A strong exit for 2015

Photocure currently has approval for the bladder cancer diagnostic agent hexaminolevulinate hydrochloride (HAL) in Europe as Hexvix and in North America as Cysview. When paired with a blue light source it allows for improved detection of cancerous lesions in the bladder and a lower rate of recurrence following resection. Hexvix/Cysview has a strong presence in the Nordic countries, where it currently has 40% market share, and is marketed in the rest of the EU through a partnership with Ipsen. The largest growth prospects for the brand are currently in the US where Photocure has been directly marketing the product since 2011. The company is currently enrolling patients into a Phase III label expansion trial, which would permit the use of the product for cancer screening, a market that is two to three times as large as the currently approved surgical resection market.

Photocure is also developing Cevira, a drug/device combination for the treatment of HPV related dysplasias of the cervix using the same light sensitive molecule at Hexvix/Cysview and an intravaginal light device. The treatment successfully demonstrated efficacy controlling high-grade squamous intraepithelial lesions, and is currently Phase III-ready, pending Photocure finding a development partner. Visonac is a treatment for acne in development at Photocure, which could potentially be used in patients who are refractory to other treatments. It is similarly Phase III-ready pending a partnership.

After the slow sales of Hexvix/Cysview in Q315, the most recent quarter marks a return to sequential growth and the highest quarterly revenue for the franchise. Sales for the fourth quarter increased 34% year-on-year and 13% sequentially.

Hexvix/Cysview unit sales dropped by 5% in the Nordic countries in Q415. The company cited a “reduced seasonality effect” as the cause for the drop as Q4 historically has the strongest sales of the year. Despite the already strong market share in this region, there remain opportunities for expansion. Notably, unit sales in Sweden were up 17% for the quarter.

Sales of Hexvix/Cysview in the EU had a large increase in revenue of 34% in Q4. However, this value was affected by the timing of orders from Ipsen, as end user unit sales showed a steady 9% growth rate. After a strong Q1, Q2 and Q3 of 2015 showed limited partnered growth, due to inventory drawdowns at Ipsen. Photocure continues to pursue other overseas partnering for Hexvix/Cysview, and has licensed the product to BioSyent in Canada and Juno Pharmaceuticals in Australia and New Zealand. BioSyent announced during the quarter that it has launched Hexvix/Cysview in the Canadian market, and expects there to be meaningful revenue beginning in H116.

The Q415 41% unit growth rate in the US marks a return to previous historical rates. The reported unit sales for Q315 were down 5% year-on-year primarily because of a large order from the National Cancer Institute in Q314. Revenues from the US increased 95% for Q415 and 87% for the year, but a large portion of this growth was due to currency tailwinds, and US revenue was up 46% on a constant currency basis for the year. Although US top lines for the quarter were bolstered by currency effects, they were compensated by increased costs, and the net effect of currency on US earnings was negative. Across all markets, the net effect of currency on earnings was approximately zero. The total number of blue light cystoscopes installed in hospitals and urology centres in the US was up to 65, vs 62 in Q315 and 51 in Q414. This corresponds to a 27% increase in the number of offices using Hexvix/Cysview in the past year, implying that the remaining 6% of unit growth can be attributed to same-centre volume increases.

One of the largest headwinds in the US is the unfavourable reimbursement environment for Hexvix/Cysview. Under normal circumstances, Medicare sets the reimbursement rate for in-patient procedures as a bundle instead of for individual devices and drugs. Doctors must use this single reimbursement to purchase drugs and devices as well as pay themselves. Hexvix/Cysview is currently only approved for use as part of a transurethral resection of the bladder (TURB) procedure, which is estimated to be reimbursed in the range of $2,000. With an $800 price tag, there is a significant financial disincentive to hospitals and doctors using Hexvix/Cysview. Part of the importance of the ongoing label expansion trial is that it would enable separate reimbursement for Hexvix/Cysview for screening procedures. The company is also seeking to improve reimbursement through a legislative route, and bills have been introduced in the House of Representatives and the Senate to reimburse imaging agents separate from bundles. The 2015 year-end filings and conference call provided an update on the progress of the legislation and, although there has been no action on the bills since they were referred to committee, they have been receiving an increasing number of supporters in congress. Collectively, the two bills have increased their number of co-sponsors from 37 to 53 since the end of Q215.

We are increasing our valuation of Photocure to NOK1,499m or NOK70 per basic share (NOK67 per diluted share), from NOK1,420m or NOK66 per basic share (NOK62 per diluted share). The adjustment is due in part to rolling our NPV model forward by one year following the FY15 results. Additionally, the company outperformed our Hexvix/Cysview sales expectations especially in the US in Q415, which is now reflected in our new peak sales estimates (NOK361m vs NOK344m previously). The increase in sales is partially offset by the negative currency impact on development and selling costs.

Photocure generated NOK122m in sales in 2015 compared to NOK94m in 2014, with approximately half of the increase from the US. Our current model remains unchanged with respect to forecast growth rates for the US over the next two years making it the largest segment of the company by 2017. Our current forecasts predict the company will achieve profitability for the year 2018 concurrent with the approval of the Hexvix/Cysview label expansion. This reflects a slight delay from our previous forecasts, which predicted break-even in mid-2017, due to downward adjustments in EBITDA of NOK6-8m per year due to an 11% increase in SG&A and R&D costs, partially offset by increased revenue. The increase in costs is largely associated with currency effects, as the majority of the development and selling expenses are in US dollars.

Despite increased spending, the company’s cash of NOK134m (at 31 December 2015) should be more than sufficient to reach profitability in 2018. The difference in cash from our previous estimates for Q415 (of NOK127m) is due to better than expected operational cash flows from increased revenue, tax benefits, and improvement in working capital. Additionally, the company is entitled to receive the final €4m payment in Q416 from Galderma for the acquisition of Metvix. Photocure is debt free and we do not expect the company to need additionally financing. However, in the absence of partners for the Cevira and Visonac programmes, there is a degree of uncertainty in near-term development costs and milestones as well as long-term revenue potential.