Oxford BioMedica. Orchard deal adds to growing revenue stream. Orchard Therapeutics deal adds to growing list
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1 Oxford BioMedica Orchard deal adds to growing revenue stream Company update Pharma & biotech Oxford BioMedica s (OXB s) recently announced strategic alliance with Orchard Therapeutics further underpins the value the wider cell therapy market sees in its in-house capabilities. OXB will develop and supply lentiviral vectors to Orchard for use in primary immune deficiency and inherited metabolic disorders. OXB has received a 1.95% equity stake in Orchard and will receive royalties on future of products covered by the deal. Our valuation for OXB remains unchanged at 173m (6.2p/share). Year end Revenue PBT* EPS* (p) DPS (p) P/E (x) Yield (%) 12/ (10.4) (0.41) 0.0 N/A N/A 12/ (16.6) (0.49) 0.0 N/A N/A 12/16e 27.5 (13.6) (0.34) 0.0 N/A N/A 12/17e 33.6 (8.7) (0.15) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. 2 December 2016 Price 3.50p Market cap 108m Net cash at end June 2016 (excl. 11.5m equity raise in September 2016) Shares in issue ,088.0m Free float 83% Code Primary exchange Secondary exchange Share price performance OXB LSE N/A Orchard Therapeutics deal adds to growing list The strategic collaboration with Orchard Therapeutics adds to OXB s growing list of collaborators, which look to capitalise on OXB s technical knowhow and manufacturing facilities. It will focus on two initial rare indications, adenosine deaminase severe combined immunodeficiency (ADA-SCID) and mucopolysaccharidosis-iiia (Sanfilippo Syndrome type A) along with undisclosed follow-on indications. OXB will provide process development services and manufacture clinical and commercial GMP-grade vectors for Orchard, which will manufacture the ex-vivo gene therapy products. In addition to the initial 1.95% equity stake, OXB could receive a further 1.95% in equity if it meets defined undisclosed performance related targets. CTL019 at ASH 2016: Data will determine next steps Upcoming presentations at ASH 2016 (3-6 December) by Novartis on CTL019 should give further insight into the efficacy and safety of product (OXB s lentiviral technology is an integral component). After further setbacks for Juno Therapeutics CD19 programme (after two patient deaths), Novartis is well positioned to race Kite Pharma to market. Key to this will be its data on safety and duration of response, two closely watched metrics of all CAR-T therapies. OXB s lentiviral technology remains vital to Novartis s CTL019 product and any ability to capture a larger share of the diffuse large B-cell lymphoma (DLBCL) and paediatric acute lymphoblastic lymphoma (ALL) markets will result in increased royalties and manufacturing revenue for OXB. Valuation: Manufacturing and pipeline at 173m We retain our valuation of 173m or 6.2p/share. Our rnpv model consists of the clinical-stage pipeline, coupled with a DCF value for OXB s manufacturing and IP income net of corporate costs and 2015 net debt. In the near term, the valuation is underpinned by manufacturing deals. Furthermore, regulatory approval of Novartis s CTL019, with filing anticipated in 2017, could see significant further increase in demand for OXB vectors. % 1m 3m 12m Abs (7.9) (15.7) (41.8) Rel (local) (6.0) (15.5) (44.4) 52-week high/low 7.8p 3.0p Business description Oxford BioMedica has a leading position in genebased therapy. The lenti-vector technology is wide ranging and underpins much of the development pipeline, notably OXB-102, OXB-202 and OXB OXB s manufacturing expertise, is gaining valuable commercial traction. Next events CTL019 NDA in pall FY16 results Q117 Q117 Further partnership deals 2016/17 Licensing deals/spin-outs 2017/18 Analysts Dr Susie Jana +44 (0) Daniel Wilkinson +44 (0) healthcare@edisongroup.com Edison profile page Oxford BioMedica is a research client of Edison Investment Research Limited
