Home-Based Dermatology Treatments Will Drive Long-Term Upside For This Pediatric Infection Specialist

Catalysts

About Pelthos Therapeutics

Pelthos Therapeutics develops and commercializes innovative topical treatments for pediatric and dermatologic infections, anchored by its first in class at home therapy ZELSUVMI and the recently acquired XEPI.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of the first and only FDA approved at home prescription therapy for molluscum, combined with strong physician and caregiver preference for convenient home based treatments, supports sustained prescription growth and expanding net revenue.
• Growing recognition of the burden of molluscum in children and increasing diagnosis and treatment rates in pediatric and dermatology settings should enlarge the treated market, driving higher top line revenue and improved operating leverage.
• Expansion of the sales force into currently uncovered high volume metropolitan markets, without materially increasing fixed infrastructure, is likely to accelerate prescription momentum and enhance earnings power as sales productivity scales.
• Leveraging a single commercial platform across complementary pediatric infection brands, ZELSUVMI and XEPI, should lower per product selling costs, support healthier net margins and improve the path to cash flow breakeven.
• Transition from stepped up merger inventory to normalized in house API manufacturing, combined with durable patent and trade secret protection into the mid to late 2030s, is expected to reduce cost of goods and support expanding gross margin and earnings over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Pelthos Therapeutics's revenue will grow by 190.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -318.4% today to 20.6% in 3 years time.
• Analysts expect earnings to reach $37.3 million (and earnings per share of $3.85) by about December 2028, up from $-23.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the US Biotechs industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• High current net losses and the need to scale from $7.1 million in quarterly net product revenue to an annual gross revenue run rate in excess of $50 million may prove optimistic if prescription growth slows as the launch matures. This would directly pressure revenue growth and delay the path to positive earnings and cash flow.
• The strategy relies heavily on payer support, favorable prior authorization trends and Medicaid formulary wins for a high wholesale acquisition cost of $1,950 per unit. Any shift to tougher reimbursement terms, higher gross to net discounts or more restrictive access for pediatric acute treatments could compress net pricing and reduce net margins.
• Management guidance assumes that normalized cost of goods will be a fraction of current levels once stepped up merger inventory and API are consumed. However, if manufacturing efficiencies, input costs or royalty obligations do not improve as expected, gross margins may remain weaker than projected and weigh on future earnings.
• The expansion from 50 to 64 sales representatives and the planned relaunch of XEPI require sustained prescription momentum and effective cross selling. If these investments fail to generate sufficient incremental volume in a non seasonal, underdiagnosed market, selling and general expenses could rise faster than sales, limiting operating leverage and profitability.
• Long term dependence on a single lead product in a pediatric dermatology niche, despite patent protection to at least 2035 and possibly 2037, leaves Pelthos exposed to potential new competitors, evolving treatment patterns or reduced concern about molluscum among caregivers. Any of these factors could cap peak penetration and reduce long run revenue and earnings versus expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $59.8 for Pelthos Therapeutics based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $181.7 million, earnings will come to $37.3 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $22.25, the analyst price target of $59.8 is 62.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.