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Research: Healthcare
Pacific Edge announced that it has successfully gained inclusion into a local coverage determination (LCD) enabling reimbursement at US$760 per test from the US Centers for Medicare and Medicaid Services (CMS). This reimbursement decision covers the Cxbladder Detect and Cxbladder Monitor products that currently account for 93% of the total laboratory throughput in the US for Cxbladder products. This is a transformative milestone for Pacific Edge as it should lead to greater usage of Cxbladder (both from CMS and private payers) as well as payment on tests previously performed. As a reminder, 21,789 Cxbladder tests were performed on CMS patients as of 31 March 2020, accounting for 43% of US commercial tests.
Written by
Maxim Jacobs
Pacific Edge |
CMS reimbursement obtained |
Financial update |
Healthcare equipment |
20 July 2020 |
Share price performance
Business description
Next events
Analysts
Pacific Edge is a research client of Edison Investment Research Limited |
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Pacific Edge announced that it has successfully gained inclusion into a local coverage determination (LCD) enabling reimbursement at US$760 per test from the US Centers for Medicare and Medicaid Services (CMS). This reimbursement decision covers the Cxbladder Detect and Cxbladder Monitor products that currently account for 93% of the total laboratory throughput in the US for Cxbladder products. This is a transformative milestone for Pacific Edge as it should lead to greater usage of Cxbladder (both from CMS and private payers) as well as payment on tests previously performed. As a reminder, 21,789 Cxbladder tests were performed on CMS patients as of 31 March 2020, accounting for 43% of US commercial tests.
Year end |
Revenue (NZ$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/19 |
4.8 |
(17.8) |
(3.5) |
0.0 |
N/A |
N/A |
03/20 |
5.0 |
(18.8) |
(3.2) |
0.0 |
N/A |
N/A |
03/21e |
20.2 |
(4.6) |
(0.6) |
0.0 |
N/A |
N/A |
03/22e |
44.1 |
17.4 |
2.3 |
0.0 |
25.2 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Kaiser Permanente signs on
Pacific Edge recently announced that Kaiser Permanente, one of the largest non-profit health providers in the US, has reached an agreement with the company on the commercial use of Cxbladder by its urologists. Kaiser Permanente has more than 12 million members, operates 39 hospitals and employs 23,000 physicians, so this commercial agreement is a major milestone for Pacific Edge, which we expect should provide a meaningful increase in revenues.
Cxbladder sales increased 14% in FY20
The company reported an increase in Cxbladder sales of 14% in FY20 to NZ$4.4m with a 7% increase in total laboratory throughput to 16,861 tests. Sales in the rest of the world (primarily Australia, New Zealand and Singapore) were particularly strong and were also up 14% with a 12% increase in total laboratory throughput.
COVID-19 impact in April but already recovering
Due to COVID-19 related restrictions and lockdowns, April total laboratory throughput was about half (51%) of what it was in April 2019. The impact was mitigated in part by an in-home sampling option, as the healthcare industry puts a greater emphasis on telemedicine and other alternatives to in-person care. Due to easing restrictions and the in-home sampling option a recovery has already started.
Valuation: NZ$538m or NZ$0.78 per share
Our DCF-based valuation has been increased from NZ$231m (NZ$0.33/share) to NZ$538m (NZ$0.78/share). This increase is mainly due to markedly increasing our revenue estimates following CMS reimbursement and rolling forward our DCF, and was partially offset by lower net cash. We continue to expect profitability for FY22 and do not forecast any additional financing needs for the company.
Reimbursement is here
Pacific Edge has now completed all three components necessary for CMS reimbursement in the US, namely the attainment of product specific CPT codes, a national price of US$760 per test and inclusion in an LCD. An LCD is a document that includes the coverage decisions of the Medicare Administrative Contractor (MAC) and provides the conditions of the coverage as well as the price, guidance on reimbursement and coding information. This LCD inclusion covers the Cxbladder Detect and Cxbladder Monitor products, which together currently account for 93% of the company’s total laboratory throughput in the US (69% for Cxbladder Detect and 24% for Cxbladder Monitor).
