A strong 2018 for the commercial business

International Stem Cell 1 May 2019 Update
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International Stem Cell

A strong 2018 for the commercial business

Financial update

Pharma & biotech

1 May 2019

Price

US$1.22

Market cap

US$9m

Net debt ($m) at 31 December 2018

1.0

Shares in issue

7.5m

Free float

38%

Code

ISCO

Primary exchange

OTC

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.9

(20.8)

(12.9)

Rel (local)

4.8

(27.3)

(21.7)

52-week high/low

US$1.77

US$1.10

Business description

International Stem Cell is an early-stage biotechnology company developing therapeutic, biomedical and cosmeceutical applications for its proprietary stem form of pluripotent stem cells – human parthenogenetic stem cells. Its lead candidate is a cell therapy treatment for Parkinson’s disease.

Next events

Updates on commercial business

2019

Phase I data from PD trial

H120

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

International Stem Cell is a research client of Edison Investment Research Limited

International Stem Cell (ISCO) reported strong FY18 revenues of $11.1m, up 48.7% compared with 2017 mainly due to the biomedical business, which had revenues of $9.3m, up 78.4% year-on-year. The profitability of the biomedical business continues to improve as well, with operating income of $3.3m, up 78.2% compared with the previous year. The company has also reported that the 12-patient Phase I trial of ISC-hpNSC in Parkinson’s disease (PD) is now fully enrolled with complete data expected in H120.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

7.5

(4.9)

(1.19)

0.0

N/A

N/A

12/18

11.1

(3.5)

(0.54)

0.0

N/A

N/A

12/19e

13.0

(2.7)

(0.36)

0.0

N/A

N/A

12/20e

14.1

(7.1)

(0.88)

0.0

N/A

N/A

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

Strong sales

ISCO’s commercial operations leverage its human parthenogenetic stem cell (hpSC) technology and generate revenues to partially offset R&D spending for therapeutic development. Lifeline Skin Care (LSC) develops and sells skincare products and Lifeline Cell Technology (LCT) produces human cell culture products for testing. Together they generated $11.1m in sales in 2018, up 48.7% compared with last year and provided $2.4m in operating profit which was used to fund R&D.

LCT, the engine of the commercial business

LCT develops, manufactures and commercializes over 130 human cell culture products, including frozen human “primary” cells and the reagents (called media) needed to grow, maintain and differentiate the cells. Cell types include endothelial, epithelial, fibroblasts, melanocytes, stem and smooth muscle among others.

Final cohort of PD trial completed

The third and fourth patients in the third cohort of four patients have been successfully dosed. As a reminder, patients in the study are being treated in three cohorts with 30m, 50m and 70m stem cells, delivered via intracranial injection. The single-arm, open-label study is being conducted at the Royal Melbourne Hospital in Australia. Clinical assessments are scheduled at six and 12 months following surgery with complete data expected in H120.

Valuation: $43m or $5.75 per share

We have adjusted our valuation to $43m or $5.75 per basic share from $42m or $6.16 per basic share. The increase in total valuation is mainly due to rolling forward our NPV while the per share valuation decreased due to a higher share count. We project that the company will need at least $40m in additional financing before profitability in 2024 (down from $45m due to higher revenues and continued cost controls), of which an additional $3m will be required by the end of 2019.

Q418 results

The company reported strong FY18 revenues of $11.1m, up 48.7% compared with 2017 mainly due to the biomedical business, which had revenues of $9.3m, up 78.4% year-on-year. For the quarter, revenues were $2.2m, up 20.7% compared with Q417 mainly due to the biomedical business, which had quarterly revenues of $1.7m, up 43.4% compared with the same quarter last year. The cosmetics business, however, was down 19.7% for the year and now represents just 16.3% of total revenues compared with 30.3% in 2017. The operating profit of the commercial business increased 67.7% to $2.4m in 2018. For the company as a whole (including its therapeutics development programs), the operating loss was $3.5m for the year, down 29.7% from $4.9m in the previous year. We have made some adjustments to our model, decreasing our 2019 revenue estimate for the commercial business from $13.5m to $13.0m due to a slightly lower run rate than we modeled for the fourth quarter. We have kept SG&A roughly the same but reduced our 2019 R&D estimate to $2.5m from $6.5m due to continued cost controls at the company and the fact that the Phase I is now fully enrolled. We are also introducing 2020 estimates, including revenue of $14.1m, up 8.1% compared to our 2019 estimate.

Exhibit 1: Changes to estimates

$000s

Revenue

Operating profit

Profit after tax

Old

New

% change

Old

New

% change

Old

New

% change

2019e

13,483

12,999

(3.6%)

(6,207)

(4,008)

35.4%

(7,009)

(4,491)

35.9%

2020e

N/A

14,057

N/A

N/A

(6,173)

N/A

N/A

(7,296)

N/A

Source: Edison Investment Research. Note: Operating profit and profit after tax exclude amortization of acquired intangibles, exceptional items and share-based payments.

The company had $1.1m in cash on the balance sheet at the end of 2018. There was $2.0m in a related-party payable stemming from a promissory note that provided cash to the company from its co-chairman and CEO, with the note due and payable on 15 January 2019. Subsequent to the quarter end, the company entered into a conversion agreement to convert $1.0m of the note into 599,222 shares, with the remaining $1.0m now due on 15 January 2020. We project that the company will need at least $40m in additional financing before profitability in 2024 (down from $45m due to continued cost controls), of which an additional $3m will be required by the end of 2019.

