adult-close-up-eye-946727

IOPtiMate sales slow as Asian distribution on hold

Biolight Life Sciences 12 September 2017 Update
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BioLight Life Sciences

IOPtiMate sales slow as Asian distribution on hold

Financial update

Pharma & biotech

12 September 2017

Price*

NIS14.72

Market cap

NIS54m

NIS3.58/US$

*Priced as at 08 September 2017

Net cash (NISm) at H117

25.5

Shares in issue

3.6m

Free float

43%

Code

BOLT

Primary exchange

TASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.5)

20.7

3.5

Rel (local)

(8.0)

24.0

7.4

52-week high/low

NIS16.8

NIS8.4

Business description

Based in Israel, BioLight Life Sciences is an emerging ophthalmic company focused on the development and commercialisation of products and product candidates that address ocular conditions. Lead products IOPtiMate and VS-101 are directed towards the treatment of glaucoma.

Next events

Decision on IOPtiMate US regulatory strategy

H217

Analysts

Pooya Hemami, CFA

+1 646 653 7026

Maxim Jacobs, CFA

+1 646 653 7027

BioLight reported H117 results in late August and IOPtiMate revenue was lower than expected, due to a pause in distributor activity in China. This interruption may last until there is a definitive conclusion in the pending Chengdu transaction. We have decreased our near-term IOPtiMate forecasts and extended the time runway estimated to achieve our peak sales targets for the product. We now derive an rNPV of NIS109.7-130.7m (down from NIS121.6-135.7m, previously).

Year end

Revenue (NISm)

PBT*
(NISm)

EPS*
(NIS)

DPS
(NIS)

P/E
(x)

Yield
(%)

12/15

1.4

(25.1)

(6.96)

0.0

N/A

N/A

12/16

2.1

(26.3)

(5.55)

0.0

N/A

N/A

12/17e

2.2

(30.1)

(6.88)

0.0

N/A

N/A

12/18e

8.9

(34.6)

(8.81)

0.0

N/A

N/A

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

BioLight reports H117 results

BioLight recently reported H117 revenue of NIS0.574m, an EBITDA loss of NIS13.5m, and a reported net loss of NIS15.32m. As Q117 results were already known, we infer Q217 revenue of NIS0.190m, an EBITDA loss of NIS7.07m, and a reported net loss of NIS7.78m. The Q217 net loss figure included NIS3.04m in losses attributable to non-controlling interests. We had expected Q217 revenue (derived from IOPtiMate sales) of NIS1.16m and an EBITDA loss of NIS5.14m.

IOPtima distribution activities in Asia on hold

IOPtiMate’s Q217 revenue was well below our expectations, as H117 BioLight revenue declined 32% y-o-y to NIS0.574m. Management explains that the current primary distributor for China has halted most of its continuing sales efforts, due to IOPtima’s ongoing negotiations for it to be sold to Chengdu Kanghong Pharma (which would become the new distributor in Asia if the sale were to proceed). Hence, a majority of IOPtima sales in China are on hold pending the result of the IOPtima sale negotiations with Chengdu. If the negotiations terminate without a transaction, the current distributor is expected to recommence sales efforts.

Valuation: Risk-adjusted rNPV of NIS109.7-130.7m

Eye-D VS-101 remains the largest potential source of revenue for the company, and we continue to use a 30% probability of success estimate for this project. After reducing our near-term IOPtiMate estimates, extending the duration needed to achieve peak sales, and adjusting forex assumptions (and the public market value of held Micromedic shares), we now obtain an rNPV of NIS109.7-130.7m (down from NIS121.6-135.7m). BioLight’s H117 net cash position of NIS25.5m (with NIS13.5m held at the parent company and the remainder at its subsidiaries) should be sufficient for the company to maintain operations into Q417. Our base case model assumes that BioLight will raise NIS18m in H217 and NIS30m in 2018 to maintain its operations and development strategy. For modelling purposes, we assign these financings to long-term debt. We have not adjusted our model for the potential IOPtima sale to Chengdu.

BioLight reports H117 financials

BioLight reported H117 financials in late August 2017; H117 revenue was NIS0.574m, the EBITDA loss was NIS13.5m, and the reported net loss was NIS15.32m. Given that BioLight had reported Q117 results in May 2017, we infer Q217 revenue of NIS0.190m, an EBITDA loss of NIS7.07m, and a reported net loss of NIS7.78m. This Q217 net loss figure included NIS3.04m in losses attributable to non-controlling interests, including those attributed to the Micromedic subsidiary (BioLight owns 34% of Micromedic). Excluding the non-controlling interests, the Q217 net loss attributable to BioLight shareholders was NIS4.74m.

