Moving towards key decision points

Pacific Edge 17 November 2015 Update

Pacific Edge

Moving towards key decision points

Commercial update

Pharma & biotech

17 November 2015

Price

NZ$0.42

Market cap

NZ$158m

NZ$1.53/US$

Net cash (NZ$m) at 30 March 2015

7.8

Shares in issue

376.5m

Free float

74%

Code

PEB

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.7)

(26.3)

(48.4)

Rel (local)

(10.8)

(28.3)

(50.2)

52-week high/low

NZ$0.91

NZ$0.41

Business description

Pacific Edge develops and sells molecular diagnostic tests based on biomarkers for the early detection and management of cancer. Cxbladder Detect is sold in New Zealand, Australia and the US and complementary product Cxbladder Triage was launched in New Zealand in December (US launch planned mid-2015). The pipeline includes additional tests in bladder, colorectal and gastric cancers.

Next events

US launch Cxbladder Triage

2015

Decision on Commercialisation VA/CMS

Early/mid-2016

Cxbladder Monitor launch New Zealand

2015

Interim results

26 November 2015

Analysts

Katherine Genis

+1 646 653 7026

Christian Glennie

+44 (0)20 3077 5727

Pacific Edge continues to make progress commercialising its bladder cancer diagnostics tests as key user programmes move towards critical junctures. We anticipate the company will convert user programmes into full commercial contracts over the next year, while new programmes continue to be initiated. We also expect decisions on a go-ahead for commercialisation with key public health organisations in the US, while laboratory throughput of Cxbladder tests continues to move upwards, reflecting steadily growing adoption by new customers and the expansion of testing through user programmes. Our fair value is amended slightly to NZ$496m due to exchange rate movements.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

0.5

(9.8)

(3.4)

0.0

N/A

N/A

03/15

3.7

(11.1)

(3.5)

0.0

N/A

N/A

03/16e

8.5

(15.1)

(4.1)

0.0

N/A

N/A

03/17e

28.2

1.7

0.4

0.0

N/A

N/A

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

Judgment time ahead in the US

Pacific Edge awaits approval for use of its bladder cancer diagnostics tests from two major public organisations in the US, the Veteran’s Administration (VA) and Centers for Medicare and Medicaid Services (CMS), each representing major market opportunities. The company is now in the final stages of a lengthy review process with the VA to gain access to the Federal Supply Schedule that will enable sales to VA urologists. Management expects discussions with the CMS on approval and reimbursement for Cxbladder tests to conclude in mid-2016. CMS, according to Pacific Edge, represents c 40% of its total target market.

Converting user programmes to sales

In early November, Pacific Edge reported semi-annual laboratory throughput numbers – a figure combining both user programmes test kits and commercial sales worldwide. Cxbladder tests increased 19% in the six months to 30 September from the prior six months (185% y-o-y). A number of user programmes are underway in the US with the potential to convert to commercial sales over the next year, including with the sizeable Southern California Permanente Medical Group.

Valuation: Edges up to NZ$496m

Our valuation for Pacific Edge edges upwards to NZ$496m (NZ$1.32 per share) from NZ$487m (NZ$1.29/share) purely on the back of a slight strengthening of the US dollar (>95% of our forecast sales are derived from the US). Following the NZ$35m rights offer in July, the company looks to have sufficient liquidity to fund operations into 2017, at which time we expect Pacific Edge to become profitable.

Pacific Edge is a research client of Edison Investment Research Limited

Working towards full commercialisation

Pacific Edge is moving towards fully commercialising its molecular diagnostics testing with a steady increase in sales from existing customers, albeit off a low base, and with healthcare organisations' ongoing testing through user programmes. A number of these programmes are underway in the US where we await news on the slightly delayed recruitment for the sizeable Southern California Permanente Medical Group. In Singapore, the first user programme at Tan Tock Seng hospital is testing the potential for Cxbladder products in South-East Asia for patients needing testing for bladder cancer as well as those coming to SEA for routine medical check-ups. Sales in the smaller New Zealand market are slowly building, where a third product, Cxbladder Monitor, is targeted for launch by the year end. In Australia an announcement is expected on a new commercial partnership to drive sales forwards after the company ended its agreement with Healthscope earlier this year.

