Angle — Update 14 February 2017

Angle is a diagnostics business focused on the proprietary cell separation system, Parsortix, which can be used to capture and harvest very rare CTCs from blood for analysis, including cancer and foetal cells. The product has been launched for the research market, where it is generating the first research use sales, and is being investigated in two large prospective ovarian cancer studies. Parsortix has CE mark regulatory approval for the clinical market in Europe and Angle is working on an updated submission to the FDA for the approval in the US. The company is listed on the London Stock Exchange and trades on the AIM market. The company has also established a Level 1 ADR program in the US, which is traded on the OTCQX market. Since its IPO in 2004, Angle has raised c £39.6m, including £9.6m (net) from an equity raise in May 2016. Angle is headquartered in Guildford, England and employs 34 people

In H117 Angle’s research use sales were £219k ($273k) versus £361k ($450k) in H216 (£0 in H116). We keep our sales estimates of £1.1m ($1.4m) and £3.6m ($4.5m) of FY17 and FY18 respectively, but note that while the company has a strong prospects list for H217, given budgets are often tied to calendar year-ends, there is also a risk that customer evaluations could take longer than expected. After the positive early evaluation of ovarian cancer studies, we upped our expected clinical use market penetration from 20% to 25%. Angle’s total operating spend in H117 was £3.1m ($3.9m) compared to a total of £5.7m ($7.1m) in FY16. We keep our forecast of operating costs increasing to £9.2m ($11.5m) in FY17 due to an increase in R&D activities primarily related to key clinical studies, although we note that if the FDA approval process takes longer than expected costs may roll over into the following year. End-October 2016 cash (no debt) was £9.7m ($12.1m), boosted by the £9.6m ($12.0) net equity raise in May 2016.

We value Angle at $175m or $23.4/ADR, based on an SOTP approach. Rolling our model forward was partially offset by the slightly lower cash position, while our long term clinical use sales were revised upwards after the positive early evaluation of the ovarian cancer studies. Our SOTP valuation includes a DCF model for Angle’s operations running the organization, research use sales and ovarian cancer application. We have already included two additional applications after Angle provided more details about the use of Parsortix for prostate cancer and metastatic breast cancer.

As a new technology in a fast-emerging market, Angle’s greatest challenge will be communicating and convincing customers of the advantages of Parsortix, to ensure widespread adoption and achieve sales forecasts. The diagnostics field is highly competitive, with a number of large companies able to apply significant resources to promotion and commercialization activities. In addition, as CTCs are an emerging technology, adoption may be slow and market penetration may be limited. Key to widespread adoption of Parsortix in the clinical markets, and therefore substantial sales, is the continued positive evaluations of the system and demonstration of its clinical utility by KOLs and the data from the initiated prospective clinical studies. Any delays or negative decisions by the FDA will affect estimated timelines and clinical sales in the US, so will have an impact on our valuation as the US market is likely to be key. Angle is reliant on external manufacturers to maintain GMP standards, scale and continuity of production, and to maintain current margins. As sales rise and demand increases, we would anticipate dual sourcing and strategic stocks to mitigate the risk of supply interruptions.

Angle is a specialist medical diagnostic company, with a focus on cancer diagnostics. The proprietary Parsortix cell separation system is able to capture CTCs, which are outnumbered by healthy blood cells by over one billion to one. The capture of CTCs from a blood sample could potentially negate the need for further invasive biopsies and allow the patient’s cancer treatment to be tailored toward the specific mutations of their tumor, thus fulfilling the objectives of precision medicine. The development of precision (or personalized) medicine providing ‘the right patient with the right drug, at the right dose, at the right time’ is a core mission for the FDA and governments worldwide. In addition, CTCs have potential for use in screening tests, and as an aid to decision making. Angle has recognized that to secure widespread use of the Parsortix system in the diagnosis and treatment of cancer, endorsement of its medical utility must be provided by KOLs. Parsortix has been evaluated by multiple KOLs and a number of endorsements and its competitive advantages have already been reported, particularly its ability to capture different types of CTCs, its applicability to multiple cancer types, the easy harvesting and high purity of captured cells.

The landscape of cancer care is shifting from non-specific cytotoxic drugs to targeted and immunotherapy approaches that promise to improve treatment efficacy and reduce toxicity. Increasingly, treatment decisions will be based on the molecular abnormality profile of a tumor, gained through analysis of the patient’s cancer cells, to predict the patient response to these therapies. Angle’s Parsortix system offers the potential for the harvesting of these cells for analysis from a simple blood test (liquid biopsy).

