Midatech Pharma — Announced acquisition to expand portfolio

Midatech Pharma (AIM: MTPH)

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Research: Healthcare

Midatech Pharma — Announced acquisition to expand portfolio

Midatech announced an all-stock acquisition of Bioasis Technologies (a Canada-based biopharmaceutical company) by issuing 75,884,553 new shares at an exchange ratio 0.9556 per Bioasis share. This translated to a deal value of c C$7.4m (c £4.4m) at the time of the announcement (at c 5.8p per Midatech share) but is subject to change based on share price movements. The proposed acquisition is expected to close in Q123, contingent on regulatory and shareholder approval. In parallel, Midatech announced a two-stage equity raise worth US$10.0m (£8.2m), which will be utilised to support working capital requirements of the combined business and partially pay Bioasis’s outstanding debt. Following the acquisition, Midatech now intends to maintain a dual listing (AIM and NASDAQ).

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Midatech Pharma

Announced acquisition to expand portfolio

Pharma and biotech

Spotlight - Update

21 December 2022

Price

2.6p

Market cap

£3m

Share price graph

Share details

Code

MTPH

Listing

AIM

Shares in issue as on 19 December 2022

108.3m

Net cash at 13 December 2022

c £3.6m

Business description

Midatech Pharma is platform-based drug delivery specialist founded in 2000 and listed on AIM in 2014. Its three technology platforms, Q-Sphera (for a sustained release of drugs), MidaSolve (nano inclusion for local delivery) and MidaCore (gold nanoparticles for targeted delivery) are designed to re-engineer and reformulate existing therapeutic drugs with the aim of improving biodistribution and delivery. The focus is now on the QSphera development pipeline and the clinical asset MTX110 (for brain cancer).

Bull

Scalable technology platforms with a broad product pipeline.

First-in-class potential in brain cancers.

Early success in encapsulating a mAb.

Bear

Challenges in finding partners/out-licensing opportunities if deal with Bioasis falls through.

Challenging macroeconomic environment making fund-raising difficult.

Earlier-stage product out-licensing strategy may limit upside potential of partnership deals.

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Jyoti Prakash, CFA

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

Midatech Pharma is a research client of Edison Investment Research Limited

Midatech announced an all-stock acquisition of Bioasis Technologies (a Canada-based biopharmaceutical company) by issuing 75,884,553 new shares at an exchange ratio 0.9556 per Bioasis share. This translated to a deal value of c C$7.4m (c £4.4m) at the time of the announcement (at c 5.8p per Midatech share) but is subject to change based on share price movements. The proposed acquisition is expected to close in Q123, contingent on regulatory and shareholder approval. In parallel, Midatech announced a two-stage equity raise worth US$10.0m (£8.2m), which will be utilised to support working capital requirements of the combined business and partially pay Bioasis’s outstanding debt. Following the acquisition, Midatech now intends to maintain a dual listing (AIM and NASDAQ).

Historical financials

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

1.94

(11.8)

(339.0)

0.0

N/A

N/A

12/19

0.67

(10.9)

(50.0)

0.0

N/A

N/A

12/20

0.34

(11.1)

(22.9)

0.0

N/A

N/A

12/21

0.58

(6.1)

(6.8)

0.0

N/A

N/A

Source: Midatech company filings. Note: PBT and EPS are normalised.

A synergistic acquisition

The proposed acquisition makes strategic sense as it diversifies Midatech into a novel drug development vs a pure-play drug delivery platform. We also see synergies as the lead assets of both companies (Midatech-MTX110 and Bioasis-CRES101) target the CNS space, in particular rare and orphan indications. In addition, both companies own their respective proprietary drug delivery platforms with Bioasis’s xB3 platform (designed to cross the blood brain barrier) holding several licensing and co-development agreements with upwards of US$200m in potential milestone payments.

New equity raises to provide operational headroom

Midatech also announced a two-step equity raise totalling US$10m (£8.2m), comprising a registered direct offering to existing shareholders for gross proceeds of US$0.4m (c £0.3m) at 3.3p/share (concluded on 16 December) and a private placement to raise an additional US$9.6m (c £7.9m). The additional capital will be used to support the working capital needs of the combined business and repay a portion of Bioasis’s outstanding debt (c C$2.4m) with Lind Global Macro Fund. In addition, Midatech will be extending a short-term loan worth US$0.75m (across three tranches) to Bioasis to support its working capital requirements.

