Test sales up 43% in H119

Pacific Edge 7 January 2019 Update
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Pacific Edge

Test sales up 43% in H119

Financial update

Pharma & biotech

7 January 2019

Price

NZ$0.33

Market cap

NZ$163m

NZ$1.45/US$

Net cash (NZ$m) at 30 September 2018

10.1

Shares in issue post-offering (estimate)

494.8m

Free float

89.9%

Code

PEB

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.7)

6.4

(13.0)

Rel (local)

(9.3)

13.1

(13.0)

52-week high/low

NZ$0.44

NZ$0.19

Business description

Pacific Edge develops and sells a portfolio of molecular diagnostic tests based on biomarkers for the early detection and management of cancer. Tests utilising its Cxbladder technology for detecting and monitoring bladder cancer are sold in the US, New Zealand and Australia.

Next events

LCD inclusion

CY19

Kaiser Permanente commercial agreement

CY19

Analysts

Maxim Jacobs

+1 646 653 7027

Briana Warschun

+1 646 653 7031

Pacific Edge is a research client of Edison Investment Research Limited

Pacific Edge recently reported H119 results, including 43% growth in Cxbladder sales compared to H118. These sales exclude tests for patients covered by the US Centers for Medicare and Medicaid Services (CMS), which currently account for 47% of lab throughput. The company is in the process of gaining inclusion in the CMS’s local coverage determination (LCD), which will enable reimbursement and negotiation for payment of more than 14,000 tests previously performed on patients covered by CMS.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/17**

4.4

(22.4)

(5.9)

0.0

N/A

N/A

03/18

4.6

(19.6)

(4.5)

0.0

N/A

N/A

03/19e

5.0

(17.5)

(3.5)

0.0

N/A

N/A

03/20e

10.2

(13.2)

(2.6)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Note: **FY17 restated for IFRS15.

CMS reimbursement process two-thirds of the way

The company has completed two of the three components necessary for national reimbursement in the US, namely CPT codes and a national price of US$760 per test. The company continues to work with CMS to gain inclusion in an LCD, which would enable consistent payments from CMS as well as reduce the lag time between the test being performed and receipt of cash. Timing is uncertain but typically it can take up to five years to gain inclusion in a LCD and Pacific Edge has been in the process since 2014.

12% increase in billable test volume

Billable test volume increased 12% over a very strong H118. Total laboratory throughput increased 3.9% as the number of non-billable tests fell. The company believes that it will be able to achieve growth between 10.7% and 17.7% (16,000 and 17,000 tests) in total laboratory throughput in FY19, exclusive of any major changes from new customers (like Kaiser Permanente) or CMS LCD inclusion.

Raising funds

Pacific Edge completed a private placement of shares to raise proceeds of around NZ$7m through the issuance of around 20m shares at $0.35 each. Following the completion of the placement it intends to allow New Zealand resident shareholders to purchase up to NZ$5m at $0.35 per share as well via a share purchase plan.

Valuation: NZ$255m or NZ$0.52 per share

Our DCF-based valuation has been reduced to NZ$255m (NZ$0.52/share) from NZ$348m (NZ$0.75/share). This reflects a combination of lower near-term estimates to reflect a more conservative view of the sales ramp for the Cxbladder franchise in the US and delayed cash inflow from product sales in the US. We continue to expect profitability in FY21. We estimate the financing needs of the company to be NZ$10m in FY20 following completion of the private placement.

CMS and Kaiser negotiations ongoing

The company is continuing to work with CMS to obtain reimbursement. So far, the company has completed two of the three components necessary for national reimbursement in the US, namely CPT codes and a national price of US$760 per test. The final step will be to gain inclusion in an LCD. An LCD is a document that includes the coverage decisions of the Medicare Administrative Contractor (MAC). An LCD would provide the conditions of the coverage as well as the price, guidance on reimbursement and coding information. Unfortunately there is no set process for achieving an LCD and in many ways it is the epitome of arbitrary bureaucracy. Typically the process can take up to five years to gain an LCD inclusion so while Pacific Edge has been in this process for around four years, it is within the normal timeframe.

