MagForce — 2019 a pivotal year

In Europe, NanoTherm therapy is already approved via a CE mark to treat brain cancers, and the therapy can therefore be used to treat primary and recurrent brain tumours. MagForce reported revenues of €24k for this indication in H118, which is lower than revenues in previous years. Revenues from the sale of NanoTherm nanoparticles and usage of NanoActivator devices totalled €154k for FY17 and €176k for FY16. Reported revenues in H118 have been affected by multiple factors including:

To drive growth in sales, MagForce is focused on reimbursement discussions with various member states and rolling out NanoActivator devices (to enable NanoTherm therapy) into the broader European market. Access to the devices outside Germany remains a key factor in driving treatment numbers. Financing from the EIB announced in October 2017 (up to €35m) is enabling MagForce to roll out its devices across Europe and reach patients who were previously unable to travel across the border to Germany (where MagForce has three commercially operational devices). Installation of a NanoActivator in Lublin, Poland is now planned by year end 2018 and is a significant milestone for MagForce’s European expansion plans. Management also highlights Spain and Italy as other key locations where there is likely to be sharp uptake from private patients; roll-out into these territories has been slightly more protracted than we had expected. Furthermore, the reimbursement process, which varies by country, is critical to MagForce establishing substantial revenue growth; reimbursement discussions currently taking place in Germany should conclude in early 2019.

Our forecasts for Europe are based on the number of NanoActivators that MagForce could install in both Germany and other Europe states, along with clinical uptake based on usage per device. We have reviewed our forecasts and have changed our EU GBM sales trajectory to reflect flat sales growth in Germany in 2018. We have also pushed back our 2018 sales forecasts to reflect the slower than expected roll-out of devices in territories beyond Germany. The first device is to be installed by year-end 2018 (in Poland). We forecast three installations a year in 2019 onwards in Europe outside Germany. This roll-out profile is required to achieve our peak sales forecasts, which we maintain at €10m for GBM in Germany and €61m in broader Europe. These estimates suggest that NanoTherm therapy would be treating c 3,500 patients pa in Europe at peak levels (c 2025). This should be seen in the context that around 25,000 new cases of brain cancer are diagnosed per year in the EU5 (the UK, France, Germany, Italy and Spain).

NanoTherm therapy is regulated as a device rather than a drug in the US, and therefore follows a medical device regulatory route to approval. As part of this pathway, in May 2015 MagForce filed an IDE with the US FDA, which was subsequently granted in February 2018. In July 2018, MagForce reported the initiation of its pivotal prostate cancer trial across two clinical sites where NanoActivators are installed (University of Washington in Seattle, Washington and CHRISTUS Santa Rosa Hospital in San Antonio, Texas). The $9m gross proceeds from the capital increase in MagForce USA have provided funding to complete the ongoing prostate cancer trial, and both completion and submission for FDA review are expected in H219. While we maintain our €235m peak sales forecasts for prostate in the US for 2025, we have delayed launch to late 2019.

The single-arm US prostate cancer trial aims to recruit up to 120 prostate cancer patients who have a prostate cancer Gleason score of 71 and are under active surveillance to assess NanoTherm therapy as focal treatment for prostate cancer. The study is structured such that 10 patients will be treated initially (before year-end 2018), and preliminary data accessed to demonstrate that NanoTherm is safe and there is no systemic translocation of the nanoparticles from the prostate. Enrolment of the subsequent 110 patients will then be used to demonstrate efficacy as defined by no recurrence of tumour in a follow-up biopsy. The therapy aims to destroy localised tumours in the prostate of patients by focal ablation. By ablating the prostate cancer focally, MagForce anticipates that patients will be able to maintain active surveillance and avoid definitive treatments such as surgery or whole gland radiotherapy, which is associated with side effects such as impairment in urinary functions (incontinence) and sexual functions (impotence).

With a relatively quick turnaround time in determining whether the primary endpoint has been met (biopsy to confirm reduction of prostate cancer lesions), a six- to nine-month turnaround after the preliminary safety results (expected Q119) is conceivable, providing that trial recruitment proceeds as planned. Based on this, the data available in Q319 should be sufficient to support a pre-market approval application for the device (based on the larger NanoActivators), with smaller pNanoActivators approved towards the end of the clinical trial, either by being included in the clinical data package or via the 510k route (using the original NanoActivator as the predicate device). While the GBM indication is reliant on the larger NanoActivators for activation of the NanoTherm nanoparticles, the more localised prostate cancer can be treated by the pNanoActivators (smaller ambulatory machines that resemble a dentist’s chair), thereby widening outreach to the US patient pool in the longer term.

We assume regulatory approval and first sales of treatments from Q419, assuming timely recruitment of the remaining 110 patients is achieved in H119. We assume that all future device sales will be of the smaller (and substantially cheaper) pNanoActivators and that devices will be provided via third-party leasing, MagForce will collect revenues from the sale of the pNanoActivators to the leasing provider. MagForce believes it will have 20 pNanactivators installed by Q419, and we conservatively assume that each prostate NanoActivator could treat around 30 patients per year in 2019. As a smaller quantity of nanoparticles will likely be required in prostate cancer, we assume a lower vial price of around a quarter of GBM, ie around $7k per vial. This price would position NanoTherm competitively with brachytherapy and each prostate NanoActivator could therefore generate revenues. Our estimates for peak sales of combined NanoTherm therapy and pNanoActivator sales of $268m (€235m) are based on annual roll-out of 20-35 devices per year from 2019, with 200 patients treated per device at peak in 2025.

The destruction or treatment of cancerous cells with heat, commonly through laser or microwave irradiation, is well established. Current techniques can often be intrusive and can be hampered by unfocused heat distribution. NanoTherm therapy is utilised to ablate cancerous cells at the core of a tumour, while generating lower temperatures in the hyperthermia region at the edges of the tumour, minimising healthy cell damage. The NanoTherm therapy has three main components:

MagForce AG is the parent company of the MagForce group, which consists of five companies: MagForce AG, MagForce USA, MagForce USA Holding GmbH, MagForce Ventures GmbH and MT MedTech Engineering GmbH. The company is not required to report consolidated financial statements under HGB accounting standards.

MagForce reported net profit of €4.1m in H118 (H117: €3.0m loss). Revenues from sales decreased for H118 to €24k (H117: €683k), and are a reflection that revenues in Europe continue to be affected by a lengthy reimbursement process (carried out on a per-patient basis) and a change in revenue recognition. Other operating income, reported at €9.1m in H118 (H117: €605k), was largely attributed to the transfer of 975,000 shares in MagForce USA to MagForce USA Holding GmbH on 25 June 2018, and consequent realisation of hidden reserves of €8.8m at the parent company level (MagForce AG). This is a non-cash item of a non-operating nature. Cost of materials decreased to €364k (H117: €574k) due to the lower use of raw materials, supplies and purchased goods. Personnel expenses were in line y-o-y at €1.7m. We have updated our 2018 forecasts to include the €8.8m as non-operating income, which reduces our forecast operating loss for 2018 to €1.8m from €8.0m. However, we highlight the potential one-time impact and forecast a higher operating loss of €8.2m in 2019. Exhibit 1 summarises the key changes to our forecasts.

MagForce reported cash and cash equivalents at 30 June 2018 of €5.3m. In January 2018, the first €10.0m tranche of the €35.0m loan facility with the EIB (secured in October 2017) was disbursed with a five-year maturity (with interest, €10.4m is owed). In May 2018, the €400k loan granted from Lipps & Associates was repaid with interest (the loan was due on 30 June 2019 and had a 5% interest rate). Interest repayments of €83k were made for the €5m convertible bond issued in March 2017 (the bond has a maturity of three years, an interest rate of 5% pa and a conversion price of €5/share). As at 30 June 2018, MagForce had net debt of €10m (H117: €0.4m).

Our updated valuation is €303.1m or €11.5/share (previously €307.6m or €11.7 per share) based on a risk-adjusted NPV analysis. The main factor in the slight reduction in valuation is pushing back our EU revenue forecasts (for GBM) by a year, reflecting the delay in NanoActivator installations in the broader EU market and lower sales in Germany. We have rolled forward our model and updated it to reflect H118 results, net debt of €10.0m at 30 June 2018 and updated FX exchange rates. We have also reflected dilution in the US subsidiary to reflect MagForce’s 68% stake (previously 77%). We value only treating glioblastoma multiforme (GBM) in the EU and prostate cancer in the US. While we recognise MagForce’s intention to treat additional indications in each region, we do not currently value these opportunities. The breakdown of our rNPV valuation, which uses a 12.5% discount rate, is shown in Exhibit 2.