Selling most of its InSightec stake

Elbit Medical 28 January 2020 Update
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Elbit Medical

Selling most of its InSightec stake

Financial update

Pharma & biotech

28 January 2020

Price

NIS1.03

Market cap

NIS238m

Priced at 24 January 2020

NIS3.48/US$

Net debt ($m) at 30 September 2019

42.8

Shares in issue

231.5m

Free float

36.2%

Code

EMTC

Primary exchange

TASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.8

13.3

5.6

Rel (local)

7.8

7.3

(12.2)

52-week high/low

NIS1.03

NIS0.70

Business description

Elbit Medical Technologies is an Israeli biomedical and healthcare technology group. Its portfolio of two companies is focused on medical devices and therapeutics: InSightec, which develops and markets the ExAblate platform for non-invasive thermal tissue ablation, and Gamida Cell, which is developing a universal bone-marrow transplant.

Next events

Gamida Cell omidubicel Phase III top-line data

H120

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Elbit Medical recently signed an agreement to sell most of its stake in InSightec for $102m at a $702m valuation for the company, leaving Elbit Medical with approximately 4.7% of InSightec (the company estimates approximately 3.7% on a fully diluted basis). At the end of Q319, Elbit Medical owned 22% of InSightec and 18% on a fully diluted basis. Completion of the transaction is subject to Elbit Medical shareholder approval and other conditions. The company expects to use the proceeds of this transaction to repay its debt, fund corporate expenses and use the remaining cash from the transaction to buy back stock through a tender offer.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

0.0

(5.2)

(0.00)

0.0

N/A

N/A

12/18

35.0

26.8

0.12

0.0

N/A

N/A

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

Positive GDA-201 data for Gamida Cell

Gamida Cell (~8% owned by Elbit Medical, ~7% fully diluted) recently presented data from its Phase I trial of GDA-201 in 22 heavily pre-treated non-Hodgkin lymphoma (NHL) and multiple myeloma (MM) patients at the American Society of Hematology Annual Meeting (ASH). Within the nine evaluable NHL patients, GDA-201 achieved a 56% complete response rate and a 67% objective response rate. Among the 12 evaluable MM patients, there was an 8% complete response rate while 42% achieved stable disease.

Phase III trial for omidubicel complete

Gamida Cell has completed enrolment in its Phase III trial of omidubicel in haematological malignancies with top-line data expected in H120. If these Phase III data are positive, Gamida Cell plans to submit a biologic licence application (BLA) filing for omidubicel in H220.

An eventful 2019 for InSightec

In February 2019, InSightec announced that Noridian posted positive local coverage determination for magnetic resonance imaging and high-intensity focused ultrasound (MRgFUS) and Medicare beneficiaries in 38 US states will have coverage for the treatment of essential tremor (ET) using MRgFUS. In June, the company announced it received national reimbursement in Japan for treating ET. In July it announced it received both FDA approval and a CE mark for ExAblate Neuro compatible with the SIGNA Premier MRI system from GE Healthcare.

Valuation: NIS346.1m or NIS1.50 per share

We have decreased our valuation from NIS353.1m or NIS1.53 per share to NIS346.1m or NIS1.50 per share mainly due to higher net debt. A key valuation inflection point for the stake in Gamida Cell will be the Phase III data for omidubicel, expected in H120.

Clinical progress for Gamida Cell

Gamida Cell recently presented data from its Phase I trial of GDA-201 in 22 heavily pre-treated NHL and MM patients at the annual ASH meeting. As a reminder, the GDA-201 programme is based on donor-derived natural killer (NK) cells. NK cells are a type of lymphocyte, or white blood cell, that play a central role in lysing infected or transformed cells and therefore offer an innovative approach to cancer treatment.

Of the 22 patients in the trial, 21 were evaluable (nine with NHL and 12 with MM). Within the evaluable NHL patients, GDA-201 achieved a 56% complete response rate and a 67% objective response rate (as there was one partial response in addition to the complete responses). Among the evaluable MM patients, there was an 8% complete response rate while 42% achieved stable disease. The company is working on a cryopreserved version of GDA-201 to enable a multi-centre, multi-dose study in NHL patients in 2020.

