OpGen — Shareholder votes on Curetis merger coming

OpGen’s proposed merger with Curetis would combine two complementary companies in the molecular diagnostic space that are focused on accelerating the speed of the detection of pathogens and treatment of infectious disease. The initial disease focus will be on complicated urinary tract infections (cUTI) with OpGen’s Acuitas platform and on lower respiratory tract infections with Curetis’s Unyvero platform.

As a reminder, Opgen’s Acuitas AMR Gene Panel is a qualitative and semi-quantitative nucleic acid-based in vitro diagnostic test that is currently optimized for the cUTI market, which will be the initial focus commercially, as the five pathogens it detects (namely E. coli, E. faecalis, K. pneumoniae, P. mirabilis and P. aeruginosa) represent approximately 88% of all cUTIs. Importantly, the test is able to detect resistance genes regardless of the original pathogen, so the resistance data are not limited to the five target pathogens. With regards to market size, there are approximately one million cases of cUTI per year, with 70–80% attributable to indwelling catheters found in hospitals.1

The Unyvero A50 from Curetis is a high-plex PCR platform for the diagnosis of infectious disease in hospital patients. It tests for up to 130 diagnostic targets, both pathogens and resistance genes, in less than five hours with approximately only two minutes of hands-on time and importantly does not require any culturing of the samples. The system first received a CE-IVD mark (which is a CE mark especially for in vitro diagnostic products) in 2012 and gained a 510(k) De Novo clearance in 2018 along with the Unyvero LRT test, which Curetis believes covers more than 90% of infection cases of hospitalized pneumonia through testing for 36 pathogens and 10 resistance genes. Importantly, the LRT test provides the broadest coverage of carbapenem resistance and is the only molecular pneumonia panel that covers resistance to penicillin. According to the Agency for Healthcare Research and Quality, pneumonia is the cause of 1.1 million stays in hospitals in the US per year. The company has developed several other tests, which currently have a CE-IVD mark in the EU and approval in additional countries in some cases (see Exhibit 2). It has also developed a new platform, the Unyvero A30 RQ, which is designed for low-mid plex markets and tests for five to 30 DNA targets with results in 45–90 minutes with only two to three minutes of hands-on time. It has a smaller footprint and has attractive cost of goods. Launch in the EU is possible in 2020.

In addition to these platforms, both companies have antimicrobial resistance bioinformatics solutions. OpGen’s Lighthouse is cloud-hosted and includes a few key components: the Acuitas Lighthouse portal, which is a web application, the Acuitas Lighthouse Prediction Engine, data analysis software that draws from Lighthouse Knowledgebase, a relational database management system. Data from the Acuitas AMR Gene Panel is input into the Lighthouse portal and the Prediction Engine component indicates whether there is evidence of resistance due to the presence of certain genes and if there is any known intrinsic resistance to certain drugs (up to 14 antibiotics across nine antibiotic classes, including Aminoglycosides, Carbapenems, Cephalosporins, Fluoroquinolones, Polymyxins, Penicillins, Sulfonamides, Trimethoprim and Vancomycin). The final results are reported in a Prediction Report and the Resistance Dashboard interface in the portal. A key foundation of the Lighthouse system is the Lighthouse Knowledgebase, populated by data from the Merck Study for Monitoring Antimicrobial Resistance Trends (SMART) archive, which includes data on approximately 15,000 bacterial isolates.

Curetis ARESdb is a comprehensive genetic and phenotypic database, which includes information on 40,000 sequenced strains and phenotypic correlation data against over 100 antibiotics. Qiagen and Sandoz currently have collaborations with Curetis involving ARESdb and the company recently signed an R&D and option agreement with an un-named leading global IVD corporation. The purpose of that collaboration is to jointly develop diagnostics for infectious disease based on next-generation sequencing (NGS) technology.

