Impressive data means SANET-ep trial stopped early

Lighthouse | 14 June 2019

Share this note

Chi-Med has announced that the China Phase III SANET-ep study of surufatinib in advanced extra-pancreatic neuroendocrine tumours (NET) has been terminated early as it has already met its primary endpoint of progression free survival (PFS) at the planned interim stage analysis.
The Independent Data Monitoring Committee (IDMC) determined that the trial has already met the pre-defined primary endpoint and so the study result is viewed as achieved. Full data will be presented at a future scientific conference.
Chi-Med intends to schedule a pre-NDA (New Drug Application) with the NMPA (China National Medical Products Administration) to discuss the process for the NDA submission. As a precedent, the fruquintinib NDA was submitted within 4 months following pivotal top line data and then it took about 15 months for approval to be granted.
The earlier nature of SANET-ep data suggests some extra time may be needed to prepare the NDA submission. However, given that surufatinib will be manufactured at the same GMP certified facility as fruquintinib, we might expect a more rapid CMC review as a number of components are already validated. Consequently, we suspect that the 15 month post-NDA approval timeline may be shorter.
Clearly, the impressive outcome of the SANET-ep trial means that our forecast timelines for approval and marketing will be accelerated. We will review our model, and valuation, but a rough assessment suggests a benefit of c 12 months compared to our previous expectations.

Trinity Delta view: The encouraging result of SANET-ep suggest that surufatinib (previously known as HMPL-012 or sulfatinib) will be the first approved and marketed product where Chi-Med holds worldwide rights. Our base case scenario was that the trial would run to completion (enrolment completing by year-end and top line data in mid-2020), hence our current Chi-Med valuation of $4.742bn ($35.57/ADS) or £3.648bn (£5.47/share) will be reviewed following this positive outcome. We also highlight that we anticipate additional clinical, regulatory, and commercial catalysts during 2019 and 2020 that will unlock further value.

Lighthouse

14 June 2019


Price (US ADS) (UK share)	$27.04 418p
Market Cap	$3.61bn £2.79bn
Exchanges	NASDAQ AIM London
Sector	Healthcare
Company Codes	HCM HCM.L

Corporate client	Yes

Company description

Hutchison China MediTech is a Hong Kong headquartered biopharma with an established Commercial Platform in China, and a diverse pipeline of first-in-class/best-in-class selective oral tyrosine kinase inhibitors (Innovation Platform). Its pipeline, discovered in-house, is in development for the China and global oncology markets.

Analysts

Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Disclaimer

Trinity Delta Research Limited (“TDRL”; firm reference number: 725161), which trades as Trinity Delta, is an appointed representative of Equity Development Limited (“ED”). The contents of this report, which has been prepared by and is the sole responsibility of TDRL, have been reviewed, but not independently verified, by ED which is authorised and regulated by the FCA, and whose reference number is 185325.

ED is acting for TDRL and not for any other person and will not be responsible for providing the protections provided to clients of TDRL nor for advising any other person in connection with the contents of this report and, except to the extent required by applicable law, including the rules of the FCA, owes no duty of care to any other such person. No reliance may be placed on ED for advice or recommendations with respect to the contents of this report and, to the extent it may do so under applicable law, ED makes no representation or warranty to the persons reading this report with regards to the information contained in it.

In the preparation of this report TDRL has used publically available sources and taken reasonable efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee or warranty as to the accuracy or completeness of the information or opinions contained herein, nor to provide updates should fresh information become available or opinions change.

Any person who is not a relevant person under section of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom should not act or rely on this document or any of its contents. Research on its client companies produced by TDRL is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. The report should be considered a marketing communication for purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. TDRL does not hold any positions in any of the companies mentioned in the report, although directors, employees or consultants of TDRL may hold positions in the companies mentioned. TDRL does impose restrictions on personal dealings. TDRL might also provide services to companies mentioned or solicit business from them.

This report is being provided to relevant persons to provide background information about the subject matter of the note. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information that we provide is not intended to be, and should not in any manner whatsoever be, construed as personalised advice. Self-certification by investors can be completed free of charge at www.fisma.org. TDRL, its affiliates, officers, directors and employees, and ED will not be liable for any loss or damage arising from any use of this document, to the maximum extent that the law permits.

Scancell

Vulpes investment brings £3.88m in new funds

Lighthouse | 13 June 2019

Download PDF

Share this note

Scancell has announced that it has raised £3.877m (gross) through the issue of 77.6m new shares to Vulpes Life Sciences Fund at a price of 5p per share. The new investment results in Vulpes holding 16.67% of the enlarged share capital, overtaking Calculus Capital as the largest shareholder.
Vulpes Investment Management has a track record of identifying under-appreciated life sciences companies and then taking sizeable stakes. Importantly, they are supportive long-term holders. Martin Diggle, a founder of Vulpes in 2011, will join the Scancell board as a non-executive director.
The funds help extend Scancell’s cash runway, but it should be noted that the cash burn is expected to rise as it enters the more expensive clinical stages; our forecast is detailed in our Initiation note of November 2018.
It is worth highlighting that Scancell has two promising technology platforms for therapeutic vaccines that have the potential to treat many cancers, either as monotherapy or in combination with checkpoint inhibitors.
We feel that the timely development of these programmes has been hindered historically by financial issues. We view the Vulpes investment as a comforting sign that funding concerns appear to be being overcome.

Trinity Delta view: The sizeable stake by a new investor is welcomed and serves as useful validation of the investment thesis. Vulpes’s track record of its timings of investment suggests that the shares are materially under-valued, which helps corroborate our valuation model. To reiterate, we value Scancell based on a rNPV and sum-of-the-parts methodology, with conservative assumptions. Based on our model we continue to value Scancell at £82.0m, previously equivalent to 21.1p a share, which accounting for the new shares issued now drops to 17.2p.

Lighthouse

13 June 2019


Price	5.35p
Market Cap	£20.8m
Primary exchange	AIM London
Sector	Healthcare
Company Code	SCLP

Corporate client	Yes

Company description

Scancell is a clinical-stage immuno-oncology specialist that is developing two innovative and flexible therapeutic vaccine platforms. ImmunoBody and Moditope induce high avidity cytotoxic CD8 and CD4 responses, respectively, with the potential to treat various cancers.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Disclaimer

BerGenBio

ASCO: more supportive data for bemcentinib

Update | 5 June 2019

Download PDF

Share this note

BerGenBio has presented further early Phase II proof-of-concept data at ASCO, which support bemcentinib’s potential in NSCLC and AML as a part of a combination regimen. Data in NSCLC shows that bemcentinib enhances pembrolizumab activity in patients with AXL-expressing tumours, particularly in PD-L1-negative tumours which do not normally respond to PD-1/PD-L1 monotherapy. In AML, combination with low dose chemotherapy in poor prognosis patients improves treatment outcomes. Safety data indicate that bemcentinib in combination is well-tolerated. Larger randomised Phase II studies are in planning; detail on these and additional clinical data is expected in H219. Ahead of this, we value BerGenBio at NOK3.14bn (NOK57.45/share).

