Orgenesis Inc. (NASDAQ: ORGS)

Transcription

1 Small Capitalization Research Company Sponsored Research 06/07/2018 Orgenesis Inc. (NASDAQ: ORGS) Strong Execution Continues with Unprecedented Industry Growth Investment Highlights: On February 28, 2018, Orgenesis, Inc. (NASDAQ: ORGS) reported revenue of $2.64 million, a 42% increase year over year, due to the robust demand from both new customers, and expanding contracts from existing customers. Orgenesis reported gross profit of $992,000 for the three months ending February 28, 2018, as compared to a loss of $53,000 in the same period last year. The dramatic improvement is indicative of the scalability of the business, and we expect gross profit to improve further as Orgenesis builds out its capacity and ability to meet growing customer demand, with the CAR-T market representing an enormous growth opportunity The cell therapy market is experiencing unprecedented growth. Orgenesis is positioned to support the cell manufacturing needs of global cell therapy companies as an emerging leader in this market. The company recently completed a joint development program with Pall Corporation to develop a commercially viable production process for a novel cell therapy for diabetes to support submission of an IND application in the U.S. Orgenesis entered into an agreement to co-develop an automated culturing system for cost-efficient and automated manufacturing of autologous cell therapies. Orgenesis is trying to enhance manufacturing processes and increase the efficiency to achieve higher yields, reduce costs and improve product quality. We view it as an indication that the company will continue growing rapidly Company Description Orgenesis, Inc. is a service and research company focused on developing cell therapies and trans-differentiation technology in regenerative medicine industry. The company operates through two segments, Contract Development and Manufacturing Organizations (CDMO) and Cellular Therapy (CT) Business. Biotechnology Hunter Diamond, CFA Gina Peng (equity research associate) research@diamondequityresearch.com 1120 Avenue of Americas, 4th Floor, New York, NY Price-Volume History Key Statistics Closing Price (As Of 05/31/2018) $8.55 Valuation $12 52 Week Range $0.32-$16.80 Average Daily Volume 47,357 Shares Outstanding (M) 10.9 Market Capitalization (M) $93.17 Number of Analysts Covering 1 Enterprise Value/Revenue 10.15x Revenue ($ in millions) Dec. FY 2017A 2018E 2019E 1Q 1.85A 2.64A 3.86E 2Q 2.30A 3.14E 5.02E 3Q 2.56A 4.22E 6.14E 4Q 3.38A 5.54E 8.33E FY 10.09A 15.54E 23.35E EPS ($) Dec. FY 2016A 2017E 2018E 1Q (0.58)A (0.42)A (0.33)E 2Q 0.02A 0.02E 0.26E 3Q (0.02)A (0.09)E 0.05E 4Q (0.41)A (0.18)E (0.37)E FY (1.08)A (0.66)E (0.39)E Please see last page for important disclosures 1120 Avenue of Americas, 4th Floor, New York, NY

2 First Quarter Results Orgenesis, Inc. reported Q1 18 revenue of $2.64 million, compared to $1.85 million in Q1'17, up 42%. The company reported a positive gross profit of $992,000 for the three months ending February 28, 2018, as compared to a loss of $53,000 in the same period last year. EBIT was -$3.24 million (EBIT margin: %) versus -$3.45 million (EBIT margin: %) in Q1 17. Net loss for the three months declined 10% from $6.26 million (Q1 17) to $5.48 million (Q1 18) million, while the loss per share was $0.52 versus $0.66. CDMO segment delivered a solid quarter, as the total sales for this segment grew by 48% to $3.18 million due to a rise in demand for its service. While CTB segment still generated no revenues and reported an operating loss of $2.24 million. Liquidity and Balance Sheet As of February 28, 2018, Orgenesis s total cash and cash equivalents marginally increased to $4.23 million as compared to $3.52 million at November 30, Total accounts receivable was $1.20 million versus $1.34 million on November 30, The shareholders equity of the company was $19.48 million, as compared to $14.12 million as of November 30, From March 1, 2018, through April 15, 2018, the company raised $6.7 million from the proceeds of a private placement to certain accredited investors of equity and equity-linked securities and received, through MaSTherCell, proceeds of approximately $1.1 million in accounts receivable from its customers. The company has accumulated losses of roughly $49.7 million, although the company is now showing a positive gross profit in its CDMO business. Orgenesis expects to continue to incur losses within its CT business as it moves toward clinical trials. 2

