Theraclion — Update 25 July 2016

Theraclion sells EchoPulse, a compact, standalone CE-marked system that delivers high-intensity focused ultrasound (HIFU). EchoPulse treats benign but troublesome breast fibroadenomas and palpable thyroid nodules. Each treatment requires a single-use cooling consumable EPack. EchoPulse is easy to use and leaves no scars, with no infection or surgical risks. Theraclion has offices in the UK, France and Germany and a branch in Hong Kong. Distributors are being appointed elsewhere. US trials started in 2014 with a de novo 510(k) planned for H216.

Although in the long term Theraclion will only sell EchoPulse systems in the near term, to encourage uptake, some commercial lease agreements exist. Commercial arrangements are meant to be short term. Production is currently a limiting factor, with units being hand built. An optimised production system was due to take effect in 2016 but may not be ready until 2017.

In H1 overall, sales reported were one unit sold at €294k with one unit sale agreed in H1, but to be recorded in H2. There were three units leased under commercial agreements. Fees from agreements were €101k. These are usually short-term so that a hospital can evaluate the therapy before buying outright.

Consumable use in H1 was 156 cases. Of these, 31 were associated with clinical trials, making 125 commercial sales, 80% of the H1 total. These yielded revenues of €56k, up from €6k in H115, with most momentum in thyroid treatments. Exhibit 1 shows the EPack use breakdown with our H216 forecast.

Service revenues of €13k were reported for the first time. This revenue will build up as standard monthly service charges apply once systems come off the initial guarantee period.

According to Theraclion (IPO document), the target EchoPulse market is 5,300 systems with a goal of an installed base of 300 units in the US and 225 in Europe by 2025 (source: January 2016 management presentation). China and Asia may add another 430 units. Reimbursement of the procedure takes up to three years per country, to be agreed. The 2015 trading update stated that there were 14 EchoPulse systems in clinics (with clinical users on 16 sites – two units are shared between four sites). This will have risen to 19 by 30 June 2016.

Currently, the leading market for Theraclion is Germany, where management estimates there are about 150,000 thyroid treatments per year. There were nine centres operating at the end of H116. These include the Regiomed-Kliniken Bavarian group with four main clinics; the Bürgerhospital in Frankfurt; the Nuklearmedizinische Praxis Seeberger, a private practice in Heilbronn, Germany; and the leading endocrinology clinic Klinikum Stephansplatz-Hamburg, under a commercial agreement. Klinikum Stephansplatz does around 2,000 thyroid diagnostics per year. Tübingen University has been running a small standard trial in breast fibroadenoma (see below) and signed a commercial agreement in April.

Two more German reimbursement organisations, HEK (Hanseatische Krankenkasse) and BKK24, started to cover EchoPulse treatment for both fibroadenoma and thyroid nodules in H1. HEK operates in northern Germany and covers 0.5 million people; previously it covered only fibroadenoma. BKK24 covers 100,000 people in Lower Saxony. In total, 1.5 million Germans are covered for EchoPulse fibroadenoma therapy and one million for thyroid nodule ablation. The average fee to hospitals for the EchoPulse procedure is €2,200.

In France, Theraclion has applied for a Forfait Innovation grant to evaluate cost effectiveness in a trial, which eventually may speed uptake. This was deemed admissible in April 2016 and the patient eligibility criteria were requested in June. Theraclion is now updating its application.

In the UK, uptake will be affected by a health economic appraisal – even then cash constraints may limit use — although private use has already started with an EchoPulse on Harley Street.

In Italy, one insurer provides reimbursement. In June, A.S.L. 6 di Livorno, a hospital based in Tuscany, signed a commercial agreement (lease) and will be the first Italian centre to offer EchoPulse therapy for benign thyroid nodules. A clinical research collaboration agreement on thyroid nodules has been signed with the hospital Regina Apostolorum (Albano Laziale, Rome).

Other territories include Turkey (in 2014) and Egypt (one 2015 order for 2016 delivery, but no update available). In Hong Kong, where Theraclion has a subsidiary, one unit has been sold to Queen Mary Hospital (45 procedures run since December 2015). Korea and Taiwan each have one system used to gain market access. Theraclion is seeking a Chinese strategic partner; a joint venture may be created.

The US regulatory stance has become more flexible in the last few years as the new 513(f) process enables a de novo 510(k) application based on more limited clinical data than a PMA. SonaCare used this route in October 2015, so there seems no reason why EchoPulse could not also be successful.