Once an LCD inclusion is attained, reimbursement from CMS (which currently represents approximately 47% of Cxbladder test volume) should become consistent and timely. Besides this immediate benefit of new tests being covered by CMS, the company may finally receive payment on the more than 14,000 tests previously conducted for CMS patients. Pacific Edge has not received payment for tests provided to patients covered by CMS until LCD inclusion so there could be a multi-year backlog of test revenue that is recognised in a single reporting period post-inclusion. In addition, private payers often base their own coverage decisions and reimbursement levels on the coverage listed in an LCD, so a success here is expected to lead to faster growth for the company.

Pacific Edge is also in discussions with Kaiser Permanente regarding a commercial relationship and is working with Kaiser’s staff to ensure that commercial tests can begin shortly after an agreement is reached. Commercial adoption by Kaiser could provide a significant ramp in sales. However, management confirms that it is taking longer than anticipated for Kaiser to work through its internal processes and to finalise the Kaiser agreements.

Additionally, the company recently announced that Johns Hopkins Medicine, an $8 billion healthcare system, has commenced a commercial evaluation of Cxbladder with a select group of urologists at the world-class institution. With regards to its home market in New Zealand, 62% of the population of New Zealand currently have coverage for Cxbladder through their healthcare providers, up from just 36% a year ago.

Valuation

Our DCF-based valuation has been reduced to NZ$255m (NZ$0.52/share) from NZ$348m (NZ$0.75/share). This reflects a combination of lower near-term estimates to reflect a more conservative view of the sales ramp for the Cxbladder franchise in the US and delayed cash inflow from product sales in the US. We will revisit these estimates once agreements are completed with CMS and Kaiser Permanente and we have greater clarity on the ramp-up once reimbursement is in place. CMS reimbursement is especially important as once LCD inclusion occurs revenue recognition would normalise and the backlog of unpaid tests from previous years would provide a boost to revenue as they are paid.

Exhibit 1: Valuation based on DCF

Discounted cash flow (NZ$000)

238,189

Net cash (NZ$000) at 30 September 2018 + private placement

17,060

Valuation (NZ$000)

255,249

Number of shares (m) at 30 September 2018 + private placement (estimate)

494.79

Value per share (NZ$)

0.52

Source: Edison Investment Research

Financials

The company recently published H119 results with operating revenue growth of 42.7% from NZ$1.4m in H118 to NZ$2.0m. As a reminder, the company previously announced that it had adopted the new revenue recognition accounting standard, NZ IFRS 15, which means that revenue from US customers will only be recognised once cash payment is received (previously the company recognised tests that had been billed but not yet paid). Using the prior accounting standard, the company would have reported NZ$5.6m in sales for the period, 33% growth over H118.

Billable test volume increased 12% over a very strong H118. Total laboratory throughput increased 3.9% as the number of non-billable tests fell. The company currently believes that it will be able to achieve approximately 14.2% growth in total laboratory throughput in FY19, exclusive of any major changes from new customers (like Kaiser Permanente) or CMS LCD inclusion. Operating expenses for H119 were reported as NZ$11.4m, a 6% decrease compared to H118.

With this in mind we have lowered our FY19 and FY20 revenues estimates to be more in line with guidance and the run rate for sales. Our FY19 revenue estimate is now NZ$5.0m compared to NZ$7.8m previously and our FY20 estimate has been changed from NZ$12.7m to NZ$10.2m. Conversely, we have reduced our R&D expenses by NZ$1.2m for FY19 and by NZ$1.7m for FY20 due to a lower than expected run rate. Also, we have reduced our SG&A expense estimates by NZ$3.4m for FY19 and NZ$3.1m for 2020 for the same reason. We continue to expect profitability in FY21.