Additionally, Gamida Cell’s 120-patient Phase III study of omidubicel in patients with haematological malignancies has completed enrolment. Omidubicel, which is the company’s lead asset, expands umbilical cord blood (UCB) cell grafts ex vivo and enriches the specific subpopulation of stem and progenitor cells to treat haematological malignancies such as leukaemia and lymphoma. Essentially, CD133+ cells selected from a single unit of UCB are cultured for approximately three weeks in nicotinamide and are then cryopreserved until they are transplanted into the intended patients. This expansion is expected to provide a substantial advantage over a single UCB graft. The use of UCB for bone marrow transplantation (BMT) is limited by the minimal number of stem and progenitor cells. The omidubicel process seeks to provide a more viable alternative to BMT in cancer patients and only partial genetic matching is needed (ie, a minimum requirement of four out of six human leukocyte antigen biomarkers). The registrational trial is investigating the ability of omidubicel to provide a graft with an ample number of cells that have fast and vigorous in vivo neutrophil- and platelet-producing potential to improve transplantation outcomes (as low cell dose is associated with delayed engraftment and poor outcomes). The primary endpoint for the trial is time to neutrophil engraftment following transplantation (on or before the 42nd day post-transplant) compared to an unmanipulated cord blood unit. Top-line data from the Phase IIII trial are expected in H120. Provided these Phase III data are positive, Gamida Cell plans to submit a BLA filing for omidubicel for the treatment of haematological malignancies in H220.

The company is also investigating omidubicel for the treatment of severe aplastic anaemia in an ongoing Phase I/II study. With patient inclusion in cohort one complete (and encouraging data presented on those first cohort patients at the annual Transplantation and Cellular Therapy meeting earlier this year), enrolment into cohort two began in June. Cohort two will evaluate engraftment and transplantation outcomes with the omidubicel-expanded unit alone (in other words, without a haploidentical donor).

The company ended Q319 with $68.1m in cash and marketable securities. Gamida Cell has guided for a $35–40m in cash outflow for operating activities over 2019 and expects its current resources to fund its operations into Q420.

InSightec

The ExAblate system uses MRgFUS to perform non-invasive thermal tissue ablation for a wide range of neurology, oncology and gynaecology clinical applications. By way of full clinical validation under the pre-market approval route, the company has achieved FDA approval and CE markings for the ExAblate 2100 (body) system for the treatment of symptomatic uterine fibroids and pain palliation caused by bone metastases, and for its ExAblate 4000 (neuro) system for the treatment of medication-refractory ET and tremor-dominant Parkinson’s disease (PD). Moreover, the company has received CE markings for the treatment of prostate cancer, neuropathic pain and tremor-dominant PD.

Last year was busy for the company. In February 2019, InSightec announced Noridian posted positive local coverage determination for MRgFUS effective 1 April 2019 and that Medicare beneficiaries in 38 US states will have coverage for the treatment of ET using MRgFUS. In June, the company announced it received national reimbursement from the Japanese Ministry of Health, Labour and Welfare for treating ET. And in July, it announced it received both FDA approval and a CE mark for ExAblate Neuro compatible with the SIGNA Premier MRI system from GE Healthcare.

InSightec recently reported its Q319 results. Revenues, which are based on the sale of ExAblate systems and corresponding annual service contract costs and consumables, were $7.3m in Q319, down 10% from $8.1m in Q318. For the first nine months, revenues were $22.4m, up 10% from the same period a year ago. Cash flow for operating activities in the first nine months was a negative $40.0m. Cash, cash equivalents and deposits totalled $66.0m as of 30 September 2019.