While BioLight consolidates the financial results of the Micromedic subsidiary in its financials, our forecasts do not include projections or considerations for Micromedic. Overall, we had expected Q217 BioLight revenue of NIS1.16m, an EBITDA loss of NIS5.14m, and a net loss of NIS5.27m.

While BioLight does not break down its revenue by product line or subsidiary, we estimate that as in prior quarters, the large majority of reported Q217 revenue reflected IOPtima-related sales (including capital equipment sales and per-procedure recurring revenue). We believe that a small proportion of Q217 revenue (proportion undisclosed by the company) was recognised from the analysis services agreement entered by DiagnosTear (one of BioLight’s subsidiaries, with an 82% ownership interest) with an undisclosed pharmaceutical company in February 2017. Under their agreement, the undisclosed partner will use DiagnosTear’s TeaRx multi-parameter diagnostic assays as part of a clinical trial for dry eye syndrome (DES). BioLight indicates this entire contract agreement should provide revenue in the hundreds of thousands of Israeli shekels range, and a positive gross margin, over the term of the services agreement (which we estimate could last into early 2018). BioLight recently also confirmed that as part of its TeaRx development plans, it has started recruitment for a European TeaRx validation study, which could end by YE17 and would be used to support a regulatory filing for the approval of this diagnostic test in Europe.

IOPtima revenue fell below expectations as distributor paused sales efforts

We estimate that IOPtima Q217 revenue was approximately NIS0.15-0.19m, which is well below our Q117 estimate of NIS1.16m. In Q216 BioLight reported revenue (of which IOPtima revenue reflected the large majority) of NIS0.09m. IOPtiMate sales growth has stalled recently, as shown by H117 BioLight revenue declining 32% y-o-y to NIS0.574m. Management explains that the current primary distributor for China has halted most of its continuing sales efforts, due to IOPtima’s ongoing negotiations for it to be sold to Chengdu Kanghong Pharma (which would become the new distributor in China if the sale were to proceed). If a sale occurs, then Chengdu will start distribution activities; if the negotiations terminate without a transaction, the current distributor is expected to recommence sales efforts. Altogether, we estimate that a considerable proportion of ex-US IOPtima sales are currently on hold pending the result of the IOPtima sale negotiations with Chengdu.

Potential IOPtima sale to Chengdu still under consideration

On 19 April 2017, BioLight’s IOPtima subsidiary (of which BioLight holds a 70% ownership stake) signed a non-binding term sheet, which calls for it to be sold to a Chinese company, Chengdu Kanghong Pharma. As detailed in our 2 May 2017 research note, the proposed transaction is arranged in several tranches, whereby existing IOPtima shareholders (eg BioLight) could begin receiving cash proceeds from the sale approximately six months from the formal signing of the transaction.

As a reminder, on signing of a formal transaction, initially Chengdu would invest $7m in IOPtima for a 19% stake in the company. Six months after this initial investment, Chengdu would acquire additional shares in IOPtima from the existing shareholders for $17.2m (about NIS62m), thereby raising its stake to 60% (this would value IOPtima at about $42m at that point). This amount would be allocated to IOPtima shareholders on a pro rata basis and according to the preferences assigned to different classes of IOPtima shares. While BioLight owns 70% of IOPtima equity, the different IOPtima share classes and their assigned preferences have not been disclosed, and hence the potential allocation to BioLight (of this $17.2m payment) has not yet been disclosed. In two further stages, scheduled for 2019 and 2021, respectively, Chengdu would acquire the remaining shares in IOPtima (20% of IOPtima in each stage). The price to be paid by Chengdu in each of these two stages (each corresponding to a purchase of 20% of IOPtima’s equity) would be determined using a pricing formula that is dependent on IOPtima’s profitability at the time (and that price would be calculated separately for each of these two stages), and that can correspond to an IOPtima firm valuation of between $40.5m to $56.25m. We believe BioLight is continuing to work with Chengdu to finalise a formal transaction, but as of yet, there is still no assurance that this process will be completed.