Exhibit 2: Financial forecast changes

FY19e

FY20e

Old

New

Old

New

Revenue (NZ$m)

7.8

5.0

12.7

10.2

PBT (normalised) (NZ$m)

(17.7)

(17.5)

(14.2)

(13.2)

EPS (NZ$)

(0.04)

(0.04)

(0.03)

(0.03)

Source: Edison Investment Research

The company had net cash of NZ$10.1m at 30 September 2018 thanks in part to a NZ$2.6m share raise with Manchester Management Company, a US-based fund specialising in life sciences. The company has just completed an additional private placement of shares to raise proceeds of around NZ$7m through the issuance of around 20m shares at $0.35 each. Following the completion of the placement it intends to allow New Zealand resident shareholders to purchase up to NZ$5m at $0.35 per share as well in a share purchase plan. That offering is expected to open on 10 December and close on 25 January.

We estimate the financing needs of the company to be NZ$10m (which we show as illustrative long-term debt) following the completion of the private placement and will be lower once the share purchase plan is completed.

Exhibit 3: Financial summary

NZ$'000s

2017

2018

2019e

2020e

Year end 31 March

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

PROFIT & LOSS

Revenue

 

 

4,432

4,642

4,986

10,219

Cost of Sales

(1,446)

(4,619)

(4,759)

(5,235)

Gross Profit

2,986

23

227

4,984

EBITDA

 

 

(22,293)

(19,500)

(17,563)

(13,162)

Operating Profit (before amort. and except.)

(22,646)

(19,816)

(17,795)

(13,426)

Intangible Amortisation

(189)

(188)

(158)

(66)

Exceptionals

(43)

46

(5)

0

Operating Profit

(22,878)

(19,958)

(17,958)

(13,492)

Other

0

0

0

0

Net Interest

249

231

338

259

Profit Before Tax (norm)

 

 

(22,398)

(19,585)

(17,457)

(13,166)

Profit Before Tax (FRS 3)

 

 

(22,629)

(19,727)

(17,620)

(13,233)

Tax

0

0

0

0

Profit After Tax (norm)

(22,398)

(19,585)

(17,457)

(13,166)

Profit After Tax (FRS 3)

(22,629)

(19,727)

(17,620)

(13,233)

Average Number of Shares Outstanding (m)

382.5

438.4

491.9

511.6

EPS - normalised (c)

 

 

(5.9)

(4.5)

(3.5)

(2.6)

EPS - FRS 3 (c)

 

 

(5.9)

(4.5)

(3.6)

(2.6)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,166

1,135

925

781

Intangible Assets

329

281

265

345

Tangible Assets

837

854

660

436

Other

0

0

0

0

Current Assets

 

 

16,541

18,530

11,230

8,900

Stocks

824

752

846

846

Debtors

663

1,064

836

836

Cash

14,564

16,242

8,636

6,306

Other

490

472

912

912

Current Liabilities

 

 

(2,734)

(2,999)

(2,861)

(12,861)

Creditors

(2,734)

(2,926)

(2,771)

(2,771)

Short term borrowings

0

0

0

(10,000)

Short term leases

0

(73)

(90)

(90)

Other

0

0

0

0

Long Term Liabilities

 

 

0

(26)

(48)

(48)

Long term borrowings

0

0

0

0

Long term leases

0

(26)

(48)

(48)

Other long term liabilities

0

0

0

0

Net Assets

 

 

14,973

16,640

9,246

(3,228)

CASH FLOW

Operating Cash Flow

 

 

(18,086)

(18,331)

(17,284)

(12,403)

Net Interest

249

231

338

259

Tax

0

0

0

0

Capex

(479)

(335)

(180)

(186)

Acquisitions/disposals

0

0

0

0

Financing

8,750

21,318

9,623

0

Dividends

0

0

0

0

Other

(91)

(1,261)

(66)

0

Net Cash Flow

(9,657)

1,622

(7,569)

(12,330)

Opening net debt/(cash)

 

 

(24,160)

(14,564)

(16,143)

(8,498)

HP finance leases initiated

0

(99)

(39)

0

Other

61

56

(37)

0

Closing net debt/(cash)

 

 

(14,564)

(16,143)

(8,498)

3,832

Source: Edison Investment Research, company accounts

General disclaimer and copyright

This report has been commissioned by Pacific Edge and prepared and issued by Edison, in consideration of a fee payable by Pacific Edge. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Pacific Edge and prepared and issued by Edison, in consideration of a fee payable by Pacific Edge. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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