3 Competitive Advantage Orgenesis competes with a number of companies both in CT and CDMO fields. In CT field, the company is challenged by those companies who target the cell-based and immune-based therapy for diabetes and cancers, especially for diabetes market. Some of the competitors have dominated diabetes by some benefits such as Novo Nordisk A/S, Eli Lilly and Company, Sanofi- Aventis, Takeda Pharmaceutical Company Limited, Pfizer Inc., Merck KgaA, and Bayer AG. In the other hand, there are considerable competitors in CDMO field, including but not limit to the following: Lonza Group Ltd, Progenitor Cell Therapy (PCT) LLC (fully acquired by Hitachi in 2017), Pharmacell BV (acquired by Lonza Group Ltd in 2017). Merger and acquisition activity in the field of contract manufacturing has been pretty intense with two major recent deals: the acquisition of Caladrius PCT by Hitachi and more recently the full acquisition of Pharmacell by Lonza. Most recently, the company has entered into an agreement, in Feb 2018, with Adva Biotechnology Ltd, an Israeli-based biotechnology company focused on developing novel cell therapy. Collaborating with Adva enables Orgenesis to further the innovative technology program with joint venture and potentially distribute their system globally. In conclusion, these deals show the growing attractiveness of the field as well as the internationalization of the market. Within the market, clients are looking for an increasingly international presence and concurrently a high quality and brand. MaSTherCell is looking to position itself at the higher end of both these criteria. Investment Thesis Orgenesis offers investors the rare opportunity to own a biotechnology stock with significant upside if their diabetes product reaches the market but also more limited downside given the strong revenue growth of the company s CDMO business Orgenesis appears undervalued based on its top-line growth and depressed valuation with numerous catalysts over the next 24 months and is a potential acquisition target for a more established company. The Company has sufficient capital to achieve its near-term goals and can continue to attractively finance the business via grants, organic revenue, and local government support, with limited dilution for investors Through a new joint venture partner based in Israel, Adva Biotechnology Ltd., the company has increased its ability to build a global network through its MaSTherCell program and its CDMO partners The Company s uniqueness of hybrid business model, combining CT business with revenue-generating CDMO business, provides them financial support to cover R&D expenses and speed up the innovation process of cell-based treatment for diabetes and cancers alike. With Global visions and ambitions of the management team, Orgenesis has achieved a significant breakthrough in developing and manufacturing MaSTherCell and obtained international joint venture partners in Israel and Korea. The company has built a global fully-integrated bio-pharmaceutical cell-therapy network in a cost-efficient way. 3

4 Key Risk Factors Orgenesis (the "Company"), like many other biotech companies, faces inherent risks going forward due to the competitive market they operate in, as well as internal risk factors. The Company has a history of losses and negative free cash flow and may never achieve consistent profitability. The Company has a limited operating history, limited capital and limited stream of revenues, which may act as internal factors restraining the Company's growth The Company also faces potential competition from both well-established and emerging companies, which could limit the Company s growth. MaSTherCell is also very dependent on its key employees and contractors given the complexity of its business, there is no assurance the Company will be able to attract and retain top talent. The Company also faces regulatory risks, including the approval of their drugs by the U.S. Food and Drug Administration (FDA). Given the inherently risky nature of engaging in the R&D of biopharmaceutical products, Orgenesis may suffer from extensive, complex, and costly government regulation as well as inspections not only in the U.S. but also worldwide. If the Company fails to obtain the capital necessary to fund their operations, their financial results, financial condition and ability to continue as a going concern will be adversely affected and Orgenesis will have to delay, reduce the scope of or terminate some or all of their research and development programs and may be forced to cease operations. Orgenesis will require additional capital to fund the continued development of their cell therapy product candidates and the operation, enhancement and expansion of their manufacturing operations and their clinical development activities. The Company owes a significant amount on convertible loan agreements and unless these amounts are converted or the Company raises significant working capital, Orgenesis may not be able to pay them when due. The ability to pay these notes is dependent on the Company raising sufficient capital and/or achieving internal cash flow generation. Some of the Company's directors and officers are not residents of the United States, making it difficult for investors to enforce action against them. Some of these directors and officers have a substantial portion of their assets outside the United States, making it difficult to enforce judgments predicated upon civil liability provisions of United States securities law. The Company is dependent on external capital to grow its CDMO operations; if the Company is unable to obtain financing on attractive terms the Company may be forced to reduce or eliminate the expansion of their contract development and/or manufacturing operations. For Full List of Risk Factors See Company 10-K Filing 4