2017 could be a transformational year for Angle, with the data from the first clinical trial in ovarian cancer due any time now. As announced in July 2016, the first patients were recruited into two clinical studies that are running in parallel in the US and Europe and explore Parsortix’s efficacy in triaging women with ovarian masses before surgery (looking at whether the tumor is benign or malignant to estimate the extent of the necessary surgery). Both studies seek to recruit 200 patients. In Europe, blood samples from the first half of the patients will be used as training to optimize the use of RNA markers for malignancy, which were identified during the successful pilot trial at the Medical University of Vienna. The blood samples from the rest of the patients will be used for verification. The design of the US study is slightly different and will also evaluate clinical information (eg demographics, imaging results, etc) for the estimation of the risk of malignancy.

On 26 January 2017 Angle announced positive interim evaluation of ovarian cancer clinical studies after the first 50 patients were enrolled in each of the trials. The purpose of this evaluation was to optimize the set of RNA markers, which would allow for maximum accuracy with a minimal required number of RNA markers. Although only minimal details were released, the company indicated that the early evaluation from both clinical trials suggests researchers are able to accurately differentiate between women with a malignant pelvic mass and those with benign tumors. In addition, Angle revealed that the European study is over 95% enrolled and expected to be completed in February 2017. This is slightly behind schedule due to a slower than expected recruitment rate. The patient recruitment into the US study is ahead of plan and now 70% enrolled, with the goal of completion in April 2017. Headline results from both studies are expected in Q217.

Of the three potential clinical applications, using Parsortix for triaging women with ovarian masses before surgery is the most advanced. In January 2015, the Medical University of Vienna reported the results of a patient study supporting the use of Parsortix for ovarian cancer detection, demonstrating “unprecedented sensitivity and specificity”. Parsortix-harvested CTCs were analyzed for CTC-specific RNA markers. The results indicated sensitivity1 of 90% for primary epithelial ovarian cancer (which constitutes 90% of ovarian cancers), and a specificity of 100%. Previous CTC enrichment technologies used by the university (including many technologies listed in Exhibit 2) had been limited by high levels of white blood cell contamination, with just 24.5% the best sensitivity achieved.

In April 2015, the results of the extended study (n=65, which also included endometrial [n=5], cervical [n=6] and breast [n=7] cancers) were presented at the American Association for Cancer Research. Analysis of seven RNA markers again demonstrated 100% specificity. The sensitivity for ovarian cancer was 80%. The sensitivity for metastatic breast cancer was 71% (versus 40% for the standard CTC diagnostic approach). As part of the study, 13 patient samples were reanalyzed using 30 RNA markers, resulting in an improved sensitivity, with a 92% average across all cancer types and 100% sensitivity for the seven ovarian cancer patients.

The American Cancer Society estimates that there were 21,000 new diagnoses of ovarian cancer in the US in 2015. Of the c 200,000 surgeries performed on pelvic masses each year, 11% could be ovarian cancer. In 2012, c 239,000 women worldwide were diagnosed with ovarian cancer (65,600 in Europe; source: Cancer Research UK). As there are limited symptoms in the early stages, the cancer is often at an advanced stage at diagnosis. For those with Stage III or Stage IV at diagnosis, five-year survival rates are just 19% and 3% respectively, whereas for Stage I it is 90%. Hence, there is a strong need for early diagnosis.

Patients with very early stage ovarian cancer benefit from the removal of the mass intact, since opening the mass results in a more advanced stage (through dissemination), adversely effecting prognosis.2 Thus, it is essential that an appropriate surgical approach is used and the procedure is performed by a gynecological oncologist. In advanced disease, surgery performed by a gynecological oncologist resulted in a six- to nine-month median survival benefit.2 Success in the study could lead to the use of Parsortix to identify patients at high risk of ovarian cancer, aiding surgical management decisions, which can be critical to the patient’s prognosis. Going one step further, future upside in ovarian cancer could come from the expansion of Parsortix use for diagnosis, screening in high risk patients, treatment stratification and monitoring and remission surveillance. However, these applications will likely require additional data.

The best-studied serum biomarker for ovarian cancer, CA-125, is elevated in c 85% of women with advanced ovarian cancer but its sensitivity is only c 50% in early-stage disease and the specificity is poor, meaning that serum levels are raised in a number of benign conditions and other cancers.3 The FDA-approved OVA1 (Vermillion) is a blood test and software algorithm used to evaluate ovarian masses for malignancy before surgery. OVA1 has a sensitivity of c 95% but a specificity of just c 40%, resulting in a significant level of false positives which results in women often ‘over-diagnosed‘ leading to ‘over-preparation’ for the surgery.

