A slower quarter

Photocure 12 November 2015 Update

Photocure

A slower quarter

Q315 results

Pharma & biotech

12 November 2015

Price

NOK38.10

Market cap

NOK818m

NOK8.6/US$

Net cash (NOKm) at end Q315

139

Shares in issue

21.4m

Free float

82.3

Code

PHO

Primary exchange

Oslo

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.8)

(3.8)

81.4

Rel (local)

(2.9)

(2.4)

82.3

52-week high/low

NOK42.5

NOK19.6

Business description

Photocure specialises in photodynamic therapy. Its bladder cancer imaging product is sold as Hexvix in Europe and Cysview in the US. Photocure handles the marketing in Nordic countries and the US, while Ipsen is its marketing partner in the EU. Cevira is a Phase III-ready product for HPV-related diseases of the cervix and Visonac is a Phase III-ready product for acne.

Next event

Partnerships for Cevira and Visonac

2016

Analysts

Maxim Jacobs

+1 646 653 7027

Christian Glennie

+44 (0)20 3077 5727

Photocure is a research client of Edison Investment Research Limited

Following a robust Q215, in which global in-market sales of Hexvix/Cysview grew 26% year-on-year, growth slowed in Q315 to 22%. Growth in the US also slowed, although Hexvix/Cysview revenues grew 42% compared to last year and is now available in 62 centres compared to 51 at the end of 2014. Importantly, the company has commenced patient enrolment in their label expansion trial, which could triple the size of the addressable market. We have lowered our near-term sales estimates as we take a more conservative view of Photocure’s organic growth rate.

Year end

Revenue (NOKm)

PBT*
(NOKm)

EPS*
(NOK)

DPS
(NOK)

P/E
(x)

Yield
(%)

12/14

129.0

1.5

0.07

0.0

N/A

N/A

12/15e

124.8

(16.9)

(0.79)

0.0

N/A

N/A

12/16e

138.8

(10.1)

(0.47)

0.0

N/A

N/A

12/17e

156.2

0.5

0.02

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Hexvix/Cysview takes a little hit, but still growing

Q315 results for Hexvix/Cysview showed a sequential decline in sales, which is partly due to inventory fluctuations as well as seasonal weakness. Q3 is generally a seasonally weak quarter for healthcare procedures, which this year was likely exacerbated by an inventory drawdown. Global in-market sales of Hexvix/Cysview are up 22% compared to Q314, down from 26% year-on-year growth in Q215.

US market continues to be a key growth driver

US Hexvix/Cysview sales increased 42% compared to the year-ago period, although actual unit sales fell 5% due to a large order in Q314 from the National Cancer Institute (NCI). Importantly, the number of centres with permanent blue light cystoscopes installed increased to 62 from 51 at the end of 2014.

Hexvix/Cysview label expansion trial commences

In October, the company commenced enrolment in a 360 patient study in order to expand Hexvix Cysview use from initial diagnosis to surveillance. This has the potential to increase the addressable market from 250,000 to 1.2 million procedures in the US and from 300,000 to 750,000 procedures in the EU.

Valuation: NOK66 per basic share

We have lowered our valuation of Photocure to NOK1,420m or NOK66 per basic share (NOK62 per diluted share) from NOK1,523m or NOK71 per basic share (NOK67 per diluted share) as we take a more conservative view of Hexvix/Cysview’s near-term growth prospects, (which feed into lower peak sales forecasts and a lower valuation) following slower Q315 results. Key potential catalysts for the company will be partnerships for both Visonac and Cevira.

Continuing to build on a profitable foundation

Photocure currently markets the imaging agent known as Hexvix in the EU and Cysview in the US, which is approved globally for detecting and managing bladder cancer. It improves detection rates and helps prolong recurrence-free survival. The company recently announced the approval of its special protocol assessment (SPA) by the FDA for the Phase III registration programme for Cevira, which is an integrated drug/device combination for the treatment of patients with HPV-related diseases of the cervix. It has demonstrated statistically significant efficacy in patients with high-grade squamous intraepithelial lesions (HSIL), which has over 1m cases diagnosed annually in the US and EU and indicates a higher risk of cancer. Visonac is its Phase III-ready treatment for inflammatory acne, which could be used in those who fail or are unsuitable for isotretinoin and oral antibiotics, a two million-person market in the US and EU.

