Trinity Delta On the cusp of commercialisation

Sphere Medical

On the cusp of commercialisation

Update | 22 September 2016

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The coming 12 months should mark Sphere Medical’s transition into a commercial organisation as the launch of Proxima 4 across major European markets translates into revenues.The delay in receiving the CE Mark is clearly disappointing; however, the preparations for its marketing are well advanced. Updating and rolling forward our three-phase DCF-based model yields a valuation of £21.8m, equivalent to 15.4p a share, which is up from £14.4m, 10.2p per share, previously. We again remind that we expect this to rise when the CE Mark is received to reflect the effect of the reduced investment risk.

Year-end: December	2014	2015	2016E	2017E
Sales (£m)	0.0	0.0	0.1	0.7
Adj. PBT (£m)	(5.9)	(6.0)	(5.8)	(5.5)
Net Income (£m)	(5.3)	(5.5)	(5.4)	(5.1)
Adj. EPS (p)	(9.9)	(5.3)	(3.7)	(3.5)
Cash (£m)	3.7	10.0	2.8	6.7
EBITDA (£m)	(5.8)	(6.0)	(5.8)	(5.2)

Source: Trinity Delta Note: Adjusted numbers exclude share-based payments and exceptionals.

Interim results highlight the progress made Sphere Medical has achieved a number of critical milestones in the period. These include the appointment of a distributor in Italy, the first commercial sales in Germany and Belgium, improved connectivity with patient data systems, increased hospital evaluations (patient connections rose by 52%), and the opening of the new, dedicated manufacturing facility in St Asaph, North Wales.
Proxima 4 CE Mark expected shortly The CE mark certification of the Proxima 4 system remains the next key step. The process has been completed for three major elements (there are four core components that are reviewed), with only minor matters awaiting sign off on the fourth. An approval is expected shortly, with launch still due before the year end.
Tight cost control continues Despite the continuing preparations for Proxima 4’s commercialisation, operating expenses (£2.6m vs £3.5m in H115) were kept below budget. Marketing costs rose from £0.5m to £0.7m, with administrative expenses flat at £1.0m. Reflecting the rising visibility, product development costs of £0.1m (£1.2m H115) were expensed and £1.1m (nil in H115) was capitalised. The reported loss decreased from £3.5m to £2.6m, with loss per share down from 4.0p to 1.4p. Cash outflow was £3.3m, in line with the prior year, and net cash and equivalents was £6.6m (£12.8m H115).
Valuation set to rise further as risks reduce Updating our DCF model results in our valuation rising from £14.4m (10.2p a share) to £21.8m (15.4p a share). The impact is magnified as, in line with our conservative approach, our valuation excludes the company’s current cash. We also note that the CE Mark grant represents an inflection point in our model – as business risks decrease – and we intend to review our forecasts and valuation at that time

Update

22 September 2016


Price (Sterling)	12.5p
Market Cap	£17.7m
Enterprise Value	£11.1m
Shares in issue	141.8m
12 month range	6.0p-15.9p
Free float	100%
Primary exchange	AIM London
Other exchanges	NA
Sector	Healthcare
Company Code	SPHR.L

Corporate client	Yes

Company description

Sphere Medical develops and commercialises medical monitoring and diagnostic equipment. Its lead product, Proxima, provides near real-time analysis of blood gases, electrolytes, and metabolites at the patient’s bedside within critical care.

Analysts

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

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

Exhibit 1: Summary of financials

Source: Sphere Medical, Trinity Delta Note: Adjusted numbers exclude share-based payments and exceptionals.

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