The current ‘gold standard’ procedure for obtaining information about a tumor is a solid biopsy. However, this is not without limitations, including:

CTCs are cells that have been shed from a solid tumor into the vasculature. They can be found even in patients with no overt evidence of metastasis and in whom the primary tumor has been completely removed. This population of cells includes viable tumor cells capable of initiating metastasis and the presence and quantity of CTCs has been shown to be indicative of patient prognosis in a number of cancers.6 CTCs also hold valuable information about the tumor, including the genetic mutations that drive the tumor’s growth and resistance mechanisms, the very information that makes each tumor unique. Thus, CTCs could serve an important role in putting precision medicine into practice, namely in diagnosis, treatment stratification on the basis of molecular characterization, real-time monitoring of treatment efficacy and remission surveillance.6

In addition to the information they can provide, the appeal of CTCs is that they can be harvested from a peripheral blood sample, or liquid biopsy, which is significantly less invasive and better suited for serial sampling. However, CTCs are extremely rare with estimates of just one CTC per 107 white blood cells per milliliter of blood.6 Therefore, their detection and capture is not straightforward.

CellSearch is the only FDA-approved CTC capturing device approved for CTC enumeration in breast, prostate and colon cancers. It isolates CTCs using magnetic particles coated with antibodies that bind to a cell surface marker called anti-epithelial cell adhesion molecule (EpCAM). Once extracted, CTCs are enumerated and their concentration has been proven to have prognostic value for progression-free survival and overall survival in primary and metastatic disease of patients. However, CTCs are heterogeneous and may express fewer cell surface markers, like EpCAM, in a process called epithelial-to-mesenchymal transition (EMT). The exact process of metastasis is still unclear, but emerging data in this field point to EMT transition being involved. EMT is the process in which malignant epithelial cells gain migratory and invasive properties.2 Due to EMT, circulating tumor cells may express fewer cell surface markers, like EpCAM. Also many cancers have weak epithelial expression, such as ovarian. Therefore, antibody-based systems, such as CellSearch, which are limited to detecting epithelial markers may fail to capture key subsets of CTCs, which are of particular clinical relevance.

Angle’s Parsortix system is a platform technology for harvesting rare cells from blood. The system uses a patented step-based microfluidic technology in the form of a disposable cassette, to capture and harvest the CTCs. The system processes the patient blood sample (volumes of <1ml up to 50ml) through the cassette, taking 60 to 90 minutes per standard 10ml sample. Based on their morphology, namely that they are less deformable and larger than other blood components, CTCs are caught in the cassette while the other blood components are able to pass through. The CTCs can then either be fixed and stained in the cassette for identification and enumeration, or can be harvested from the cassette to allow for external staining, genetic analysis and culture, Exhibit 1.

The Parsortix system, comprising a desktop machine and one-time use consumables, can be purchased for use on site alongside existing analysis platforms. In contrast, many of the competitor systems are so complex that the sample must be sent to a CLIA certified laboratory for processing. This has commercial downsides as it requires large in-house investment, is less scalable and deprives the hospital of the reimbursement, which instead goes to the external laboratory. The Parsortix system has potential to offer a number of advantages over other CTC enrichment technologies, particularly antibody-based approaches. These include the low cost and simplicity of the capture process, and the high purity of harvested cells, with minimal white blood cell contamination. In addition, the Parsortix system offers three important advantages:

There a number of CTC detection systems in development. Exhibit 2 lists a selection of these.

Over the course of 2016, Angle released more KOL initiated pilot data, which led Angle to add two additional clinical applications in its further R&D pipeline: prostate cancer and metastatic breast cancer. Breakthrough pilot data for prostate cancer was gathered by Angle’s KOL partner Barts Cancer Institute (BCI) and by the University of Southern California (USC) Norris Comprehensive Cancer Center for metastatic breast cancer.

In September 2015, the BCI published the results of a pilot study in which it evaluated the Parsortix system for CTC harvest in prostate cancer. The study compared Parsortix to CellSearch and to IsoFlux, another antibody-coated magnetic bead-based CTC isolation system that relies on cell surface markers to select CTCs. The study included only 19 prostate cancer patients and 17 healthy controls, therefore statistical interpretation is limited; however, the trends and conclusions were as follows:

Furthermore, in March 2016, Angle announced that the BCI presented additional data from the prostate cancer pilot study with 52 patients. The final data are yet to be published, but headline results indicated that Parsortix could potentially perform as well as or better than current standard of care in terms of detecting early-stage prostate cancer and assessing its severity, and can do so with a simple blood test. This prompted Angle to select prostate cancer as a second clinical application to be explored in clinical studies. The main conclusions included:

