained lacklustre (significantly lower than Imvexxy as seen in Chart 1). Management even pushed back Bijuva's full launch to 2021 after the low dose version is approved.

The slow uptake of Bijuva and delay in launch potentially hint of Bijuva's market sizing and/or dynamics being less favourable than expected, i.e. the need for an approved compounded hormone is limited or access to the patients is not as simple as a partnership with compounders. The company expects 100k script for 2020, which is a far cry from 4 million script projection with limited clarity on how to get there given slow traction from compounding pharmacies.

Annovera, a product licensed from another company, is becoming the lifeline for the company. Within two quarters after launch, Annovera is earning more than what Imvexxy made in a year after launch. Despite its unique value proposition (usable for a year, more pliable and less bleeding), management has given rough guidance of 21k script. This is a mere 2% of the vaginal ring market (compared to 9% for Imvexxy in 1 year). So either management is being very conservative or Annovera's market dynamics are not as favorable as management made it out to be.

Diagram 1: Multiple paths to $1 billion sales

Source: TXMD's company presentation

Potential market projection from the management of $1 billion (highlighted in Diagram 1) is likely overly optimistic. Based on current sales level and trajectory, achieving $500 million will be ambitious and at least 4-5 years out.

Payor Coverage Remains Challenging

Table 1: Overview of payor coverage in top 10 states**

Source: MMIT data as of 25 April 2020 (app version), **top ten states account for ~50% of the market for hormonal and birth control products

Management earlier has projected hitting 60% net revenue as % of weighted average cost ("WAC") for Imvexxy sales to commercial coverage patients by Q4 2019. Based on backward estimates, that percentage is closer to 40%, much lower than management's forecast. To add fuel to the flames, Imvexxy has lost preferred Part D coverage under United, leading to a sharp drop in Medicare prefered coverage. And this could be a sign of how payors view Imvexxy's Medicare coverage.

With the standard coverage, patients will have to pay ~$72 versus average $40 for Part D patients. This significant jump in price will likely cause further patient attrition when the company gets Part D coverage, which seems to be further delayed. Over 30% of scripts and 20% of Imvexxy's net revenue (author's estimate) are at risk in the likely event of not attaining preferred coverage.

Bijuva has gained relatively good coverage and does not have the Medicare problem of Imvexxy. The main issue with Bijuva lies with demand as elaborated above, rather than payor coverage.

Annovera has gotten rapid coverage after launch. However, it will likely face coverage challenge once payor realised it is not getting a new birth control class status (FDA had updated their site in February 2020 and no new class of birth control was added). Without this status, it is hard to imagine payors like CVS and OptumRX continuing to cover Annovera with zero co-pay given Annovera will not be covered under the Affordable Care Act ("ACA") in non-mandatory states (70% of the market). This is especially so given the cost-conscious market dynamic and availability of generic Nuvaring in that vaginal ring class of contraception.

Net realisable revenue per script will likely trend down as payors roll back on their non-mandatory zero co-pay coverage and the company starts relying on couponing. The biggest issue will be a significant attrition rate and much lower customer acquisition rate. When there are $0 options available, few consumers will go for a $60 option i.e. Annovera.

Further, in some of the biggest mandatory $0 co-pay states like Califonia and New York, unrestricted coverage remained relatively low, below 60%. This is likely a loophole that payors are using to restrict prescription of Annovera as prescribers prefer to avoid the paperwork required for prior authorisation.

Total Change in RTM Strategy

Chart 3: Imvexxy and Bijuva monthly script trend since launch till Dec-19

Source: Company's data and Symphony data from Bloomberg

Burning cash to build market share has been a tried and tested strategy seen in companies like Netflix. The end goal of which is to reach a substantial volume to cover fixed costs, i.e. production costs for the case of Netflix. The company employed a similar strategy, with the fixed costs here being the distribution costs.

In Q4 2019, the company scaled back the aggressive coupon strategy, likely to meet the TPG's net revenue covenant to draw down the additional $50 million. This has led to a sharp drop in script count for Imvexxy (as seen in Chart 3) and likely hampered plans to lower distribution costs. The company has aimed to hit 3-5% cut in distribution costs by year-end, which seems ambitious given volume is now driven solely by marketing push.

Also, payor challenge will cause further pressure to volume, in particular for Imvexxy. And with the potential of significant volume being a long way out, distributors will be unlikely to budge on their rates. In the near term, the company will have limited negotiating room on the high distribution rates.

High Probability of Default

Table 2: Income and Cashflow projection

Source: Author's estimate (used rough cash-based numbers for FY19)

The unprecedented COVID-19 situation has led management to suspend guidance of $90-110 million and undergo deep cost cuts of $30 million with $10 million being marketing costs for Imvexxy and Annovera. The above projection is based on floor estimates for 2020 provided in the Cowen's conference call and includes aggressive growth projection for 2021, while also including the deep cost cuts management had announced.

Considering the sharp volume dropoff for Imvexxy in mid-April and aggressive spending cut especially for marketing, these floor estimates might even be on the optimistic end. Huge growth has also been assumed for 2021 numbers. Even then, the cash balance only remains slightly above the mandatory $60 million. This is not accounting for the need to utilise cash for working capital needs.

Another aspect to consider is the minimum consolidated net revenue target for Q4 2020 financial covenant in the TPG loan. Management has not shed light on the exact target, but it's likely based on the lower end of guidance (similar to $11 million Q4 2019 guidance). With management suspending guidance and the economic condition being unfavorable for non-essentials, it is highly likely the company might not meet its Q4 2020 revenue covenant.

Potential Way Out of Default

In order to not default, the company has to achieve 2 things: 1) raise additional capital and 2) renegotiate with TPG.

Equity raise is definitely in the cards with the company filing a prospectus for security issuance and proposing to almost double the limit for authorized shares from 350 million to 600 million. Given the historical trend of having >$100 million cash, the company will likely seek to raise at least $40 million. Fortunately, the recent patent acceptance for Annovera has led to a significant rebound in the share price, thereby limiting potential dilution to ~10%.

TPG has indicated flexibility around the terms of the loan, allowing $50 million to be drawn down at TPG's discretion when the company failed to get Annovera classified as a new contraceptive class by end December 2019. Again, TPG will likely exercise flexibility on the Q4 revenue covenant target given the unprecedented circumstance. But the issue here will be whether 2020 poor performance will cascade over to 2021 and lead to further failure to hit quarterly covenant targets. By then, TPG will likely not be as generous and will declare a default and start selling the company by parts.

Conclusion

To sum up, the company will likely be able to avoid a default in the near-term, but investors have to be prepared for at least 1 more round of dilution. With the high likelihood of an upcoming dilution, I recommend existing investors to take advantage of the recent price spike to exit.

I have sold my shares as I was disappointed in the slow sales trajectory especially for Bijuva and saw heightened growth risks for both Imvexxy and Annovera. Without further clarity on these material headwinds, I recommend potential investors to stay away.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.