Theraclion has a single-centre, 20-patient fibroadenoma study running in the US at the University of Virginia (NCT02078011), which started enrolment in April 2014. This was expected to conclude in H116; a larger multi-centre trial will probably be run with an assumed 12-month follow-up. Assuming this trial completes recruitment soon, a de novo application could be lodged in H216 and approval potentially gained by 2019. However, this timetable is not yet confirmed and may slip. Theraclion might be able to gain an earlier entry to the Canadian market as the process is less onerous.

Tübingen University has presented promising echotherapy results from a 27-patient breast fibroadenoma trial (NCT02011919) lead by Professor Markus Hahn. This used the standard EchoPulse software, which avoids damage to normal tissue. The study design was published in Senologie (not available on PubMed, but accessed through Theraclion). The trial’s final endpoint is the reduction in FA volume after five years. Data are due in December 2018. It started in December 2013.

A conference presentation (unavailable) in late May 2016 reported that at 12 months, 24 of 27 of the biopsied patients had no viable fibroadenoma tissue on biopsy. Professor Hahn, from the Tübingen group, commented: “Histology performed 12 months after treatment was able to show absence of vital tissue in 90% of cases. The technique which is very easy to use could be envisioned for breast cancer treatment in the short-term future.” (Edison emphasis.)

The statement on 8 June triggered a share price increase from €5.80 to €8.20 by 10 June.

The Hahn group is a leading breast cancer specialist centre running 700 cancer operations per year. It would be well placed to run a specific breast cancer study and the current work has given experience in the use of EchoPulse. Note that so far, the FDA has not approved any ultrasound therapy for a cancer indication.

The procedure requires that local anaesthetic is injected at several points around the FA. This will be an important factor in patient comfort and acceptance at the time of treatment. In the longer term, the absence of scarring and lack of infection risk are very important benefits. In the Hahn study, 26 out of 27 patients declared that they would recommend the procedure.

To kill all fibroadenoma tissue reliably requires that a zone of healthy tissue around the FA is heated. This is the procedure that would have to be used in a malignant cancer treatment procedure. It is not clear if an extended margin was used; this would have been unusual for FA. Without more data, it is not possible to assess the trial further, but the data as they stands are encouraging.

The previous valuation followed Theraclion management expectations of about 100 installed EchoPulse units by the end of 2018, up from 19 to date. This has been scaled back to 70 units with lower rates on EPack use. These figures will be adjusted as more historical sales data become available and the market becomes established. In the longer term, we expect sales to follow a similar path to previous forecasts once the US develops; we forecast 2025 revenues of €70m, against €72m previously. For valuation purposes, we have applied probabilities of 80% to European unit sales, 65% to US unit sales (adding in regulatory risk) and 70% to EPack treatment rates. China and other Asian markets could be much bigger, but we cautiously apply a 50% probability.

The indicative value has been revised in the short term due to the following factors:

On a 2025 perspective, Theraclion is expected to develop into a highly profitable ongoing business, due to EPack sales, so we have used a continuing value based on a 12.5% cost of capital (Edison standard) and a 2% terminal growth rate. A 24% average tax rate is assumed, although the French headline corporate tax rate is 33.3%. Using these assumptions, the previous indicative value published in February 2016 is now revised to €9.14/share, Exhibit 2; the previous value was €10.09/share. This is after the 390,000 shares issued to the Chinese investor in May at €4.54/share, taking the shares in issue to 4.8m. The value, on a risk-adjusted basis, shows a negative cash flow present value as a result of higher costs and lower sales expectations over 2016-18. Management’s internal view is for strong sales in 2017.

Further capital of up to €9m may be needed in tranches between 2016 and 2018 in either equity or loans. The forecast assumes €5m of this in 2017. This estimate is on a risk-adjusted basis and strong sales in 2018 would reduce this need. It does seem likely that there will be further dilution. New funding is represented by indicative debt. Working capital management will be important.

The business update in July was a basic update and not a full set of accounts. In H116, Theraclion generated €463 of revenues. Of these, consumable sales were €56k. Rental for systems was a further €101k and service revenues yielded €13k. EchoPulse sales were €294k – one unit with a further sale delayed until H2. Three other EchoPulse units were placed in clinical units under commercial agreements, in effect a lease.

Cash on 31 December was €3.8m. No H1 cash update has been given. There was a €1.8m investment in May from a Chinese investor for 390,000 new shares for €1,770,600 at €4.54/share. In addition, 145,000 shares were issued under the March 2015 agreement with Kepler Cheuvreux. The proceeds are not disclosed but, assuming €5/share, an extra €725k would have been gained in H1. A Bpifrance repayable advance of €433km was received in H1. The company will require further cash funding in 2016 and 2017; we assume up to €9m. The Kepler Cheuvreux arrangement has 255,000 new shares remaining to be issued over the next two years.