AFT Pharmaceuticals — Re-acceleration leveraging its platform

AFT Pharmaceuticals (ASX: AFT)

Last close As at 27/03/2024

NZD3.05

0.00 (0.00%)

Market capitalisation

NZD320m

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Research: Healthcare

AFT Pharmaceuticals — Re-acceleration leveraging its platform

Overcoming COVID-19 headwinds, AFT Pharmaceuticals reported strong FY22 year results, largely driven by management’s ability to leverage its broad infrastructure to launch new products and push through price increases. Revenues increased 15.2% y-o-y to NZ$130.3m, aided by double-digit growth across all regions. Margins benefited from price increases and scale economies. Management has guided for the FY23 operating profit to be in the range of NZ$27–32m (NZ$20.4m reported in FY22) driven by domestic market traction and ramp up in global roll-out of Maxigesic variants. Following this improved operating performance, the company has announced the initiation of a dividend policy (anticipated to be 20–30% of normalised profit after tax starting FY23). We have increased our valuation slightly to NZ$681m or NZ$6.50/share, from NZ$671m.

Jyoti Prakash

Written by

Jyoti Prakash

Analyst, Healthcare

Healthcare

AFT Pharmaceuticals

Re-acceleration leveraging its platform

Financial update

Pharma and biotech

16 June 2022

Price

NZ$3.9

Market cap

NZ$410m

NZ$0.65/US$

Net debt (NZ$m) at 31 March 2022

29.3

Shares in issue

104.8m

Free float

26.8%

Code

AFT

Primary exchange

NZX

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

19.0

7.8

(14.4)

Rel (local)

25.4

20.6

5.0

52-week high/low

NZ$5.0

NZ$3.1

Business description

AFT Pharmaceuticals is a specialty pharmaceutical company that operates primarily in Australasia but has product distribution agreements across the globe. The company’s product portfolio includes prescription and over-the-counter drugs to treat a range of conditions and a proprietary nebuliser.

Next events

US Maxigesic oral and IV approval

30 June 2022

Analysts

Jyoti Prakash, CFA

+44 (0) 20 3077 5700

Soo Romanoff

+44 (0) 20 3077 5700

Nidhi Singh

+44 (0) 20 3077 5700

AFT Pharmaceuticals is a research client of Edison Investment Research Limited

Overcoming COVID-19 headwinds, AFT Pharmaceuticals reported strong FY22 year results, largely driven by management’s ability to leverage its broad infrastructure to launch new products and push through price increases. Revenues increased 15.2% y-o-y to NZ$130.3m, aided by double-digit growth across all regions. Margins benefited from price increases and scale economies. Management has guided for the FY23 operating profit to be in the range of NZ$27–32m (NZ$20.4m reported in FY22) driven by domestic market traction and ramp up in global roll-out of Maxigesic variants. Following this improved operating performance, the company has announced the initiation of a dividend policy (anticipated to be 20–30% of normalised profit after tax starting FY23). We have increased our valuation slightly to NZ$681m or NZ$6.50/share, from NZ$671m.

Year end

Revenue
(NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/21

113.1

8.2

7.1

0.00

N/A

N/A

03/22

130.3

18.9

19.2

0.00

N/A

N/A

03/23e

155.9

27.0

20.4

4.04

N/A

N/A

03/24e

194.2

43.5

30.0

5.94

N/A

N/A

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

Domestic market growth drives FY22 results

Despite continued COVID-19 headwinds, AFT’s FY22 uptrend was largely aided by new launches. A solid recovery was observed across Australia with sustained growth in New Zealand (collectively contributing 86% of sales), which delivered a combined revenue uplift of c 13% y-o-y. The company’s largest market, Australia with 59% of sales, reported improving profitability, with the operating margin increasing from 12% to 20%. This improvement drove group margins, which expanded to 15.6% from 9.5% in FY21. With 20 product launches planned for the next year, we expect this momentum to continue into FY23.