5 Appendix Financial Model Assumptions: Revenue: As per MarketsandMarkets research, the global Regenerative medicine market is expected to reach $38.70 Bn by 2021 from $13.41 Bn in 2016 at a CAGR of 23.6% from 2016 to According to Reportlinker, the global regenerative medicines market is expected to reach $50.55 Bn by 2025 from $17.0 Bn in Considering the above industry growth rates and taking into account the Company increasing sales contribution to the world market, we have assumed the Company s revenue to post a CAGR of ~34% during the forecast period (FY18-FY25). We have assumed abnormal high-growth rate for the five years of the forecast period and from FY23 onwards, we expect the Company to enter normal growth period, and the topline growth is expected to reach ~15% by FY25. The Company s revenue contribution to the global market is expected to more than double between FY17 to FY25. PARTICULARS FY16A FY17A FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E Regenerative Medicines Market (Markets & Markets) ($ in Bn) y/y growth 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% Regenerative Medicines Market (Reportlinker) ($ in Bn) y/y growth 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% Regenerative Medicines Market (Hybrid) ($ in Bn) y/y growth 23.6% 23.6% 23.6% 23.6% 23.6% 23.6% 18.2% 12.8% 12.8% 12.8% ORGS: Total Revenue ($ in Mn) Contribution to the World Market % increase in contribution % 0.06% 0.08% 0.09% 0.11% 0.12% 0.14% 0.15% 0.15% 0.16% 74.0% 27.6% 24.6% 21.6% 18.6% 13.6% 10.6% 7.6% 4.6% 1.6% 5

6 Cost of Goods Sold: Based on management guidance that gross margin is expected to reach to 50%, we have assumed the cost of goods sold, as a percentage of sales, to gradually decline and reach 50% by FY20. It is expected to stay at this level during the rest of the forecast period. Operating Expenses i. Research & Development (R&D) expenses: We have assumed the Company s R&D expenses to be around 10% of its total revenue each year from FY19 onwards. ii. Selling, General & Administrative (SG&A) expenses: Selling, General & Administration expenses (as a % of sales) Period Assumption rate (as a % of sales) YoY growth (%) FY % 7.0% FY % 10.0% FY % 8.0% FY % 13.5% FY % 15.1% FY % 15.8% FY % 16.5% FY % 14.9% iii. Depreciation & Amortization In our model, we have charged depreciation at an average rate of 15% on the opening balance of property and equipment each year. We have amortized intangible assets at the rate of 10% - 13%, during the forecast period. Depreciation & Amortization expenses (as a % of sales) Period Assumption rate FY % FY % FY20 7.1% 6

7 FY21 5.0% FY22 3.9% FY23 2.8% FY24 2.4% FY25 2.1% Financial Expenses: For the forecast period, we have assumed effective interest rate of 11% p.a. on the outstanding balance of convertible loans and loans each year. Tax rate: From FY18 onwards, we have assumed effective tax rate of 23% in our model. Capex: For the forecast period, we have assumed the Company would spend an amount mostly equal to depreciation & amortization expense every year. Days Payable Outstanding: Based on historical average, we have assumed outstanding receivable days, for each year during the forecast period, to be close to 44 days. Days Inventory Held: We have assumed the Company would maintain inventory turnover of around 8 times during the forecast period and inventory days would gradually rise from ~54 days in FY18 to ~83 days by FY25. Days Payable Outstanding: Based on historical trend, we have assumed outstanding payable days, for each year during the forecast period, to be close to 217 days. Debt: For short-term loans: For the forecast period, we have assumed the Company would raise short-term loans equivalent to 3.5% of expected total sales each year. For loans payable: We have assumed that for each year, during the forecast period, the Company would raise an amount, equivalent to 15% of its total of capital expenditure requirement, through the issuance of loans payable. We expect the maturity period of such loans to be three years. For convertible loans: 7

8 For the forecast period, we have assumed that in FY18, the Company would raise up to 65% of its operating cost requirement by the issuance of convertible loans. This largely because of the loss-making position of the Company and inadequate working capital situation to fund its normal operations. However, we expect the Company to be profitable from FY20 onwards and fundraise through the issuance of convertible bonds, to gradually decline to 25% of expected operating cost requirements by FY25. In case of convertible loans, we have assumed that for the next two years, around 80% of the debtholders would opt for conversion into equity and from FY20 onwards, close to 60% of debtholders would opt for conversion into equity. WACC in DCF: Market Return: We have used S&P500 Health Care (Ticker: S5HLTH) Index as the best proxy for the market index. We have considered 5-years of annualized return. Risk-free rate: We have used 10-year US Treasury rate. Beta: Source: Yahoo Finance. Cost of Debt: The Interest rate on debt has been p.a. in line with the average interest rate applicable to the current outstanding debt. Income Statement FY Ends on November 30 ($ in M) FY15A FY16A FY17A FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E REVENUE CDMO CT Business Less: Corporate & Eliminations Revenue from Cont Ops Cost of Sales Gross Profit Research & Development expenses Selling, General & Administrative expenses Amortization of Intangible expenses Total Operating Costs & Expenses Adj. EBIT D&A Adj. EBITDA Financial Expenses / (Income) Other Income/(Expense) Share in Net Losses/(Income) of Associated Company Adj. PBT Income Tax Expenses (Benefits) Adj. Net Profit/(Loss) from Continuing operations