Year-end: December 31	2017	2018	2019E	2020E
Sales (NOKm)	0.0	2.3	0.0	0.0
Adj. PBT (NOKm)	(182.2)	(197.7)	(240.2)	(250.9)
Net Income (NOKm)	(182.2)	(197.7)	(240.2)	(250.9)
Adj. EPS (NOK)	(4.0)	(3.6)	(4.4)	(4.6)
Cash (NOKm)	370.4	360.4	114.8	66.2*
EBITDA (NOKm)	(183.5)	(194.3)	(239.3)	(250.7)

Source: Trinity Delta; Note: *2020E cash includes a NOK200m capital raise. Adjusted numbers exclude exceptionals.

Continued durable response and survival data in NSCLC The Phase II bemcentinib + pembrolizumab NSCLC study (BGBC008) continues to show promise, especially in patients with AXL positive tumours (AXL+), including those with low or no PD-L1 expression. At data cut off, 35/46 pts were evaluable; 58% (19) were AXL+ and achieved an objective response rate of 40% irrespective of PD-L1 status, consistent with data from the first 10 pts (see February Outlook). 92% (32) patients had low or non-PD-L1 expressing tumours. ORR for all patients was 29%. Median overall survival of 12.2 months (for stage 1) compares favourably with 9.3 month mOS in 2L non-squamous NSCLC reported in KEYNOTE-001 Phase I pembro monotherapy.
Bemcentinib enhances chemo in poor prognosis AML BGBC003 data (low dose chemotherapy + bemcentinib) showed improved efficacy and survival duration in elderly AML patients ineligible for intensive chemotherapy. In the LDAC (low dose cytarabine) arm, ORR was 46% (6/13) – significantly higher than historic data for cytarabine monotherapy – with a 25% ORR (3/12) for the decitabine arm. Relapse free survival data is immature but reported as 6.2 and 5 months respectively.
Randomised Phase II trials in planning Detail on bemcentinib’s randomised Phase II programme is as yet undisclosed. We expect a focus on NSCLC and AML/MDS, given the promise shown to date, with trials designed to be potentially pivotal to support FDA/EMA filing and expedite the route to market. Confirmation of design of a PD-1/PD-L1 + bemcentinib NSCLC trial is pending H219 results from Cohort B (previously treated advanced NSCLC which has progressed on anti-PD(L)1 therapy).
NOK57.45/share (NOK3.14bn or $370m) valuation Our valuation suggests the potential of targeting AXL remains underappreciated, despite increasing recognition as an important oncology target. We believe that Phase II data from several trials of bemcentinib (the leading selective small molecule AXL inhibitor in development) over the coming year will further highlight its potential and catalyse the shares.

Update

5 June 2019


Price	NOK20.0
Market Cap	NOK1.099bn
Enterprise Value	NOK792m
Shares in issue	54.9m
12-month range	NOK17.44-45.50
Free float	60.6%
Primary exchange	Oslo
Other exchanges	N/A
Sector	Healthcare
Company Code	BGBIO

Corporate client	Yes

Company description

BerGenBio is a clinical-stage, biopharmaceutical company based in Bergen, Norway and Oxford, UK. It is developing innovative therapies for aggressive cancers by way of inhibiting the AXL signalling pathway. The lead oncology compound, bemcentinib, is in multiple Phase II trials.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Exhibit 1: Summary of financials

Source: Company, Trinity Delta Note: The short-term debt in FY20 is indicative of the company’s funding requirement

Disclaimer

Mereo BioPharma

Encouraging interim BPS-804 data in OI

Update | 31 May 2019

Download PDF

Share this note

Mereo BioPharma has reported encouraging interim results from BPS-804’s Phase IIb trial in osteogenesis imperfecta (OI). Interim data from the open label arm of the 112-patient ASTEROID study showed a 1.4% improvement over baseline in the primary endpoint at three months and a 3.2% improvement at six months. The secondary endpoint showed a 3.5% improvement at six months. Clearly the sample size in this study arm is small (11 and 12 patients), but these data suggest the 12 month results (expected in Q419) should show further improvement. Importantly, no cardiac safety signals were noted. We value Mereo BioPharma at 506p/share or $25.59/ADS.

Year-end: December 31	2017	2018	2019E	2020E
Sales (£m)	0.0	0.0	0.0	0.0
Adj. PBT (£m)	(43.3)	(35.0)	(41.9)	(29.2
Net Income (£m)	(38.8)	(32.0)	(38.6)	(28.2
Adj. EPS (p)	(51.9)	(42.2)	(41.2)	(27.3)
Cash (£m)	52.5	27.5	23.2	6.1*
EBITDA (£m)	(45.3)	(35.2)	(42.4)	(29.6)

Source: Trinity Delta Note: Adjusted numbers exclude share-based payments and exceptionals. *The cash position in FY20 assumes £25m is raised from equity, debt or partnering of assets.

ASTEROID study yields promising results The interim data for BPS-804 from the open-label arm of the Phase IIb study in osteogenesis imperfecta (OI) has shown promising results. The 112-patient trial has three double blinded dose-ranging arms and one open-label arm. The three month data showed a 1.4% improvement in bone mineral density (BMD) using the primary endpoint of changes in Tr vBMD, which increased to a 3.2% improvement at six months. A 3.5% improvement was seen in the secondary endpoint using DXA measurements at six months.
Data suggest clinical improvement likely The small sample size (11 and 12 patients) means significance would not be shown; but these encouraging results are expected to improve further as the study matures. Indications are that top line data from the full study, expected in Q419, will demonstrate clinically meaningful results. Importantly, side-effects were minor, primarily headache, and no cardiovascular safety signals were seen. Current treatment options for OI, such as alendronate, are recognised as being sub-optimal and the medical need for novel agents is clear.
BPS-804 will be self-commercialised BPS-804 is one of the two Orphan Drug programmes Mereo BioPharma is developing that it intends to commercialise itself; the other is MPH-966 (alvelestat) for α1-antitrypsin deficiency. OI is a debilitating disease for which there is currently no FDA or EMA approved treatment. OI affects between 20,000 and 50,000 people in the US and between 32,000 and 51,000 people in Europe. The characteristics of this market mean that it should be easily addressed through a small, well-targeted sales team.
rNPV valuation of 506p/share We value Mereo BioPharma using a risk-adjusted DCF model of its four leading assets at £541m ($704m), equivalent to 506p/share or $25.59/ADS (fully diluted). For context, we attribute a value of 345p a share, or $17.26 per ADR, to BPS-804. As previously indicated, there are multiple significant catalysts due in 2019, which could lead to major re-ratings of the shares.

