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Pernix Reports Loss in 1Q

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Pernix Therapeutics Holdings, Inc’s first quarter 2013 adjusted loss (including stock-based compensation expense) of 6 cents per share, compared unfavorably to the Zacks Consensus Estimate of earnings of 2 cents per share.

On a reported basis, net loss was 23 cents per share compared to earnings of 4 cents in the year-ago quarter.

Revenues in the first quarter of 2013 came in at $22.1 million, up 52.4% from the year-ago quarter but missed the Zacks Consensus Estimate of $28 million.

Quarter In Detail

The year-over-year growth in revenues was primarily due to recent acquisitions. We note that Pernix completed the acquisitions of Cypress Pharmaceuticals (a privately-owned generic pharmaceutical company) and Hawthorn Pharmaceuticals (a privately-owned branded pharmaceutical company) at the end of Dec 2012.

In early Mar 2013, Pernix completed the acquisition of Somaxon Pharmaceuticals, thereby adding insomnia drug Silenor in its portfolio.

However, the increase in revenues due to recent acquisitions was partially offset by a decrease in the sales of legacy cough and cold products. Even though the wholesalers and retailers worked through their inventories, a stronger-than-normal flu season which ended earlier than Pernix expected, reduced the demand for additional stocking in the first quarter of 2013, thereby impacting sales.

Revenues in the reported quarter were also negatively impacted by an increase in sales allowances on branded and generic products related to higher government rebates, increased returns allowances due to changes in Medicaid coverage impacting demand. Further, rebates, competitive pressure and other pricing issues also impacted the top line among others.

Gross margin declined to 57% in the reported quarter from 68% in the year-ago quarter. The gross margin was negatively impacted by sale of lower-margin product sales.

Selling, general and administrative (SG&A) expenses in the first quarter of 2013 increased 106.2% from the year-ago quarter to $14.1 million. The increase was primarily due to higher  employee costs and other costs related to acquisitions along with expenses related to the development of the over the counter (OTC) cough and cold candidate Dr. Cocoa and expenses related to progress made in ongoing research and development projects, which were acquired through acquisitions.

2013 Outlook Slashed

Pernix slashed its guidance for 2013 owing to a weak first quarter. Pernix now projects revenues between $90 million and $100 million in 2013, down from the previous guidance range of $125 million – $135 million. The projected revenue range includes contribution from recent acquisitions of Cypress Pharmaceuticals, Hawthorn Pharmaceuticals, and Somaxon Pharmaceuticals.

The Zacks Consensus Estimate of $121 million for 2013 is well ahead of the company’s guidance range.

Pipeline Update

Pernix expects to launch Dr. Cocoa, an OTC chocolate flavored cough and cold offering, in 2013. The distribution of Dr. Cocoa has been approved by major retail pharmacy chains such as Walgreens and CVS Caremark Corp. (CVS - Free Report) among others. Additionally, Pernix is in the process of relaunching Silenor and begin the development of Silenor as an OTC product.

Pernix also plans to initiate phase III trials for its pediatric product in development, which as per the company represents a potential market opportunity of over $100 million.

Other Developments

Concurrent with the earnings release, Pernix announced a change in top management. Mike Pearce will replace Cooper Collins as the company’s President and Chief Operating Officer.

Our Take

We were disappointed by Pernix’s performance in the first quarter. Nevertheless, we expect investor focus to remain on Silenor’s relaunch as an OTC product and integration of the above mentioned acquisitions.

Pernix currently carries a Zacks Rank #4 (Sell). Right now, Santarus looks attractive with a Zacks Rank #1 (Strong Buy).

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