Oxford BioMedica — Update 2 December 2016

Healthcare

Oxford BioMedica

Orchard deal adds to growing revenue stream

Company update

Pharma & biotech

2 December 2016

Price	3.50p
Market cap	£108m

Net cash (£m) at end June 2016 (excl. £11.5m equity raise in September 2016)		11.9

Shares in issue	3,088.0m
Free float	83%
Code	OXB

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(7.9)	(15.7)	(41.8)
Rel (local)	(6.0)	(15.5)	(44.4)

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7.8p

3.0p

Business description

Oxford BioMedica has a leading position in gene-based therapy. The lenti-vector technology is wide ranging and underpins much of the development pipeline, notably OXB-102, OXB-202 and OXB-302. OXB’s manufacturing expertise, is gaining valuable commercial traction.

Next events

CTL019 NDA in pALL	Q117
FY16 results	Q117
Further partnership deals	2016/17
Licensing deals/spin-outs	2017/18

Analysts

Dr Susie Jana	+44 (0) 20 3077 5700
Daniel Wilkinson	+44 (0)20 3077 5734

healthcare@edisongroup.com

Edison profile page

Oxford BioMedica is a research client of Edison Investment Research Limited

Oxford BioMedica’s (OXB’s) recently announced strategic alliance with Orchard Therapeutics further underpins the value the wider cell therapy market sees in its in-house capabilities. OXB will develop and supply lentiviral vectors to Orchard for use in primary immune deficiency and inherited metabolic disorders. OXB has received a 1.95% equity stake in Orchard and will receive royalties on future of products covered by the deal. Our valuation for OXB remains unchanged at £173m (6.2p/share).

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
12/14	13.6	(10.4)	(0.41)	0.0	N/A	N/A
12/15	15.9	(16.6)	(0.49)	0.0	N/A	N/A
12/16e	27.5	(13.6)	(0.34)	0.0	N/A	N/A
12/17e	33.6	(8.7)	(0.15)	0.0	N/A	N/A

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

Orchard Therapeutics deal adds to growing list

The strategic collaboration with Orchard Therapeutics adds to OXB’s growing list of collaborators, which look to capitalise on OXB’s technical knowhow and manufacturing facilities. It will focus on two initial rare indications, adenosine deaminase severe combined immunodeficiency (ADA-SCID) and mucopolysaccharidosis-IIIA (Sanfilippo Syndrome type A) along with undisclosed follow-on indications. OXB will provide process development services and manufacture clinical and commercial GMP-grade vectors for Orchard, which will manufacture the ex-vivo gene therapy products. In addition to the initial 1.95% equity stake, OXB could receive a further 1.95% in equity if it meets defined undisclosed performance related targets.

CTL019 at ASH 2016: Data will determine next steps

Upcoming presentations at ASH 2016 (3-6 December) by Novartis on CTL019 should give further insight into the efficacy and safety of product (OXB’s lentiviral technology is an integral component). After further setbacks for Juno Therapeutics CD19 programme (after two patient deaths), Novartis is well positioned to race Kite Pharma to market. Key to this will be its data on safety and duration of response, two closely watched metrics of all CAR-T therapies. OXB’s lentiviral technology remains vital to Novartis’s CTL019 product and any ability to capture a larger share of the diffuse large B-cell lymphoma (DLBCL) and paediatric acute lymphoblastic lymphoma (ALL) markets will result in increased royalties and manufacturing revenue for OXB.

Valuation: Manufacturing and pipeline at £173m

We retain our valuation of £173m or 6.2p/share. Our rNPV model consists of the clinical-stage pipeline, coupled with a DCF value for OXB’s manufacturing and IP income net of corporate costs and 2015 net debt. In the near term, the valuation is underpinned by manufacturing deals. Furthermore, regulatory approval of Novartis’s CTL019, with filing anticipated in 2017, could see significant further increase in demand for OXB vectors.

OXB: Gene and cell therapy expertise

OXB is a leading player in gene- and cell-based medicines as shown by the growing number of collaborations. Its expertise with the various aspects of developing and commercialising lentiviral products continues to be recognised, as does the strength of its intellectual property (IP) relating to gene and cell therapy drug development. This is highlighted by deals this year with Orchard Therapeutics, Green Cross LabCell and Immune Design. OXB’s commercial production of cell therapies is expected to continue to be a main source of revenue in the near term and should lead to further contracts.

