Oryzon Genomics — Update 20 May 2016

Oryzon Genomics (BME: ORY)

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Research: Healthcare

Oryzon Genomics — Update 20 May 2016

Oryzon Genomics

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Healthcare

Oryzon Genomics

Second product enters Phase I

Q116 results

Pharma & biotech

20 May 2016

Price

€2.90

Market cap

€83m

Net cash (€m) at end of Q116

10.9

Shares in issue

28.47m

Free float

30%

Code

ORY

Primary exchange

Madrid Stock Exchange

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.3)

(10.0)

N/A

Rel (local)

(7.3)

(19.3)

N/A

52-week high/low

€4.60

€2.77

Business description

Oryzon is a Spanish biotechnology company focused on developing novel epigenetic compounds. Lead compound ORY-1001 is partnered with Roche and is undergoing a Phase I/IIa study for acute leukaemia. ORY-2001 has potential for Alzheimer’s disease and has entered Phase I.

Next events

ORY-1001 Phase I/IIa results

Dec 2016 (ASH)

ORY-2001 Phase I results

H117

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Juan Pedro Serrate

+44 (0) 20 3681 2534

Oryzon Genomics is a research client of Edison Investment Research Limited

Q116 results and the corporate update on 12 May showed that Oryzon is on track with its both clinical stage assets. Preliminary efficacy data from Part 2 Phase I/IIa study with ORY-1001 for acute leukaemia is expected to be announced at ASH in December 2016. Oryzon’s second product, ORY-2001, targets Alzheimer’s disease (AD) with preclinical data potentially indicating a disease-modifying effect. A Phase I trial started in Q116 and we expect data in early 2017. Our valuation is largely unchanged at €160m.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

15.5

11.3

0.48

0.0

N/A

N/A

12/15

7.2

(0.1)

(0.01)

0.0

N/A

N/A

12/16e

3.0

(3.6)

(0.11)

0.0

N/A

N/A

12/17e

2.2

(4.7)

(0.17)

0.0

N/A

N/A

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

New debt boosts cash position

Oryzon reported its Q116 results on 12 May. Operating costs amounted to €1.8m (of which R&D expenses were €1.2m), which largely met our expectations. The cash position was significantly boosted (by €10.5m in new debt) to €29.0m and the additional funds will mainly be used to support existing operations. Oryzon has a history of efficient use of available public grants, which could further provide non-dilutive financing. In total, during the past 12 months Oryzon has managed to attract €27m in new funding from various sources.

Phase I/IIa ongoing to plan; ORY-2001 enters Phase I

The main event for Oryzon this year is the preliminary efficacy data from Part 2 of the ongoing Phase I/IIa study with lead product ORY-1001 in different subsets of acute leukaemia patients. The results are expected to be presented at the American Society of Hematology (ASH) annual meeting on 3-6 December 2016. ORY-1001 is a first-in-class inhibitor of lysine specific demethylase 1 (LSD1), partnered with Roche, and can be best described as a second-generation epigenetic therapeutic agent with increased specificity and novel target compared to a handful of approved first generation HDAC inhibitors. A second product, ORY-2001, entered Phase I trial in Q116 with healthy volunteers to establish safety/tolerability. Phase II with AD patients could start in H117. ORY-2001 has a dual activity, inhibiting LSD1 and monoamine oxidase B (MAO B), so represents a refreshingly novel mode of action in AD research.

Valuation: Largely unchanged at €160m, €5.6/share

Our valuation of Oryzon is largely unchanged at €160m or €5.6m/share with the only changes being the updated net cash position and rolling our model further in time, which offsets the decrease in net cash. The main catalyst for the stock this year is the expected preliminary ORY-1001 efficacy results from the ongoing Phase I/IIa trial. Early next year, if positive, safety and tolerability data read-out from Phase I with ORY-2001 will be a major de-risking event.

Financials

In Q116 Oryzon reported income of €957k to account for the capitalization of the development costs. Oryzon follows Spanish GAAP and research costs are expensed, while development costs can be capitalised. This is achieved by recognising the costs as revenue in the P&L, cash outflow from investing activities and a subsequent increase in intangible assets. The remaining income of €302k consists of a reimbursement payment from Roche according to the R&D collaboration agreement separate to the ORY-1001 licensing deal, and recognition of deferred income after a milestone payment of $4m from Roche in July 2015.