Maxigesic action plan for FY23

The roll-out of Maxigesic, AFT’s core IP product line, slowed down in FY22 with continued COVID-19 headwinds. Despite resulting launch delays, AFT anticipates a strong recovery in FY23 with the planned addition of 17 incremental markets (three new market launches in FY22) from the existing 46 currently for the Maxigesic tablet formulation. To date the company has launched Maxigesic IV in seven countries, and we expect the upcoming FDA decision (PDUFA date set for 30 June 2022) on the IV formulation (outlicensed to Hikma Pharmaceuticals) to be a key near-term catalyst.

Valuation: NZ$680.8m or NZ$6.50 per share

We have made slight adjustments to our forecasts based on the FY22 performance, management guidance for FY23 and our updated assessment of the company’s operations. Overall, our valuation increases slightly to NZ$680.8m or NZ$6.50 per share (from NZ$671m or NZ$6.41 per share). We also note the additional income stream to investors with the announced dividend initiation, with first payout (interim dividend) expected in H223.

FY22 results reflect robust domestic market growth

AFT Pharmaceuticals is a New Zealand based specialty pharmaceuticals company selling over 130 proprietary and in-licensed products, covering a wide range of therapeutic categories primarily in the over the counter (OTC) markets (c 60% of sales). The remaining 40% is derived from prescription and hospital products. The company markets its products directly in its domestic markets (Australia and New Zealand) and through distribution/licensing agreements in other markets like Asia and the rest of the world. AFT lowers its overall risk by steering away from drug development of new chemical entities and instead focuses on improving existing treatments. The product portfolio is an equal mix of own-brand products, in-licensed products rebranded and sold by AFT and in-licensed products sold under partner brands. All products are manufactured through contract manufacturers across the globe, resulting in reduced overheads while offering a broader manufacturing scale and scope. Maxigesic (analgesic) is one of top-selling products for AFT (15–20% of total sales, to our knowledge) and the company is currently focusing on its global roll-out.

AFT reported revenue of NZ$130.3m in FY22 (the period ending 31 March 2022). This represented a solid 15.2% growth over FY21, primarily driven by double-digit growth across all regions despite COVID-19 headwinds and supply chain interruptions during the year. The growth was skewed towards H222 (NZ$74.8m in revenues versus NZ$55.5m in H122), benefiting from new product launches. Increased licensing revenues from international operations (aided by the one-time fee of NZ$4.8m from the licensing agreement with Hikma Pharmaceuticals in H122) was another factor supporting this re-acceleration. Domestic markets (Australia and New Zealand) accounted for 86% of the total group revenue, while the remaining 14% was contributed by other Asian markets and international business.

Despite inflationary pressures and increased input costs during the period, the FY22 gross profit margin improved by over four percentage points (to 47.4% from 43.1% in FY21 due to an improving product mix and the ability to pass through cost increases in OTC products, along with contribution from the Maxigesic IV licensing deal in the United States (which fell straight through to the bottom-line). The higher revenues allowed the company to scale overhead expenses in sales and marketing (S&M) and general and administrative (G&M), and as a result the operating margin expanded to 15.6%, up from 9.5% in the prior year. Net profit increased more than 154% to NZ$19.8m in FY22.

Exhibit 1: FY22 results by region

NZ$000

Revenue FY22

Revenue FY21

Operating profit before tax FY22

Operating profit before tax FY21

Australia

76,669

68,266

15,685

7,919

New Zealand

35,072

30,526

(73)

(69)