Valuation

We have adjusted our valuation to $43m or $5.75 per basic share from $42m or $6.16 per basic share. The increase in valuation is mainly due to rolling forward our NPV while the per share valuation decreased due to a higher share count.

Exhibit 2: International Stem Cell valuation

Product

Status

Launch

Peak sales ($m)

NPV ($m)

Probability

rNPV ($m)

NPV/share ($/share)

Cosmetic and biomedical business

Commercial

Current

18

35

90%

31

4.17

Parkinson’s disease (royalties at 12% of sales)

Phase I/IIa

2024

2,800

592

7.5%

44

5.92

G&A expense - after tax

100%

(32)

(4.21)

Net cash

(1.0)

100%

(1.0)

(0.13)

Valuation

 

 

 

626

 

43

5.75

Source: Edison Investment Research

One key risk to remember stems from the capital structure, which potentially creates sizeable dilution risk for minority investors. To date, ISCO has relied primarily on funds from management in the form of a combination of convertible preferred shares, warrants and options to fund its growth so that on a fully diluted basis management controls a significant portion of the company. While management has not converted the bulk of its sizeable holdings investors need to consider the possibility of significant dilution risk at some point in the future. There remain approximately 14.4m potentially dilutive shares from 4.0m warrants, 4.4m options and 6.1m convertible preferred shares in addition to the 7.5m common shares outstanding. Also, investors should note that the convertible preferred shares are subject to anti-dilution provisions under certain circumstances, creating further dilution potential.

Exhibit 3: Financial summary

US$000

2017

2018

2019e

2020e

Year end 31 December

GAAP

GAAP

GAAP

GAAP

PROFIT & LOSS

Revenue

 

 

7,456

11,089

12,999

14,057

Cost of Sales

(2,122)

(4,069)

(4,550)

(4,920)

Gross Profit

5,334

7,020

8,449

9,137

Research and development

(2,658)

(2,396)

(2,500)

(6,500)

EBITDA

 

 

(4,616)

(3,166)

(2,200)

(5,865)

Operating Profit (before amort. and except.)

(4,942)

(3,474)

(2,508)

(6,173)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

(1,127)

1,343

0

0

Operating Profit

(6,069)

(2,131)

(2,508)

(6,173)

Net Interest

0

0

(240)

(880)

Profit Before Tax (norm)

 

 

(4,942)

(3,474)

(2,748)

(7,053)

Profit Before Tax (reported)

 

 

(6,069)

(2,131)

(2,748)

(7,053)

Tax

0

0

0

0

Profit After Tax (norm)

(4,942)

(3,474)

(2,748)

(7,053)

Profit After Tax (reported)

(6,069)

(2,131)

(2,748)

(7,053)

Average Number of Shares Outstanding (m)

4.2

6.4

7.7

8.0

EPS - normalised ($)

 

 

(1.19)

(0.54)

(0.36)

(0.88)

EPS - normalised fully diluted ($)

 

 

(1.46)

(0.33)

(0.36)

(0.88)

EPS - reported ($)

 

 

(1.46)

(0.33)

(0.36)

(0.88)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

71.5

63.3

65.0

65.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

4,009

4,026

4,428

4,849

Intangible Assets

2,922

2,674

2,996

3,318

Tangible Assets

1,013

1,274

1,354

1,453

Investments

74

78

78

78

Current Assets

 

 

2,855

3,770

5,363

6,613

Stocks

1,307

1,501

2,321

2,509

Debtors

465

651

928

1,003

Cash

304

1,075

1,572

2,557

Other

779

543

543

543

Current Liabilities

 

 

(4,800)

(5,077)

(4,094)

(3,136)

Creditors

(4,800)

(3,032)

(3,094)

(3,136)

Short term borrowings

0

(2,045)

(1,000)

0

Long Term Liabilities

 

 

0

(182)

(3,000)

(11,000)

Long term borrowings

0

0

(3,000)

(11,000)

Other long term liabilities

0

(182)

0

0

Net Assets

 

 

2,064

2,537

2,697

(2,674)

CASH FLOW

Operating Cash Flow

 

 

(2,142)

(1,082)

(1,553)

(4,406)

Net Interest

0

0

(240)

(880)

Tax

0

0

0

0

Capex

(864)

(661)

(710)

(729)

Acquisitions/disposals

0

0

0

0

Financing

3,200

514

1,000

0

Dividends

0

0

0

0

Net Cash Flow

194

(1,229)

(1,503)

(6,015)

Opening net debt/(cash)

 

 

(110)

(304)

970

2,428

HP finance leases initiated

0

0

0

0

Other

0

(45)

45

0

Closing net debt/(cash)

 

 

(304)

970

2,428

8,443

Source: Edison Investment Research, company reports

General disclaimer and copyright

This report has been commissioned by International Stem Cell and prepared and issued by Edison, in consideration of a fee payable by International Stem Cell. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by International Stem Cell and prepared and issued by Edison, in consideration of a fee payable by International Stem Cell. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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