Financials

BioLight’s shareholder rights offering (described in our 19 June 2017 update note) was subscribed at a 96% level, which led to the sale of 1.028m new shares at NIS11.20 per share, and gross proceeds of NIS11.5m. The offering increased BioLight’s shares outstanding by 39%. The completion of the rights offering helped fulfil the firm’s imminent need to raise additional funds, as it finished Q217 with NIS25.5m in net cash (NIS25.1m cash and equivalents and NIS0.4m in short-term deposits). However, NIS11.6m of this cash is held at IOPtima and other BioLight subsidiaries (NIS9.9m at IOPtima, NIS1.3m at Micromedic and NIS0.5m at other subsidiaries), and BioLight prefers to avoid inter-corporate cash transfers to the parent company. Hence, the parent company (BioLight) only had c NIS13.5m in net cash available at Q217.

BioLight had an H117 operating cash burn rate (including all subsidiaries) of NIS12.8m, and we estimate a similar burn rate in future quarters. Hence, we believe BioLight’s cash on hand should last into Q417, assuming that no inter-company transfers will take place. This runway could potentially also be sufficient to allow for the closing or finalisation of the IOPtima sale to Chengdu.

We continue to model that BioLight will raise NIS18.0m in H217 in debt to sustain its operations and R&D projects. We continue to model that BioLight will raise NIS30.0m in 2018 and NIS25.0m in 2019. For modelling purposes, we assign these financings to long-term debt.

Given the uncertainty as to whether the Chengdu transaction will proceed, we have not adjusted our model or valuation for this potential transaction (our model continues to assume that IOPtima will operate as a separate, BioLight-controlled entity). We continue to assume that IOPtiMate ex-US sales will account for the majority of near-term BioLight revenue, and that R&D and other operating costs will exceed sales growth in the near term. We have not materially changed our G&A and R&D estimates for the remainder of 2017 and for 2018. However, given the slowdown in IOPtima sales as the Chinese market distribution activities are on hold, we have decreased our IOPtima sales forecasts for 2017 and 2018, to NIS2.2m and NIS8.6m, respectively, from NIS4.9m and NIS11.0m, respectively. We have not reduced our peak sales estimates, but have extended the amount of time expected to reach peak sales by one year in both the US market (to 2027) and also in ex-US markets (to 2024).

Valuation

As we do not include completion of the Chengdu transaction in our forecasts, our BioLight valuation continues to include the prospects for IOPtiMate, Eye-D VS-101 and TeaRx. We apply a risk-adjusted net present value (rNPV) model with a 12.5% cost of capital. For each of these projects, we provide a weighted rNPV based on BioLight’s ownership of the associated subsidiary company. For IOPtiMate, we continue to apply a lower probability of success for our US forecasts than our ex-US market forecasts, as the product has yet to receive US regulatory clearance, while it is already cleared for sale in Europe and China. As we have decreased our near-term IOPtima revenue estimates and prolonged the time runway needed to achieve our peak sales targets, our IOPtiMate valuation components have mildly decreased. Eye-D VS-101 remains the largest potential source of revenue for the company, and we continue to use a 30% probability of success estimate for this project. After adjusting our IOPtiMate estimates and adjusting forex assumptions (and the public market value of held Micromedic shares), we now obtain an rNPV of NIS109.7-130.7m (down from NIS121.6-135.7m, previously).

Exhibit 1: BioLight Life Sciences rNPV assumptions

Product contributions (net of R&D costs)

Indication

rNPV
(NISm)

rNPV/share (NIS)

Probability of success

Launch year

Peak sales (US$m)

IOPtiMate for ex-US Markets (70% weighted)

Glaucoma

83.5

22.97

70.0%

2015

$22.1 in 2024

IOPtiMate in US Market (70% weighted)

Glaucoma

24.2

6.65

40.0%

2021

$23.4 in 2027

VS-101 (97% weighted)

Glaucoma

122.1

33.60

30.0%

2020

$69.8 in 2026

TeaRx (80% weighted)

DES diagnosis

26.1

7.18

50.0%

2017

$19.8 in 2025

Corporate costs & expenses

SG&A expenses

(58.4)

(16.08)

Net capex, NWC & taxes

(90.4)

(24.88)

Value of Micromedic shares (MCTC, TASE)*

3.3

0.90

Total rNPV

110.3

30.35

Net cash (debt) (H117)

25.5

7.01

Total equity value**

135.8

37.36

FD shares outstanding (000) (H117)

3,634

Source: Edison Investment Research. Note: *5.29m shares held with 6 September 2017 price of NIS0.617 per share. **Excludes the impact from any dilution resulting from any future equity offerings.