Asia

5,487

4,411

618

1,450

Rest of world

13,086

9,902

4,159

1,408

Total

130,314

113,105

20,389

10,708

Source: AFT Pharmaceuticals

Revenue from Australia, which accounted for 59% of the FY22 revenue, was up 12.3% y-o-y to NZ$76.7m. The OTC channel, which represents approximately 62% of revenue for Australia, grew 10.9% mainly due to strong sales from Maxigesic (paracetamol/ibruprofen) and eyecare brands (primarily Hylo-forte, Hylo-fresh and NovaTears) along with new product launches including Ocuzo (a preservative-free treatment for eye infections), Allerclear (allergy product), the Hemptuary dermatology range, Opti-Soothe (a three-in-one dry eye treatment kit) and the Maxigesic hot-drink sachet line extension. The hospital channel, which represents 27% of sales in Australia, was up by 15.4% due to higher antibiotic sales with increasing footfall in hospitals and new product launches in H222. The prescription channel (11% of the country’s sales) increased 12.9% due to new product launches and some of the already marketed products reverting to normalised sales patterns. More importantly, operating margins in the region rose sharpy to 20% from 12% in the previous year (NZ$15.7m in operating profit in FY22 from Australia, from NZ$7.9m in FY21) and was the key contributor to the improvement in group operating margin during the year.

New Zealand revenue was up 15% to NZ$35.1m in FY22 despite difficult operating conditions as many pharmacies were locked down during the year, blocking independent customer access to AFT’s OTC products. The OTC channel (57.1% of New Zealand sales) grew 18.4% to NZ$20.1m, reflecting a trend towards normalisation in H222 amid eased COVID-19 restrictions, supported by new product launches including Opti-Soothe (eyecare pack), CrystaMed (first aid kit), Hemptuary line extensions and Ferro Lipo-Sachets. While the hospital channel (14.7% of sales) grew 6.3% to NZ$5.1m, the prescription channel (28.2% of sales) recorded 11% growth to NZ$9.8m as normalcy was gradually restored in hospitals and pharmacies in H222. Excluding head office costs, the region booked an operating profit of NZ$5.2m (up from NZ$4.0m in the prior-year period).

Asia revenue increased by 24.4% to NZ$5.5m in FY22, driven by the hospital and prescription channels, which grew 32% due to strong anti-bacterial sales. The OTC segment revenue remained largely flat over the year as sales growth in Malaysia was offset by lower sales in Singapore (due to pharmacies stocking up on Maxigesic in FY21). Operating profit declined to NZ$0.6m from NZ$1.4m in FY21, due to unfavourable product mix as hospitals stockpiled low-margin injectable antibiotics. For FY23, AFT plans to scale up operations to include more countries through licensing and distribution agreements.

Rest of world revenues grew by 32.2% to NZ$13.1m, largely resulting from licence payments from Hikma for Maxigesic IV (NZ$4.8m in H122). Royalties earned increased to NZ$0.5m from NZ$0.3m in FY22 while product sales declined due to continued COVID-19 headwinds and stockpiling in FY21. Operating profit was NZ$4.2m, up from NZ$1.4m in FY21, mainly reflecting the licensing payment. As a next step, the company has set up a subsidiary in Europe (AFT Pharmaceuticals Europe) to scale up operations further (including planned Maxigesic launches in different countries). For FY23, AFT has guided for operating profit to be in the range of NZ$27–32m.

Importantly, the company has followed through on its previously announced plans to initiate a dividend policy as a result of its improving operating performance. The board has announced its intention to pay dividends on an ongoing basis (a payout of 20–30% or normalised profit after tax), with the first dividend to be paid in relation to FY23 (we expect the initial interim dividend to be paid out in H223).

Exhibit 2: FY22 revenue by source

Exhibit 3: FY22 revenue (excluding ROW) by channel

Source: AFT Pharmaceuticals presentation

Source: AFT Pharmaceuticals presentation

Exhibit 2: FY22 revenue by source

Source: AFT Pharmaceuticals presentation

Exhibit 3: FY22 revenue (excluding ROW) by channel

Source: AFT Pharmaceuticals presentation

Maxigesic: Global roll-out in action

Maxigesic is AFT’s flagship IP commercialisation product line. It is a non-opioid family of pain relief medicines, a proprietary formulation combining acetaminophen with ibuprofen, two very popular non-opioid analgesics. Maxigesic uses a unique 3.3 to 1 acetaminophen to ibuprofen ratio formulation (500mg acetaminophen/150mg ibuprofen) for the purpose of pain relief. Maxigesic has demonstrated approximately 33% lower average pain scores over 48 hours after oral surgery in adults compared with an equivalent dosage of either acetaminophen or ibuprofen alone in a 135-patient randomised clinical trial.

