Oxford Immunotec — Not your usual diagnostics company

Oxford Immunotec — Not your usual diagnostics company

Oxford Immunotec is in transition. Having passed the stage before which most diagnostic companies stall – their first approved test – it has recently restructured, with the $170m sale of its US diagnostic services business to Quest. Its diagnostic products are now the focus, while the rate of growth of its first (T-SPOT.TB) test, having reached one million tests per quarter, may moderate. Once the financial and operational dust clears on the divestment, the future direction and time to profitability for Oxford Immunotec is likely to be dependent on the use of its c $200m net cash.

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Oxford Immunotec

Not your usual diagnostics company

Pharma & biotech

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30 November 2018

Price

$15.2

Market cap

$401m

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Share details

Code

OXFD

Listing

NASDAQ

Shares in issue

26.4m

Business description

Oxford Immunotec is a global diagnostics company focused on developing and commercialising proprietary tests for the management of underserved immune-regulated conditions. The company’s T-SPOT.TB test has been approved for sale in over 50 countries, including the US, where it has received pre-market approval from the FDA, and in Europe, where it is CE marked, as well as Japan and China.

Bull

Proven diagnostic development and commercialisation capability.

Divestment of services business will bring $170m in cash and a seven-year T-SPOT.TB supply agreement.

Once simplified, value-generating options like technology and product acquisitions could be a focus.

Bear

Suspension of revenue guidance and opacity on the impact of the transaction.

Slowing revenue growth in the largest product (T-SPOT.TB).

US T-SPOT.TB revenue growth now controlled by Quest.

Analyst

Andy Smith

+44 (0)20 3077 5700

Oxford Immunotec is in transition. Having passed the stage before which most diagnostic companies stall – their first approved test – it has recently restructured, with the $170m sale of its US diagnostic services business to Quest. Its diagnostic products are now the focus, while the rate of growth of its first (T-SPOT.TB) test, having reached one million tests per quarter, may moderate. Once the financial and operational dust clears on the divestment, the future direction and time to profitability for Oxford Immunotec is likely to be dependent on the use of its c $200m net cash.

Q318 results

Oxford Immunotec’s total Q3 GAAP revenues grew 7% to $16.1m, of which product sales were $15.1m, up 12% (almost entirely TB). Non-GAAP TB revenues rose 15% y-o-y to $27.9m, reflecting two facets – the inclusion of its services business (recently sold but reclassified under US GAAP as discontinued in Q3) and the growth of its T-SPOT.TB test revenues. The sale of the lower-margin services business lifted Q318 GAAP gross margin to 71.5% (from 65% in Q317). A c $11m y-o-y reduction ($0.9m excluding one-off items) in operating expenses to $16.5m included $2.4m in transaction costs. Going forward, headcount has almost halved and the kit transfer pricing dynamic has changed, both as a result of the transaction. Reported cash at end-Q318 was $70.2m (vs $90.3m end-Q317) but is indicated to be c $200m following the services business sale. While $33m of the proceeds was used to pay down debt, the transaction and related cash inflow will improve profitability, facilitate growth in the US and provide strategic flexibility.

That second product is always harder than the first

A small UK diagnostics company with an approved revenue-generating product in the US and EU and its first positive adjusted-EBITDA quarter is rare when most VCs only whisper about their zombie diagnostics companies. The T-SPOT.TB test has a long heritage of growth, which at this stage may logically be expected to moderate. This reinforces the need for that next leg of growth, and the acquisition of new diagnostic products and technologies may be a component of that growth.

Valuation: Opacity probably weighs on valuation

The utilisation of all of its tax losses by the transaction means that the company emerging from the simplification will be very different to the one that entered it. The suspension of its revenue guidance has also resulted in opacity on the investment case and this is probably reflected in being valued at only twice net cash.

Consensus estimates

Year
end

Revenue
($m)

PBT
($m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

86.1

(26.1)

(1.00)

N/A

N/A

N/A

12/17

103.1

(31.1)

(2.19)

N/A

N/A

N/A

Source: Company data, Thomson Reuters I/B/E/S estimates. Note: 2018/19 guidance currently suspended; consensus not restated to reflect the services business divestment.

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. 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 Edison analyst 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 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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 Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Late-stage clinical trial readouts in 2019 will be critical to Transgene’s immunoncology (IO) aspirations and, if positive, could further its position in the sector; notably efficacy data expected from the Phase II TG4010 (+nivolumab +chemotherapy) trial in first line non-small cell lung cancer (NSCLC) and the Phase III Pexa-Vec (+sorafenib) trial in first line hepatocellular carcinoma (HCC) (trial conducted by partner SillaJen). Next-generation platforms Invir.IO and myvac continue to progress, with assets from both expected to enter the clinic in 2019. Additional financing is needed to ensure a cash reach beyond September 2019. We value Transgene at €4.68 per share (€290m).

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