A strong exit for 2015

Photocure 7 March 2016 Update

Photocure

A strong exit for 2015

2015 results

Pharma & biotech

7 March 2016

Price

NOK35.90

Market cap

NOK768m

NOK8.6/US$

Net cash (NOKm) at end Q415

134

Shares in issue

21.4m

Free float

82.5

Code

PHO

Primary exchange

Oslo

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.4)

2.3

(0.8)

Rel (local)

(7.8)

10.5

11.4

52-week high/low

NOK45.0

NOK29.4

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

Partnership deals

2016

Analysts

Maxim Jacobs

+1 646 653 7027

Dr Nathaniel Calloway

+1 646 653 7036

Photocure is a research client of Edison Investment Research Limited

Hexvix/Cysview sales grew 34% year-on-year for Q415, showing marked improvement over Q315 growth rates of 17%. The year closed with NOK115.8m in sales of Hexvix/Cysview, a 26% improvement over 2014, driven primarily by increased unit volume in the US but bolstered by a favourable currency exchange. Revenue growth for the quarter was in the double digits across all reported markets and the company ended the year with cash of NOK134m, which we see as more than sufficient to bring the company to profitability in 2018.

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

12/15

134.7

(17.4)

(0.82)

0.0

N/A

N/A

12/16e

148.0

(20.2)

(0.94)

0.0

N/A

N/A

12/17e

170.6

(7.6)

(0.35)

0.0

N/A

N/A

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

Hexvix/Cysview has strongest quarter to date

Photocure reported its highest quarterly revenue to date of NOK34.5m in Q415. Sales of Hexvix/Cysview have recovered after a slow Q3 and growth rates have returned to previous levels. Although the strong sales were partially offset by increased operating expenses, improvements to operating cash flow including working capital allowed the company to generate more cash (NOK134m at Q415) than our previous estimate (NOK127m).

US remains the strongest growth market

Sales of Hexvix/Cysview grew 95% for the quarter (year-on-year) and 87% for the year in the US. Despite reimbursement headwinds, the US remains the company’s greatest growth driver. The growth was in part due to favourable currency exchange rates, but US unit sales grew 41% in Q415, and the total number of centres using blue light cystoscopes increased to 65 compared to 62 in Q315 and 51 in Q414.

Other markets stabilised

Sales of Hexvix/Cysview in the EU through partner Ipsen were up 34% year-on-year in Q415, which reflects the resolution of the inventory drawdowns limiting this revenue stream over the course of the year. EU end user unit sales were stable at 9% growth in Q4. Nordic unit sales decreased slightly by 5% for the quarter, but revenue growth remained strong at 13% for the quarter and 16% for the year.

Valuation: NOK70 per basic share

We have increased 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 slight increase mainly reflects our higher peak sales forecast due to stronger than expected sales in Q415, as well as rolling our NPV model forward by one year, partially offset by currency-related cost pressures.

Sustained growth supports continued development

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.

Q415 and full year results

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.

Exhibit 1: Hexvix/Cysview growth rates year-on-year

(%)

Revenues growth

Unit sales growth

Region

Q3

Q4

Year

Q3

Q4

Year

Nordic

11

13

16

14

-5

5

EU

4

34

17

8

9

6

US

42

95

87

-5

41

33

Global in-market

22

22

20

8

8

7

Source: Photocure

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.

Valuation

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.

Exhibit 2: 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

361

2019-20

Fully owned – US and Nordics, partner with Ipsen in EU (35% royalty)

627

Cevira

HPV-related diseases

Phase III

50%

2020

2,399

2030

17.5%

346

Visonac

Acne

Phase III

60%

2020

2,175

2028

17.5%

392

Total

 

 

 

 

 

 

 

1,365

Cash and cash equivalents (Q415)

134

Total firm value

1,499

Total basic shares (m)

21.4

Value per basic share (NOK)

70

Options (Q415, m)

1.1

Total number of shares (m)

22.5

Diluted value per share (NOK)

67

Source: Edison Investment Research, company reports

Financials

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.

Exhibit 3: Financial summary

NOK'000s

2012

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

133,823

83,616

128,952

134,717

147,975

170,630

Cost of Sales

(9,405)

0

(6,996)

(8,221)

(11,303)

(13,501)

Gross Profit

124,418

83,616

121,956

126,496

136,672

157,129

Sales, General and Administrative Expenses

(113,583)

(114,657)

(95,032)

(117,136)

(126,507)

(132,832)

Research and Development Expense

(50,083)

(33,976)

(32,554)

(31,337)

(35,097)

(36,852)

EBITDA

 

 

(39,248)

(71,846)

(5,630)

(21,977)

(24,932)

(12,556)

Operating Profit (before GW and except.)

(39,248)

(71,846)

(5,630)

(21,977)

(24,932)

(12,556)

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)

(21,977)

(24,932)

(12,556)

Net Interest

8,236

8,688

7,157

4,547

4,729

4,918

Other

(11,356)

(14,015)

(15,573)

(9,772)

0

0

Profit Before Tax (norm)

 

 

(31,012)

(63,158)

1,527

(17,430)

(20,203)

(7,637)

Profit Before Tax (FRS 3)

 

 

(42,368)

(80,867)

(14,046)

(27,201)

(20,203)

(7,637)

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

(17,430)

(20,203)

(7,637)

Profit After Tax (FRS 3)

(41,478)

(72,663)

(14,046)

(27,201)

(20,203)

(7,638)

Average Number of Shares Outstanding (m)

21.3

21.2

21.3

21.4

21.6

21.8

EPS - normalised (NOK)

 

 

(1.42)

(2.59)

0.07

(0.82)

(0.94)

(0.35)

EPS - FRS 3 (NOK)

 

 

(2.79)

(3.44)

(0.66)

(1.27)

(0.94)

(0.35)

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

76,394

68,192

90,749

Intangible Assets

59,951

51,969

42,393

50,615

41,706

63,589

Tangible Assets

4,111

3,681

3,056

2,288

2,996

3,669

Other

40,840

49,109

31,063

23,490

23,490

23,490

Current Assets

 

 

328,076

197,020

194,067

171,670

157,153

132,704

Stocks

9,826

12,624

13,237

13,800

14,352

14,926

Debtors

15,432

17,085

15,585

23,844

24,798

25,790

Cash

302,818

167,258

165,245

134,026

118,003

91,988

Other

0

53

0

0

0

0

Current Liabilities

 

 

(51,089)

(30,307)

(27,466)

(34,039)

(34,039)

(34,039)

Creditors

(51,089)

(30,307)

(27,466)

(34,039)

(34,039)

(34,039)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(1,621)

(2,296)

(3,055)

(3,960)

(4,356)

(4,792)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(1,621)

(2,296)

(3,055)

(3,960)

(4,356)

(4,792)

Net Assets

 

 

380,268

269,176

240,058

210,064

186,949

184,621

CASH FLOW

Operating Cash Flow

 

 

(54,927)

(99,722)

(6,089)

(21,030)

(21,679)

889

Net Interest

0

0

0

0

0

0

Tax

0

0

0

0

0

0

Capex

0

0

(748)

(14,930)

3,235

(29,422)

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

2,326

2,421

2,518

Net Cash Flow

(45,854)

(95,204)

(2,699)

(33,634)

(16,023)

(26,015)

Opening net debt/(cash)

 

 

(355,173)

(302,818)

(167,258)

(165,244)

(134,025)

(118,003)

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

2413

0

0

Closing net debt/(cash)

 

 

(302,818)

(167,258)

(165,244)

(134,025)

(118,002)

(91,988)

Source: Edison Investment Research, company reports

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