Maxigesic’s commercial roll-out is being undertaken currently in three dose forms (tablets, the intravenous form and other oral dose forms like the oral liquid formulation). AFT intends to add a number of different formulations to its Maxigesic product line as a way of growing Maxigesic sales in both existing and new markets and as a means of lifecycle management. While the commercialisation process for current doses is in its initial stages, the company plans to expand to new dose forms in the near future. Maxigesic tablets (OTC product) are now sold and launched in 46 countries, up from 43 at the end of March 2021. Recent launches include Switzerland and Greece. The tablets are registered in 52 different countries and the company continues to seek licensing agreements and registration across Asian and South American markets.

Maxigesic IV (developed in collaboration with Hyloris Pharmaceuticals), which is a hospital-based product, is launched in seven countries (including Germany, Austria, South Korea and Panama) but registered in 37. The United States is an important target market for Maxigesic in all dose forms and, in a positive development, in April 2021 AFT out-licensed Maxigesic IV to Hikma Pharmaceuticals (a leading supplier of generic injectable medicines). The terms of the agreement include up to US$18.8m in upfront, regulatory and commercial milestones and a profit share (of which US$3.6m was received in H122 as an upfront payment). Note that while Maxigesic is yet to receive regulatory approval in the US, the PDUFA date has been set for 30 June 2022 and management plans to launch it by end CY22 on successful approval.

Exhibit 4: Maxigesic commercialisation status

Product/territories

Maxigesic Tablet

Maxigesic IV

Maxigesic Oral Solution

Maxigesic Hot Drink

Licensed

100+

100+

100+

100+

Registered

52

37

2

1

Sold in

46

7

0

1

Source: AFT Pharmaceuticals presentation

The following exhibit presents different dose forms/variants for Maxigesic and the respective patent expiry dates.

Exhibit 5: Maxigesic variants

Source: AFT Pharmaceuticals presentation

R&D pipeline

AFT’s key R&D pipeline projects include expansion of Maxigesic family of medicines, NasoSURF (a patented nasal drug nebuliser) and a number of trials for applications in dermatology, gastro-intestinal health and medicinal cannabidiol (CBD) products. During the year, the company added five more projects (listed in Exhibit 6 below), out of which three (HS, BT and SD) are late-stage projects. The company is still exploring additional projects to further strengthen its R&D pipeline. We note that AFT’s strategy is to develop its R&D programmes in partnerships (such as with Hyloris for Maxigesic IV and Timber Pharmaceuticals for Pascomer), mitigating some of the risks related to new product development. Following the recent FDA approval of Nobelpharma’s topical rapamycin formulation for facial angiofibromas (AFs), AFT’s Pascomer R&D programme is unlikely to pursue this indication in the United States (Nobelpharma received orphan-drug designation from the FDA, which would prevent Pascomer from competing during the associated seven-year exclusivity period) and will instead focus on other indications such port wine stains (PWSs). The first study in PWSs is likely to commence in Spain in the next couple of months.

Exhibit 6: AFT Pharmaceutical's R&D projects

Product

Indication

Development partner

Status

Maxigesic

Analgesic

N/A

Hot drink sachet (launched)

Paediatric oral liquid (first approvals in Europe)

Cold & flu (filed registration in ANZ)

Rapid (awaiting registration in US)

Day & Night (seeking registration in ANZ)

Dry stick sachet (slated for 2023 filing in ANZ)

Maxigesic IV

Analgesic

Hyloris (EU)

Intravenous form (out-licensed to Hikma Pharmaceuticals in the US; PDUFA date set for 30 June 2022)

Pascomer

Dermatology applications including the treatment of facial angiofibroma associated with TSC and other indications

Timber Pharmaceuticals (US)

Clinical studies for facial angiofibromas underway and first results due in mid-2022. Clinical studies planned in port wine stains in the next few months.