Exhibit 1: Pacific Edge upcoming newsflow – Cxbladder franchise

Event

Timing (calendar year)

Formal launch Cxbladder Triage US

2015

Enrolment into completion of Kaiser Permanente user programme

Mid-2016

Decisions on commercialisation VA/CMS

Early/mid-2016

Initiate up to four key user programmes in South-East Asia

2015/16

Cxbladder Monitor launch in New Zealand

2015

Cxbladder Predict launch in New Zealand

2016

Event

Formal launch Cxbladder Triage US

Enrolment into completion of Kaiser Permanente user programme

Decisions on commercialisation VA/CMS

Initiate up to four key user programmes in South-East Asia

Cxbladder Monitor launch in New Zealand

Cxbladder Predict launch in New Zealand

Timing (calendar year)

2015

Mid-2016

Early/mid-2016

2015/16

2015

2016

Source: Edison Investment Research

Continued growth in laboratory throughput

In conjunction with a recent company update for investors issued earlier this month, Pacific Edge released its semi-annual laboratory throughput numbers, which include both user programmes and commercial sales worldwide. Absolute numbers are not provided, but the company reported an increase in the number of Cxbladder tests processed through Pacific Edge Laboratories of 19% in the six months to 30 September and an increase of 185% y-o-y. Management also indicated that laboratory throughput continued to grow strongly in September and October following the traditional seasonal downturn in the US.

Exhibit 2: Semi-annual laboratory throughput

Source: Edison Investment Research, company reports

Making inroads with US public and private healthcare organisations

Pacific Edge is making steady progress in the US public sector. Earlier this year, the company submitted its dossier for Cxbladder Detect for approval and addition to the Federal Supply Schedule (VA FSS)1 to gain commercial access to the VA. The company is now in the final stages of a lengthy review process with the VA to gain access to the Federal Supply Schedule that will enable sales to VA urologists. The VA is an organisation that represents a considerable market providing care to approximately nine million veterans and their families. Progress has also been made in the negotiation process with the CMS, and management expect the conclusion of discussion on approval and reimbursement to provide a significant lift in revenue/lab throughput for Cxbladder tests in the coming months. CMS provides healthcare services to the elderly and lower income in the US and, according to Pacific Edge, represents 40% of its total target market. Volumes with the VA and CMS are likely to be significant (although prices fetched will be somewhat lower than that anticipated in non-public markets).

Enables provision of goods and services to government entities and enterprises.

In the private sector, the company’s large user programme with Southern California Permanente Medical Group is currently recruiting an approximate 2,000 patients for the evaluation of the Cxbladder Triage. Recruitment of the pilot programme has been somewhat slower than our expectations but a more rapid ramp-up is expected following the imminent finalisation of a new patient consenting electronic platform and full recruitment is anticipated by mid-2016 We believe a successful conclusion of the programme will provide a critical validation of the Cxbladder technology and its usefulness in clinical workups for those patients with bladder cancer and/or those at risk. We also expect other ongoing US user programmes to conclude and transition to full commercial adoption in the coming quarters.

Pacific Edge is also moving ahead in the US on other fronts. Management plans to hire an extra two sales executives in addition to the current four in the coming months. The new hires will augment the16 sales specialists, which are canvassing 19 earmarked regions. Meanwhile, a soft launch of the company’s second bladder cancer test, Cxbladder Triage, was completed in the US in July with a formal launch planned by year end following the anticipated final CLIA regulatory approval.

Valuation

Our fair value for Pacific Edge is adjusted only slightly to NZ$496m (NZ$1.32 per share) from NZ$487m (NX$1.29 per share) in August 2015 on the edging up of the US dollar against the New Zealand dollar (to NZ$1.53 from NZ$1.51). We derive our valuation by applying our standard 12.5% discount rate, which includes only the sales of Cxbladder Detect and Cxbladder Triage in the US, New Zealand and Australia. We exclude forecasts for potential additional product launches in the Cxbladder franchise, tests in the pipeline for follow-on cancer indications and sales in additional regions, including South-East Asia where Cxbladder is currently in beta testing in Singapore.