Hence, on the technology side, we believe OpGen and Curetis have complementary/synergistic solutions. There are also synergies with regards to commercialization. Following the merger, the company will have a combined team of 12 direct salespeople in the US with the ability to sell each other’s products. Curetis also brings an additional 10 commercial operations team members in the EU and Latin America. In addition, Curetis has international distribution through 18 distributors across 43 countries, including Menarini Diagnostics for Europe and Beijing Clear Biotech for China. With regards to China, the current agreement with Beijing Clear Biotech includes minimum purchase levels of 360 Unyvero A50 systems as well as over 1.5m Unyvero cartridges over the duration of the agreement following regulatory clearance by the National Medical Products Administration (NMPA), which may occur in 2020. Based upon previously agreed transfer price levels, this volume equates to €60m in cumulative revenues from China over the first five years for Curetis and then €30m annually over the following three years.

The merger is currently expected to close by the end of January 2020 with closure mainly depending on the approval of shareholders of both companies. One complication is that, because of OpGen’s recent offering in October 2019, the stock price has fallen so that now the 2.7m shares that would be issued to Curetis shareholders are only worth around $3m while the current Curetis market capitalization is around €9.5m (over $10m). However, OpGen is also currently acting as lender to Curetis and agreed to provide up to $4m in capital through the closure of the merger and without that capital, Curetis would need to do a raise of its own or go bankrupt, either of which could have a major impact on the share price of that company.

As a reminder, OpGen announced in May that it filed for 510(k) clearance of its Acuitas AMR Gene Panel test in bacterial isolates with the FDA. It received a formal request for additional information in July and has been working towards responses to the FDA’s questions/comments. It expects to submit its formal response in early January with clearance likely a few months later. The company is also beginning a trial that will enable a 510(k) De Novo submission for testing urine samples in the Acuitas AMR Gene Panel. Nine sites are under contract and the trial will involve 1,500 samples.

We have adjusted our valuation to $46.9m or $8.39 per basic share, from $43.9m or $2.49 per share. The total valuation increased due to a higher net cash level following a capital raise with $8.3m in net proceeds. The per share value increased due to a one-for-20 reverse stock split in August, which lowered the share count. This was offset in part by the financing, which increased the number of shares outstanding. We do not currently include Curetis in our forecasts but will do so following closure of the merger.

OpGen reported revenue of $0.65m for the third quarter, up 17.4% compared to the $0.55m last year. Product sales, which are mainly for the legacy FISH-based tests, were down 6.1% to $0.57m. There was also a milestone payment of $75,000 related to the New York State Infectious Disease Digital Health Initiative. R&D expenses fell 11.4% from $1.29m to $1.14m as some of the expenses associated with the New York State initiative were moved from R&D to cost of services. SG&A expenses were $2.48m for the quarter, up 17.6% compared to the same quarter last year mainly due to the $0.54m in transaction costs related to the Curetis merger. OpGen’s Q319 post-tax loss was $3.48m, up 7.2% from a loss of $3.26m in Q318, primarily due to the same transaction costs. We have lowered our 2019 revenue estimate by $0.54m and increased our 2020 estimate by $0.25m, mainly as some of the New York State initiative milestone payments have shifted to next year and due to lower product sales forecasts. We lowered the R&D expense for 2019 to $5.44m compared to $6.38m previously due to a lower run rate and due to some of the urine test expenses shifting to next year, which had estimates increase by $0.61m. We also lowered SG&A estimates by $0.68m for 2019 due to a lower than expected run rate. Note these estimates do not include Curetis revenue or expense forecasts, which will be included once the deal closes. Through the first nine months of 2019, Curetis reported €1.38m in revenue, €8.63m in SG&A and €6.15m in R&D with an operating loss of €15.2m.

OpGen reported $0.63m in cash and cash equivalents and $0.84m in debt at the end of Q319 and raised approximately $8.3m net in capital through an offering in October. In November, the company entered into an interim facility agreement, which would provide up to $4m in capital to Curetis through closure. The company currently believes it has funding into Q220. We model an additional financing need of $36m in total through to profitability in 2023 (reduced from $41m previously due to the raise). Per Edison policy, we assume future financings are to be funded with debt.