Orchard deal adds to growing revenue stream

Oxford BioMedica 2 December 2016 Update

Oxford BioMedica

Orchard deal adds to growing revenue stream

Company update

Pharma & biotech

2 December 2016

Price

3.50p

Market cap

£108m

Net cash (£m) at end June 2016
(excl. £11.5m equity raise in September 2016)

11.9

Shares in issue

3,088.0m

Free float

83%

Code

OXB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.9)

(15.7)

(41.8)

Rel (local)

(6.0)

(15.5)

(44.4)

52-week high/low

7.8p

3.0p

Business description

Oxford BioMedica has a leading position in gene-based therapy. The lenti-vector technology is wide ranging and underpins much of the development pipeline, notably OXB-102, OXB-202 and OXB-302. OXB’s manufacturing expertise, is gaining valuable commercial traction.

Next events

CTL019 NDA in pALL

Q117

FY16 results

Q117

Further partnership deals

2016/17

Licensing deals/spin-outs

2017/18

Analysts

Dr Susie Jana

+44 (0) 20 3077 5700

Daniel Wilkinson

+44 (0)20 3077 5734

Oxford BioMedica is a research client of Edison Investment Research Limited

Oxford BioMedica’s (OXB’s) recently announced strategic alliance with Orchard Therapeutics further underpins the value the wider cell therapy market sees in its in-house capabilities. OXB will develop and supply lentiviral vectors to Orchard for use in primary immune deficiency and inherited metabolic disorders. OXB has received a 1.95% equity stake in Orchard and will receive royalties on future of products covered by the deal. Our valuation for OXB remains unchanged at £173m (6.2p/share).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

13.6

(10.4)

(0.41)

0.0

N/A

N/A

12/15

15.9

(16.6)

(0.49)

0.0

N/A

N/A

12/16e

27.5

(13.6)

(0.34)

0.0

N/A

N/A

12/17e

33.6

(8.7)

(0.15)

0.0

N/A

N/A

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

Orchard Therapeutics deal adds to growing list

The strategic collaboration with Orchard Therapeutics adds to OXB’s growing list of collaborators, which look to capitalise on OXB’s technical knowhow and manufacturing facilities. It will focus on two initial rare indications, adenosine deaminase severe combined immunodeficiency (ADA-SCID) and mucopolysaccharidosis-IIIA (Sanfilippo Syndrome type A) along with undisclosed follow-on indications. OXB will provide process development services and manufacture clinical and commercial GMP-grade vectors for Orchard, which will manufacture the ex-vivo gene therapy products. In addition to the initial 1.95% equity stake, OXB could receive a further 1.95% in equity if it meets defined undisclosed performance related targets.

CTL019 at ASH 2016: Data will determine next steps

Upcoming presentations at ASH 2016 (3-6 December) by Novartis on CTL019 should give further insight into the efficacy and safety of product (OXB’s lentiviral technology is an integral component). After further setbacks for Juno Therapeutics CD19 programme (after two patient deaths), Novartis is well positioned to race Kite Pharma to market. Key to this will be its data on safety and duration of response, two closely watched metrics of all CAR-T therapies. OXB’s lentiviral technology remains vital to Novartis’s CTL019 product and any ability to capture a larger share of the diffuse large B-cell lymphoma (DLBCL) and paediatric acute lymphoblastic lymphoma (ALL) markets will result in increased royalties and manufacturing revenue for OXB.

Valuation: Manufacturing and pipeline at £173m

We retain our valuation of £173m or 6.2p/share. Our rNPV model consists of the clinical-stage pipeline, coupled with a DCF value for OXB’s manufacturing and IP income net of corporate costs and 2015 net debt. In the near term, the valuation is underpinned by manufacturing deals. Furthermore, regulatory approval of Novartis’s CTL019, with filing anticipated in 2017, could see significant further increase in demand for OXB vectors.

OXB: Gene and cell therapy expertise

OXB is a leading player in gene- and cell-based medicines as shown by the growing number of collaborations. Its expertise with the various aspects of developing and commercialising lentiviral products continues to be recognised, as does the strength of its intellectual property (IP) relating to gene and cell therapy drug development. This is highlighted by deals this year with Orchard Therapeutics, Green Cross LabCell and Immune Design. OXB’s commercial production of cell therapies is expected to continue to be a main source of revenue in the near term and should lead to further contracts.

We forecast manufacturing income streams through to 2029. In the main, these are based on the Novartis contract being extended (assuming CTL019 is approved). The partnership with Novartis is focused around CTL019 (OXB is the sole supplier of the lentiviral vector for the CTL019 clinical study) and an undisclosed CAR-T programme is still set to provide up to $76m of performance-based milestones. A regulatory approval for CTL019 could see production rates of the lentiviral vector used in CTL019 increase, which we believe could add significantly to OXB’s revenue stream via royalty payments.