Update

31 May 2019


Price (UK share) (US ADS)	77p $4.48
Market Cap	£73.9m $85.9m
Enterprise Value	£33.3m $37.0m
Shares in issue (shares) (ADS)	96.0m 19.2m
12 month range	77.5-320p $4.20-$8.48
Free float	68.9%
Exchanges	AIM London NASDAQ
Sector	Healthcare
Company Code	MPH.L MREO

Corporate client	Yes

Company description

Mereo BioPharma develops and commercialises innovative therapeutics addressing rare diseases. It also has specialty pharmaceutical products that it will partner. The assets are acquired or licensed in at clinical stages from large pharmaceutical companies. The portfolio consists of six compounds that are in clinical development.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

ASTEROID Phase IIb study on track

BPS-804 (setrusumab) is a fully humanised monoclonal antibody targeting sclerostin (SOST); a protein secreted by the osteocyte cell that plays a pivotal role in bone metabolism. It is being developed by Mereo BioPharma for the orphan disease osteogenesis imperfecta (OI), which is better known as brittle bone disease. BPS-804 is one of the two Orphan Drug programmes that Mereo BioPharma intends to commercialise itself; the other being MPH-966 (alvelestat), an oral small molecule in development for α₁-antitrypsin deficiency (AATD).

OI is characterised by different genotypes with varying degrees of skeletal fragility. Most types (usually classified into eight categories) are caused by disruption or mutations of one or both of two genes (COL1A1 or COL1A2) that carry instructions for the production of type 1 collagen. The hallmark of OI is bone fractures that occur with only minimal to moderate trauma. Type I is the least severe form of the disease and is associated with comparatively fewer fractures to other categories of OI, whereas Type II is the most severe and causes babies to be born with multiple fractures and die within a few weeks of birth. Breaks can occur in any bone, but lower limb breakage (often the femur) is the most common. In general, the earlier the fractures occur in life, the more severe the disease is.

ASTEROID is a 112 adult patient, double-blind Phase IIb clinical trial being performed in the US, Europe and Canada. Patients are Type I, III, and IV with the defect in COL1A1/2 gene confirmed by genetic testing; these three types account for c 80% of OI patients. Of the 112 patients enrolled, 69 have Type I OI, 29 have Type IV OI, and 14 have Type III OI. Recruitment, despite complex logistics (eg standardising transport for such delicate patients) to 27 specialist sites, completed on track in October 2018. The study design includes three double-blinded, active arms, evaluating differing intravenous doses (low, mid, and high), and one open-label arm at the top dose. The open-label arm was initially the placebo arm before the study was amended in August 2018 following consultation with regulators, investigators and patient groups.

The primary endpoint, measured at twelve months, is changes in trabecular volumetric bone mineral density (Tr vBMD) of the radius (at the wrist) measured by high resolution peripheral quantitative CT (HRpQCT) and changes in bone strength on finite element analysis (FEA). Secondary endpoints include: Tr vBMD measured by HRpQCT at six months; BMD measured by traditional two-dimensional dual-energy X-ray absorptiometry (DXA); additional measures of bone parameters on HRpQCT; bone turnover markers and quality of life scores.

The open-label arm posted interim 13 and 26-week data showing promising improvements in both primary and secondary endpoints, with patients of all three major phenotypes represented. Twelve patients were measured at three months and 11 at six months, with a mean increase of 1.4% in Tr vBMD at the radius at three months and a 3.2% increase at six months. Six month data for areal BMD at the lumbar spine using DXA measurements were available for twelve patients and these showed a 3.5% increase over baseline. Importantly, BPS-804 had a clean side-effect profile with no cardiovascular safety signals.

The headline results from the blinded dose ranging part of the study and the 12 month data from the open label arm are expected in Q419.

Exhibit 1: Summary of financials

Source: Company, Trinity Delta; Notes: Our estimates exclude the costs associated with the pivotal Phase III paediatric study with BPS-804, because the timing of the trial is yet to be decided. We include in FY20 long-term debt (other financing cash flow) of £25m, which is indicative of our estimate of the company’s capital requirement; this could be achieved through an equity raise, debt of proceeds from partnering non-rare disease assets.

Disclaimer

Hutchison China MediTech

Timing is right for a Hong Kong debut

Update | 30 May 2019

Download PDF

Share this note

Approval of EGM resolutions paves the way for the IPO of Hutchison China MediTech (Chi-Med) on the Hong Kong Stock Exchange (SEHK) in the coming months. This IPO should enhance Chi-Med’s access to capital, broaden its shareholder base, further raise its profile in its home market, and, importantly, improve liquidity. Liquidity will be further boosted by an associated global offering (size and structure are not yet disclosed), the secondary placement of shares by majority shareholder CK Hutchison Holdings Ltd, and a share split effective May 30^th. Each ordinary AIM share is being divided into 10 new shares; an adjustment to the ADS ratio ensures there is no effect on the NASDAQ trading price. Accounting for this share split, our valuation remains $35.57/ADS ($4.74bn) but is now £5.47/share (£3.65bn) vs £54.72/share previously.

Year-end: December 31	2017	2018	2019E	2020E
Sales (US$m)	241.2	214.1	168.6	207.6
Adj. PBT (US$m)	(53.5)	(86.7)	(205.6)	(202.0)
Net Income (US$m)	(23.0)	(71.3)	(170.6)	(164.4)
Earnings per ADS (US$)	(0.22)	(0.57)	(1.31)	(1.26)
Cash (US$m)	358.3	301.0	285.9*	233.8
Adj. EBITDA (US$m)	(17.2)	(69.7)	(163.9)	(159.5)

Source: Trinity Delta Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments, Adjusted EBITDA includes equity in earnings of equity investees. *2019E cash figure includes assumed raise of $250m.

