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Research: Healthcare
Pacific Edge recently reported H119 results, including 43% growth in Cxbladder sales compared to H118. These sales exclude tests for patients covered by the US Centers for Medicare and Medicaid Services (CMS), which currently account for 47% of lab throughput. The company is in the process of gaining inclusion in the CMS’s local coverage determination (LCD), which will enable reimbursement and negotiation for payment of more than 14,000 tests previously performed on patients covered by CMS.
Written by
Pacific Edge |
Test sales up 43% in H119 |
Financial update |
Pharma & biotech |
7 January 2019 |
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 recently reported H119 results, including 43% growth in Cxbladder sales compared to H118. These sales exclude tests for patients covered by the US Centers for Medicare and Medicaid Services (CMS), which currently account for 47% of lab throughput. The company is in the process of gaining inclusion in the CMS’s local coverage determination (LCD), which will enable reimbursement and negotiation for payment of more than 14,000 tests previously performed on patients covered by CMS.
Year end |
Revenue (NZ$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/17** |
4.4 |
(22.4) |
(5.9) |
0.0 |
N/A |
N/A |
03/18 |
4.6 |
(19.6) |
(4.5) |
0.0 |
N/A |
N/A |
03/19e |
5.0 |
(17.5) |
(3.5) |
0.0 |
N/A |
N/A |
03/20e |
10.2 |
(13.2) |
(2.6) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Note: **FY17 restated for IFRS15.
CMS reimbursement process two-thirds of the way
The company has completed two of the three components necessary for national reimbursement in the US, namely CPT codes and a national price of US$760 per test. The company continues to work with CMS to gain inclusion in an LCD, which would enable consistent payments from CMS as well as reduce the lag time between the test being performed and receipt of cash. Timing is uncertain but typically it can take up to five years to gain inclusion in a LCD and Pacific Edge has been in the process since 2014.
12% increase in billable test volume
Billable test volume increased 12% over a very strong H118. Total laboratory throughput increased 3.9% as the number of non-billable tests fell. The company believes that it will be able to achieve growth between 10.7% and 17.7% (16,000 and 17,000 tests) in total laboratory throughput in FY19, exclusive of any major changes from new customers (like Kaiser Permanente) or CMS LCD inclusion.
Raising funds
Pacific Edge completed a private placement of shares to raise proceeds of around NZ$7m through the issuance of around 20m shares at $0.35 each. Following the completion of the placement it intends to allow New Zealand resident shareholders to purchase up to NZ$5m at $0.35 per share as well via a share purchase plan.
Valuation: NZ$255m or NZ$0.52 per share
Our DCF-based valuation has been reduced to NZ$255m (NZ$0.52/share) from NZ$348m (NZ$0.75/share). This reflects a combination of lower near-term estimates to reflect a more conservative view of the sales ramp for the Cxbladder franchise in the US and delayed cash inflow from product sales in the US. We continue to expect profitability in FY21. We estimate the financing needs of the company to be NZ$10m in FY20 following completion of the private placement.
CMS and Kaiser negotiations ongoing
The company is continuing to work with CMS to obtain reimbursement. So far, the company has completed two of the three components necessary for national reimbursement in the US, namely CPT codes and a national price of US$760 per test. The final step will be to gain inclusion in an LCD. An LCD is a document that includes the coverage decisions of the Medicare Administrative Contractor (MAC). An LCD would provide the conditions of the coverage as well as the price, guidance on reimbursement and coding information. Unfortunately there is no set process for achieving an LCD and in many ways it is the epitome of arbitrary bureaucracy. Typically the process can take up to five years to gain an LCD inclusion so while Pacific Edge has been in this process for around four years, it is within the normal timeframe.
Once an LCD inclusion is attained, reimbursement from CMS (which currently represents approximately 47% of Cxbladder test volume) should become consistent and timely. Besides this immediate benefit of new tests being covered by CMS, the company may finally receive payment on the more than 14,000 tests previously conducted for CMS patients. Pacific Edge has not received payment for tests provided to patients covered by CMS until LCD inclusion so there could be a multi-year backlog of test revenue that is recognised in a single reporting period post-inclusion. In addition, private payers often base their own coverage decisions and reimbursement levels on the coverage listed in an LCD, so a success here is expected to lead to faster growth for the company.