An internal review in April 2016 led to the prioritisation of three internally developed pipeline assets: OXB-102 (Parkinson’s disease – Phase I/II), OXB-202 (corneal graft rejection – Phase I/II) and OXB-302 (cancer, multiple types – preclinical), which could deliver the best potential economic returns. The goal of each is to be advanced to at least proof of concept in humans via out-licensing or through formation of externally funded SPVs. OXB will look to obtain value through upfront payments, equity stakes or developmental milestones and royalty on sales. Product candidates that fall outside the priority programme (OXB-201 for wet age related macular degeneration and OXB-301 for multiple cancers) will only be progressed once suitable opportunities like partnering enable reduced investment from OXB. The group will continue to invest in earlier-stage gene and cell therapy concepts (eg in ocular, CNS and respiratory indication) with the aim of identifying new candidates for further development via out-licensing or spin-outs.

Nearer term, OXB’s outlook and our sum-of-the-parts valuation are highly geared to the value from the manufacturing, IP licence and collaboration revenue streams, notably the fate and fortune of CTL019 (for multiple haematological malignancies including paediatric ALL and diffuse large B-cell lymphoma). Novartis will file a biologics licence application in early 2017 and OXB will receive royalties on product sales.

Sensitivities

OXB is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks and financing and commercial risks. A key longer-term sensitivity for OXB relates to it crystallising value from the early-stage pipeline. Both clinical development and partnering risks remain and we have limited visibility on the terms and timing of any potential deal(s). Furthermore, the company has invested around £26m in establishing a GMP facility (and the associated infrastructure) to manufacture cell- and gene-therapy products at commercial scale. The rationale is sound, with the potential to use spare capacity for third-party production offering the prospect of an additional revenue stream. OXB is highly exposed to any potential delay or cancellation of Novartis’s CTL-019; this would entail incurring operating costs (estimated at greater £2m pa) until the surplus capacity was utilised.

Valuation

Our sum-of-the-parts valuation consists of an rNPV model of the R&D pipeline, coupled with a simple DCF valuation of the projected manufacturing revenues and our forecast licence income and IP royalties and milestones (Exhibit 1). Our valuation of £173m or 6.2p/share is based on a number of assumptions, which are highlighted in the table below. We have applied a top-down analysis of the Parkinson’s disease and corneal graft rejection markets, which form the basis of our sales projections for clinical stage, priority assets OXB-102 and OXB-202, respectively. Due to the current lack of clarity on potential future revenue from the Orchard Therapeutics collaboration, we have not adjusted our valuation, as such any income generated from this deal will provide upside.

Exhibit 1: OXB sum-of-the-parts valuation

Product(s)

Indication

Partner

Status

Probability of success

Estimated launch year

Estimated maximum royalty or margin

Estimated peak sales ($m)

NPV
(£m)

rNPV
(£m)

rNPV/ share (p)

OXB-102

Parkinson’s disease

 

Phase I/II

20%

2024

15%

1,048.1

119.0

23.8

0.84

OXB-202

Corneal graft rejection

 

Phase I/II

20%

2026

15%

381.3

33.5

6.7

0.24

OXB-201

Wet AMD

 

Phase I/II

20%

2026

15%

337.5

44.4

8.9

0.31

OXB-301

Cancer (multiple)

 

Phase I/II

20%

2024

15%

360.0

28.1

5.6

0.20

SAR422459 (StarGen)*

Stargardt disease

Sanofi

Phase IIa

25%

2021

7%

337.5

29.3

7.3

0.26

SAR421869 (UshStat)*

Usher syndrome type 1B

Sanofi

Phase I/II

20%

2023

7%

45.0

3.8

0.8

0.03

Manufacturing (including CTL019)

 

Various

 

100%

 

40% operating margin

75.4

103.5

103.5

3.66

Licence income & IP milestones

 

Various

 

100%

 

100% operating margin

 

34.8

34.8

1.23

Less net debt

 

 

 

 

 

 

 

17.9

17.9

0.52

Total

 

 

 

 

 

 

 

378.5

173.4

6.24

Source: Edison Investment Research. Note: *Sanofi has fully licensed these products – we estimate 7% royalty rate on forecast product sales. rNPV = risk-adjusted NPV.

Our DCF model for the manufacturing income streams forecasts the lentiviral production revenues (OXB solution) through to 2029. We separately model milestone and licence income to reflect the value of Novartis CTL019 (potential incoming royalty stream from CTL019 should the Novartis contract be extended; assuming CTL019 is approved) and other deals, eg Immune Design and Green Cross LabCell. These are summed and discounted at 10%, in line with other revenue generating units under Edison coverage. We estimate that Novartis will launch CTL019 for DLBCL and paediatric ALL mid- to late 2017, with combined royalties expected in 2017 of £978k and peak combined royalties in 2023 of £12.4m. We assume OXB will be due a 1% royalty on sales for both indications. Further information on our valuation methodology can be found in our recently published outlook note.

