New Curosurf Contract Terms are Good News for CRTX

Cornerstone Therapeutics (NASDAQ:CRTX) has renegotiated a distribution agreement with partner and majority shareholder Chiesi Farmaceutici, an Italian pharmaceutical company, which according to the company, should improve Cornerstone’s gross and operating margins. Curosurf is a lung surfactant used for the treatment of respiratory distress syndrome in premature infants, and was licensed from Chiesi in 2009. In an 8-K filed after the close on Thursday, Cornerstone, a diversified specialty pharmaceutical focused on the hospital segment, reported that its Curosurf distribution agreement with Chiesi has been extended an additional five years and will last through 2024. Additionally, the amendment provides “certain modifications to the financial terms of the Distribution Agreement, including supply price and commercial incentives.” Not only will Cornerstone see better economics following the changes, but the improving margins signal that Chiesi, which has been increasing an already substantial stake in Cornerstone, could ultimately buy the entire company at some point in the future.

Growing majority stake and improving margins suggest upside in CRTX. Chiesi is Cornerstone’s majority stockholder and currently owns approximately 65% of the company. In fact, Chiesi increased its ownership in the company by another 5% in June of this year, an ongoing trend since the firm originally took a 51% stake in 2009. Cornerstone entered a term loan facility with Chiesi this June for $90m in which Chiesi’s CRTX ownership increased to 65% of the outstanding shares. While the companies did not disclose the precise changes to Curosurf margins on Thursday, the distribution changes will allow Cornerstone to generate better profits on sales of the surfactant. And given Chiesi’s large ownership stake in Cornerstone, increasing incrementally since 2009, the maneuver is consistent with the company wanting to get behind CRTX to improve the valuation of this asset. Curosurf represents about 40% of CRTX’s sales and only has a 35% gross margin, creating a significant drag on profitability. Any improvement in the margin for this product will create bottom line leverage for CRTX, indicating that the shares should strengthen on Friday. The company’s corporate gross margin of 65% is poised to improve, and we look forward to more details on the company’s earnings call next year to better understand the new leverage. Expect shares of CRTX to trade up on Friday given the news, particularly with Chiesi’s clear signal that it wants to improve value of the stock.