We forecast manufacturing income streams through to 2029. In the main, these are based on the Novartis contract being extended (assuming CTL019 is approved). The partnership with Novartis is focused around CTL019 (OXB is the sole supplier of the lentiviral vector for the CTL019 clinical study) and an undisclosed CAR-T programme is still set to provide up to $76m of performance-based milestones. A regulatory approval for CTL019 could see production rates of the lentiviral vector used in CTL019 increase, which we believe could add significantly to OXB’s revenue stream via royalty payments.

An internal review in April 2016 led to the prioritisation of three internally developed pipeline assets: OXB-102 (Parkinson’s disease – Phase I/II), OXB-202 (corneal graft rejection – Phase I/II) and OXB-302 (cancer, multiple types – preclinical), which could deliver the best potential economic returns. The goal of each is to be advanced to at least proof of concept in humans via out-licensing or through formation of externally funded SPVs. OXB will look to obtain value through upfront payments, equity stakes or developmental milestones and royalty on sales. Product candidates that fall outside the priority programme (OXB-201 for wet age related macular degeneration and OXB-301 for multiple cancers) will only be progressed once suitable opportunities like partnering enable reduced investment from OXB. The group will continue to invest in earlier-stage gene and cell therapy concepts (eg in ocular, CNS and respiratory indication) with the aim of identifying new candidates for further development via out-licensing or spin-outs.

Nearer term, OXB’s outlook and our sum-of-the-parts valuation are highly geared to the value from the manufacturing, IP licence and collaboration revenue streams, notably the fate and fortune of CTL019 (for multiple haematological malignancies including paediatric ALL and diffuse large B-cell lymphoma). Novartis will file a biologics licence application in early 2017 and OXB will receive royalties on product sales.

Sensitivities

OXB is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks and financing and commercial risks. A key longer-term sensitivity for OXB relates to it crystallising value from the early-stage pipeline. Both clinical development and partnering risks remain and we have limited visibility on the terms and timing of any potential deal(s). Furthermore, the company has invested around £26m in establishing a GMP facility (and the associated infrastructure) to manufacture cell- and gene-therapy products at commercial scale. The rationale is sound, with the potential to use spare capacity for third-party production offering the prospect of an additional revenue stream. OXB is highly exposed to any potential delay or cancellation of Novartis’s CTL-019; this would entail incurring operating costs (estimated at greater £2m pa) until the surplus capacity was utilised.

Valuation

Our sum-of-the-parts valuation consists of an rNPV model of the R&D pipeline, coupled with a simple DCF valuation of the projected manufacturing revenues and our forecast licence income and IP royalties and milestones (Exhibit 1). Our valuation of £173m or 6.2p/share is based on a number of assumptions, which are highlighted in the table below. We have applied a top-down analysis of the Parkinson’s disease and corneal graft rejection markets, which form the basis of our sales projections for clinical stage, priority assets OXB-102 and OXB-202, respectively. Due to the current lack of clarity on potential future revenue from the Orchard Therapeutics collaboration, we have not adjusted our valuation, as such any income generated from this deal will provide upside.

Exhibit 1: OXB sum-of-the-parts valuation

Product(s)	Indication	Partner	Status	Probability of success	Estimated launch year	Estimated maximum royalty or margin	Estimated peak sales ($m)	NPV (£m)	rNPV (£m)	rNPV/ share (p)
OXB-102	Parkinson’s disease		Phase I/II	20%	2024	15%	1,048.1	119.0	23.8	0.84
OXB-202	Corneal graft rejection		Phase I/II	20%	2026	15%	381.3	33.5	6.7	0.24
OXB-201	Wet AMD		Phase I/II	20%	2026	15%	337.5	44.4	8.9	0.31
OXB-301	Cancer (multiple)		Phase I/II	20%	2024	15%	360.0	28.1	5.6	0.20
SAR422459 (StarGen)*	Stargardt disease	Sanofi	Phase IIa	25%	2021	7%	337.5	29.3	7.3	0.26
SAR421869 (UshStat)*	Usher syndrome type 1B	Sanofi	Phase I/II	20%	2023	7%	45.0	3.8	0.8	0.03
Manufacturing (including CTL019)		Various		100%		40% operating margin	75.4	103.5	103.5	3.66
Licence income & IP milestones		Various		100%		100% operating margin		34.8	34.8	1.23
Less net debt								17.9	17.9	0.52
Total								378.5	173.4	6.24

Source: Edison Investment Research. Note: *Sanofi has fully licensed these products – we estimate 7% royalty rate on forecast product sales. rNPV = risk-adjusted NPV.