Exhibit 1: Photocure pipeline

Product

Active Ingredient

Indication

Stage

Upcoming catalyst

Advantages over currently approved products

Hexvix/Cysview

Hexaminolevulinate hydrochloride (HAL)

Detection and management of bladder cancer

Market

Continued revenue growth

Improves ability to see cancerous lesions on the bladder. Improves recurrence-free survival

Cevira

Hexaminolevulinate hydrochloride (HAL)

HPV-related diseases of the cervix

Phase III

Partnership potentially in 2016

Lower pre-term labour risk than surgical procedures

Visonac

Methyl aminolevulinate (MAL)

Moderate-to-severe inflammatory acne

Phase III

Partnership potentially in 2016

Potential efficacy in refractory patients

Source: Photocure

Q315 earnings

Following a robust Q215 earnings announcement, Hexvix/Cysview growth slowed in Q315, although part is likely due to inventory fluctuations rather than end-user sales. For example, within the Nordic region, year-over-year revenue growth for Hexvix/Cysview slowed from 19% in Q2 to 11% in Q3 although actual unit sales growth increased from 6% in Q2 to 14% in Q3 (see Exhibit 2). Photocure’s Nordic market share is 39% and Sweden continues to be a growth market with 21% unit sales growth over the first nine months of the year.

Exhibit 2: Hexvix/Cysview growth rates year-on-year

(%)

Revenues

Unit sales

Region

Q2

Q3

Q2

Q3

Nordic

19

11

6

14

EU

3

4

15

8

US

118

42

55

(5)

Global in-market

26

22

15

8

Source: Photocure

US Hexvix/Cysview sales increased 42% compared to the year ago period, although actual unit sales fell 5% due to a large NCI order in Q314. Given that hospital penetration has increased 27% since Q314, one would expect growth through existing and new centres to provide enough of a tailwind so that there would not be a year-over-year decrease in units. However, the US continues to be a challenge due to the unattractive reimbursement profile for Hexvix/Cysview, despite data unequivocally supporting its use.

Partner revenue (EU) increased by only 4% due to inventory drawdowns following excessive stocking earlier in the year. On an underlying, unit sales growth basis, this line item increased 8% compared to the year-ago period.

Importantly, the company also announced that it has begun enrolment in a 360 patient study to obtain a label expansion into the surveillance market, with data expected in 2017. Currently, Hexvix/Cysview is used in the initial diagnosis and treatment of patients as part of the transurethral resection of the bladder (TURB) procedure. However, following TURB, patients will undergo surveillance in the form of cystoscopy examinations every three to nine months. So, while there are an estimated 250,000 TURB procedures in the US and another 300,000 in the EU, there are 1.2m surveillance procedures in the US and another 750,000 in the EU.

We currently model peak Hexvix/Cysview revenues to Photocure of NOK344m (~$40m) in 2020, which takes into account a label expansion in 2018 to include the surveillance market. This is down from our previous estimate of peak sales of NOK373m (~$43m). We have lowered our sales estimates for Hexvix/Cysview across the US, EU and Nordic markets to take into account the slower growth exhibited in Q315 and to take a more conservative stance on the future. We believe this estimate is reasonable given that the TURB market alone has a $400-500m market potential and the surveillance market is around triple the size.

Valuation

We have lowered our valuation of Photocure to NOK1,420m or NOK66 per basic share (NOK62 per diluted share) from NOK1,523m or NOK71 per basic share (NOK67 per diluted share) as we take a more conservative view of Hexvix/Cysview’s growth prospects following Q315 results. Key potential catalysts for the company will be partnerships for both Visonac and Cevira, which we currently expect to occur sometime in 2016, as discussions with potential partners are ongoing.

Exhibit 3: Photocure valuation

Product

Main Indication

Status

Probability of commercialisation

Launch year

Peak sales (NOKm)

Patent protection

Economics

rNPV (NOKm)

Hexvix/Cysview

Bladder cancer detection

Market

100%

Launched

344

2019-20

Fully owned – US and Nordics. Partner with Ipsen in EU (35% royalty).

569

Cevira

HPV-related diseases

Phase III

50%

2020

2,399

2030

17.5%

333

Visonac

Acne

Phase III

60%

2020

2,175

2028

17.5%

379

Total

 

 

 

 

 

 

 

1,281

Cash and cash equivalents (Q315)

139

Total firm value

1,420

Total basic shares (m)

21.4

Value per basic share (NOK)

66

Options (Q315, m)

1.3

Total number of shares (m)

22.8

Diluted value per share (NOK)

62

Source: Edison Investment Research, company reports

Financials

The Hexvix/Cysview franchise is profitable, with NOK23.1m in operating profits through 9M15, compared to NOK14.4m in the previous year. US revenue is the main growth driver, up 84% so far this year compared to last year. We have lowered our revenue forecasts due to this quarter’s results and now forecast low-teens annual revenue growth over the next two years, with group operating profit achieved in 2018 (we had been expecting break-even in 2017). With NOK139m in cash and the possibility for upfront and regulatory milestone payments, Photocure should have enough capital to meet its needs. However, this will partially depend on the level of upfront and milestone payments, as well as royalties from potential partners.

