MagForce — Heading in the right direction

MagForce has demonstrated that it started to turn a corner in H120, with 17 glioblastoma multiforme (GBM) patients commercially treated across its three operational treatment centres: 11 in Germany (Münster and Zwickau) and six in Poland (Lublin). Albeit modest, this is a significant uptick for MagForce given we estimate that c 30 fully remunerated treatments had occurred since launch (2015–19). We interpret this as a sign that the renewed commercial strategy is beginning to bear fruit in Europe and continued momentum could enable sustainable profitability from 2022. This is particularly impressive given the backdrop of the COVID-19 pandemic, which has significantly affected the number of in-patient treatments during H120, highlighting both the urgency of treating GBM patients and the commercial potential for NanoTherm in this setting.

The company expects growth in patient treatments in H120 to be sustainable, with management guiding to c 30–40 patients treated in 2020, increasing threefold during 2021 to c 90–120 patients. This will be facilitated in part by a third treatment centre in Germany at the Hufeland clinic in Mühlhausen, which opened in November and replaces the Cologne treatment centre that has not been actively treating patients this year and has been decommissioned. MagForce also plans a fourth centre in Germany, which it expects to be operational during 2021. Its broader European expansion plans have changed slightly from prior guidance, with centres in Spain and Italy put on hold until pandemic headwinds abate. However, management has highlighted that it is now also looking to expand into other Europeans countries (such as the Netherlands and Austria) following interest from neurosurgical units. We assume MagForce will continue to install two new NanoActivator devices per year across European sites, including a fourth site in Germany during 2021. A mobile ‘plug-and-treat’ solution is now the delivery standard in Europe (already used in Zwickau and Lublin) and means the lead time to start patient treatment in new centres has shortened significantly (now less than three months from placing an order).

Meaningful growth in the top line through treatment sales has historically been hampered by local reimbursement issues and we believe commercial treatments are still likely to stem primarily from private paying patients. However, management has estimated that it has the necessary number of patient outcomes to negotiate reimbursement in Germany and will make an application to the Federal Joint Committee (G-BA) by end-2020. Subject to approval, it will submit an HTA application during H221, from which point treatment costs will be federally reimbursed until a decision on full approval is made. In Poland, an investigator-initiated trial has started at the Lublin treatment centre to enable an application for reimbursement in this territory.

Enrolment into the pivotal US study in prostate cancer has continued despite the pandemic, albeit with some delays due to the requisite testing of patients for COVID-19 infection. With the streamlined trial protocol agreed with the FDA in April 2020, safety and tolerability data for the refined treatment procedure will be available by end-2020 (Stage 2a, c 10 patients). Enrolment of patients in this second part of this study to determine efficacy will begin in January 2021 (Stage 2b, c 100 patients). While Stage 2a was conducted in only one of MagForce’s treatment centres, at least three treatment centres will be used in Stage 2b, thus accelerating patient enrolment and treatments.

MagForce has guided that based on the Stage 2a data expected at end-2020 it will start commercial preparations ahead of FDA approval. Launch and commercial treatments are now expected during H221 (previously Q221). Alongside the three established US treatment sites being used in the trial (San Antonio, Texas; Seattle, Washington; and Sarasota, Florida), MagForce intends to have two additional treatment sites ready at launch. These timelines are ambitious in our view and we reiterate that both prudent trial execution and timely commercial roll-out remain essential. MagForce has outlined two marketing channels to accelerate its commercial plans, which include a sale and leaseback partnership (three-year term) for ambulatory NanoActivators with urology clinics.

Our revised valuation of MagForce is €260.6m or €9.4/share vs €269.1m or €9.7/share previously, based on a risk-adjusted NPV analysis. Following updated guidance, we have adjusted our near-term sales forecasts in Germany, slightly reduced our peak sales forecasts ex Germany and adjusted the timing of the US sales launch. We have rolled forward our model and updated for FX and reported net debt of €22.0m at 30 June 2020 (from €16.5m at 31 December 2019).

We have made a number of changes to our forecasts and valuation:

MagForce AG is the parent company of the MagForce group, which consists of seven companies: MagForce AG, MagForce USA, MagForce USA Holding GmbH, MagForce Ventures GmbH, MT MedTech Engineering GmbH, and the wholly owned regional sales subsidiaries MagForce sp. z o.o. in Poland and MagForce Nanomedicine S.L. in Spain. The company is not required to report consolidated financial statements under HGB accounting standards. As MagForce USA is not currently consolidated as per company reporting, we do not consolidate its contributions into our financial forecasts. However, we do include it in our valuation. We expect that the company will start consolidating its statements as MagForce USA becomes a profitable operation.

Revenues from sales increased significantly during H120 to €384k (H119: €26k), reflecting the strong uptick in commercial treatments. A total of 17 patients were treated in H120 (11 in Germany and six in Poland). MagForce booked €212k relating to NanoTherm treatments in Germany and €173k relating to the delivery of NanoTherm and catheters to its subsidiaries, which can be considered primarily as treatment revenues ex Germany. Other operating income of €332k was flat year-on-year (H119: €329k) and mainly related to recharges of €206k to its subsidiaries for management and administrative services. MagForce also capitalised €196k relating to a one-off expense for preparing product files in accordance with the EMA’s new Medical Device Regulation. Cost of materials increased to €286k (H119: €194k) due to an increase in raw materials, supplies and purchased goods, and personnel expenses increased to €2.1m (H119: €1.8m). The operating loss declined slightly to €3.4m in H120 (H119: loss of €3.6m), although the higher net financial expense led to a flat reported net loss of €4.9m in H120 (H119: €4.9m loss).

We expect MagForce to report operating losses until sales pick up after reimbursement has been fully resolved and patient centre growth continues ex Germany. After this we forecast sustainable profitability from 2022 with operating margins of c 50%. If MagForce USA is consolidated, we believe these margins would improve to c 60%, as would the top line. We have revised our sales forecasts downwards in 2021 to reflect management’s new guidance, and brought down COGS and other operating expenses to be in line with H120, Exhibit 3. Management now expects a threefold increase in patient treatments during 2021, albeit from a lower base. However, this is lower than our previous estimates as we now only expect two operational treatment centres ex Germany by end-2021 (vs four previously). Management expects the gross margin to improve as treatment sales ramp up due to economies of scale. We have also increased forecast capex due to the expected increase in device manufacture ahead of launch in the US and additional European countries.

MagForce reported cash and cash equivalents of €1.7m at 30 June 2020. In January, the second €3.0m tranche of a €35.0m loan facility with the European Investment Bank (EIB) was disbursed, and in June the first €2.5m tranche of a €15.0m convertible bond facility with Yorkville Advisors Global LP was drawn. Both will facilitate the continued commercial expansion plans. We believe an additional €25m will be required to fund operations until profitability in 2022. We expect that this will be drawn from the remaining €12.5m zero interest bearing convertible notes with Yorkville or the remaining €22m of the EIB loan facility. In H120, interest expenses on the EIB loan amounted to €774k (liability of €15.2m outstanding) and interest repayments of €208k were made on the €5m convertible bond issued in March 2017. At 30 June 2020, MagForce had net debt of €22.0m.

MagForce USA had cash of €2.0m at 30 June 2020, which will ensure funding for the Stage 2 US prostate cancer trial and preparations for commercialisation in H221. MagForce AG’s holding in MagForce USA is 65.3%.