Exhibit 1: Summary of the Cxbladder products
Product name |
Function |
Status |
Notes |
Cxbladder Detect |
Detects bladder cancer in patients with haematuria. |
Commercially available in NZ, Australia and the US since 2013. |
Non-invasive laboratory test for the detection of bladder cancer. Adjunct to cystoscopy. |
Cxbladder Triage |
Segregates patients without bladder cancer. |
Commercially available in NZ (2014), Australia and the US (2015). |
High sensitivity and high negative predictive value. |
Cxbladder Resolve |
Classifies tumours as low or high grade. |
Launched in New Zealand (2016) with US roll-out expected in late FY21. |
Prognostic test with sensitivity and high specificity to patients with high-grade and late-stage disease. |
Cxbladder Monitor |
Ongoing monitoring to check for recurrence of bladder cancer. |
Commercially available in NZ (2015) and the US (2016). |
High sensitivity and high negative predictive value to determine patients who should receive follow-up tests. |
Source: Pacific Edge
Now that LCD inclusion is attained, reimbursement from CMS (which currently represents approximately 43% of US Cxbladder commercial test volume) should become consistent and timely. Besides this immediate benefit of new tests being covered by CMS, the company will negotiate the payment terms for the 21,789 tests previously billed but not paid (as of 31 March 2020).
In addition, private payers often base their own coverage decisions and reimbursement levels on the coverage listed in an LCD, so the success here is expected to lead to faster growth for the company with other healthcare coverage providers. The company is also seeking a positive shift in guideline inclusion language in bladder cancer which may assist with obtaining additional private reimbursement.
Commercial agreement with Kaiser Permanente
Pacific Edge recently announced that Kaiser Permanente, one of the largest non-profit health providers in the US, has reached an agreement with the company on the commercial use of Cxbladder by its urologists in patients being evaluated for bladder cancer. Kaiser Permanente has more than 12 million members (approximately 3.6% of the US population), operates 39 hospitals and employs 23,000 physicians so this commercial agreement is a major milestone for the company, which we expect should provide a meaningful increase in revenues going forward. To illustrate the size of the opportunity with Kaiser Permanente, EY-Parthenon has previously estimated the size of the addressable market in the US to be US$1.2bn (see Exhibit 2). It is unclear what percentage of tests are performed on Kaiser Permanente members, but if we assume it is 1.8% (half of its proportionate share of the population as a disproportionate number of tests are performed on people covered by CMS), this could be a US$21.6m (NZ$33.4m) per year opportunity for Pacific Edge.
|
Exhibit 2: Addressable market in the US |
|
|
Source: Pacific Edge, based on an EY-Parthenon business review of the market |
Importantly, Pacific Edge will be utilising in-home sampling to service Kaiser Permanente members, as the ability to do so has become extremely pertinent during the COVID-19 pandemic. Kaiser Permanente has been especially focused on telemedicine/telehealth and has stated that 95% of its adult and family medicine visits in Northern California are now virtual. Going forward, the ability to service patients remotely will be especially important. According to McKinsey, only 11% of people in 2019 conducted telehealth compared to 46% today due to the pandemic. Additionally, 76% of consumers are now interested in using telehealth going forward. Regarding Pacific Edge’s business, the company moved quickly with three public healthcare providers in New Zealand, commencing in-home sampling of Cxbladder in April.
Valuation
Our DCF-based valuation has been increased from NZ$231m (NZ$0.33/share) to NZ$538m (NZ$0.78/share). This uplift is mainly due to markedly increasing our revenue estimates following CMS reimbursement (as well as the Kaiser Permanente commercial agreement). Our peak sales estimate has increased from NZ$164m to NZ$228.5m as we have increased our product adoption estimates across the board (although we continue to estimate limited contribution from the South-East Asia region, which the company believes is a meaningful opportunity long term). Additionally, the valuation has increased due to rolling forward our DCF and was partially offset by lower net cash.