New capital to support pipeline investment Chi-Med’s Global Innovation and China Oncology pipelines are maturing, with eight programmes under evaluation in over 30 clinical trials. The company is raising funds to support investment into advancing its pipeline but has so far given no indication of the potential size and structure of the proposed primary capital offering. Based on expected cash burn over the next two years, and guidance for FY19 R&D spend of $160-200m, we estimate Chi-Med would look to raise $200-250m.
Majority holder deconsolidating, but still committed Reducing CK Hutchison’s holding from 60.2% to <50%, via dilution and a secondary placement, will give Chi-Med more flexibility to pursue its own strategic goals and maximise its potential. The secondary placing of, we calculate c$250m, will also improve its liquidity and means it will no longer be consolidated in CK Hutchison’s financial accounts.
Various approaches to boost liquidity In addition to the proposed IPO, global offering, and secondary share sale by CK Hutchison, Chi-Med shareholders have approved a share split. Effective May 30^th, each AIM share is subject to a one-for-ten share split; with the ADS ratio adjusted to 1 ADS = 5 shares (from 1 ADS = 0.5 share) to ensure the ADS value is unaffected. This should make Chi-Med shares more accessible to the spectrum of investors and reduce the bid/offer spread.
Updated £5.47/share valuation; per ADS remains $35.57/ADS Our Chi-Med valuation employs a DCF-based SOTP approach that includes a detailed rNPV of the clinical pipeline. Our current pre-money valuation is $4.74bn ($35.57/ADS) or £3.65bn (with the share split this is now equivalent to £5.47/share). We anticipate clinical, regulatory, and commercial catalysts that will unlock further value.

Update

30 May 2019


Price (US ADS) (UK share)	$28.46 4.52p
Market Cap	$3.79bn £3.01bn
Enterprise Value	$3.49bn £2.78bn
Shares in issue (ADS) (shares)	133.3m 666.6m
12-month range	$20.83-$39.68 318p-567p
Free float	32%
Exchanges	NASDAQ AIM
Sector	Healthcare
Company Code	HCM HCM.L

Corporate client	Yes

Company description

Analysts

Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Exhibit 1: Summary of financials

Source: Company, Trinity Delta Note: Adjusted numbers exclude exceptionals. * Forecast EPS for 2019 and 2020 adjusted for one-to-ten ordinary share split, with new ADS ratio of 1:5 shares. Our estimate of $250m proceeds from the proposed equity raise are shown as short-term debt in FY19e, until transaction size, structure, and terms are confirmed.

Disclaimer

Nexstim

Getting back on the front foot

Update | 21 May 2019

Download PDF

Share this note

Nexstim has successfully secured funding to enable the commercialisation of its proprietary Navigated Brain Therapy (NBT) platform in MDD (major depressive disorder). The near-term challenges now shift to maximising the uptake of NBT in specialist centres in North America and Europe. Initial indications are encouraging, with notable support from major centres and key opinion leaders. Our valuation and financial models have been updated to reflect the capital raise. We value Nexstim at €18.8m or €0.53 per share (€0.40 diluted), against €35.5m, or €1.00/share (€0.73/share diluted) were the remaining financial risks removed.

Year-end: December 31	2017	2018	2019E	2020E
Sales (€m)	2.6	2.7	4.0	6.1
PBT (€m)	(7.3)	(6.2)	(7.0)	(6.4)
Net Income (€m)	(7.3)	(6.2)	(7.0)	(6.4)
EPS (€)	(2.77)	(1.93)	(0.20)	(0.13)
Cash* (€m)	8.5	7.2	4.0	15.7
EBITDA (€m)	(5.3)	(5.9)	(6.0)	(5.1)

Source: Trinity Delta. Note: *Our cash forecast assumes that all the warrants issued with the rights issue are exercised at €0.115 raising €1.8m in Q419 and Nexstim raises an additional €10m in FY20

Fund raise removes the major uncertainty The recent rights issue has raised €3.1m (net), with 31.2m new shares issued. Warrants for one share for each two shares subscribed for were also issued, exchangeable between 22 October and 4 November 2019 at the greater of a 25% discount to prevailing price or €0.115. The cash position is now estimated to be c. €7.2m. We calculate the company will be able to operate into Q120, or into Q220 if all the warrants are exercised in Q419.
Putting the elements in place Although NBS (pre-surgical mapping) continues to generate sales, it is NBT’s use in Major Depressive Disorder (MDD) that is set to be the revenue driver. Transcranial magnetic stimulation is increasingly recognised as a therapy for c. 6m MDD patients, and NBT is the only system that can deliver accurate and reproducible treatment. The data on patient outcomes and economic benefits are compelling and the task is to raise clinical awareness of the platform’s value. An impressive Scientific Advisory Board has been assembled and well-targeted marketing and distribution plans are being executed.
Financial concerns remain an overhang We believe that evidence of gaining traction in the key US market will be the major determinant of Nexstim’s success. But, understandably, the likely need for additional funding ahead of forecast break-even remains an issue. We expect that demonstrable effective commercialisation of NBT in MDD will be employed to support a further rights issue, albeit at more favourable terms. The possible divestment of the NBS pre-surgical mapping unit remains on the cards, but we have not factored this into our expectations.
Valuation updated for fund raise We have updated our DCF model for the outcome of the rights issue and the reduced financial risks now present. We value Nexstim at €18.8m or €0.53/share currently or €0.40/share diluted (in the money options only). This compares to €10.5m or €3.23/share diluted previously.

Update

21 May 2019


Price	€0.09
Market Cap	€3.3m
Enterprise Value	€4.3m
Shares in issue	35.4m
12 month range	€0.07-1.23
Free float	100%
Primary exchange	Helsinki
Other exchanges	Stockholm
Sector	Healthcare
Company Codes	NXTMH/NXTMS

Corporate client	Yes

Company description

Nexstim is a targeted neuro-modulation company that has developed a proprietary navigated rTMS platform for use in diagnostics (NBS) and therapeutics (NBT). NBS is used in planning brain surgery while NBT is focused on depression and chronic pain. FDA approval for depression was given in 2017, and the focus is on commercial roll out in the US, Europe and Asia.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5041

Nexstim: now focussed on commercialisation

Nexstim’s management has successfully raised €3.1m (net) through a discounted rights issue. These funds allow the commercial strategy to be progressed to the stage where clear market traction can be demonstrated, at which point we would expect additional funds or a strategic partner to be sought. Despite the funding difficulties, significant progress has been made over the past six months in establishing the necessary infrastructure to exploit the market potential of its highly accurate TMS (Transcranial Magnetic Stimulation) system as a treatment for major depressive disease (MDD).

We have detailed Nexstim’s proprietary rTMS technology and its clinical applications in previous notes (notably Initiation July 2018), with further notes examining its use in depression and its commercial prospects (Update October 2018, Update March 2019). In summary, Nexstim’s platform is differentiated by its ability to navigate precisely, reliably, and reproducibly. Its value in pre-surgical brain mapping (NBS) is acknowledged, but it is its potential in therapeutic applications (NBT) that has most commercial appeal. It has CE Marks for clinical use in stroke, depression, and chronic pain; as well as FDA approval in pre-surgery brain mapping and major depression. The applications are shown in Exhibit 1.