Merged business to maintain a dual listing

Although Midatech initially communicated plans to delist from AIM following the acquisition, it now intends to maintain a dual listing on AIM and NASDAQ and trade under the ticker BDRX. Management estimates that the current cash balance (c £3.6m) will provide operational cash runway until Q123, which could extend to Q423 on successful conclusion of the fund-raise and acquisition.

Bioasis acquisition: A strategic move

Bioasis Technologies, listed on the TSX Venture Exchange (TSXV: BTI), is a development-stage biotechnology company focused on developing products for the diagnosis and treatment of neurological diseases and disorders. Traditionally focused on its proprietary drug delivery platform xB3 (for delivering therapeutics across the blood brain barrier), the company diversified into therapeutics with the June 2022 acquisition of Norway-based Cresence, which brought on board three clinic-ready assets – all epidermal growth factor (EGF) therapeutics being evaluated for the treatment of CNS indications such as optic neuritis associated with multiple sclerosis (MS), Guillain-Barre syndrome (GBS) and chronic inflammatory degenerative polyneuropathy (CIDP), respectively.

In addition to its therapeutic programmes, Bioasis also holds several licensing and co-development agreements for its xB3 platform with companies such as Chiesi Farmaceutici, Prothena Corporation, Janssen Pharmaceutica (a Johnson and Johnson subsidiary) and Neuramedy, which has netted the company a combined US$1.3m in upfront fees with potential to receive c US$240m in royalty payments, should the agreed milestones be met. Midatech too has an ongoing collaboration with Janssen for its Q-Sphera platform, for which the company has received a combined US$1.2m in payments to date. Exhibit 1 lists the two companies’ strategic partnerships.

Exhibit 1: Midatech and Bioasis strategic partnerships

Source: Bioasis shareholder presentation, December 2022

To broaden Midatech’s portfolio and generate synergies

Midatech believes that acquiring Bioasis’s therapeutic portfolio will help it broaden its offerings and position itself as a drug development company (rather than a dedicated drug delivery company) focused on rare and orphan conditions (where much of Midatech’s recent research has been directed regarding MTX110). A focus on the rare diseases space is strategic for Midatech, given the ability to conduct smaller clinical trials, command higher drug prices and gain market exclusivity and a possible faster route to the market, driven by regulatory support for therapeutics targeting these conditions. Management also believes that a broader development pipeline following Bioasis’s integration would reduce its reliance on R&D collaborations and third-party licensing for developing novel products (a typical go-to-market strategy for drug delivery companies). Management also anticipates a decline in overall operating expenses as a combined entity, which is likely to be driven by expected cost synergies arising from the acquisition. As highlighted earlier, the deal also brings on board Bioasis’s drug delivery platform xB3, for which the company holds several licensing and co-development agreements with the potential to generate upwards of US$200m in milestone payments, should various performance conditions be met.

Exhibit 2 presents a snapshot of the combined entity’s development pipeline. We understand that, following the merger, the initial focus for the group will be on Midatech’s MTX110 (to be renamed BDX110) currently being evaluated in aggressive brain cancer such as glioblastoma (GBM) and diffuse intrinsic pontine glioma (DIPG) and Bioasis’s CRES-101 (to be renamed BDX101) for optical neuritis associated with MS.

Exhibit 2: Midatech + Bioasis (Biodexa)’s clinical pipeline

Source: Bioasis shareholder presentation, December 2022

Fund-raising: To meet pre-specified objectives

Coinciding with the acquisition, Midatech has announced a two-stage equity issue with Armistice Capital to raise a total of US$10m (c £8.2m) in gross proceeds. The first stage of the fund-raising has now been completed and was executed through the issue of an additional c 9.9m Midatech shares for 3.3p per share (equivalent to 394k American Depository Shares (ADSs) at US$1.0 per ADS given the ratio of 25 shares per ADS), raising a total of US$0.3m (c.£0.2m) in net proceeds. Management intends to utilise the net proceeds from the raise, along with part of its existing cash balance (£3.6m), to extend a short-term bridge loan of US$0.75m (c £0.61m) to Bioasis (across three tranches of US$0.25m each on 19 December 2022, 3 January 2023 and 6 February 2023) in order to support its immediate working capital needs. The loan will attract an interest rate of 2% per month and will be repayable by 30 June 2023.