In late December 2019, Elbit Medical announced it has agreed to sell most of its stake in InSightec for $102m at a $702m valuation for the company, leaving Elbit Medical with approximately 4.7% of InSightec (the company estimates approximately 3.7% on a fully diluted basis). As of the end of Q319, Elbit Medical owned 22% of InSightec and 18% on a fully diluted basis. Completion of the transaction is subject to Elbit Medical shareholder approval, among other conditions. The company expects to use the proceeds of this transaction to repay its debt, fund corporate expenses and use the remaining cash from the transaction to buy back stock through a tender offer. Note that as the transaction has not yet been completed, we are not changing our estimates at this time. Elbit Medical has also announced that InSightec has executed a non-binding term sheet for an additional $100m to $150m investment from an existing InSightec shareholder, which could have an impact on our estimates as well. Elbit Medical currently estimates that if the third party investment is made that its stake in InSightec would fall from 4.7% to 3.1%.

Valuation

We have decreased our valuation from NIS353.1m or NIS1.53 per share to NIS346.1m or NIS1.50 per share mainly due to higher net debt. A key valuation inflection point for the stake in Gamida Cell will be the Phase III data for omidubicel, expected in H120. Once the InSightec transaction closes we will review our valuation as the company is selling its stake at a $702m valuation, which represents a premium to the $648m valuation for the company that we have in our model. However, this will depend on whether InSightec finalizes the $100-$150m financing from a third party and the size of Elbit Medical’s remaining stake on a fully diluted basis if such a financing occurs.

Exhibit 1: Valuation of Elbit Medical Technologies

Product

Setting

Status

Launch

Peak sales ($m)

Probability of success

Royalty rate

rNPV ($m)

% owned by Elbit Medical (fully diluted)

Elbit Medical rNPV ($m)

InSightec

MRgFUS (for gynaecology, oncology, neurology indications)

Market

Market

583

100%

100%

648

18.0%

116.6

Gamida cell

Leukaemia (AML, ALL, CML, CLL)

Phase III

2021

370

50%

100%

346

7%

24.2

Portfolio total ($m)

140.8

Net debt (at 30 September 2019) ($m)

-42.8

Overall valuation

98.0

Shekel/dollar conversion rate

3.5

Overall valuation in shekels (NISm)

346.1

Shares outstanding (m)

231.5

Per share (NIS)

1.50

Source: Elbit Medical Technologies reports, Edison Investment Research

Financials

Elbit Medical recently announced its Q319 financial results. The post-tax loss was $4.7m, mainly due to changes in the fair value of assets and financial instruments. General and admin costs for the period were $0.1m, which includes management fees, professional services and other related expenses. The company had cash, cash equivalents and restricted cash of $2.4m at 30 September 2019 and $45.2m in debt. As stated earlier, Elbit expects to pay down its debt with the proceeds of the InSightec transaction and buy back shares with the remaining cash. We outline historical financials in Exhibit 2. Please note we continue not to provide financial forecasts at this time.

Exhibit 2: Financial summary

US$'000s

2017

2018

Year end 31 December

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

34,951

Cost of Sales

0

0

Gross Profit

0

34,951

R&D expenses

0

0

SG&A expenses

(677)

(918)

EBITDA

 

 

(677)

34,033

Operating Profit (before amort. and except.)

 

 

(677)

34,033

Intangible Amortisation

0

0

Exceptionals

(5,518)

0

Operating Profit

(6,195)

34,033

Other

(4,557)

0

Net Interest

0

(7,212)

Profit Before Tax (norm)

 

 

(5,234)

26,821

Profit Before Tax (FRS 3)

 

 

(10,752)

26,821

Tax

0

0

Profit After Tax (norm)

(5,234)

26,821

Profit After Tax (FRS 3)

(10,752)

26,821

Average Number of Shares Outstanding (m)

1,851.9

231.5

EPS - normalised (c)

 

 

(0.00)

0.12

EPS - FRS 3 (USD)

 

 

(0.01)

0.12

Dividend per share (c)

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

50

24,233

Intangible Assets

0

23,016

Tangible Assets

0

0

Other

50

1,217

Current Assets

 

 

40

3,797

Stocks

0

0

Debtors

8

11

Cash

32

3,786

Other

0

0

Current Liabilities

 

 

(60)

(1,526)

Creditors

(60)

(1,526)

Short term borrowings

0

0

Short term leases

0

0

Other

0

0

Long Term Liabilities

 

 

(42,415)

(41,998)

