Silence Therapeutics — A year of unprecedented change

Silence Therapeutics (LN: SLN)

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Research: Healthcare

Silence Therapeutics — A year of unprecedented change

The year 2019 marked a major turnaround for Silence, as it both ramped up its development activity, with the advancement of SLN124 for iron overload and SLN360 for cardiovascular disease, and made massive partnering efforts. We have seen the fruits of this business development in the form of three partnering deals with major pharmaceutical companies Mallinckrodt, Takeda and AstraZeneca. Together all these efforts demonstrate the value of the company’s siRNA platform and intellectual property.

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Healthcare

Silence Therapeutics

A year of unprecedented change

Earnings update

Pharma & biotech

16 April 2020

Price

429p

Market cap

£355m

US$1.24/£

Net cash (£m) at 31 December 2019

33.5

Shares in issue

82.7m

Free float

42.5%

Code

SLN

Primary exchange

AIM

Secondary exchange

OTCMKTS

Share price performance

%

1m

3m

12m

Abs

(4.2)

30.8

646.1

Rel (local)

(7.1)

79.5

884.3

52-week high/low

610p

44p

Business description

Silence Therapeutics (SLN) has a portfolio of siRNA drugs in early stage testing. SLN124 for iron overload is entering the clinic in 2020. SLN360 is being developed for cardiovascular disease and is targeting an IND filed in H220. Silence recently signed partnering deals with Mallinckrodt, Takeda and AstraZeneca to develop siRNA drugs using its platform.

Next events

SLN360 IND filing

2020

SLN124 interim Phase Ib study results

H121

SLN360 Phase I interim results

Mid-2021

Analyst

Nathaniel Calloway

+1 646 653 7036

Silence Therapeutics is a research client of Edison Investment Research Limited

The year 2019 marked a major turnaround for Silence, as it both ramped up its development activity, with the advancement of SLN124 for iron overload and SLN360 for cardiovascular disease, and made massive partnering efforts. We have seen the fruits of this business development in the form of three partnering deals with major pharmaceutical companies Mallinckrodt, Takeda and AstraZeneca. Together all these efforts demonstrate the value of the company’s siRNA platform and intellectual property.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

0.0

(19.8)

(25.2)

0.0

N/A

N/A

12/19

0.2

(22.3)

(27.2)

0.0

N/A

N/A

12/20e

4.6

(23.7)

(25.0)

0.0

N/A

N/A

12/21e

10.0

(20.9)

(20.9)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Three major deals in a 12-month span

The three partnering deals the company signed are each of different forms. The Mallinckrodt deal was for the licensing of SLN500, the company’s C3 targeted siRNA (for $25m upfront), but it includes options for future licensing. The Takeda and the AstraZeneca deals are both research partnerships. But whereas the Takeda deal is framed as a technology evaluation (and includes single digit millions in research support), the AstraZeneca deal includes commitments to evaluate up to 10 target leads (five to be evaluated in the first three years) and the largest upfront payment of the three deals ($60m cash and $20m equity investment), demonstrating significant confidence in the partnership (further details on the deals are below).

Accelerated internal pipeline a major value driver

Although the partnering deals have made for impressive headlines, Silence’s internal development programs are no less valuable. The company expects to enrol the first patients in Phase I programs for both SLN124 and SLN360 in 2020, and to report initial results in H121 and mid-2021, respectively. However, it is the cash influx from the partnering that has enabled both of these programs to run simultaneously, allowing the company to advance its SLN360 program ahead of schedule, and elevating it to the title of lead asset.

Valuation: £461m or 558p

Our valuation for Silence is largely unchanged at £461.2m or 558p/share, following a slight adjustment of less than £1m (£461.9m or 559p previously). This adjustment is due to slightly lower expected revenue from the Onpattro royalty stream, based on the company’s reports (£73k in 2019). We expect the company to require £85m (up from £80m, and recorded in 2023) in additional capital to reach profitability in 2027.

The quintessential turnaround story

The year 2019 marked a major shift in strategy for Silence Therapeutics, and upon review it was an unqualified success. The company began the year on the heels of the disappointing conclusion of its prolonged litigation with Alnylam over intellectual property. However, the company subsequently demonstrated just how valuable its IP was. Its investment in business development during 2019 has subsequently paid off, and the company has signed three separate agreements with major pharmaceutical companies seeking to utilise its technology to develop novel siRNA drugs (Exhibit 1).

