OpGen — Forecasts reset ahead of busy 2023

A key near-term catalyst for OpGen, in our view, is the upcoming De Novo filing with the FDA for the company’s Unyvero UTI test panel. In December 2022, OpGen had reported encouraging final data from its Unyvero UTI panel, a diagnostic test designed to detect pathogens and antimicrobial resistance markers related to UTI, from native urine specimens without the need for culturing. The study, which recruited over 1,800 patient samples across four trial sites in the United States, met its primary endpoint with an overall weighted average sensitivity of 96.4% and specificity of 97.4% in preliminary analysis, when compared with the trial sites’ standard of care microbiology results. As a reminder, the UTI clinical trial, initiated in Q321, was conducted on 1,858 prospective patient samples across four US sites with over 3,300 Unyvero UTI cartridges used, including for controls. The primary objective was to test the effectiveness of the Unyvero UTI panel in identifying UTIs using clean-catch or catheter-related urine samples.

Complicated UTIs are one of the most prevalent hospital-acquired infections, with a rising number of infections caused by antibiotic-resistant bacteria. The Unyvero UTI panel tests for a broad range of bacterial and fungal pathogens as well as antimicrobial resistance markers (25 pathogens and 15 resistance genes) directly from native urine specimens, without the need for culturing, resulting in much quicker turnaround times (four to five hours versus days in the case of culture-based tests). This is a key advantage in our opinion as early diagnosis remains crucial for effective treatment and should lead to more optimal usage of available antibacterial treatments, decreased hospital stays and lower healthcare costs.

Based on the final study data, OpGen is preparing a submission package for the FDA under the De Novo classification, with application filing expected in the coming weeks. For the regulatory submission, the study data will be complemented by the next-generation sequencing (NGS) data, generated by the company’s ARES business team at its Rockville (US) laboratory, which processed over 1,200 isolates from the UTI trial. We view the FDA clearance as likely (assigning an 80% probability of approval in our model), which would further validate the company’s Unyvero platform and add an additional revenue stream. Note that the Unyvero UTI panel is already available in the United States as a research use only product to hospitals, public health departments, clinical laboratories, pharmaceutical companies and contract research organizations.

Another key growth opportunity for OpGen, albeit in the longer term, is the potential approval, launch and commercialization of its portable benchtop solution, the Unyvero A30 RQ system. OpGen announced an R&D collaboration with FIND (a global non-profit organization for diagnostics) and the German KfW bank in September 2022 for its Unyvero A30 RQ platform for low- and middle-income countries (LMICs). The Unyvero A30 RQ system is OpGen’s sample-to-answer benchtop system designed to test up to 33 diagnostic targets using a one-time disposable cartridge with a turnaround time of 30–90 minutes (two to three minutes of hands-on time). FIND committed to invest €700k in the initial pilot study (€300k of which was recognized as collaboration revenue in FY22) with an option to extend the collaboration, including a potential commercialization agreement. Under the feasibility phase of the project, OpGen, through its German subsidiary Curetis, is to develop a molecular test panel and an easy-to-operate workflow system compatible with currently available blood culture systems in LMICs, as well as modifying certain features of the Unyvero A30 RQ system to adapt to region-specific constraints such as unstable power grids.

As per the latest communication from FIND in January 2023, the Unyvero A30 RQ platform has achieved of a number of milestones (triggering a €200k milestone payment) including successful DNA isolation on the Unyvero A30 cartridge from bacterial strains, 3-plex assays with both pathogen detection and AMR markers and meeting specific requirements for the target product. In addition, device specification for a prototype cockpit optimized for use with the A30 RQ platform has also been defined. OpGen plans to complete all remaining requirements of the pilot phase agreements by Q223, which will trigger another milestone payment of €200k. If successful, the agreement could be expanded to the next phase of development (including clinical studies, followed by regulatory filings and eventual commercialization) with a materially higher level of investment from FIND. Discussions are ongoing between Curetis (OpGen’s subsidiary) and the FIND team for the potential second stage contract, which might cover broader details about the final research and development framework, clinical trials required for regulatory submission, along with regulatory approvals and launch plans in a list of LMICs.

We see this collaboration as another opportunity for OpGen to expand its Unyvero franchise (particularly into developing markets) and make inroads into the benchtop diagnostics systems space.