Financials

OXB reported H116 gross income (the aggregate of revenues and other operating income) of £14.0m, an increase of 141% from £5.8m in H115, driven by higher bioprocessing and process development income due mainly to process development activities for Novartis (CTL019). R&D collaboration revenues (licence, milestone and grant income) increased slightly to £1.5m (£1.4m in H115). R&D and bioprocessing costs increased to £16.1m (£11.7m in H115), and we expect a further uplift in these expenses in 2016 to £20.0m; however, from 2017 we forecast a significant reduction reflecting the near-term strategy to out-license or spin out the product portfolio (£16.5m in 2017 and £14.5m in 2018). We forecast a small loss at the EBITDA level in 2017 and a profit of £3.6m in 2018. For a full breakdown of OXB’s financials please see our recently published outlook note.

Exhibit 1: Financial summary

£'000s

 

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

13,618

15,909

27,500

33,600

38,190

Cost of Sales

(4,416)

(5,839)

(12,200)

(15,240)

(17,076)

Gross Profit

9,202

10,070

15,300

18,360

21,114

R&D

(16,986)

(20,274)

(20,000)

(16,500)

(14,500)

Other operating income

1,128

2,862

2,000

1,000

1,000

EBITDA

 

 

(9,514)

(12,456)

(6,760)

(995)

3,556

Depreciation

(703)

(1,264)

(2,592)

(3,193)

(3,176)

Operating profit (before GW and except)

 

(10,217)

(13,720)

(9,353)

(4,188)

380

Amortisation

(396)

(363)

(291)

(242)

(202)

Exceptionals

0

0

0

0

0

Operating profit

 

 

(10,613)

(14,083)

(9,643)

(4,430)

178

Net Interest

(185)

(2,899)

(4,266)

(4,468)

(4,679)

Other

0

0

0

0

0

Profit Before Tax (norm)

 

 

(10,402)

(16,619)

(13,619)

(8,656)

(4,299)

Profit Before Tax (reported)

 

 

(10,798)

(16,982)

(13,909)

(8,898)

(4,501)

Tax

2,137

3,963

4,000

4,000

4,000

Profit After Tax (norm)

(8,265)

(12,656)

(9,619)

(4,656)

(299)

Profit After Tax (reported)

(8,661)

(13,019)

(9,909)

(4,898)

(501)

Average Number of Shares Outstanding (m)

2,019

2,574

2,831

3,087

3,087

EPS - normalised (p)

 

 

(0.41)

(0.49)

(0.34)

(0.15)

(0.01)

EPS - reported (p)

 

 

(0.43)

(0.51)

(0.35)

(0.16)

(0.02)

Dividend per share (p)

 

 

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

67.6%

63.3%

55.6%

54.6%

55.3%

EBITDA Margin (%)

(69.9%)

(78.3%)

(24.6%)

(3.0%)

9.3%

Operating Margin (before GW and except) (%)

(75.0%)

(86.2%)

(34.0%)

(12.5%)

1.0%

BALANCE SHEET

Fixed Assets

 

 

11,050

26,139

30,256

27,821

25,443

Intangible Assets

2,106

1,743

1,453

1,210

1,009

Tangible Assets

8,944

24,396

28,804

26,610

24,434

Current Assets

 

 

22,755

25,712

31,725

31,854

35,227

Stocks

1,407

2,706

4,178

5,219

5,848

Debtors

5,153

10,930

6,986

7,545

8,677

Cash

14,195

9,355

17,276

15,805

17,418

Other

2,000

2,721

3,284

3,284

3,284

Current Liabilities

 

 

(9,231)

(13,169)

(14,423)

(15,669)

(15,757)

Creditors

(6,304)

(9,286)

(9,192)

(10,438)

(10,526)

Provisions

0

(838)

(838)

(838)

(838)

Deferred income

(2,927)

(3,045)

(4,393)

(4,393)

(4,393)

Long Term Liabilities

 

 

(1,535)

(27,788)

(29,072)

(30,417)

(31,825)

Long term borrowings

(1,000)

(27,255)

(28,539)

(29,884)

(31,292)

Other long term liabilities

(535)

(533)

(533)

(533)

(533)

Net Assets

 

 

23,039

10,894

18,486

13,588

13,087

CASH FLOW

Operating Cash Flow

 

 

(7,431)

(14,871)

(3,035)

(1,348)

1,884

Net Interest

(238)

(1,494)

(2,997)

(3,138)

(3,286)

Tax

1,637

3,247

3,437

4,000

4,000

Capex

(5,577)

(16,716)

(7,000)

(1,000)

(1,000)

Acquisitions/disposals

0

0

0

0

0

Financing

22,582

144

17,501

0

0

Dividends

0

0

0

0

0

Other

53

38

15

15

15

Net Cash Flow

11,026

(29,652)

7,921

(1,471)

1,613

Opening net debt/(cash)

 

 

(2,169)

(13,195)

17,900

11,263

14,079

HP finance leases initiated

0

0

0

0

0

Other

0

(1,443)

(1,284)

(1,345)

(1,409)

Closing net debt/(cash)

 

 

(13,195)

17,900

11,263

14,079

13,875

Source: Oxford BioMedica, 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. 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 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Oxford BioMedica 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.
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Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Oxford BioMedica 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.
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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

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