2 OXB: Gene and cell therapy expertise OXB is a leading player in gene- and cell-based medicines as shown by the growing number of collaborations. Its expertise with the various aspects of developing and commercialising lentiviral products continues to be recognised, as does the strength of its intellectual property (IP) relating to gene and cell therapy drug development. This is highlighted by deals this year with Orchard Therapeutics, Green Cross LabCell and Immune Design. OXB s commercial production of cell therapies is expected to continue to be a main source of revenue in the near term and should lead to further contracts. We forecast manufacturing income streams through to In the main, these are based on the Novartis contract being extended (assuming CTL019 is approved). The partnership with Novartis is focused around CTL019 (OXB is the sole supplier of the lentiviral vector for the CTL019 clinical study) and an undisclosed CAR-T programme is still set to provide up to $76m of performancebased milestones. A regulatory approval for CTL019 could see production rates of the lentiviral vector used in CTL019 increase, which we believe could add significantly to OXB s revenue stream via royalty payments. An internal review in April 2016 led to the prioritisation of three internally developed pipeline assets: OXB-102 (Parkinson s disease Phase I/II), OXB-202 (corneal graft rejection Phase I/II) and OXB-302 (cancer, multiple types preclinical), which could deliver the best potential economic returns. The goal of each is to be advanced to at least proof of concept in humans via out-licensing or through formation of externally funded SPVs. OXB will look to obtain value through upfront payments, equity stakes or developmental milestones and royalty on sales. Product candidates that fall outside the priority programme (OXB-201 for wet age related macular degeneration and OXB- 301 for multiple cancers) will only be progressed once suitable opportunities like partnering enable reduced investment from OXB. The group will continue to invest in earlier-stage gene and cell therapy concepts (eg in ocular, CNS and respiratory indication) with the aim of identifying new candidates for further development via out-licensing or spin-outs. Nearer term, OXB s outlook and our sum-of-the-parts valuation are highly geared to the value from the manufacturing, IP licence and collaboration revenue streams, notably the fate and fortune of CTL019 (for multiple haematological malignancies including paediatric ALL and diffuse large B-cell lymphoma). Novartis will file a biologics licence application in early 2017 and OXB will receive royalties on product sales. Sensitivities OXB is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks and financing and commercial risks. A key longer-term sensitivity for OXB relates to it crystallising value from the early-stage pipeline. Both clinical development and partnering risks remain and we have limited visibility on the terms and timing of any potential deal(s). Furthermore, the company has invested around 26m in establishing a GMP facility (and the associated infrastructure) to manufacture celland gene-therapy products at commercial scale. The rationale is sound, with the potential to use spare capacity for third-party production offering the prospect of an additional revenue stream. OXB is highly exposed to any potential delay or cancellation of Novartis s CTL-019; this would entail incurring operating costs (estimated at greater 2m pa) until the surplus capacity was utilised. Oxford BioMedica 2 December
3 Valuation Our sum-of-the-parts valuation consists of an rnpv model of the R&D pipeline, coupled with a simple DCF valuation of the projected manufacturing revenues and our forecast licence income and IP royalties and milestones (Exhibit 1). Our valuation of 173m or 6.2p/share is based on a number of assumptions, which are highlighted in the table below. We have applied a top-down analysis of the Parkinson s disease and corneal graft rejection markets, which form the basis of our sales projections for clinical stage, priority assets OXB-102 and OXB-202, respectively. Due to the current lack of clarity on potential future revenue from the Orchard Therapeutics collaboration, we have not adjusted our valuation, as such any income generated from this deal will provide upside. Exhibit 1: OXB sum-of-the-parts valuation Product(s) Indication Partner Status Probability of success launch year maximum royalty or peak sales ($m) NPV rnpv rnpv/ share (p) OXB-102 Parkinson s Phase I/II 20% % 1, disease OXB-202 Corneal graft Phase I/II 20% % rejection OXB-201 Wet AMD Phase I/II 20% % OXB-301 Cancer (multiple) Phase I/II 20% % SAR Stargardt Sanofi Phase IIa 25% % (StarGen)* disease SAR Usher syndrome Sanofi Phase I/II 20% % (UshStat)* type 1B Manufacturing (including CTL019) Various 100% 40% operating Licence income & IP milestones Various 100% 100% operating Less net debt Total Source: Edison Investment Research. Note: *Sanofi has fully licensed these products we estimate 7% royalty rate on forecast product sales. rnpv = risk-adjusted NPV. Our DCF model for the