Exhibit 2: Financial summary

NIS000s

2014

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

941

1,391

2,111

2,217

8,937

20,061

Cost of Sales

(538)

(734)

(996)

(1,172)

(4,022)

(9,027)

Sales, General & Administrative

(8,529)

(11,956)

(10,360)

(10,234)

(9,193)

(11,640)

Research & Development

(18,560)

(13,045)

(10,982)

(18,010)

(27,800)

(21,800)

EBITDA

 

 

(26,686)

(24,344)

(20,227)

(27,199)

(32,077)

(22,406)

Depreciation

(3,884)

(1,306)

(3,190)

(1,329)

(2,400)

(2,400)

Amortization

0

0

0

0

0

0

Operating Profit (before exceptionals)

 

(30,570)

(25,650)

(23,417)

(28,528)

(34,477)

(24,806)

Exceptionals

(5,886)

(2,475)

(7,357)

241

0

0

Other

0

0

0

0

0

0

Operating Profit

(36,456)

(28,125)

(30,774)

(28,287)

(34,477)

(24,806)

Net Interest

448

543

(2,836)

(1,563)

(143)

(800)

Profit Before Tax (norm)

 

 

(30,122)

(25,107)

(26,253)

(30,091)

(34,620)

(25,606)

Profit Before Tax (FRS 3)

 

 

(36,008)

(27,582)

(33,610)

(29,850)

(34,620)

(25,606)

Tax

0

0

0

0

0

0

Profit After Tax and minority interests (norm)

(17,216)

(16,784)

(14,467)

(23,224)

(32,024)

(24,744)

Profit After Tax and minority interests (FRS 3)

(23,102)

(19,259)

(21,824)

(22,983)

(32,024)

(24,744)

Average Number of Shares Outstanding (m)

1.9

2.4

2.6

3.4

3.6

3.6

EPS - normalised (NIS)

 

 

(8.91)

(6.96)

(5.55)

(6.88)

(8.81)

(6.81)

EPS - normalised and fully diluted (NIS)

 

(8.91)

(6.96)

(5.55)

(6.88)

(8.81)

(6.81)

EPS - (IFRS) (NIS)

 

 

(11.96)

(7.98)

(8.37)

(6.80)

(8.81)

(6.81)

Dividend per share (NIS)

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

8,002

9,832

5,282

7,910

13,749

17,749

Intangible Assets

7,106

6,869

3,910

3,910

3,910

3,910

Tangible Assets

896

2,963

1,372

4,000

9,839

13,839

Current Assets

 

 

32,432

53,439

30,031

30,501

16,289

13,298

Short-term investments

6,408

385

417

382

382

0

Cash

22,196

50,697

25,057

27,476

9,406

1,928

Other

3,828

2,357

4,557

2,643

6,500

11,370

Current Liabilities

 

 

(6,552)

(6,605)

(6,988)

(7,121)

(772)

(1,525)

Creditors

(6,552)

(6,605)

(6,988)

(7,121)

(772)

(1,525)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(8,144)

(9,605)

(11,915)

(29,653)

(59,653)

(84,653)

Long term borrowings

0

0

0

(18,000)

(48,000)

(73,000)

Other long term liabilities

(8,144)

(9,605)

(11,915)

(11,653)

(11,653)

(11,653)

Net Assets

 

 

25,738

47,061

16,410

1,637

(30,387)

(55,130)

CASH FLOW

Operating Cash Flow

 

 

(27,435)

(24,580)

(24,106)

(22,885)

(39,687)

(25,279)

Net Interest

448

543

(2,836)

(1,563)

(143)

(800)

Tax

0

0

0

0

0

0

Capex

(402)

(182)

(370)

(4,066)

(8,239)

(6,400)

Acquisitions/disposals

0

(837)

(227)

(192)

0

0

Financing

38,374

47,320

2,554

11,479

0

0

Net Cash Flow

10,985

22,264

(24,985)

(17,227)

(48,070)

(32,478)

Opening net debt/(cash)

 

 

(17,901)

(28,604)

(51,082)

(25,474)

(9,858)

38,212

HP finance leases initiated

0

0

0

0

0

0

Other

(282)

214

(623)

1,611

0

0

Closing net debt/(cash)

 

 

(28,604)

(51,082)

(25,474)

(9,858)

38,212

70,690

Source: BioLight Life Sciences reports, Edison Investment Research. Note: The reported financial results consolidate Micromedic’s

financials, and forecast financial results (2017e and beyond) do not include Micromedic operations.

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Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. 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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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