NasoSURF

Ultrasonic nasal mesh nebuliser used for the intranasal delivery of medication and treatment of sinus conditions

N/A

Pharmacokinetic proof of concept underway, results due this financial year

Project HS

Topical analgesic

N/A

Dossier due to be filed with ex-ANZ regulators in 2022

Project BT

Gastrointestinal medicine

N/A

Dossier due to be filed in ex-ANZ in 2022

Project KW

Gastrointestinal medicine

N/A

Early-stage development

Project SD

Dermatology medicine

N/A

Dossier due to be filed in ex-ANZ in 2022

Medicinal CBD

Application confidential

Setek

Ongoing product development work

Source: AFT Pharmaceuticals Presentation

Valuation

We value AFT using a discounted cash flow (DCF) valuation methodology. We have incorporated the recent FY22 performance in our model and have made minor adjustments to our forecasts. While our revenue estimates have been upgraded to reflect strong domestic market traction (more details in the financials section below), we have pared down our operating margin estimates slightly to factor in the current run-rate, FY23 management guidance (NZ$27–32m in operating profit) and our updated assessment of group operations (a higher contribution from the domestic market but more protracted growth from the higher-margin international operations). Our implied enterprise value resets slightly lower but has been offset by a lower net debt position. Overall, our valuation is largely unchanged at NZ$680.8.m or NZ$6.50 per share (from NZ$671m or NZ$6.41 per share). We note that our valuation does not capture the company’s ongoing R&D programmes and as a result has not been affected by the aforementioned Pascomer event. Exhibit 7 shows the sensitivity of our valuation to terminal EBIT margin and revenue growth assumptions.

Exhibit 7: DCF sensitivity table (NZ$/share)

Terminal EBIT margin

Terminal revenue growth

30%

34%

36%

40%

45%

-2.0%

4.37

4.74

4.92

5.29

5.75

-1.0%

4.60

5.01

5.21

5.61

6.11

0.0%

4.89

5.33

5.55

6.00

6.55

1.0%

5.23

5.73

5.97

6.47

7.08

2.0%

5.67

6.22

6.50

7.05

7.74

3.0%

6.22

6.86

7.17

7.80

8.60

4.0%

6.97

7.70

8.07

8.81

9.73

5.0%

8.00

8.89

9.33

10.21

11.32

Source: Edison Investment Research

Financials

We have increased our revenue estimates for FY23 to NZ$156m from NZ$150m. The change in revenue forecasts was mainly driven by higher growth estimates for Australia based on management guidance for higher year-on-year growth for Australia in FY23. We have also increased our sales forecasts for New Zealand (albeit lower than Australia) due to the strong growth recorded in FY22 and visible signs of the market recovering from COVID-19. For Asia, on the other hand, we have trimmed our expectations down from our previously bullish estimates to factor in the current run-rate. On the costs side, we have increased our FY23 estimates for R&D expenditure from NZ$6.4m to NZ$6.6m to incorporate the impact from the expanding R&D pipeline.

The key modifications in our forecasts are related to operating profit margins, which we have now trimmed by two percentage points in FY23, primarily due to a change in the contribution mix of the different geographies in our forecasts. We now expect a higher contribution from the domestic Australia and New Zealand markets but a lower contribution from international sales (which, due to being made up largely of licensing income, have 100% margins).

The company reported NZ$7.9m in cash and NZ$37.2m in debt at the end of the year. As the company has met both its earnings guidance (operating profit between NZ$18m and NZ$23m) and net debt target of NZ$25–30m in FY22, AFT has announced its inaugural dividend policy; the board intends to pay regular dividends within the range of 20–30% of normalised net profit after tax, subject to factors such as earnings, financial condition and outlook for the industry, further capital and R&D requirements. The policy will be applicable from FY23, and we have incorporated this in our model.

Exhibit 8: Financial summary

NZ$000

2021

2022

2023e

2024e

Year end 31 March

NZ GAAP

NZGAAP

NZGAAP

NZGAAP

PROFIT & LOSS

Revenue

 

 

113,105

130,314

155,919

194,184

Cost of Sales

(64,364)

(68,539)

(78,521)

(91,255)

Gross Profit

48,741

61,775

77,398

102,929

EBITDA

 

 

11,812

21,433

30,622

47,092

Operating Profit (before amort. and excepts.)