We see the launch of NGS/genome sequencing and analysis services in OpGen’s new Rockville-based service laboratory in August 2022 as a major step towards realizing the commercial opportunity for this business division. The NGS lab, developed by its subsidiary Ares Genetics, offers short-turnaround genome sequencing of clinical isolates and artificial intelligence (AI) powered outbreak analysis that can be conveniently accessed through the company’s AREScloud web application.

Following the completion of the sequencing of close to 1,200 isolates from OpGen’s UTI clinical study, the lab has now commenced commercial services, with the company having received and processed first customer orders in Q123 (which should translate to first commercial revenues from sequencing services). A sizeable opportunity could come from a large health network with affiliated hospitals in the Southeastern United States, with which OpGen has signed a pilot agreement (Q123) to process 200 isolates over a three-month period. Provided the pilot is successful, the company expects the agreement to expand processing to several thousand isolates per year, which should translate to ‘several hundred thousand dollars’ in revenue for the company. Further details will be made available as the deal progresses.

The company also announced that its AMR knowledge database, ARESdb, has grown by 28% in Q123 with a bank of over 130,000 datasets (driven by its partnerships with a European national reference lab and two public health labs in the United States). A growing dataset of isolates should improve the robustness of the company’s AI models to predict antibiotic susceptibility, in our opinion. We note that, ARESdb, while part of the Ares Genetics suite of products, can also be monetized independently, as evidenced by the $600k deal signed with an undisclosed in vitro diagnostics player in November 2021 for non-exclusive access to 1.1% of ARESdb’s dataset.

With the company seeking to expand its Ares Genetics suite of products, we see the segment as becoming a major commercial contributor to the company’s growth in the medium term. As a reminder, in June 2022, OpGen extended its master services agreement with Sandoz (to develop a digital platform for the development and lifecycle management of antibiotics) to 31 January 2025.

Following positive sales traction in H122, the second half of the year was relatively muted for OpGen, with top-line growth adversely affected by longer than anticipated sales cycles and the overall cautious macroeconomic environment. FY22 revenue of $2.6m was slightly below the mid-point of the guidance range of $2.5–3.0m and c 18% below our estimate. This translated to a 39.5% decline over the FY21 figure of $4.3m, and while the Q422 figure was better than the previous quarter ($0.8m revenue in Q422 vs $0.5m in Q322), it was nearly 50% lower than the $1.4m figure recorded in Q421. The quarter-on-quarter growth in Q422 was primarily driven by the $300k milestone payment under the FIND collaboration, initial revenue from Acuitas commercial contracts and Unyvero product sales.

Products sales, accounting for 73% of total revenue ($1.9m), were down 28.7% y-o-y due to lower Unyvero sales and gradual ramp up to full capacity for the initial Acuitas contracts signed towards the end of the year. Collaboration revenue declined by 35.3% y-o-y to $541k (with contributions primarily coming from the milestone payments under the FIND collaboration), while softer laboratory services (a decline of 78.8% y-o-y to $173k) were due to a decrease in Ares laboratory services and lower testing requirements amid a diminishing impact from COVID-19. Gross margins contracted to -31.3% in FY22, versus 33.8% in FY21, which was primarily affected by higher inventory reserve requirements on account of delays in pneumonia cartridge approval in China.

Total operating loss was reported at $34.6m in FY22, higher than $23.3m in FY21, mainly attributed to impairment of goodwill ($6.9m) and in-process R&D-related intangible assets ($5.4m). The goodwill write-off was related to the acquisitions of AdvanDx (July 2015) and Curetis (April 2020), reflecting OpGen’s assessment of the current market valuation of the assets based on progress to date and the outlook. Excluding these one-off impairment charges, the adjusted operating loss improved to $22.2m in FY22 from $23.1m in FY21 due to lower R&D and G&A expenses. R&D expenses declined 25.1% y-o-y and G&A expenses reduced by 10.6% y-o-y as management implemented cost controls to extend the runway. In line with OpGen’s strategy to focus on self-commercialization in the United States, sales and marketing expenses increased 17.0% y-o-y to $4.3m and we expect this figure to continue to rise as commercialization efforts gather pace. Normalized loss before tax came in at $25.3m, an improvement from $35.7m in FY21.