The second fund-raising targets raising gross proceeds of US$9.6m through a private placement against the issue of c 14.6m ordinary shares (equivalent to 584k ADSs) at US$1.0/ADS and c 9.0m pre-funded warrants (to purchase a similar number of ADSs) at US$0.999/pre-funded warrant, which can then be exercised at a nominal price of US$0.001/unit. Additionally, Armistice Capital will be awarded A and B warrants (10m each) to purchase a similar number of ADSs on execution. The A and B warrants will have an expiration period of one and six years, respectively and under revised terms can be converted at an exercise price of US$1.1/unit (previously US$1.0/unit), potentially generating additional capital for the combined entity. The placing price will be the lower of US$1.0 per ADS (or US$0.999 per pre-funded warrant) and the 20-day volume weighted average price (VWAP) on the day before completion of the acquisition, less 10%. We note that if the VWAP is less than US$0.9, Midatech holds the right to terminate the private placement without penalty. The placement is contingent on completion of the acquisition, shareholder approval of the proposed resolutions along with approval by Bioasis shareholders.

The net proceeds from the private placement (expected to be US$8.6m or c £7.0m) will be used to pay off part of Bioasis’s debt due to Lind Global Macro Fund (raised in June 2021) and to support the operations of the combined business. Management anticipates an operational cash runway into Q423 if the acquisition and funding materialise. We estimate that Midatech will be obligated to make a cash payment of C$2.4m to Lind on behalf of Bioasis, which includes 50% of the outstanding principal and 100% of the accrued pre-paid interest from the initial loan. The remaining 50% of the principal amount will be settled by Midatech issuing 20.6m shares to Lind. In addition, Midatech will issue c 27.9m shares to Ladenburg Thalmann & Co against US$2m owed by Bioasis for the investment banking agreement. In all, Midatech estimates pro forma shares outstanding of 247.3m for the combined entity following completion of the acquisition on a non-diluted basis and 909.6m on a fully diluted basis.

Deal terms: An all-stock acquisition

The acquisition of Bioasis will be implemented through a statutory plan of arrangement (as per the laws of the Province of British Columbia, Canada), which is subject to approval by the court and both companies’ shareholders, along with successful completion of the private placement to raise US$10m in gross proceeds. Under the terms of the agreement, Midatech will acquire the total outstanding (and yet-to-be issued) share capital of Bioasis Technologies, for a nominal purchase consideration of C$7.4m (c £4.4m) as on the acquisition date (at 5.8p/share), based on a share exchange ratio of 0.9556 Midatech share for each Bioasis share. Midatech will issue a total of c 75.9m shares (77% of the currently issued shares) of 0.1p each as acquisition consideration. We highlight that the total consideration is subject to variability depending on share price movements.

Midatech initially intended to delist from the AIM unit of the London Stock Exchange post acquisition (expected in Q123), due to the purported higher trading liquidity on the Nasdaq and to save on the costs associated with managing a dual listing. However, following feedback received from shareholders, management has now revoked its decision and plans to maintain a dual listing on both AIM and Nasdaq. The newly listed shares/ADSs of the combined entity will commence trading under the name Biodexa (BDRX) following the completion of the acquisition. The likely post-acquisition shareholding (assuming completion of the private placement at US$1.0/ADS) structure is presented in Exhibit 3 below.

Exhibit 3: Post-acquisition Biodexa shareholding

Basic shareholding

Fully diluted shareholding

Existing Midatech shareholders

39.8%

13.1%

Midatech direct share offering to Armistice Capital

4.0%

1.1%

New private placement (Armistice Capital)

5.9%

56.6%

Existing Bioasis shareholders

30.7%

11.6%

Lind Global Macro Fund

8.3%

6.8%

Ladenburg Thalmann & Co

11.3%

10.2%

Cresence Founders

0.6%

Total

100.0%

100.0%

Source: Midatech offer document, dated 13 December 2022

General disclaimer and copyright

This report has been commissioned by Midatech Pharma and prepared and issued by Edison, in consideration of a fee payable by Midatech Pharma. Edison Investment Research standard fees are £60,000 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.

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General disclaimer and copyright

This report has been commissioned by Midatech Pharma and prepared and issued by Edison, in consideration of a fee payable by Midatech Pharma. Edison Investment Research standard fees are £60,000 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 research department of Edison 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 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

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