manufacturing income streams forecasts the lentiviral production revenues (OXB solution) through to We separately model milestone and licence income to reflect the value of Novartis CTL019 (potential incoming royalty stream from CTL019 should the Novartis contract be extended; assuming CTL019 is approved) and other deals, eg Immune Design and Green Cross LabCell. These are summed and discounted at 10%, in line with other revenue generating units under Edison coverage. We estimate that Novartis will launch CTL019 for DLBCL and paediatric ALL mid- to late 2017, with combined royalties expected in 2017 of 978k and peak combined royalties in 2023 of 12.4m. We assume OXB will be due a 1% royalty on sales for both indications. Further information on our valuation methodology can be found in our recently published outlook note. Financials OXB reported H116 gross income (the aggregate of revenues and other operating income) of 14.0m, an increase of 141% from 5.8m in H115, driven by higher bioprocessing and process development income due mainly to process development activities for Novartis (CTL019). R&D collaboration revenues (licence, milestone and grant income) increased slightly to 1.5m ( 1.4m in H115). R&D and bioprocessing costs increased to 16.1m ( 11.7m in H115), and we expect a further uplift in these expenses in 2016 to 20.0m; however, from 2017 we forecast a significant reduction reflecting the near-term strategy to out-license or spin out the product portfolio ( 16.5m in Oxford BioMedica 2 December
4 2017 and 14.5m in 2018). We forecast a small loss at the EBITDA level in 2017 and a profit of 3.6m in For a full breakdown of OXB s financials please see our recently published outlook note. Exhibit 1: Financial summary '000s e 2017e 2018e Year end 31 December IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 13,618 15,909 27,500 33,600 38,190 Cost of Sales (4,416) (5,839) (12,200) (15,240) (17,076) Gross Profit 9,202 10,070 15,300 18,360 21,114 R&D (16,986) (20,274) (20,000) (16,500) (14,500) Other operating income 1,128 2,862 2,000 1,000 1,000 EBITDA (9,514) (12,456) (6,760) (995) 3,556 Depreciation (703) (1,264) (2,592) (3,193) (3,176) Operating profit (before GW and except) (10,217) (13,720) (9,353) (4,188) 380 Amortisation (396) (363) (291) (242) (202) Exceptionals Operating profit (10,613) (14,083) (9,643) (4,430) 178 Net Interest (185) (2,899) (4,266) (4,468) (4,679) Other Profit Before Tax (norm) (10,402) (16,619) (13,619) (8,656) (4,299) Profit Before Tax (reported) (10,798) (16,982) (13,909) (8,898) (4,501) Tax 2,137 3,963 4,000 4,000 4,000 Profit After Tax (norm) (8,265) (12,656) (9,619) (4,656) (299) Profit After Tax (reported) (8,661) (13,019) (9,909) (4,898) (501) Average Number of Shares Outstanding (m) 2,019 2,574 2,831 3,087 3,087 EPS - normalised (p) (0.41) (0.49) (0.34) (0.15) (0.01) EPS - reported (p) (0.43) (0.51) (0.35) (0.16) (0.02) Dividend per share (p) Gross Margin (%) 67.6% 63.3% 55.6% 54.6% 55.3% EBITDA Margin (%) (69.9%) (78.3%) (24.6%) (3.0%) 9.3% Operating Margin (before GW and except) (%) (75.0%) (86.2%) (34.0%) (12.5%) 1.0% BALANCE SHEET Fixed Assets 11,050 26,139 30,256 27,821 25,443 Intangible Assets 2,106 1,743 1,453 1,210 1,009 Tangible Assets 8,944 24,396 28,804 26,610 24,434 Current Assets 22,755 25,712 31,725 31,854 35,227 Stocks 1,407 2,706 4,178 5,219 5,848 Debtors 5,153 10,930 6,986 7,545 8,677 Cash 14,195 9,355 17,276 15,805 17,418 Other 2,000 2,721 3,284 3,284 3,284 Current Liabilities (9,231) (13,169) (14,423) (15,669) (15,757) Creditors (6,304) (9,286) (9,192) (10,438) (10,526) Provisions 0 (838) (838) (838) (838) Deferred income (2,927) (3,045) (4,393) (4,393) (4,393) Long Term Liabilities (1,535) (27,788) (29,072) (30,417) (31,825) Long term borrowings (1,000) (27,255) (28,539) (29,884) (31,292) Other long term liabilities (535) (533) (533) (533) (533) Net Assets 23,039 10,894 18,486 13,588 13,087 CASH FLOW Operating Cash Flow (7,431) (14,871) (3,035) (1,348) 1,884 Net Interest (238) (1,494) (2,997) (3,138) (3,286) Tax 1,637 3,247 3,437 4,000 4,000 Capex (5,577) (16,716) (7,000) (1,000) (1,000) Acquisitions/disposals Financing 22, , Dividends Other Net Cash Flow 11,026 (29,652) 7,921 (1,471) 1,613 Opening net debt/(cash) (2,169) (13,195) 17,900 11,263 14,079 HP finance leases initiated Other 0 (1,443) (1,284) (1,345) (1,409) Closing net debt/(cash) (13,195) 17,900 11,263 14,079 13,875 Source: Oxford BioMedica, Edison Investment Research. Oxford BioMedica 2 December
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