 

10,993

20,649

29,838

46,308

Intangible Amortisation

(285)

(260)

(260)

(260)

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

10,708

20,389

29,578

46,048

Net Interest

(2,821)

(1,704)

(2,815)

(2,815)

Profit Before Tax (norm)

 

 

8,172

18,945

27,023

43,492

Profit Before Tax (reported)

 

 

7,887

18,685

26,763

43,232

Tax

(105)

1,163

(5,620)

(12,105)

Profit After Tax (norm)

8,067

20,108

21,403

31,387

Profit After Tax (reported)

7,782

19,848

21,143

31,127

Average Number of Shares Outstanding (m)

103.3

104.7

104.8

104.8

EPS - normalised (c)

 

 

7.1

19.2

20.4

30.0

EPS - (reported) (NZ$)

 

 

0.07

0.19

0.20

0.30

Dividend per share (NZ$)

0.00

0.00

0.04

0.06

Gross Margin (%)

43.1

47.4

49.6

53.0

EBITDA Margin (%)

10.4

16.4

19.6

24.3

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

9.7

15.8

19.1

23.8

BALANCE SHEET

Fixed Assets

 

 

37,230

44,218

48,742

53,342

Intangible Assets

32,720

38,093

42,462

46,831

Tangible Assets

305

484

639

871

Investments

4,205

5,641

5,641

5,641

Current Assets

 

 

67,902

77,542

92,227

117,927

Stocks

33,654

33,500

36,850

40,535

Debtors

31,039

36,002

43,062

50,955

Cash

3,209

7,940

12,215

26,337

Other

0

100

100

100

Current Liabilities

 

 

(32,102)

(29,050)

(28,807)

(33,008)

Creditors

(26,404)

(23,845)

(27,602)

(31,803)

Short term borrowings

(5,161)

(4,000)

0

0

Other

(537)

(1,205)

(1,205)

(1,205)

Long Term Liabilities

 

 

(36,442)

(35,966)

(35,966)

(35,966)

Long term borrowings

(33,200)

(33,200)

(33,200)

(33,200)

Other long term liabilities

(3,242)

(2,766)

(2,766)

(2,766)

Net Assets

 

 

36,588

56,744

76,195

102,295

CASH FLOW

Operating Cash Flow

 

 

(2,231)

12,289

18,339

34,083

Net Interest

3,151

2,084

2,815

2,815

Tax

(170)

(221)

(5,620)

(12,105)

Capex

(6,231)

(5,585)

(5,568)

(5,644)

Acquisitions/disposals

0

0

0

0

Financing

11,673

295

0

0

Dividends

(188)

0

(1,691)

(5,027)

Net Cash Flow

6,004

8,862

8,275

14,122

Opening net debt/(cash)

 

 

37,081

35,152

29,260

20,985

HP finance leases initiated

0

0

0

0

Other

(4,075)

(2,970)

(0)

0

Closing net debt/(cash)

 

 

35,152

29,260

20,985

6,863

Source: AFT Pharmaceuticals accounts, Edison Investment Research


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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. 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 (i.e. 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.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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IP Group — Impact + innovation at a compelling discount

IP Group trades at 0.54x its rebased end-May NAV of 139p per share, down 17% from the year end NAV/share of 167p. This prices in the public market fall in Oxford Nanopore Technologies (29p off IP Group’s NAV per share in FY22 to date), while the private company portfolio saw fair value gains over the period. First Light Fusion mitigated the fall in NAV per share, with a valuation increase on achieving first fusion and management’s expectation of a substantial up-round still ahead. Critically, IP Group remains well funded, with £251m of cash and deposits, providing comfort that it can support key investee companies, drive value from its portfolio and take advantage of the downcycle for new investments. Management recognises that realisations are likely to be few and far between if the current market backdrop persists.

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