Exhibit 1: Unique navigated TMS system for diagnostic and therapeutic applications

Source: Nexstim, Trinity Delta

MDD indication gaining traction in key US market

Following approval by the FDA, the NBT depression therapy system was launched in the US in May 2018. Since then six systems have been ordered and installed, with utilisations rising as treatment protocols become embedded. The US market is receptive to leasing of capital equipment and all the current NBT systems there have been placed on a pay-per-use model, which means that the majority of these revenues will be recognised as net sales through the rest of 2019 and beyond. The targeted revenue for each system, when fully employed, is $100k per annum.

In Europe the market is less developed and more varied, with a mix of private and public operators (with regional differences in the preference of leasing or capital acquisition). Currently seven systems have been installed, with the expected annual revenues lower than the US model as utilisations tend not be as well optimised. The seven includes two systems that were recently sold in Sweden, a region that has not previously employed TMS for the treatment of MDD.

The US is being addressed through a focussed direct sales team, with ten people currently addressing four key geographic areas (North East states, South East states, Texas, and California) where TMS is already established and high-volume psychiatric practices appear primed. In Europe and Asia, a mixed direct and distributor model is being deployed, with the recent Ampere Medical distribution deal for Hong Kong demonstrating progress in developing new markets.

Impressive Scientific Advisory Board in place

A Scientific Advisory Board, composed of key opinion leaders in the field of TMS, has been established. The current members are:

Professor Turo Nurmikko MD, PhD, is Professor of Pain Relief at the Walton Centre NHS Foundation Trust. He is known for his extensive research on pain relief, especially in the field of chronic neuropathic pain. He has authored over 100 scientific publications and served on editorial boards of several pain journals.
Professor Paul Fitzgerald MD, PhD, is Professor of Psychiatry and Director of the Epworth Centre for Innovation in Mental Health in Melbourne, Australia. He is also Director of Therapeutic Brain Stimulation at the Monash Alfred Psychiatry Research Centre (MAPrc).
Professor Pascual-Leone MD, PhD, is Professor of Neurology and an Associate Dean for clinical and translational research at Harvard Medical School. A world leader in TMS in cognitive neuroscience and for therapeutic applications. He uses TMS therapy to treat patients with MDD at the Berenson-Allen Center for Noninvasive Brain Stimulation, a Harvard-affiliated center within Beth Israel Deaconess Medical Center, Boston, MA.
Professor Linda Carpenter MD, is a professor of Psychiatry and Human Behavior at the Alpert Medical School of Brown University, United States. She has extensive experience in the field of TMS and is the founding Director of the Butler Hospital TMS Clinic and Neuromodulation Research Facility and has been a Director of the Clinical TMS Society since 2016.

These renowned experts will provide specialist support, advice and guidance to Nexstim as it develops its clinical applications.

Valuation and Financials

We employ a risk-adjusted DCF model to value Nexstim, forecasting cash flows for the three known likely revenue streams and then applying a development risk probability as appropriate (detailed in Exhibit 2). However, realistically, the single major consideration lies in ensuring sufficient financing is in place to properly execute the commercial plans for the MDD indication. To reflect this, we have applied a further adjustment as a financial risk (see table), which we will continue to update as the funding visibility improves. To take into account the recent capital raise, our risk-adjustment is now 50%, versus 35% previously (NB. 100% is equivalent to no significant financial risk). Obviously, assuming the appropriate funding is available, the second valuation figure should converge with the first valuation over time. Despite our conservative stance, our valuation suggests that Nexstim is undervalued at current levels.

NBT MDD is the largest element, with the “commercial” valuation being €21.8m, but reducing to €10.9m when we overlay our “financial risk” adjustment. The NBS diagnostic unit is valued at €6.2m and reduces to €3.1m after risk adjustment. Similarly, the NBT Pain indication is valued at €5.4m and €2.7m respectively. Obviously, the net cash position remains at €2.0m under both scenarios. This results in our valuation for the company being €18.8m, which is equivalent to €0.53/share, or €0.40/share diluted (based on in-the-money options and warrants). This compares to €35.5m or €1.00/share and €0.73/share diluted were the financial risk removed.

Exhibit 2: Updated DCF-based valuation of Nexstim

Source: Trinity Delta; Note: Peak sales achieved after nine years in the US and 10 years in Europe. We assume the subscription prices for the 2018 options is the weighted average of existing options, which is €5.337.

The rights issue has strengthened the balance sheet, raising €3.1m (net) with the cash position at May 2019 estimated at c. €7.2m, including the €3.756m loan from Kreos Capital. We believe this will be sufficient to maintain the marketing and selling efforts at the current levels through to Q120, and into Q220 if all the warrants from the rights issue are exercised at €0.115 in Q419. Assuming the uptake of NBT in depression does happen as planned, we would expect the improving commercial visibility would be used to support a further fund raise (at better rates) to progress to the next milestone before break-even is achieved (forecast within our model as FY22).

The next 12 months will define Nexstim’s future, with the degree of success in executing the commercial plans being the critical determinant. We believe that it will be the level of sales performance over the coming quarters will dictate the attractiveness of Nexstim’s investment case. The value of accurate navigation is well documented; however, the key question is whether clinicians are sufficiently aware of the NBT system and, if so, are they ready to adopt it. Yet, importantly, even a modest clinical adoption should result in increasing interest from other industry participants, potentially raising the prospect of material value accretion.

Exhibit 3: Summary of changes to estimates

Source: Trinity Delta

Exhibit 4: Summary of financials

Source: Nexstim, Trinity Delta Note: The accounts are produced according to Finnish GAAP. In FY19, we assume that all the warrants associated with the May 2019 capital raise are exercised in November at a strike price of €0.115 and the short-term debt in FY20 is indicative of our view of the company’s funding requirement. Our sales forecasts do not include any contribution from indications that are yet to be approved. Historic EPS, DPS and Average no. of shares have been adjusted to reflect the 30:1 share consolidation in December 2018.

Disclaimer

Scancell

SCIB2 to use new nanoparticle formulation

Lighthouse | 20 May 2019

Download PDF

Share this note

Scancell’s second ImmunoBody, SCIB2, will use a new lipid nanoparticle formulation and will be delivered via a standard injection to patients in the planned Phase I/II study, rather than using electroporation.
A known lipid carrier is used in the formulation, with the nanoparticles optimised to deliver SCIB2 (a DNA vaccine) efficiently to immune cells without degradation of the DNA.
Based on preclinical studies, Scancell believes the delivery of the ImmunoBody to the immune cells using the nanoparticle formulation should be at least comparable to, and could be better than, using electroporation.
SCIB2 is being developed in a collaboration between Scancell and Cancer Research UK (CRUK), and is designed to induce an immune response against the tumour-associated antigen, NY-ESO-1, which is expressed in many different tumours (including sarcomas, neuroblastomas, myeloma, NSCLC, prostate and breast cancers).
CRUK is responsible for funding and conducting the Phase I/II clinical trial with SCIB2 in NSCLC. At the end of the study, Scancell will have the option (no terms disclosed) to acquire the data to support the further development of SCIB2. No timings have been disclosed for the Phase I/II study.