Exhibit 1: Silence partnering arrangements

Partner

Scope

Indications

Upfront

Options and milestones

Royalties

Mallinckrodt

Licensing of SLN500, with options to license two additional undisclosed assets

Complement disorders

$20m cash, $5m equity

$10m research milestones ($2m already paid), $100m clinical and regulatory milestones, $563m commercial milestones, $703m in milestones for future optioned assets

Low double digits to high teens

Takeda

Technology evaluation agreement

Undisclosed

Single-digit millions in research support

To be negotiated for licensed assets

To be negotiated for licensed assets

AstraZeneca

Research agreement for up to 10 programs, five in first three years

Cardiovascular, renal, metabolic and respiratory diseases

$60m cash, $20m equity investment

$10m option fee, $140m in development milestones, $250m in commercial milestones per asset

High single digit to low double digit

Source: Silence Therapeutics

The Mallinckrodt and AstraZeneca deals brought in $107m in cash and equity investments (in upfront payments and the first Mallinckrodt milestone), and have the downstream potential to bring in $5.4bn of additional cash in options and milestones. The Takeda deal has few details disclosed but includes single-digit millions in research support and additional future licensing potential.

All of the above deal-making occurred in parallel with the company ramping up its own internal pipeline development during 2019. It began preparations in 2019 to enter the clinic with its iron overload treatment SLN124, but with the influx of cash from its new partners it decided to also advance its ambitious SLN360 program for the treatment of cardiovascular disease. The company is planning to file an IND for SLN360 later in 2020 and subsequently dose initial Phase I patients this year (with interim results expected in mid-2021).

The Phase I trial for SLN124 had clinical sites open, but enrolment has been delayed by COVID-19. It is expected to resume later in 2020. The company announced in its earnings release that this drug candidate received an orphan designation for myelodysplastic syndrome (MDS). This is in addition to the previously announced paediatric rare disease designation for beta-thalassemia.

Valuation

Our valuation for Silence is largely unchanged at £461.2m or 558p per basic share. It is slightly lower by less than £1m from our previous report (£461.9m or 559p per basic share), because we have slightly adjusted the near-term revenue stream from Onpattro royalties, based on the financial results. Otherwise our models remain unchanged.

Exhibit 2: Valuation of Silence Therapeutics

Product

Indication

Clinical stage

Prob. of success

Launch year

Peak sales ($m)

Margin/ royalty rate

rNPV
(£m)

SLN124

Beta-Thalassemia

Phase I ready

15%

2027

489.2

59%

62.7

MDS

Phase I ready

15%

2027

683.7

60%

66.1

SLN360

Cardiovascular disease

Preclinical

7.5%

2027

5214.0

54%

167.1

SLN500

Complement disorder

Preclinical

5%

2027

*400

*11–19%

26.4

Takeda project

Undisclosed

Preclinical

3%

2028

*400

*11–19%

17.7

AZ project

Undisclosed

Preclinical

3%

2029

*400

*8–12%

39.9

QPI-1002

AKI & kidney transplant

Phase III

60%

2022

381.5

1.5–4.0%

9.7

Onpattro

hATTR Amyloidosis

Approved

354.5

0.33–1.0%

4.2

Total

393.8

Pro forma net cash and deposits (at 31 December 2019 + AZ upfront est.) (£m)

67.4

Total firm value (£m)

461.2

Total basic shares (m)

82.7

Value per basic share (p)

558

Dilutive options (m)

4.7

Total diluted shares (m)

87.4

Value per diluted share (p)

532

Source: Silence Therapeutics reports, Edison Investment Research. Note: *Peak sales for licensing deals are a placeholder, royalty rates estimated.

Financials

The company reported revenue of £0.2m for 2019 from Onpattro royalties (£0.07m) and partial recognition of the Mallinckrodt upfront and milestone received (£0.17m). The difference from our previous revenue estimates (£2.1m) largely reflects differences from our presumed revenue recognition schedule, which included the $2m milestone paid in full. The revenue recognition from this and the AstraZeneca payments, as well as research support payments from Takeda represent the vast majority of our revenue estimates in 2020 (£4.6m) and 2021 (£10.0m), but are subject to change as in the case of 2019. The company had R&D spending of £13.3m in 2019, which we expect to increase in 2020 (£20.2m) and 2021 (£22.4m) as the company enters the clinic with SLN124 and SLN360. SG&A spending for 2019 (£9.6m) was higher than our previous estimates (£8.4m), which we attribute largely to nonrecurring expenses associated with the deals and staffing changes (although the company has not broken this down). We forecast slightly lower SG&A spending in 2020 at £8.8m.

The company ended the year with £33.5m in cash, which has subsequently been bolstered by the initial $20m portion of the AstraZeneca upfront (with the $40m remainder of the $60m total upfront payable by the first anniversary) and AstraZeneca’s concurrent $20m equity investment. We have adjusted our financing schedule for the company and forecast the company will need £85m in additional capital, which we include as illustrative debt in 2023 (from £80m in 2024, previously), with the change reflecting the long-term accumulated effects of adjustments in Onpattro royalties and a slight increase in SG&A spending.