Exhibit 3: Valuation based on DCF
Discounted cash flow (NZ$000) |
523,095 |
Net cash (NZ$000) at 31 March 2020 |
14,784 |
Valuation (NZ$000) |
537,879 |
Number of shares (m) as of 31 March 2020 |
689.7 |
Value per share (NZ$) |
0.78 |
Source: Edison Investment Research
Financials
Pacific Edge recently published FY20 results with operating revenue growth of 14% from NZ$3.8m in FY19 to NZ$4.4m. The US segment saw operating revenue increase 15% to NZ$3.8m while it increased 14% in the rest of world (primarily Australia, New Zealand and Singapore) to NZ$0.6m. Total laboratory throughput increased 7% globally to 16,861 tests, with a 6% increase in the US and a 12% increase in the rest of the world. The US remains the company’s largest market, accounting for 86% of group operating revenue and 78% of total laboratory throughput in FY20. Operating expenses for FY20 were reported as NZ$24.1m, a 5% increase compared to the prior year. This increase in spending is partially the result of an increase in the number of US sales executives from 11 to 16 over the course of the year. The FY20 operating cash flow (excluding net interest) was negative NZ$15.4m, an improvement over the negative NZ$17.8m level in FY19.
The company also stated that due to COVID-19 related restrictions and lockdowns, total laboratory throughput in April was about half (51%) of what it was the previous April. The impact was mitigated in part by an in-home sampling option as the healthcare industry puts a greater emphasis on telemedicine and other alternatives to in-person care. Due to easing restrictions and the in-home sampling option, a recovery has already started. Additionally, Pacific Edge has been able to reduce costs to offset income reductions, and has received financial support in the form of COVID-19 relief packages from governments in New Zealand, Australia, Singapore and the US.
We are increasing our FY21 revenue estimate from NZ$19.1m to NZ$20.2m, following the recent announcements on CMS reimbursement and the Kaiser Permanente commercial agreement. We consider this estimate to be conservative as we are not including the full value of the backlog payment in FY21 revenues. The size of any backlog payment will be dependent on the success of the company’s negotiations with the CMS. As a reminder, Cxbladder Detect and Cxbladder Monitor accounted for 93% of the company’s total laboratory throughput in the US in FY20. Assuming 93% of the 21,789 CMS tests already performed (as of 31 March 2020) can now be paid for, we calculate a potential backlog payment of US$15.4m (NZ$23.8m), based on a US$760 per test national price.
We are also conservative in our estimates for the contribution from the Kaiser Permanante commercial agreement. We calculate a NZ$33.4m annual opportunity for Pacific Edge with Kaiser Permanente but the pace of the ramp-up is unknown and the benefit to FY21 revenues will only be for a partial year.
We are also introducing our FY22 estimates, which include NZ$44.1m in revenues as well as full year profitability (see Exhibit 4).
Exhibit 4: Financial forecast changes
FY21e |
FY22e |
||
Old |
New |
New |
|
Revenue (NZ$m) |
19.1 |
20.2 |
44.1 |
PBT (normalised) (NZ$m) |
(5.8) |
(4.6) |
17.4 |
EPS (NZ$) |
(0.01) |
(0.01) |
0.02 |
Source: Edison Investment Research
During FY20, the company raised a total of NZ$20.1m, and had net cash of NZ$14.8m at 31 March 2020. Based on our current estimates, we believe the company will not need to raise additional capital.