Trinity Delta view: The use of a nanoparticle formulation, which will enable delivery via standard injection procedures, should facilitate regulatory interactions and recruitment into clinical trials, compared to electroporation delivery. On top of this, it removes a potential barrier to adoption, should SCIB2 reach the market, as no special delivery equipment will be required to deliver the therapy. It is also reassuring that in preclinical studies delivery via the nanoparticle formulation can generate an immune response at least comparable to that produced when using a validated electroporation system.

If the nanoparticle formulation approach proves to generate strong immune responses in the Phase I/II study, it is possible that the SCIB1 programme could be transitioned to use the same formulation in the future.

We value Scancell at £82.0m, equivalent to 21.1p a share.

Lighthouse

20 May 2019


Price	4.7p
Market Cap	£18.2m
Primary exchange	AIM London
Sector	Healthcare
Company Code	SCLP

Corporate client	Yes

Company description

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Disclaimer

Mereo BioPharma

Focus shifts back to imminent data

Update | 8 May 2019

Download PDF

Share this note

Mereo BioPharma has successfully completed the merger with OncoMed, and now the focus shifts firmly back to the pipeline. Initial data from the Phase II study in osteogenesis imperfecta (OI) with its leading rare disease asset, BPS-804, are due in the coming weeks, and top-line data for the full trial in Q419. The Phase II study with MPH-966 in alpha-1 anti-trypsin deficiency (AATD) is due to report top-line data around the year-end. At the same time, Mereo has strengthened the out-licensing packages of non-rare disease assets; notably the outline for a Phase III programme with BCT-197 has been agreed with the FDA, thereby raising the likelihood of BCT-197 being partnered by year-end. We value Mereo at 506p/share or $25.59/ADS.

Year-end: December 31	2017	2018	2019E	2020E
Sales (£m)	0.0	0.0	0.0	0.0
Adj. PBT (£m)	(43.3)	(35.0)	(41.9)	(29.2
Net Income (£m)	(38.8)	(32.0)	(38.6)	(28.2
Adj. EPS (p)	(51.9)	(42.2)	(41.2)	(27.3)
Cash (£m)	52.5	27.5	23.2	6.1*
EBITDA (£m)	(45.3)	(35.2)	(42.4)	(29.6)

Source: Trinity Delta Note: Adjusted numbers exclude share-based payments and exceptionals. *The cash position in FY20 assumes £25m is raised from equity, debt or partnering of assets.

Important year for data Mereo is expected to report data from its two rare-disease assets, which it aims to self-commercialise, in the coming year. The first data from the Phase II study with BPS-804 (setrusumab) in OI should be reported in the coming weeks (results of open label arm) and data from the double-blinded arms with three doses due in Q419. Mereo initiated the Phase II study with MPH-966 in AATD in Q418 and top-line is expected to report around the end of the year.
Prospects of partnering improve Mereo has four assets in its non-rare disease portfolio that management aims to partner to support the funding of its rare disease products. BCT-197 (acumapimod) is Phase III ready after Mereo agreed in principle the outline of a pivotal study programme for the treatment of acute exacerbations of COPD with the FDA in March; this should enable Mereo to partner the compound in 2019, as Phase II data suggest BCT-197 can effectively reduce severe exacerbations in COPD.
Strengthened balance sheet and expanded opportunities The merger of Mereo with OncoMed has been completed. Mereo’s cash position has increased by $51m (c. £39m), and has the possibility of raising additional funds from two clinical oncology assets; this could enable Mereo to start the pivotal Phase III paediatric study with BPS-804 in 2019. The deal also provides Mereo with a NASDAQ listing, which has already increased share liquidity, enhances access to capital, and, with the US infrastructure and expertise, raises its profile in the key US market.
rNPV valuation of 506p/share We re-introduce our estimates and valuation of Mereo following the completion of the OncoMed transaction. We value Mereo using a rNPV methodology of its four leading assets at £541m ($704m), equivalent to 506p/share or $25.59/ADS (fully diluted). As indicated, there are multiple significant catalysts due in 2019, which could lead to major re-ratings of the shares.

Update

8 May 2019


Price (UK share) (US ADS)	80p $4.73
Market Cap	£76.8m $90.8m
Enterprise Value	£39.2m $41.9m
Shares in issue (shares) (ADS)	96.0m 19.2m
12 month range	77.5-325p $4.67-$8.48
Free float	68.9%
Exchanges	AIM London NASDAQ
Sector	Healthcare
Company Code	MPH.L MREO

Corporate client	Yes

Company description

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Valuation and financials

Pending the transaction, we suspended our valuation which was £510m, or 615p per share. Following the completion of the merger, we have updated our model, and now re-introduce our valuation and estimates. We value Mereo at £541m ($704m), equivalent to 506p/share or $25.59/ADS on a fully diluted basis.

We value the company using an rNPV model of the four late-stage clinical programmes, which are then netted out against the cost of running the business and net cash, as detailed in Exhibit 1. The rNPV of each individual clinical project is assessed and the success probabilities adjusted for the inherent clinical, commercial, and execution risks each carries. These are summed and netted against the costs of running the operation and net cash. We have not included the two oncology assets, navicixizumab and etigilimab, as they are early stage clinical assets and there are with CVRs associated with the potential partnering of the assets, although they could provide a useful source of funding.

Exhibit 1: Our rNPV-based valuation of Mereo BioPharma

Source: Trinity Delta; Note: *The rNPV of BGS-649 and BCT-197 includes a deal success factor of 50% and 70% respectively. For the purpose of the valuation, the launch year is the first year of material sales.

Our financial forecasts are summarised in Exhibit 2. We estimate investment in R&D will increase by 22.6% to £27.8m in FY19, with c. 80% of the spending on BPS-804 and MPH-966. Mereo’s cash position following the completion of the merger was £53.9m ($70.1m), which should allow the company to operate to mid‑2020, but could be extended significantly by the successful partnering of non-rare disease assets.

Exhibit 2: Summary of financials

Source: Company, Trinity Delta; Notes: Our estimates exclude the costs associated with the pivotal Phase III paediatric study with BPS-804, because the timing of the trial is yet to be decided. We include in FY20 long-term debt (other financing cash flow) of £25m, which is indicative of our estimate of the company’s capital requirement; this could be achieved through an equity raise, debt of proceeds from partnering non-rare disease assets.