Exhibit 3: Financial summary

£000s

2018

2019

2020e

2021e

31-December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

0.0

244.0

4,649.2

10,039.1

Cost of Sales

0.0

0.0

0.0

0.0

Gross Profit

0.0

244.0

4,649.2

10,039.1

R&D

(9,743.0)

(13,336.0)

(20,192.9)

(22,441.6)

SG&A

(10,828.0)

(9,642.0)

(8,804.4)

(9,068.6)

EBITDA

(20,172.0)

(22,252.0)

(23,896.1)

(21,019.0)

Normalised operating profit

(19,890.0)

(22,150.0)

(23,746.6)

(20,851.4)

Depreciation & amortisation

(399.0)

(482.0)

(452.0)

(452.0)

Exceptionals

0.0

0.0

0.0

0.0

Share-based payments

(681.0)

(584.0)

(601.5)

(619.6)

Reported operating profit

(20,571.0)

(22,734.0)

(24,348.1)

(21,471.0)

Net Interest

45.0

(136.0)

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

(19,845.0)

(22,286.0)

(23,746.6)

(20,851.4)

Profit Before Tax (reported)

(20,526.0)

(22,870.0)

(24,348.1)

(21,471.0)

Reported tax

2,115.0

3,288.0

4,633.3

5,149.3

Profit After Tax (norm)

(17,800.2)

(19,989.6)

(21,299.8)

(18,702.9)

Profit After Tax (reported)

(18,411.0)

(19,582.0)

(19,714.8)

(16,321.7)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Foreign exchange adjustment

94.0

(411.0)

0.0

0.0

Net income (normalised)

(17,706.2)

(20,400.6)

(21,299.8)

(18,702.9)

Net income (reported)

(18,317.0)

(19,993.0)

(19,714.8)

(16,321.7)

Basic average number of shares outstanding (m)

70

75

85

89

EPS - basic normalised (p)

(25.18)

(27.15)

(25.02)

(20.92)

EPS - diluted normalised (p)

(25.18)

(27.15)

(25.02)

(20.92)

EPS - basic reported (p)

(26.18)

(26.07)

(23.16)

(18.26)

Dividend (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

9,387.0

8,612.0

8,386.0

8,160.0

Intangible Assets

8,191.0

7,726.0

7,726.0

7,726.0

Tangible Assets

921.0

611.0

385.0

159.0

Investments & other

275.0

275.0

275.0

275.0

Current Assets

29,498.0

37,465.0

50,029.0

64,883.7

Stocks

0.0

0.0

0.0

0.0

Debtors

0.0

4.0

0.0

0.0

Cash, cash equivalents, and deposits

26,494.0

33,515.0

44,509.7

58,848.4

Other

3,004.0

3,946.0

5,519.3

6,035.3

Current Liabilities

(3,830.0)

(9,653.0)

(14,670.2)

(19,194.5)

Creditors

(3,830.0)

(6,888.0)

(5,512.2)

(6,004.3)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

Other

0.0

(2,765.0)

(9,158.0)

(13,190.2)

Long Term Liabilities

0.0

(15,515.0)

(25,000.0)

(50,806.5)

Long term borrowings

0.0

0.0

0.0

0.0

Other long term liabilities

0.0

(15,515.0)

(25,000.0)

(50,806.5)

Net Assets

35,055.0

20,909.0

18,744.9

3,042.7

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

35,055.0

20,909.0

18,744.9

3,042.7

CASH FLOW

Op Cash Flow before WC and tax

(19,491.0)

(21,668.0)

(23,294.6)

(20,399.4)

Working capital

913.0

3,054.0

(1,371.8)

492.1

Exceptional & other

6.0

18,033.0

15,878.0

29,838.7

Tax

1,812.0

2,308.0

3,060.0

4,633.3

Net operating cash flow

(16,760.0)

1,727.0

(5,728.5)

14,564.7

Capex

(188.0)

(9.0)

(226.0)

(226.0)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

39.0

(6.0)

0.0

0.0

Equity financing

341.0

5,273.0

16,949.2

0.0

Dividends

0.0

0.0

0.0

0.0

Other

319.0

0.0

0.0

0.0

Net Cash Flow

(16,249.0)

6,985.0

10,994.7

14,338.7

Opening net debt/(cash)

(42,745.0)

(26,494.0)

(33,515.0)

(44,509.7)

FX

(2.0)

36.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

Closing net debt/(cash)

(26,494.0)

(33,515.0)

(44,509.7)

(58,848.4)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Silence Therapeutics and prepared and issued by Edison, in consideration of a fee payable by Silence Therapeutics. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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General disclaimer and copyright

This report has been commissioned by Silence Therapeutics and prepared and issued by Edison, in consideration of a fee payable by Silence Therapeutics. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Solid State — Record adjusted EBIT expected for FY20

Solid State expects to beat the consensus FY20 adjusted profit before tax estimate, which was upgraded in September, resulting in a further consensus upgrade from £4.2m to £4.5m. All of the group’s four sites in the UK remain operational as it is a critical supplier for customers in the medical, food retail, security, transportation and defence sectors, the balance sheet is strong and management has put cash conservation measures in place to cope with the impact of the COVID-19 pandemic.

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