Pacific Edge is also in discussions with Kaiser Permanente regarding a commercial relationship and is working with Kaiser’s staff to ensure that commercial tests can begin shortly after an agreement is reached. Commercial adoption by Kaiser could provide a significant ramp in sales. However, management confirms that it is taking longer than anticipated for Kaiser to work through its internal processes and to finalise the Kaiser agreements.
Additionally, the company recently announced that Johns Hopkins Medicine, an $8 billion healthcare system, has commenced a commercial evaluation of Cxbladder with a select group of urologists at the world-class institution. With regards to its home market in New Zealand, 62% of the population of New Zealand currently have coverage for Cxbladder through their healthcare providers, up from just 36% a year ago.
Valuation
Our DCF-based valuation has been reduced to NZ$255m (NZ$0.52/share) from NZ$348m (NZ$0.75/share). This reflects a combination of lower near-term estimates to reflect a more conservative view of the sales ramp for the Cxbladder franchise in the US and delayed cash inflow from product sales in the US. We will revisit these estimates once agreements are completed with CMS and Kaiser Permanente and we have greater clarity on the ramp-up once reimbursement is in place. CMS reimbursement is especially important as once LCD inclusion occurs revenue recognition would normalise and the backlog of unpaid tests from previous years would provide a boost to revenue as they are paid.
Exhibit 1: Valuation based on DCF
Discounted cash flow (NZ$000) |
238,189 |
Net cash (NZ$000) at 30 September 2018 + private placement |
17,060 |
Valuation (NZ$000) |
255,249 |
Number of shares (m) at 30 September 2018 + private placement (estimate) |
494.79 |
Value per share (NZ$) |
0.52 |
Source: Edison Investment Research
Financials
The company recently published H119 results with operating revenue growth of 42.7% from NZ$1.4m in H118 to NZ$2.0m. As a reminder, the company previously announced that it had adopted the new revenue recognition accounting standard, NZ IFRS 15, which means that revenue from US customers will only be recognised once cash payment is received (previously the company recognised tests that had been billed but not yet paid). Using the prior accounting standard, the company would have reported NZ$5.6m in sales for the period, 33% growth over H118.
Billable test volume increased 12% over a very strong H118. Total laboratory throughput increased 3.9% as the number of non-billable tests fell. The company currently believes that it will be able to achieve approximately 14.2% growth in total laboratory throughput in FY19, exclusive of any major changes from new customers (like Kaiser Permanente) or CMS LCD inclusion. Operating expenses for H119 were reported as NZ$11.4m, a 6% decrease compared to H118.
With this in mind we have lowered our FY19 and FY20 revenues estimates to be more in line with guidance and the run rate for sales. Our FY19 revenue estimate is now NZ$5.0m compared to NZ$7.8m previously and our FY20 estimate has been changed from NZ$12.7m to NZ$10.2m. Conversely, we have reduced our R&D expenses by NZ$1.2m for FY19 and by NZ$1.7m for FY20 due to a lower than expected run rate. Also, we have reduced our SG&A expense estimates by NZ$3.4m for FY19 and NZ$3.1m for 2020 for the same reason. We continue to expect profitability in FY21.
Exhibit 2: Financial forecast changes
FY19e |
FY20e |
|||
Old |
New |
Old |
New |
|
Revenue (NZ$m) |
7.8 |
5.0 |
12.7 |
10.2 |
PBT (normalised) (NZ$m) |
(17.7) |
(17.5) |
(14.2) |
(13.2) |
EPS (NZ$) |
(0.04) |
(0.04) |
(0.03) |
(0.03) |
Source: Edison Investment Research
The company had net cash of NZ$10.1m at 30 September 2018 thanks in part to a NZ$2.6m share raise with Manchester Management Company, a US-based fund specialising in life sciences. The company has just completed an additional private placement of shares to raise proceeds of around NZ$7m through the issuance of around 20m shares at $0.35 each. Following the completion of the placement it intends to allow New Zealand resident shareholders to purchase up to NZ$5m at $0.35 per share as well in a share purchase plan. That offering is expected to open on 10 December and close on 25 January.