Many prostate cancer patients have low-risk disease and are on “watchful waiting” and the disease may not necessarily progress to advanced cancer. Historically, often false positive screening and fear of incurable and unpredictable metastasis led to overtreatment of localized disease and avoidable harm to patients. Therefore, better prediction and knowledge of the biology of metastasis can improve care across the spectrum.8

Management of prostate cancer starts with screening, which is based on digital rectal exam and blood test for prostate-specific antigen (PSA), which so far has been the cornerstone for the decision to refer patients to prostate biopsy. This is typically trans-rectal and in total can require up to 18 samples of tissues, which means 18 aspirations with a biopsy needle. Overall, screening of prostate cancer is controversial to say the least. This is because PSA has low specificity and leads to large number of false positives, which results in a number of unnecessary biopsies. Estimates (cancer.gov) suggest that less than 10% of solid prostate biopsies indicate the need for treatment with around 80% showing a benign tumor. CTC analysis can fulfil the role of a biomarker by serving as an accurate, non-invasive measure of disease and can be followed throughout the course of the disease.

Since only headline results were released from the BCI study, it is premature to pinpoint the positioning of Parsortix in management of prostate cancer patients; however, two clear directions of use seem to be the detection of the cancer and the assessment of the aggressiveness, which affects the interventional treatment. In particular the finding that Parsortix may be able to indicate the metastatic or localized status of the disease with a higher level of accuracy than the Gleason score looks to be striking, but this will still need to be replicated in larger-scale trials. Angle now intends to work with BCI and other cancer centers to conduct clinical studies to validate the use of the Parsortix system as a clinical application in the routine detection, assessment and treatment of prostate cancer patients. The company expects to take at least 18 months to complete the studies, while financial details remain undisclosed.

In April 2016, Angle’s KOL partner USC presented patient data from its metastatic breast cancer study at the American Association for Cancer Research Annual Meeting (AACR). The study involved 12 patients with metastatic breast cancer, who underwent metastatic tissue biopsy. To understand whether CTCs are similar to cancer metastases, researchers used RNA sequencing (RNA-Seq) to compare expression signature of 192 genes. Gene signature is the combined expression pattern of a specific group of genes and is unique to a specific medical condition. RNA-Seq was performed on samples from metastatic tissue biopsy, Parsortix’s harvested CTCs and, as a control, peripheral blood of each of eight patients. Headline findings include:

Although the results need to be replicated in larger-scale studies, these new data imply that Parsortix could replace invasive biopsy in managing breast cancer patients. Subsequently Angle announced that metastatic breast cancer was chosen as a third application and that the first FDA clearance in the US will be pursued for this indication. According to preliminary plans, the clinical trial will enrol 392 patients, split equally between healthy volunteers and breast cancer patients. Angle believes the data could be obtained next year.

Collaboration with a network of KOLs is at the core of Angle’s R&D strategy, which also increases awareness among the leading intuitions. For example, in May 2016 Angle announced that the Clinical and Experimental Pharmacology group at Cancer Research UK (CRUK) Manchester Institute will adopt Parsortix in routine use in clinical trials and research. CRUK has been evaluating Parsortix since 2012 and is currently using the system in 16 clinical trials. Notably, CRUK is running around 620 clinical trials, so there is significant potential for Parsortix to be used in more studies. This is the first KOL that will adopt Parsortix for routine use and will generate recurring research use revenues for Angle. Exhibit 3 summarizes a selection of other collaborations.

Parsortix is CE mark authorized in Europe. If the data from the ovarian cancer study is positive (triaging women before surgery), Angle plans to start offering Parsortix to accredited European hospitals via a laboratory developed test (LDT) pathway, which means that the laboratories would be required to validate the test under their own quality control system. Centers that already are investigating Parsortix are likely to be early adopters. As LDT pathway is an additional hurdle for the customers and may limit the potential of Parsortix, Angle plans to conduct a second prospective clinical study to validate the clinical utility of Parsortix, which would “upgrade” the existing CE mark for this specific indication, thus eliminating the need for internal validation at the hospitals.

In March 2014, Angle submitted a 510K application to the FDA for the use of Parsortix as a platform for the capture and harvesting of cells from the blood for the purpose of analysis. Angle reported that the ongoing dialogue is positive and noted that the completed work on the system’s analytical validation will not be needed for every clinical application, thus likely shortening the review timelines for other applications. Angle is currently conducting an analytical study and will use breast cancer indication as the first Parsortix application to get FDA approval. Preparation for the clinical trial is in the final stages and will involve 200 metastatic breast cancer patients and 200 healthy volunteers. The study will be carried out in three US cancer centers, with the study plan finalized in H117. Both the analytical and clinical studies are expected to be finished in 2017. In Europe, if the data from the ovarian cancer study is positive, Angle plans to start offering Parsortix to accredited European hospitals via a laboratory developed test (LDT) pathway and centers that already are investigating Parsortix are likely to be early adopters. A planned second validation clinical study would allow a more widespread adoption eliminating the need for LDT pathway. As previously, Angle envisions that one more validation study will be required in the US and Europe each to gain regulatory approvals.