Financials

Our short-term estimates have been revised slightly upwards since our last update in August 2015 on exchange rate fluctuations only. The company will publish interim (half-year) results at the end of November, at which time we will revisit our forecasts. In the second half of fiscal 2015 (ending 30 March), Pacific Edge reported product sales of NZ$1.2m on throughput of several thousand tests, up significantly from NZ$715m in H115. We expect sales will remain modest until converting larger-scale user programmes to commercial use begins feeding through to the top line in the latter part of 2016. We currently model sales to top NZ $100m in 2020, more conservative than management’s communicated estimate of reaching NZ$100m by 2018.

Management projects a cash outflow of approximately NZ$15m in 2016 and we are slightly more conservative, forecasting NZ$16.4m. Current cash holdings estimated at NZ$34m at end September – boosted earlier this year by a NZ$35m rights offer – should carry the company through to profitability in 2017.

Exhibit 3: Financial summary

NZ$000s

2013

2014

2015

2016e

2017e

Year-end 31 March

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

PROFIT & LOSS

Revenue

 

 

178

523

3,737

8,470

28,157

Cost of Sales

0

0

(588)

(980)

(2,951)

Gross Profit

178

523

3,148

7,489

25,206

EBITDA

 

 

(6,960)

(9,311)

(10,508)

(14,400)

2,048

Operating Profit (before GW and except.)

(7,155)

(9,579)

(10,816)

(14,847)

1,684

Intangible Amortisation

0

(116)

(151)

(61)

(96)

Exceptionals

0

0

0

0

0

Operating Profit

(7,155)

(9,695)

(10,966)

(14,908)

1,588

Other

(92)

(571)

(750)

(750)

(750)

Net Interest

330

315

510

540

806

Profit Before Tax (norm)

 

 

(6,917)

(9,835)

(11,056)

(15,057)

1,740

Profit Before Tax (FRS 3)

 

 

(6,917)

(9,951)

(11,207)

(15,118)

1,645

Tax

0

0

0

0

(164)

Profit After Tax (norm)

(6,917)

(9,835)

(11,056)

(15,057)

1,576

Profit After Tax (FRS 3)

(6,917)

(9,951)

(11,207)

(15,118)

1,480

Average Number of Shares Outstanding (m)

275.4

291.3

318.6

366.0

376.5

EPS - normalised (c)

 

 

(2.5)

(3.4)

(3.5)

(4.1)

0.4

EPS - FRS 3 (c)

 

 

(2.5)

(3.4)

(3.5)

(4.1)

0.4

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,210

1,305

1,362

1,292

1,289

Intangible Assets

0

193

244

382

491

Tangible Assets

1,081

1,112

1,118

910

797

Other

129

0

0

0

0

Current Assets

 

 

11,012

21,426

11,271

30,332

31,980

Stocks

0

242

623

725

1,000

Debtors

132

574

2,584

2,584

2,584

Cash

10,676

20,444

7,819

26,869

28,242

Other

204

166

245

154

154

Current Liabilities

 

 

(1,078)

(953)

(1,930)

(1,167)

(1,332)

Creditors

(922)

(953)

(1,930)

(1,167)

(1,332)

Short term borrowings

0

0

0

0

0

Short term leases

0

0

0

0

0

Other

(156)

0

0

0

0

Long Term Liabilities

 

 

0

0

0

0

0

Long term borrowings

0

0

0

0

0

Long term leases

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

11,145

21,778

10,703

30,457

31,937

CASH FLOW

Operating Cash Flow

 

 

(6,710)

(9,524)

(13,026)

(16,374)

1,023

Net Interest

0

0

510

540

806

Tax

0

0

0

0

0

Capex

(1,009)

(497)

(427)

(438)

(456)

Acquisitions/disposals

0

0

0

0

0

Financing

445

21,002

0

35,000

0

Dividends

0

0

0

0

0

Other

(9)

(1,232)

1

23

0

Net Cash Flow

(7,283)

9,749

(12,942)

18,750

1,373

Opening net debt/(cash)

 

 

(17,959)

(10,676)

(20,444)

(7,819)

(26,869)

HP finance leases initiated

0

0

0

0

0

Other

0

20

317

300

23

Closing net debt/(cash)

 

 

(10,676)

(20,444)

(7,819)

(26,869)

(28,265)

Source: Pacific Edge accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Pacific Edge and 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. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues