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Research: Healthcare
The year 2019 marked a major turnaround for Silence, as it both ramped up its development activity, with the advancement of SLN124 for iron overload and SLN360 for cardiovascular disease, and made massive partnering efforts. We have seen the fruits of this business development in the form of three partnering deals with major pharmaceutical companies Mallinckrodt, Takeda and AstraZeneca. Together all these efforts demonstrate the value of the company’s siRNA platform and intellectual property.
Written by
Silence Therapeutics |
A year of unprecedented change |
Earnings update |
Pharma & biotech |
16 April 2020 |
Share price performance
Business description
Next events
Analyst
Silence Therapeutics is a research client of Edison Investment Research Limited |
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The year 2019 marked a major turnaround for Silence, as it both ramped up its development activity, with the advancement of SLN124 for iron overload and SLN360 for cardiovascular disease, and made massive partnering efforts. We have seen the fruits of this business development in the form of three partnering deals with major pharmaceutical companies Mallinckrodt, Takeda and AstraZeneca. Together all these efforts demonstrate the value of the company’s siRNA platform and intellectual property.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
0.0 |
(19.8) |
(25.2) |
0.0 |
N/A |
N/A |
12/19 |
0.2 |
(22.3) |
(27.2) |
0.0 |
N/A |
N/A |
12/20e |
4.6 |
(23.7) |
(25.0) |
0.0 |
N/A |
N/A |
12/21e |
10.0 |
(20.9) |
(20.9) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Three major deals in a 12-month span
The three partnering deals the company signed are each of different forms. The Mallinckrodt deal was for the licensing of SLN500, the company’s C3 targeted siRNA (for $25m upfront), but it includes options for future licensing. The Takeda and the AstraZeneca deals are both research partnerships. But whereas the Takeda deal is framed as a technology evaluation (and includes single digit millions in research support), the AstraZeneca deal includes commitments to evaluate up to 10 target leads (five to be evaluated in the first three years) and the largest upfront payment of the three deals ($60m cash and $20m equity investment), demonstrating significant confidence in the partnership (further details on the deals are below).
Accelerated internal pipeline a major value driver
Although the partnering deals have made for impressive headlines, Silence’s internal development programs are no less valuable. The company expects to enrol the first patients in Phase I programs for both SLN124 and SLN360 in 2020, and to report initial results in H121 and mid-2021, respectively. However, it is the cash influx from the partnering that has enabled both of these programs to run simultaneously, allowing the company to advance its SLN360 program ahead of schedule, and elevating it to the title of lead asset.
Valuation: £461m or 558p
Our valuation for Silence is largely unchanged at £461.2m or 558p/share, following a slight adjustment of less than £1m (£461.9m or 559p previously). This adjustment is due to slightly lower expected revenue from the Onpattro royalty stream, based on the company’s reports (£73k in 2019). We expect the company to require £85m (up from £80m, and recorded in 2023) in additional capital to reach profitability in 2027.
The quintessential turnaround story
The year 2019 marked a major shift in strategy for Silence Therapeutics, and upon review it was an unqualified success. The company began the year on the heels of the disappointing conclusion of its prolonged litigation with Alnylam over intellectual property. However, the company subsequently demonstrated just how valuable its IP was. Its investment in business development during 2019 has subsequently paid off, and the company has signed three separate agreements with major pharmaceutical companies seeking to utilise its technology to develop novel siRNA drugs (Exhibit 1).
Exhibit 1: Silence partnering arrangements
Partner |
Scope |
Indications |
Upfront |
Options and milestones |
Royalties |
Mallinckrodt |
Licensing of SLN500, with options to license two additional undisclosed assets |
Complement disorders |
$20m cash, $5m equity |
$10m research milestones ($2m already paid), $100m clinical and regulatory milestones, $563m commercial milestones, $703m in milestones for future optioned assets |
Low double digits to high teens |
Takeda |
Technology evaluation agreement |
Undisclosed |
Single-digit millions in research support |
To be negotiated for licensed assets |
To be negotiated for licensed assets |
AstraZeneca |
Research agreement for up to 10 programs, five in first three years |
Cardiovascular, renal, metabolic and respiratory diseases |
$60m cash, $20m equity investment |
$10m option fee, $140m in development milestones, $250m in commercial milestones per asset |
High single digit to low double digit |
Source: Silence Therapeutics
The Mallinckrodt and AstraZeneca deals brought in $107m in cash and equity investments (in upfront payments and the first Mallinckrodt milestone), and have the downstream potential to bring in $5.4bn of additional cash in options and milestones. The Takeda deal has few details disclosed but includes single-digit millions in research support and additional future licensing potential.
All of the above deal-making occurred in parallel with the company ramping up its own internal pipeline development during 2019. It began preparations in 2019 to enter the clinic with its iron overload treatment SLN124, but with the influx of cash from its new partners it decided to also advance its ambitious SLN360 program for the treatment of cardiovascular disease. The company is planning to file an IND for SLN360 later in 2020 and subsequently dose initial Phase I patients this year (with interim results expected in mid-2021).
The Phase I trial for SLN124 had clinical sites open, but enrolment has been delayed by COVID-19. It is expected to resume later in 2020. The company announced in its earnings release that this drug candidate received an orphan designation for myelodysplastic syndrome (MDS). This is in addition to the previously announced paediatric rare disease designation for beta-thalassemia.
Valuation
Our valuation for Silence is largely unchanged at £461.2m or 558p per basic share. It is slightly lower by less than £1m from our previous report (£461.9m or 559p per basic share), because we have slightly adjusted the near-term revenue stream from Onpattro royalties, based on the financial results. Otherwise our models remain unchanged.
Exhibit 2: Valuation of Silence Therapeutics
Product |
Indication |
Clinical stage |
Prob. of success |
Launch year |
Peak sales ($m) |
Margin/ royalty rate |
rNPV |
||||
SLN124 |
Beta-Thalassemia |
Phase I ready |
15% |
2027 |
489.2 |
59% |
62.7 |
||||
MDS |
Phase I ready |
15% |
2027 |
683.7 |
60% |
66.1 |
|||||
SLN360 |
Cardiovascular disease |
Preclinical |
7.5% |
2027 |
5214.0 |
54% |
167.1 |
||||
SLN500 |
Complement disorder |
Preclinical |
5% |
2027 |
*400 |
*11–19% |
26.4 |
||||
Takeda project |
Undisclosed |
Preclinical |
3% |
2028 |
*400 |
*11–19% |
17.7 |
||||
AZ project |
Undisclosed |
Preclinical |
3% |
2029 |
*400 |
*8–12% |
39.9 |
||||
QPI-1002 |
AKI & kidney transplant |
Phase III |
60% |
2022 |
381.5 |
1.5–4.0% |
9.7 |
||||
Onpattro |
hATTR Amyloidosis |
Approved |
354.5 |
0.33–1.0% |
4.2 |
||||||
Total |
393.8 |
||||||||||
Pro forma net cash and deposits (at 31 December 2019 + AZ upfront est.) (£m) |
67.4 |
||||||||||
Total firm value (£m) |
461.2 |
||||||||||
Total basic shares (m) |
82.7 |
||||||||||
Value per basic share (p) |
558 |
||||||||||
Dilutive options (m) |
4.7 |
||||||||||
Total diluted shares (m) |
87.4 |
||||||||||
Value per diluted share (p) |
532 |
||||||||||
Source: Silence Therapeutics reports, Edison Investment Research. Note: *Peak sales for licensing deals are a placeholder, royalty rates estimated.
Financials
The company reported revenue of £0.2m for 2019 from Onpattro royalties (£0.07m) and partial recognition of the Mallinckrodt upfront and milestone received (£0.17m). The difference from our previous revenue estimates (£2.1m) largely reflects differences from our presumed revenue recognition schedule, which included the $2m milestone paid in full. The revenue recognition from this and the AstraZeneca payments, as well as research support payments from Takeda represent the vast majority of our revenue estimates in 2020 (£4.6m) and 2021 (£10.0m), but are subject to change as in the case of 2019. The company had R&D spending of £13.3m in 2019, which we expect to increase in 2020 (£20.2m) and 2021 (£22.4m) as the company enters the clinic with SLN124 and SLN360. SG&A spending for 2019 (£9.6m) was higher than our previous estimates (£8.4m), which we attribute largely to nonrecurring expenses associated with the deals and staffing changes (although the company has not broken this down). We forecast slightly lower SG&A spending in 2020 at £8.8m.
The company ended the year with £33.5m in cash, which has subsequently been bolstered by the initial $20m portion of the AstraZeneca upfront (with the $40m remainder of the $60m total upfront payable by the first anniversary) and AstraZeneca’s concurrent $20m equity investment. We have adjusted our financing schedule for the company and forecast the company will need £85m in additional capital, which we include as illustrative debt in 2023 (from £80m in 2024, previously), with the change reflecting the long-term accumulated effects of adjustments in Onpattro royalties and a slight increase in SG&A spending.
Exhibit 3: Financial summary
£000s |
2018 |
2019 |
2020e |
2021e |
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
INCOME STATEMENT |
||||
Revenue |
0.0 |
244.0 |
4,649.2 |
10,039.1 |
Cost of Sales |
0.0 |
0.0 |
0.0 |
0.0 |
Gross Profit |
0.0 |
244.0 |
4,649.2 |
10,039.1 |
R&D |
(9,743.0) |
(13,336.0) |
(20,192.9) |
(22,441.6) |
SG&A |
(10,828.0) |
(9,642.0) |
(8,804.4) |
(9,068.6) |
EBITDA |
(20,172.0) |
(22,252.0) |
(23,896.1) |
(21,019.0) |
Normalised operating profit |
(19,890.0) |
(22,150.0) |
(23,746.6) |
(20,851.4) |
Depreciation & amortisation |
(399.0) |
(482.0) |
(452.0) |
(452.0) |
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
Share-based payments |
(681.0) |
(584.0) |
(601.5) |
(619.6) |
Reported operating profit |
(20,571.0) |
(22,734.0) |
(24,348.1) |
(21,471.0) |
Net Interest |
45.0 |
(136.0) |
0.0 |
0.0 |
Joint ventures & associates (post tax) |
0.0 |
0.0 |
0.0 |
0.0 |
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
Profit Before Tax (norm) |
(19,845.0) |
(22,286.0) |
(23,746.6) |
(20,851.4) |
Profit Before Tax (reported) |
(20,526.0) |
(22,870.0) |
(24,348.1) |
(21,471.0) |
Reported tax |
2,115.0 |
3,288.0 |
4,633.3 |
5,149.3 |
Profit After Tax (norm) |
(17,800.2) |
(19,989.6) |
(21,299.8) |
(18,702.9) |
Profit After Tax (reported) |
(18,411.0) |
(19,582.0) |
(19,714.8) |
(16,321.7) |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
Foreign exchange adjustment |
94.0 |
(411.0) |
0.0 |
0.0 |
Net income (normalised) |
(17,706.2) |
(20,400.6) |
(21,299.8) |
(18,702.9) |
Net income (reported) |
(18,317.0) |
(19,993.0) |
(19,714.8) |
(16,321.7) |
Basic average number of shares outstanding (m) |
70 |
75 |
85 |
89 |
EPS - basic normalised (p) |
(25.18) |
(27.15) |
(25.02) |
(20.92) |
EPS - diluted normalised (p) |
(25.18) |
(27.15) |
(25.02) |
(20.92) |
EPS - basic reported (p) |
(26.18) |
(26.07) |
(23.16) |
(18.26) |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
BALANCE SHEET |
||||
Fixed Assets |
9,387.0 |
8,612.0 |
8,386.0 |
8,160.0 |
Intangible Assets |
8,191.0 |
7,726.0 |
7,726.0 |
7,726.0 |
Tangible Assets |
921.0 |
611.0 |
385.0 |
159.0 |
Investments & other |
275.0 |
275.0 |
275.0 |
275.0 |
Current Assets |
29,498.0 |
37,465.0 |
50,029.0 |
64,883.7 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
Debtors |
0.0 |
4.0 |
0.0 |
0.0 |
Cash, cash equivalents, and deposits |
26,494.0 |
33,515.0 |
44,509.7 |
58,848.4 |
Other |
3,004.0 |
3,946.0 |
5,519.3 |
6,035.3 |
Current Liabilities |
(3,830.0) |
(9,653.0) |
(14,670.2) |
(19,194.5) |
Creditors |
(3,830.0) |
(6,888.0) |
(5,512.2) |
(6,004.3) |
Tax and social security |
0.0 |
0.0 |
0.0 |
0.0 |
Short term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
0.0 |
(2,765.0) |
(9,158.0) |
(13,190.2) |
Long Term Liabilities |
0.0 |
(15,515.0) |
(25,000.0) |
(50,806.5) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
Other long term liabilities |
0.0 |
(15,515.0) |
(25,000.0) |
(50,806.5) |
Net Assets |
35,055.0 |
20,909.0 |
18,744.9 |
3,042.7 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
Shareholders' equity |
35,055.0 |
20,909.0 |
18,744.9 |
3,042.7 |
CASH FLOW |
||||
Op Cash Flow before WC and tax |
(19,491.0) |
(21,668.0) |
(23,294.6) |
(20,399.4) |
Working capital |
913.0 |
3,054.0 |
(1,371.8) |
492.1 |
Exceptional & other |
6.0 |
18,033.0 |
15,878.0 |
29,838.7 |
Tax |
1,812.0 |
2,308.0 |
3,060.0 |
4,633.3 |
Net operating cash flow |
(16,760.0) |
1,727.0 |
(5,728.5) |
14,564.7 |
Capex |
(188.0) |
(9.0) |
(226.0) |
(226.0) |
Acquisitions/disposals |
0.0 |
0.0 |
0.0 |
0.0 |
Net interest |
39.0 |
(6.0) |
0.0 |
0.0 |
Equity financing |
341.0 |
5,273.0 |
16,949.2 |
0.0 |
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
319.0 |
0.0 |
0.0 |
0.0 |
Net Cash Flow |
(16,249.0) |
6,985.0 |
10,994.7 |
14,338.7 |
Opening net debt/(cash) |
(42,745.0) |
(26,494.0) |
(33,515.0) |
(44,509.7) |
FX |
(2.0) |
36.0 |
0.0 |
0.0 |
Other non-cash movements |
0.0 |
0.0 |
0.0 |
0.0 |
Closing net debt/(cash) |
(26,494.0) |
(33,515.0) |
(44,509.7) |
(58,848.4) |
Source: Company accounts, Edison Investment Research
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