Exhibit 4: Financial summary

NOK000s

2012

2013

2014

2015e

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

133,823

83,616

128,952

124,754

138,762

156,159

Cost of Sales

(9,405)

0

(6,996)

(7,904)

(9,713)

(10,931)

Gross Profit

124,418

83,616

121,956

116,850

129,049

145,227

Sales, General and Administrative Expenses

(113,583)

(114,657)

(95,032)

(111,538)

(116,000)

(120,640)

Research and Development Expense

(50,083)

(33,976)

(32,554)

(28,644)

(29,790)

(30,982)

EBITDA

 

 

(39,248)

(71,846)

(5,630)

(23,332)

(16,741)

(6,394)

Operating Profit (before GW and except.)

(39,248)

(71,846)

(5,630)

(23,332)

(16,741)

(6,394)

Intangible Amortisation

0

0

0

0

0

0

Other

0

0

0

0

0

0

Exceptionals

0

(3,694)

0

0

0

0

Operating Profit

(39,248)

(75,540)

(5,630)

(23,332)

(16,741)

(6,394)

Net Interest

8,236

8,688

7,157

6,388

6,643

6,909

Other

(11,356)

(14,015)

(15,573)

(10,950)

(11,388)

(11,844)

Profit Before Tax (norm)

 

 

(31,012)

(63,158)

1,527

(16,945)

(10,098)

515

Profit Before Tax (FRS 3)

 

 

(42,368)

(80,867)

(14,046)

(27,895)

(21,486)

(11,329)

Tax

890

8,204

(0)

0

0

0

Deferred tax

0

0

(0)

(0)

(0)

(0)

Profit After Tax (norm)

(30,122)

(54,954)

1,527

(16,945)

(10,098)

515

Profit After Tax (FRS 3)

(41,478)

(72,663)

(14,046)

(27,895)

(21,486)

(11,329)

Average Number of Shares Outstanding (m)

21.3

21.2

21.3

21.5

21.7

21.9

EPS - normalised (NOK)

 

 

(1.42)

(2.59)

0.07

(0.79)

(0.47)

0.02

EPS - FRS 3 (NOK)

 

 

(2.79)

(3.44)

(0.66)

(1.30)

(0.99)

(0.52)

Dividend per share (NOK)

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

104,902

104,759

76,512

70,852

68,694

68,704

Intangible Assets

59,951

51,969

42,393

48,610

48,610

48,610

Tangible Assets

4,111

3,681

3,056

2,431

273

284

Other

40,840

49,109

31,063

19,811

19,811

19,811

Current Assets

 

 

328,076

197,020

194,067

164,485

148,575

159,882

Stocks

9,826

12,624

13,237

15,501

16,121

16,766

Debtors

15,432

17,085

15,585

22,216

23,105

24,029

Cash

302,818

167,258

165,245

126,767

109,348

119,087

Other

0

53

0

0

0

0

Current Liabilities

 

 

(51,089)

(30,307)

(27,466)

(28,096)

(28,096)

(28,096)

Creditors

(51,089)

(30,307)

(27,466)

(28,096)

(28,096)

(28,096)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(1,621)

(2,296)

(3,055)

(3,674)

(3,674)

(3,674)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(1,621)

(2,296)

(3,055)

(3,674)

(3,674)

(3,674)

Net Assets

 

 

380,268

269,176

240,058

203,566

185,498

196,817

CASH FLOW

Operating Cash Flow

 

 

(54,927)

(99,722)

(6,088)

(32,384)

(19,481)

7,593

Net Interest

0

0

0

0

0

0

Tax

0

0

0

0

0

0

Capex

0

0

(748)

(10,996)

(522)

(543)

Acquisitions/disposals

0

0

0

0

0

0

Financing

0

0

0

0

0

0

Dividends

0

0

0

0

0

0

Other

9,073

4,518

4,138

2,485

2,584

2,688

Net Cash Flow

(45,854)

(95,204)

(2,698)

(40,895)

(17,418)

9,738

Opening net debt/(cash)

 

 

(355,173)

(302,818)

(167,258)

(165,245)

(126,767)

(109,348)

HP finance leases initiated

0

0

0

0

0

0

Exchange rate movements

(1)

0

(1)

2

0

0

Other

(6,500)

(40,356)

686

2415

0

0

Closing net debt/(cash)

 

 

(302,818)

(167,258)

(165,245)

(126,767)

(109,348)

(119,087)

Source: Company accounts, Edison Investment Research

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