Based on FY22 results and management guidance of $4–5m in revenue in FY23 (based on slower than expected signing of new contracts, ramp-up in utilization of consumables in existing contracts and collaboration agreement deal traction), we revise our forecasts. We have revised our FY23 revenue estimates to $4.7m from $5.3m previously. We also adjust our FY23 estimates for operating expenses, reducing R&D (to $7.8m from $8.2m) and G&A expectations (to $8.4m from $9.3m previously) and increasing our estimates for sales and marketing related expenses (to $4.6m from $3.6m previously). Based on our revised estimates, we project a quarterly operating cash outflow of $4.5m in FY23, in line with management guidance of $4.5–5.0m per quarter. We also introduce FY24 estimates, with revenue projected at $7.9m, factoring in continued sales acceleration for the core Unyvero and Acuitas platforms as well as incremental sales from Ares and other collaboration agreements. The operating loss is estimated at $16.4m in FY24 ($18.8m in FY23). Key changes to our forecasts are highlighted in Exhibit 1.

As per the EIB debt restructuring announced in May 2022, OpGen repaid €5m in April 2022 followed by monthly repayments of €700k until April 2023 (April 2023 payout pending) as part of the repayment of tranche 1. A further two tranches worth €3.0m ($3.3m) and €5.0m ($5.5m) plus accumulated deferred interest are due for repayment in June 2023 and June 2024, respectively. OpGen has indicated that it is in dialog with the EIB to restructure the second debt tranche as well, which we anticipate would take a similar form of monthly payouts, if negotiations are successful.

Post period, OpGen effected a 1:20 reverse stock split in January to regain Nasdaq’s compliance of maintaining a minimum threshold price of $1 per share. The stock consolidation resulted in the issued capital reducing from 58m to 2.9m common shares. Following the share consolidation, management announced an equity issue to raise $7.5m in gross proceeds ($6.8m net) against an issue of 2,586,207 common shares or pre-funded warrants priced at $2.90 per share. Following the exercise of 2,265,00 prefunded warrants issued as part of the offering, the current issued common shares stand at 5.5m.

The year-end net cash balance stood at $4.4m (gross cash balance of $7.4m), which has been bolstered by the $6.8m in net proceeds raised in the January 2023 equity issue. Based on management guidance of $4.5–5.0m in quarterly cash burn, we anticipate the pro-forma cash at hand to fund operations to end Q223. We anticipate the need to raise another $15m by mid-2023 and a further $45m over FY24–26, before OpGen reaches the scale to fund operations from internally generated cash flow (FY27). We reflect the capital raise as illustrative debt in our model as per Edison policy. Alternatively, if the funds are raised through an equity issue, we calculate the need to issue 45m shares (at the current trading price of $1.33/share), which would be highly dilutive to existing shareholders. Management has indicated that it is seeking non-dilutive sources of funding.

We continue to value OpGen using a risk-adjusted net present value (rNPV) approach for its different business units. We update our valuation for OpGen to reflect the FY22 performance, FY23 management guidance and our projections for business growth thereafter, keeping our underlying assumptions unchanged across the businesses. Given the longer sales cycles experienced and delayed decision-making by customers/hospitals, our revised valuation incorporates a slower sales ramp-up for Unyvero and Acuitas, which results in our peak sales estimates and rNPVs for the two segments decreasing. For Unyvero, we now estimate peak sales (excluding China) of $118m, from $134m previously, with an associated rNPV of $93.0m (previously $98.1m). We continue to estimate a 2024 launch for the UTI test panel in the United States. For Acuitas, our updated projections peg peak sales potential at $17.3m (from $20.2m) and rNPV at $9.0m (vs $14.2m previously).

We see the removal of the COVID-19-related restrictions in China (from January 2023) as a major positive for OpGen, given the magnitude of the deal with Chinese partner Beijing Clear Biotech (purchase commitments of c $180m over an eight-year period for up to 360 Unyvero systems and up to 1.5m pneumonia cartridges) and anticipate clinical studies to initiate in 2023. OpGen had previously indicated that under a new Chinese government directive, Curetis (OpGen’s subsidiary) is required to resubmit the Unyvero clinical trial application under a new electronic filing system. As a result, management anticipates potential launch to take 24–30 months from trial initiation. We therefore push out our launch estimate in China by another year (to 2026) but maintain an 80% probability of approval (we will revisit these assumptions as the regulatory process progresses). We now estimate an rNPV contribution of $18.6m from China (previously $20.5m). For Ares Genetics, for which management has indicated first commercial revenue inflows from Q123, we continue to value the business at carrying value at present. As we gain more clarity and visibility on sales development and traction, we will update our model to reflect the valuation potential. Our revised valuation stands at $66.7m or $12.2/share.