According to the news this week, Oryzon and Roche will extend the R&D collaboration agreement by one more year. The goal of the original agreement, which ended in April this year, was to further explore the potential of ORY-1001 in oncology and haematology following the licensing agreement for ORY-1001. We believe the extension shows a fruitful relationship between the companies, as four new patents were filed based on the discoveries. The extension means that Oryzon will continue to receive R&D cost reimbursement at least until the end of the extension in March 2017. Oryzon received reimbursement in the amount of €776k for the period 1 January to 30 September 2015. The scale of the new agreement in relation to the original is not clear yet, therefore we estimate a more conservative €500k in reimbursed costs for Oryzon in 2016, which is the main cause behind our somewhat increased 2016 revenue estimate, while the bottom line was mostly impacted by the increased estimates of interest expenses after inclusion of the new debt.

Exhibit 1: Changes to our forecasts

€m

2015

2016e

2016e

 

2017e

2017e

 

 

Actual

Old

New

% Chng

Old

New

% Chng

Revenue

7.185

2.755

3.047

+11%

2.077

2.170

+4%

Operating Profit reported

(0.233)

(3.921)

(4.022)

N/M

(4.732)

(5.052)

N/M

Profit Before Tax reported

(0.955)

(3.641)

(4.391)

N/M

(4.510)

(5.574)

N/M

EPS reported (€)

(0.04)

(0.13)

(0.14)

N/M

(0.16)

(0.20)

N/M

Source: Edison Investment Research

At the end of Q116, Oryzon had cash and short-term liquid investments of €29.0m. In May 2016, Oryzon raised new debt of €10.5m in long term loans at current market rates (between 2% and 3%). In total, during the past 12 months Oryzon has managed to attract €27m in new funding from various sources.

Valuation

We value Oryzon at €160m or €5.6/share, based on risk-adjusted NPV analysis, which includes €10.9m net cash at end Q116 and uses a 12.5% discount rate. The only changes to our valuation are the updated net cash position and rolling out model by one quarter, which offsets the decrease in net cash after the new debt. We use a 12.5% discount rate with a 15% and 12% probability for reaching the market for ORY-1001 and ORY-2001 respectively.

Exhibit 2: Oryzon rNPV valuation

Product

Indication

Launch

Peak sales (US$m)

Value (€m)

Probability

rNPV (€m)

NPV/Share (€/share)

ORY-1001

AML

2022

900

236.6

15%

42.6

1.5

ORY-1001

SCLC

2025

630*

111.8

8%

15.8

0.6

ORY-2001

AD

2026

4,500*

743.7

12%

90.5

3.2

Net cash

10.9

100%

10.9

0.4

Valuation

 

 

 

1,103.0

 

159.7

5.6

Source: Edison Investment Research. Note: *Peak sales are rounded to the nearest US$100m, shown in US$.

Currently our valuation is based on clinical stage compounds and one preclinical indication (Exhibit 1). After completion of the ongoing Phase I/IIa, Roche will be solely responsible for further clinical development and commercialisation of ORY-1001 and could expand beyond acute leukaemia. We assume small cell lung cancer (SCLC) as the most likely indication (see our initiation report for more details). Notably, Oryzon participated at the American Association for Cancer Research (AACR) Annual meeting in New Orleans in April. Roche and Oryzon jointly presented data describing gene expression profile that predict responses to ORY-1001 in SCLC cell lines. This was an early stage in vitro study, but indicates Roche’s active interest in SCLC indication, in our view.

ORY-2001 is still unpartnered, yet Oryzon’s strategy is to develop the asset until clinical proof-of-concept stage and then seek to out-license it. We assumed a licensing deal for this asset as well in our model.


Exhibit 3: Financial summary

EUR'000s

2012

2013

2014

2015

2016e

2017e

December

Local GAAP

Local GAAP

Local GAAP

Local GAAP

Local GAAP

Local GAAP

PROFIT & LOSS

Revenue

 

 

4,353

2,360

15,536

7,185

3,047

2,170

Cost of Sales

0

0

0

0

0

0

Gross Profit

4,353

2,360

15,536

7,185

3,047

2,170

Research and development

(876)

(873)

(1,108)

(3,191)

(2,874)

(2,949)

EBITDA

 

 

856

(94)

11,659

688

(3,110)

(4,085)

Operating Profit (before amort. and except.)