In the long term, Angle’s revenues will be generated from three distinct streams: clinical applications; research use for drug trials; and corporate deals. While clinical applications will provide the bulk of revenues in the long term, these are not anticipated to begin until the completion of the Vienna and the Rochester clinical studies (headline data due in Q217). Successful evaluations of Parsortix by KOLs have already led to Parsortix being specified in a number of clinical trials and research studies, with first research use sales booked and one of the key KOLs, CRUK, adopting Parsortix in routine use in clinical trials and research. With an estimated addressable market of c 800 Phase II and III cancer drug trials initiated each year (based on a search of clinicaltrials.gov), there is significant opportunity for the use of Parsortix in a variety of indications. Further, positive trial outcomes could lead to the adoption of Parsortix as a companion diagnostic and monitoring system for the development of new drugs.

CTCs harvested using the Parsortix system can be analyzed using a variety of existing analytical platforms, including quantitative PCR (Roche) and next generation sequencing (Illumina). Angle plans to form commercialization partnerships with established diagnostic companies, whereby combining the analytical system with the Parsortix system provides a ‘complete solution’ to the oncologist, and thus provides an additional source of revenue to the diagnostic company. This could lead to revenues through upfront payments, milestone payments, royalty income and/or sales revenues.

We value Angle at $175m or $23.4/ADR, up from $171m or $22.9/ADR, based on a sum-of-the parts (SOTP) approach. Rolling our model forward was partially offset by the lower net cash position, while our long term clinical use sales were revised upwards after the positive early evaluation of ovarian cancer studies. Our SOTP valuation includes a DCF model for Angle’s core operations running the organization, research use sales and the ovarian cancer application, assuming a discount rate of 10% and terminal growth of 2%. We have already included two additional clinical applications after Angle provided more details about the development of Parsortix for prostate cancer and metastatic breast cancer. For the two new applications in earlier stages we use a risk-adjusted NPV model with the breakdown shown in Exhibit 5. We keep all our product assumptions and financial forecasts unchanged and as discussed in detail in our 1 August 2016 report.

In H117 Angle’s research use sales were £219k ($273k) versus £361k ($450k) in H216 (£0 in H116). We keep our sales estimates of £1.1m ($1.4m) and £3.6m ($4.5m) of FY17 and FY18 respectively. However, after the positive early evaluation of ovarian cancer studies, we upped our expected clinical use market penetration (which partially discounted the remaining R&D risk) from 20% to 25%, in turn increasing long term potential (for more detailed discussion of our assumption see our initiation report). Angle mentioned that many potential clients have business cycles based on the calendar year and the company expects sales to increase substantially in H217. Research use sales came from both existing relationships with KOLs, which were converted into paying customers, and new clients. The Cancer Research UK (CRUK) Manchester Institute, a flagship customer, which adopted Parsortix for routine use in clinical trials in May 2016, has already processed 1,100 patient samples in 16 clinical trials, up from 10 clinical trials last May. As an example of the scale of the opportunity, The Christie NHS Foundation Trust is one of the partners behind CRUK Manchester Institute and runs around 620 cancer trials currently. In our view, an important ‘side effect’ of the growing research use customer base is that it is using Parsortix for investigations into new uses of the device, which increase awareness and expand the potential. In line with the company’s strategy, sales for research use are the near-term goal, while the largest potential is in clinical use of Parsortix, currently being explored in clinical trials.

Angle’s total operating spend in H117 was £3.1m ($3.9m) compared to a total of £5.7m ($7.1m) in FY16. We keep our forecast of operating costs to go up to £9.2m ($11.5m) in FY17 due to an increase in R&D activities, primarily in relation to clinical studies, although we note that if the FDA approval process takes longer than expected costs may roll over into the following year. End October 2016 net cash (no debt) was £9.7m ($12.1m), boosted by the £9.6m ($12.0) net equity raise in May 2016. We calculate cash at £5.3m ($6.6m) by end-FY17. Our model suggests that this should be sufficient to fund operations through to 2019. We assume £3.2m ($4.0m) of illustrative financing will need to be included nominally as long-term debt (as per Edison policy) on the balance sheet in 2019. We anticipate profitability in 2021 (on net income).