We estimate the financing needs of the company to be NZ$10m (which we show as illustrative long-term debt) following the completion of the private placement and will be lower once the share purchase plan is completed.
Exhibit 3: Financial summary
NZ$'000s |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 March |
NZ GAAP |
NZ GAAP |
NZ GAAP |
NZ GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
4,432 |
4,642 |
4,986 |
10,219 |
Cost of Sales |
(1,446) |
(4,619) |
(4,759) |
(5,235) |
||
Gross Profit |
2,986 |
23 |
227 |
4,984 |
||
EBITDA |
|
|
(22,293) |
(19,500) |
(17,563) |
(13,162) |
Operating Profit (before amort. and except.) |
(22,646) |
(19,816) |
(17,795) |
(13,426) |
||
Intangible Amortisation |
(189) |
(188) |
(158) |
(66) |
||
Exceptionals |
(43) |
46 |
(5) |
0 |
||
Operating Profit |
(22,878) |
(19,958) |
(17,958) |
(13,492) |
||
Other |
0 |
0 |
0 |
0 |
||
Net Interest |
249 |
231 |
338 |
259 |
||
Profit Before Tax (norm) |
|
|
(22,398) |
(19,585) |
(17,457) |
(13,166) |
Profit Before Tax (FRS 3) |
|
|
(22,629) |
(19,727) |
(17,620) |
(13,233) |
Tax |
0 |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(22,398) |
(19,585) |
(17,457) |
(13,166) |
||
Profit After Tax (FRS 3) |
(22,629) |
(19,727) |
(17,620) |
(13,233) |
||
Average Number of Shares Outstanding (m) |
382.5 |
438.4 |
491.9 |
511.6 |
||
EPS - normalised (c) |
|
|
(5.9) |
(4.5) |
(3.5) |
(2.6) |
EPS - FRS 3 (c) |
|
|
(5.9) |
(4.5) |
(3.6) |
(2.6) |
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 |
|
|
1,166 |
1,135 |
925 |
781 |
Intangible Assets |
329 |
281 |
265 |
345 |
||
Tangible Assets |
837 |
854 |
660 |
436 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
16,541 |
18,530 |
11,230 |
8,900 |
Stocks |
824 |
752 |
846 |
846 |
||
Debtors |
663 |
1,064 |
836 |
836 |
||
Cash |
14,564 |
16,242 |
8,636 |
6,306 |
||
Other |
490 |
472 |
912 |
912 |
||
Current Liabilities |
|
|
(2,734) |
(2,999) |
(2,861) |
(12,861) |
Creditors |
(2,734) |
(2,926) |
(2,771) |
(2,771) |
||
Short term borrowings |
0 |
0 |
0 |
(10,000) |
||
Short term leases |
0 |
(73) |
(90) |
(90) |
||
Other |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
0 |
(26) |
(48) |
(48) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Long term leases |
0 |
(26) |
(48) |
(48) |
||
Other long term liabilities |
0 |
0 |
0 |
0 |
||
Net Assets |
|
|
14,973 |
16,640 |
9,246 |
(3,228) |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(18,086) |
(18,331) |
(17,284) |
(12,403) |
Net Interest |
249 |
231 |
338 |
259 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(479) |
(335) |
(180) |
(186) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
8,750 |
21,318 |
9,623 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
(91) |
(1,261) |
(66) |
0 |
||
Net Cash Flow |
(9,657) |
1,622 |
(7,569) |
(12,330) |
||
Opening net debt/(cash) |
|
|
(24,160) |
(14,564) |
(16,143) |
(8,498) |
HP finance leases initiated |
0 |
(99) |
(39) |
0 |
||
Other |
61 |
56 |
(37) |
0 |
||
Closing net debt/(cash) |
|
|
(14,564) |
(16,143) |
(8,498) |
3,832 |
Source: Edison Investment Research, company accounts
|
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