Long term borrowings

(42,415)

(39,030)

Long term leases

0

0

Other long term liabilities

0

(2,968)

Net Assets

 

 

(42,385)

(15,494)

CASH FLOW

Operating Cash Flow

 

 

(4,858)

4,533

Tax

0

0

Capex

0

0

Acquisitions/disposals

0

0

Financing

0

0

Dividends

0

0

Other

0

0

Net Cash Flow

(4,858)

4,533

Opening net debt/(cash)

 

 

37,111

42,383

HP finance leases initiated

0

0

Other

(414)

2,606

Closing net debt/(cash)

 

 

42,383

35,244

Source: Company reports


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Israel

Disclosure regarding the scheme to enhance the awareness of investors to public companies in the technology and biomed sectors that are listed on the Tel Aviv Stock Exchange and participate in the scheme (hereinafter respectively “the Scheme”, “TASE”, “Participant” and/or “Participants”). Edison Investment Research (Israel) Ltd, the Israeli subsidiary of Edison Investment Research Ltd (hereinafter respectively “Edison Israel” and “Edison”), has entered into an agreement with the TASE for the purpose of providing research analysis (hereinafter “the Agreement”), regarding the Participants and according to the Scheme (hereinafter “the Analysis” or “Analyses”). The Analysis will be distributed and published on the TASE website (Maya), Israel Security Authority (hereinafter “the ISA”) website (Magna), and through various other distribution channels. The Analysis for each participant will be published at least four times a year, after publication of quarterly or annual financial reports, and shall be updated as necessary after publication of an immediate report with respect to the occurrence of a material event regarding a Participant. As set forth in the Agreement, Edison Israel is entitled to fees for providing its investment research services. The fees shall be paid by the Participants directly to the TASE, and TASE shall pay the fees directly to Edison. Subject to the terms and principals of the Agreement, the Annual fees that Edison Israel shall be entitled to for each Participant shall be in the range of $35,000-50,000. As set forth in the Agreement and subject to its terms, the Analyses shall include a description of the Participant and its business activities, which shall inter alia relate to matters such as: shareholders; management; products; relevant intellectual property; the business environment in which the Participant operates; the Participant's standing in such an environment including current and forecasted trends; a description of past and current financial positions of the Participant; and a forecast regarding future developments in and of such a position and any other matter which in the professional view of the Edison (as defined below) should be addressed in a research report (of the nature published) and which may affect the decision of a reasonable investor contemplating an investment in the Participant's securities. To the extent it is relevant, the Analysis shall include a schedule of scientific analysis of an expert in the field of life sciences. An "equity research abstract" shall accompany each Equity Research Report, describing the main points addressed. The full scope reports and reports where the investment case has materially changed will include a thorough analysis and discussion. Short update notes, where the investment case has not materially changed, will include a summary valuation discussion. The Agreement with TASE regarding the participation of Edison in the scheme for the research analysis of public companies does not and shall not constitute an approval or consent on the part of TASE or the ISA or any other exchange on which securities of the Company are listed, or any other securities’ regulatory authority which regulates the issuance of securities by the Company to the content of the Report or to the recommendation contained therein. A summary of this report is also published in the Hebrew language. In the event of any contradiction, inconsistency, discrepancy, ambiguity or variance between the English Report and the Hebrew summary of said Report, the English version shall prevail; and a note to this effect shall appear in any Hebrew summary of a Report. Edison is regulated by the Financial Conduct Authority. According to Article 12.3.2, Chapter 12 of the Conduct of Business Sourcebook, Edison, which produces or disseminates non-independent research, must ensure that it: 1) is clearly identified as a marketing communication; and 2) contains a clear and prominent statement that (or, in the case of an oral recommendation, to the effect that) it: a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and b) is not subject to any prohibition on dealing ahead of the dissemination of investment research. The financial promotion rules apply to non-independent research as though it were a marketing communication.

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United Kingdom

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United States of America

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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

1,185 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

Tel Aviv +44 (0)20 3734 1007
Azrieli Centre, Triangle Building

38th Floor, Tel Aviv, 4676652

Israel

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