Exhibit 5: Financial summary
NZ$'000s |
2019 |
2020 |
2021e |
2022e |
||
Year end 31 March |
NZ GAAP |
NZ GAAP |
NZ GAAP |
NZ GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
4,807 |
4,954 |
20,177 |
44,052 |
Cost of Sales |
(4,594) |
(5,181) |
(5,699) |
(6,269) |
||
Gross Profit |
213 |
(227) |
14,478 |
37,783 |
||
EBITDA |
|
|
(17,840) |
(17,703) |
(3,522) |
19,243 |
Operating Profit (before amort. and except.) |
|
|
(18,077) |
(19,007) |
(5,087) |
17,365 |
Intangible Amortisation |
(154) |
(123) |
(148) |
(177) |
||
Exceptionals |
(4) |
(101) |
0 |
0 |
||
Operating Profit |
(18,235) |
(19,231) |
(5,235) |
17,188 |
||
Other |
0 |
0 |
0 |
0 |
||
Net Interest |
323 |
249 |
444 |
0 |
||
Profit Before Tax (norm) |
|
|
(17,754) |
(18,758) |
(4,643) |
17,365 |
Profit Before Tax (FRS 3) |
|
|
(17,912) |
(18,982) |
(4,791) |
17,188 |
Tax |
(9) |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(17,763) |
(18,758) |
(4,643) |
17,365 |
||
Profit After Tax (FRS 3) |
(17,921) |
(18,982) |
(4,791) |
17,188 |
||
Average Number of Shares Outstanding (m) |
504.4 |
581.3 |
717.1 |
745.8 |
||
EPS - normalised (c) |
|
|
(3.5) |
(3.2) |
(0.6) |
2.3 |
EPS - FRS 3 (c) |
|
|
(3.6) |
(3.3) |
(0.7) |
2.3 |
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 |
|
|
1,002 |
2,412 |
2,254 |
2,067 |
Intangible Assets |
233 |
179 |
100 |
(8) |
||
Tangible Assets |
769 |
652 |
573 |
494 |
||
Other |
0 |
1,581 |
1,581 |
1,581 |
||
Current Assets |
|
|
15,564 |
16,916 |
14,315 |
34,116 |
Stocks |
842 |
796 |
796 |
796 |
||
Debtors |
1,265 |
642 |
642 |
642 |
||
Cash |
12,847 |
14,784 |
12,183 |
31,984 |
||
Other |
610 |
694 |
694 |
694 |
||
Current Liabilities |
|
|
(2,624) |
(4,253) |
(4,253) |
(4,253) |
Creditors |
(2,572) |
(3,270) |
(3,270) |
(3,270) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Short term leases |
(52) |
(983) |
(983) |
(983) |
||
Other |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(32) |
(571) |
(571) |
(571) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Long term leases |
(32) |
(571) |
(571) |
(571) |
||
Other long term liabilities |
0 |
0 |
0 |
0 |
||
Net Assets |
|
|
13,910 |
14,504 |
11,746 |
31,359 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(17,830) |
(15,385) |
(2,789) |
19,991 |
Net Interest |
323 |
(65) |
444 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(156) |
(183) |
(191) |
(191) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
14,569 |
20,136 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
(275) |
(2,342) |
(65) |
0 |
||
Net Cash Flow |
(3,369) |
2,161 |
(2,601) |
19,800 |
||
Opening net debt/(cash) |
|
|
(16,143) |
(12,763) |
(14,784) |
(12,183) |
HP finance leases initiated |
15 |
0 |
0 |
0 |
||
Other |
(26) |
(140) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(12,763) |
(14,784) |
(12,183) |
(31,984) |
Source: Company reports, Edison Investment Research
|
|
Research: TMT
Esker’s Q2 revenue update confirmed that transaction-based SaaS revenues were hit by lower levels of customer activity in April and May but from June have started to rebound. The company continued to win new business, launch new functionality and expand its channel partnerships during H1. With the FY20 outlook maintained, we leave our revenue and EPS forecasts unchanged. The strong balance sheet, continued positive new business momentum and high level of recurring revenues make this an attractive stock to be invested in during the pandemic.
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