Disclaimer

MaxCyte

Dosing advances to second cohort in CARMA Phase I

Lighthouse | 8 May 2019

Download PDF

Share this note

MaxCyte has completed the first dose cohort and initiated the second cohort in its first Phase I trial of MCY-M11, the first CARMA therapy in clinical development. No dose-limiting toxicities or safety concerns were observed in first patient cohort.
The Phase I is an open-label, dose-escalation study (3+3 design) evaluating safety and tolerability of intraperitoneal MCY-M11 in c. 15 patients with relapsed/refractory ovarian and peritoneal mesothelioma.
The MCY-M11 is a mesothelin-targeting CARMA therapy, which is an mRNA-based chimeric antigen receptor (CAR) therapy that is wholly owned by MaxCyte. Mesothelin is expressed at normal levels on mesothelial cells, but at high levels on various tumours, including ovarian cancer.
MaxCyte has also confirmed the feasibility of its streamlined, faster non-viral manufacturing process for CARMA. It uses MaxCyte’s proprietary flow electroporation technology to transfect mRNA into fresh, unexpanded peripheral blood mononuclear cells (PBMCs).

Trinity Delta view: In line with its guidance, MaxCyte has disclosed encouraging tolerability data for the first cohort of the MCY-M11 Phase I study, which in tandem has validated its manufacturing process.

A key goal of the Phase I study is to confirm the potential of CARMA therapies, particularly in solid tumours where there are currently limited treatment options. It is reassuring that there are no major tolerability issues associated with the initial dosing of the first CARMA therapy, although a better indication of MCY-M11’s potential should become apparent later this year, once safety and efficacy data from the higher dose cohorts becomes available. This trial will also provide the first indication in patients whether CARMA therapies can have a significant anti-tumour effect while avoiding severe on-target/off-tumour toxicities, which limits the potential protein targets of current CAR-T approaches.

Another key issue affecting the wider adoption of CAR-T therapies is manufacturing. The CARMA process can be carried out in the hospital and avoids the expansion step, so has cost and time advantages. The MCY-M11 Phase I trial has validated MaxCyte’s process and shown that it can be carried out in a single day, in comparison it takes one-to-two weeks for Novartis’ Kymriah and Kite’s Yescarta.

We expect further data from the MCY-M11 Phase I study later in 2019, and highlight that a second CARMA trial, with an intravenous formulation of MCY-M11, remains on track for initiation in H219.

We value MaxCyte at £195m or 341p per share.

Lighthouse

8 May 2019


Price	180p
Market Cap	£92m
Primary exchange	AIM London
Sector	Healthcare
Company Code	MXCT

Corporate client	Yes

Company description

MaxCyte uses its patented flow electroporation platform to transfect a wide array of cells. Revenues arise from sale and lease of equipment, disposables and licence fees; with an impressive client list. Additionally, a novel mRNA mediated CAR technology, known as CARMA, is being explored in various cancers, including solid tumours.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Disclaimer

Bonesupport

Building momentum

Update | 7 May 2019

Download PDF

Share this note

Q119 results provide evidence that the strategic initiatives put in place during 2018 are beginning to deliver results. Bonesupport posted a second successive quarter of CERAMENT sales growth and, with various growth drivers gaining traction, this momentum is set to continue during 2019 and beyond. Management are targeting 40%+ revenue growth from 2020 onwards. Key drivers include the expanded global commercial footprint becoming fully operational, leverage of key clinical and health economics data, new product launches (including potentially CERAMENT G in the US in 2021), and continued improvement in market access/reimbursement. We maintain our Bonesupport valuation of SEK39/share (or SEK 2.034bn).

Year-end: December 31	2017	2018	2019E	2020E
Sales (SEKm)	129.3	96.6	228.0	350.4
Adj. PBT (SEKm)	(127.9)	(175.2)	(123.9)	(64.9)
Net Income (SEKm)	(128.9)	(176.7)	(124.3)	(65.2)
EPS (SEK)	(3.2)	(3.4)	(2.4)	(1.2)
Cash (SEKm)	533.4	261.5	124.2	39.4
EBITDA (SEKm)	(98.1)	(172.8)	(125.1)	(65.4)

Source: Trinity Delta

Strong CERAMENT G/V performance in Europe/ROW Broader and more frequent CERAMENT G/V use by existing customers boosted its sales (+54% to SEK18.1m) and overall Europe/ROW Q119 net revenue (SEK 21.3m, +41% on Q118). Greater sales focus on Germany and UK, as well as encouraging momentum in trauma due to CERTiFY data (showing equivalence to autograft) is starting to generate results, and while Q1 sales were mainly to existing customers, growth in contribution from new customers is expected later this year.
Increasing access to the US market US Q119 sales of SEK 11.5m (vs SEK 4.2m in Q418) marks the first full quarter of CERAMENT BVF direct distribution (40 distributors, >500 sales reps). Exclusive distribution starts on May 20th. Ascension (with c150 hospitals) adds a second significant GPO contract; further improvement in market access is anticipated. Completion of initial training, improved market access, and launch of BONIFY (100% DBM) the first product from MTF Biologics collaboration, should provide a boost to US sales from mid-year onwards.
Industry-leading clinical data supports unique value proposition First human radiological and histological evidence of CERAMENT’s bone remodelling has been published. Full CERTiFy data (non-inferiority of CERAMENT BVF to gold standard autograft in fracture defects) is anticipated in Q319. Enrolment into FORTIFY (CERAMENT G in open fractures) is on track for H219 completion, with data read out and US PMA filing in 2020. SOLARIO a new 500-pt study, is investigating whether CERAMENT G/V use would allow shorter courses of systemic antibiotics.
We maintain our SEK39/share valuation Our three-phase DCF model employs conservative assumptions and generates a SEK39/share (SEK 2.034bn) valuation. Near-term upside potential comes from greater visibility of strategic execution and US sales acceleration; longer-term, data from the pivotal FORTIFY study remains, in our view, the key growth driver.

Update

7 May 2019


Price	SEK27
Market Cap	SEK1,397m
Enterprise Value	SEK1,178m
Shares in issue	51.8m
12 month range	SEK9.04-27
Free float	87.2%
Primary exchange	OMX Stockholm
Other exchanges	N/A
Sector	Healthcare
Company Code	BONEX

Corporate client	Yes

Company description

Bonesupport is a Swedish ortho-biologics company focused on developing and commercialising a pipeline of unique injectable drug eluting bioceramic bone graft substitutes based on its proprietary CERAMENT technology.

Analysts

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Bonesupport: on the right track

The focus for 2019 is firmly on driving CERAMENT market penetration and revenue growth globally. Q119 results indicate that through its 2018 strategic transformation (detailed in our October Capital Markets Day Update note) Bonesupport has laid solid foundations for growth and has also emerged from the shadow of Zimmer Biomet-related issues in the US. Targeted 40%+ year-on-year sales growth from 2020 onwards is achievable. The commercial platform is well positioned to capture market share in the key US and European territories, especially in the trauma indication supported by compelling clinical evidence from CERTiFy. 2018 was a year of transition for the company; 2019 will be a year of delivery. We value Bonesupport at SEK39/share (SEK2.034bn).