559

(370)

11,398

448

(3,228)

(4,203)

Intangible Amortisation

(455)

(657)

(657)

(657)

(794)

(849)

Exceptionals

0

(186)

(4,617)

(24)

0

0

Other

0

0

0

0

0

0

Operating Profit

104

(1,213)

6,124

(233)

(4,022)

(5,052)

Exceptionals

(220)

0

667

(169)

0

0

Net Interest

(582)

(672)

(52)

(553)

(368)

(522)

Profit Before Tax (norm)

 

 

(23)

(1,042)

11,346

(105)

(3,597)

(4,725)

Profit Before Tax (reported)

 

 

(698)

(1,885)

6,739

(955)

(4,391)

(5,574)

Tax

90

89

(88)

(37)

338

0

Profit After Tax (norm)

67

(953)

11,258

(142)

(3,259)

(4,725)

Profit After Tax (reported)

(608)

(1,796)

6,651

(992)

(4,053)

(5,574)

Average Number of Shares Outstanding (m)

23.0

23.0

23.3

24.5

28.5

28.5

EPS - normalised (EUR)

 

 

0.00

(0.04)

0.48

(0.01)

(0.11)

(0.17)

EPS - normalised and fully diluted (EUR)

 

0.00

(0.04)

0.48

(0.01)

(0.11)

(0.17)

EPS - (reported) (EUR)

 

 

(0.03)

(0.08)

0.29

(0.04)

(0.14)

(0.20)

Dividend per share (EUR)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

19.7

N/A

75.0

9.6

N/A

N/A

Operating Margin (before GW and except.) (%)

12.8

N/A

73.4

6.2

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

18,765

20,128

16,059

18,050

19,728

20,931

Intangible Assets

15,062

15,825

12,928

15,188

16,646

17,967

Tangible Assets

1,485

1,159

981

854

736

618

Investments

2,217

3,145

2,150

2,008

2,346

2,346

Current Assets

 

 

3,808

2,851

9,999

22,681

24,582

16,399

Stocks

19

2

9

4

10

7

Debtors

977

663

704

940

769

855

Cash

2,302

2,033

3,633

19,467

18,561

10,296

Other

510

153

5,654

2,270

5,242

5,242

Current Liabilities

 

 

(2,283)

(2,724)

(3,969)

(5,296)

(3,567)

(3,752)

Creditors

(765)

(1,005)

(1,299)

(2,401)

(932)

(1,487)

Short term borrowings

(1,519)

(1,719)

(2,670)

(2,895)

(2,635)

(2,265)

Long Term Liabilities

 

 

(9,949)

(11,251)

(8,196)

(7,841)

(17,202)

(15,610)

Long term borrowings

(7,963)

(9,117)

(6,420)

(6,177)

(15,237)

(14,167)

Other long term liabilities

(1,986)

(2,134)

(1,776)

(1,664)

(1,965)

(1,443)

Net Assets

 

 

10,341

9,004

13,893

27,594

23,541

17,967

CASH FLOW

Operating Cash Flow

 

 

1,420

(113)

12,178

1,076

(7,528)

(4,135)

Net Interest

(582)

(672)

(52)

(553)

(368)

(522)

Tax

0

0

0

0

338

0

Capex

0

0

0

0

0

0

Acquisitions/disposals

107

(677)

798

0

0

0

Financing

0

0

0

14,725

0

0

Other

(8,125)

(161)

(9,579)

605

(2,147)

(2,170)

Dividends

0

0

0

0

0

0

Net Cash Flow

(7,180)

(1,623)

3,345

15,853

(9,706)

(6,826)

Opening net debt/(cash)

 

 

0

7,180

8,803

5,458

(10,395)

(689)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

7,180

8,803

5,458

(10,395)

(689)

6,136

Source: Edison Investment Research, Oryzon Genomics. Note: Oryzon reports in Spanish GAAP. *Represents cash outflows related to development costs that were capitalised. **Term deposits classed as other current assets.

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