9 Loss attributable to Redeemable Non- Controlling Interest Adj. Net Income Attributable To Common Shareholders Reported Net Income Attributable to the Company (7.32) (4.45) (1.06) Earnings per Share (Reported) from Cont Ops (in $) Basic (0.08) (1.30) (1.28) (0.66) (0.39) (0.09) Diluted (0.08) (1.30) (1.27) (0.66) (0.39) (0.09) Earnings per Share (Adjusted) from Cont Ops (in $) Basic (0.07) (0.99) (1.08) (0.66) (0.39) (0.09) Diluted (0.06) (0.99) (1.08) (0.66) (0.39) (0.09) Weighted Average no. of Shares outstanding Basic Diluted Dividend per Share Dividend PO % ($ in M except per Share Data) Total Present Value of Free Cash Flows = Add: Cash & cash equivalents = 4.23 Less: P.V. of Total Debt o/s (as per latest filings) = 4.53 Less: Preferred Shares 0.00 Less: Minority Interest 3.88 Equity Value (Present Value) = Number of Shares outstanding (in M) = Fair Value per Share ($)= Sensitivity Analysis Change in Target Price with a 1% change in WACC WACC 12.69% 13.69% 14.69% 15.69% 16.69% Terminal Growth % 3.00% 3.00% 3.00% 3.00% 3.00% Target Price ($ / Share) Change in Target Price with a 0.5% change in Terminal Growth % WACC 13.69% 13.69% 13.69% 13.69% 13.69% Terminal Growth % 2.00% 2.00% 2.50% 3.00% 3.50% WACC Inputs Risk-free rate 3.0% Total Equity Risk Premium (S5INFT) 7.8% Beta 1.62 Cost of Equity (CAPM) 15.7% Cost of Debt 6.5% Statutory Tax rate 23.0% Debt / Capital 18.9% After-Tax Cost of Debt 5.04% WAC (Debt) 1.0% Cost of Equity (CAPM) 15.7% Equity / Capital 81.1% WAC (equity) 12.7% WACC Conclusion 13.69% Long-term growth rate (assumed) = 3.0% Target Price ($ / Share)

10 Discounted Cash Flows and Valuations ($ in M) FY16A FY17A FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F Operating Income (EBIT) (8.62) (8.15) (5.82) (2.59) Less: CAPEX Add: D & A Current Assets excl. cash Less: Current Liabilities Working Capital (11.19) (13.14) (14.57) (17.17) (24.05) (31.72) (41.70) (49.45) (56.98) (65.84) Increase/( Decrease) in Working Capital: (1.95) (1.43) (2.61) (6.88) (7.67) (9.98) (7.75) (7.53) (8.86) Less: Taxes (1.55) (1.31) Free Cash Flow for the Firm/Equity = (4.40) Terminal Value = Present Value of Free Cash Flows = (4.08)

11 Disclosures has created and distributed this report. This report is based on information we consider reliable, including the subject of the report, but have not been provided any non-public information. This report does not explicitly or implicitly affirm that the information contained within this document is accurate and/or comprehensive, and as such should not be relied on in such a capacity. All information contained within this report is subject to change without any formal or other notice provided. is not a FINRA registered broker/dealer or investment adviser and does not provide investment banking services and follows customary internal trading procedures pending the release of the report. This document is not produced in conjunction with a security offering and is not an offering to purchase securities. This report does not consider individual circumstances and does not take into consideration individual investor preferences. Recipients of this report should consult professionals around their personal situation, including taxation. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in micro capitalization equities. Diamond Equity Research LLC is being compensated by Orgenesis Inc. for producing research materials regarding Orgenesis Inc. and its securities, however the views represent that of Diamond Equity Research. All payments are received upfront and are billed for an annual or semi-annual research engagement. As of 06/01/2018 the issuer had paid us $14,000 for our services, which commenced 07/07/2017. Diamond Equity Research LLC may be compensated for non-research related services, including presenting at Diamond Equity Research investment conferences, press releases and other additional services. The non-research related service cost is dependent on the company, but usually do not exceed $5,000. The issuer has not paid us for non-research related services as of 06/01/2018. Issuers are not required to engage us for these additional services. Additional fees may have accrued since then., its subsidiaries, and employees may currently have or open a long/short equity position of the shares of the subject company in this report. is not a registered broker dealer and does not conduct investment banking or receive commission sharing revenue arrangements related to the subject company of the report. The price per share and trading volume of subject company and companies referenced in this report may fluctuate and is not liable for these inherent market fluctuations. The past performance of this investment is not indicative of the future performance, no returns are guaranteed, and a loss of capital may occur. Certain transactions, such as those involving futures, options, and other derivatives, can result in substantial risk and are not suitable for all investors. Photocopying, duplicating or otherwise altering or distributing reports is prohibited without explicit written permission. This report is disseminated primarily electronically and is made available to all recipients. Additional information is available upon request. For further questions, please contact research@diamondequityresearch.com 11