Bonesupport’s commercially focused strategy is starting to reap benefits, with both the important US market and the key markets in Europe now addressed by sizeable sales teams. Rich news flow during the rest of 2019 and into 2020 should further improve on the growth seen in Q119. Exhibit 1 highlights key catalysts.

Exhibit 1: Upcoming value generating milestones.

Source: Bonesupport

In the US, the shift from the underperforming exclusive distributor to a network of multiple independent distributors has been executed; Bonesupport will become the exclusive marketer of CERAMENT BVF in the US from May 20th. This should broadly coincide with the completion of initial rep training, the improved market access position coming onstream (including in areas where Zimmer Biomet has limited or no coverage) in Q2/Q3, and first physical sales of BONIFY, a 100% DBM osteoconductive product from the MTB Biologics collaboration.

Coverage of the whole bone graft substitute market in the US is one of Bonesupport’s goals. Further complementary osteobiologic products from collaborations and the in-house innovation pipeline will help in achieving this, but it is strategic sales force deployment and additional GPO contracts that are central to driving growth. In addition to smaller contracts, two major GPO contracts have so far been secured: HCA (Hospital Corporation of Americas) which covers 1,200 affiliated healthcare facilities, and Ascension, covering 151 hospitals in 21 states. The latter has strong compliance and protocols which should benefit CERAMENT BVF sales.

In Europe, the commercial focus is on underpenetrated markets and indications via a larger 25-strong sales team, targeting regions with large orthopaedic centres that previously had limited sales presence. Clear priorities are Germany, Europe’s largest bone graft substitute market where the sales team has doubled to eight, and trauma, a 10x larger opportunity than the historically strong osteomyelitis indication. Growth in Q119 has mainly come from existing customers who are increasingly comfortable with the CERAMENT platform, particularly CERAMENT G/V which is being used more broadly and frequently both to eradicate infections and prophylactically.

As in the US, Bonesupport is seeking to convert new customers using CERTiFy non-inferiority data to take market share from autograft in trauma indications. Full data from this study should be published in Q319. CERTiFy is one example of robust clinical evidence supporting CERAMENT’s clearly differentiated value proposition. Bonesupport continues to invest in studies to validate the clinical and health economic benefit of CERAMENT to patients and payors. Potentially paradigm shifting trials are shown in Exhibit 2. CERTiFy has shown non-inferiority of CERAMENT BVF to gold standard autograph in a complex trauma indication; FORTIFY is the US registration trial for CERAMENT G; and SOLARIO is a new study investigating whether use of CERAMENT G can lead to a shorter course of systemic antibiotic treatment, reducing antibiotic resistance, side-effects and cost.

Exhibit 2: Key clinical trial summaries

Source: Trinity Delta, Bonesupport, Clinicaltrials.gov

Financials and valuation

Bonesupport’s Q119 net sales were SEK 32.8m, a 6% increase on Q118 and 42% higher than Q418. Quarterly sales development by geography and product is shown in Exhibit 3. Europe/ROW sales of SEK 21.3m continued their upward trajectory (+41% on Q118; +13% in Q418) and achieved a gross margin of 84%. CERAMENT G/V performed particularly strongly, with 54% growth to SEK18.1m vs Q118; these antibiotic eluting products now account for 85% of Europe/ROW sales (vs 78% on Q118). Q119 was the first full quarter of US sales under Bonesupport’s direct distribution model (from October 23rd), with US net sales of SEK 11.5m (-28% on Q118; +274% on Q418) and an 89% gross margin. Gross profit for the quarter was SEK 28.2 m (Q118: SEK 25.5m; Q418: SEK 19.6m).

Exhibit 3: Quarterly sales progression by geography and product

Source: Trinity Delta, Bonesupport

Costs have stabilised at a lower level reflecting Bonesupport’s focused investment in initiatives to accelerate CERAMENT sales coupled with disciplined cost control in other business areas. Selling expenses are gradually levelling with a 5% increase on Q418 (the first quarter of US direct sales). Sales costs are nearly double the Q118 figure, although this is not comparable as it predates the European sales force expansion and Zimmer Biomet was the exclusive US distributor. Q119 R&D (SEK 16.9m) and admin (SEK 10.4m) spend are also stabilising at a lower level.

Operating loss widened to SEK 39m (Q118: SEK 33.1m) due to Bonesupport’s increased, albeit more focused, investment in the commercial organisation. Net loss was SEK 39.0m vs SEK 33.6m in Q118.

Post Q119 results, we have made only modest adjustments to our forecasts (Exhibit 4), principally tuning the revenue split between CERAMENT BVF and CERAMENT G/V for Europe/ROW and reducing the run-rate for admin spend.

Exhibit 4: Summary of changes to estimates

Source: Trinity Delta

Bonesupport ended March 2019 with cash and equivalents of SEK 219.1m, which, according to management, is sufficient runway to profitability and positive cash flow (achieved in 2021 and 2022 respectively according to our model).

Our updated valuation model is shown in Exhibit 5. Changes to our forecasts flow through to this, and our model has also been updated to reflect the strengthening of the SEK/US$ (9.5 vs 9.3 previously) and last reported cash, as well as rolling forward our model to reflect the passage of time. Our three-stage DCF methodology values Bonesupport at SEK 2.034bn or SEK39/share vs SEK 2.042bn (SEK39/share previously).

Exhibit 5: DCF-based valuation of Bonesupport

Source: Trinity Delta Note: Assumes USD/SEK exchange rate of 9.5 and 12.5% discount rate. The valuation is based on explicit cash flows to 2022, followed by a ten-year trending period, and a 2.5% terminal growth rate.

We expect to revisit our forecasts and valuation later in 2019 as the commercial infrastructure in both Europe/ROW and the US becomes more established; it is expected to be fully operational by mid-2019. Currently, three sales positions are yet to be filled in Europe and initial training in the US is ongoing. In Europe/ROW, increased penetration in key geographies and indications with historically limited presence is gaining traction. While in the US, the impact of CERTiFy data and major GPO contracts on the trajectory of BVF sales in trauma from 2019, and FDA approval of CERAMENT G potentially in 2021 are two key inflection points. Continued successful execution, leverage of clinical and health economics outcomes data, and new product launches could unlock further upside potential.

Exhibit 6: Summary of financials

Source: Company, Trinity Delta Note: Historical adjustment of number of shares following 5:1 consolidation in 2017.

Disclaimer