Our DCF model for the manufacturing income streams forecasts the lentiviral production revenues (OXB solution) through to 2029. We separately model milestone and licence income to reflect the value of Novartis CTL019 (potential incoming royalty stream from CTL019 should the Novartis contract be extended; assuming CTL019 is approved) and other deals, eg Immune Design and Green Cross LabCell. These are summed and discounted at 10%, in line with other revenue generating units under Edison coverage. We estimate that Novartis will launch CTL019 for DLBCL and paediatric ALL mid- to late 2017, with combined royalties expected in 2017 of £978k and peak combined royalties in 2023 of £12.4m. We assume OXB will be due a 1% royalty on sales for both indications. Further information on our valuation methodology can be found in our recently published outlook note.

Financials

OXB reported H116 gross income (the aggregate of revenues and other operating income) of £14.0m, an increase of 141% from £5.8m in H115, driven by higher bioprocessing and process development income due mainly to process development activities for Novartis (CTL019). R&D collaboration revenues (licence, milestone and grant income) increased slightly to £1.5m (£1.4m in H115). R&D and bioprocessing costs increased to £16.1m (£11.7m in H115), and we expect a further uplift in these expenses in 2016 to £20.0m; however, from 2017 we forecast a significant reduction reflecting the near-term strategy to out-license or spin out the product portfolio (£16.5m in 2017 and £14.5m in 2018). We forecast a small loss at the EBITDA level in 2017 and a profit of £3.6m in 2018. For a full breakdown of OXB’s financials please see our recently published outlook note.

Exhibit 1: Financial summary

	£'000s	2014	2015	2016e	2017e	2018e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		13,618	15,909	27,500	33,600	38,190
Cost of Sales		(4,416)	(5,839)	(12,200)	(15,240)	(17,076)
Gross Profit		9,202	10,070	15,300	18,360	21,114
R&D		(16,986)	(20,274)	(20,000)	(16,500)	(14,500)
Other operating income		1,128	2,862	2,000	1,000	1,000
EBITDA		(9,514)	(12,456)	(6,760)	(995)	3,556
Depreciation		(703)	(1,264)	(2,592)	(3,193)	(3,176)
Operating profit (before GW and except)		(10,217)	(13,720)	(9,353)	(4,188)	380
Amortisation		(396)	(363)	(291)	(242)	(202)
Exceptionals		0	0	0	0	0
Operating profit		(10,613)	(14,083)	(9,643)	(4,430)	178
Net Interest		(185)	(2,899)	(4,266)	(4,468)	(4,679)
Other		0	0	0	0	0
Profit Before Tax (norm)		(10,402)	(16,619)	(13,619)	(8,656)	(4,299)
Profit Before Tax (reported)		(10,798)	(16,982)	(13,909)	(8,898)	(4,501)
Tax		2,137	3,963	4,000	4,000	4,000
Profit After Tax (norm)		(8,265)	(12,656)	(9,619)	(4,656)	(299)
Profit After Tax (reported)		(8,661)	(13,019)	(9,909)	(4,898)	(501)

Average Number of Shares Outstanding (m)		2,019	2,574	2,831	3,087	3,087
EPS - normalised (p)		(0.41)	(0.49)	(0.34)	(0.15)	(0.01)
EPS - reported (p)		(0.43)	(0.51)	(0.35)	(0.16)	(0.02)
Dividend per share (p)		0.00	0.00	0.00	0.00	0.00

Gross Margin (%)		67.6%	63.3%	55.6%	54.6%	55.3%
EBITDA Margin (%)		(69.9%)	(78.3%)	(24.6%)	(3.0%)	9.3%
Operating Margin (before GW and except) (%)		(75.0%)	(86.2%)	(34.0%)	(12.5%)	1.0%

BALANCE SHEET
Fixed Assets		11,050	26,139	30,256	27,821	25,443
Intangible Assets		2,106	1,743	1,453	1,210	1,009
Tangible Assets		8,944	24,396	28,804	26,610	24,434
Current Assets		22,755	25,712	31,725	31,854	35,227
Stocks		1,407	2,706	4,178	5,219	5,848
Debtors		5,153	10,930	6,986	7,545	8,677
Cash		14,195	9,355	17,276	15,805	17,418
Other		2,000	2,721	3,284	3,284	3,284
Current Liabilities		(9,231)	(13,169)	(14,423)	(15,669)	(15,757)
Creditors		(6,304)	(9,286)	(9,192)	(10,438)	(10,526)
Provisions		0	(838)	(838)	(838)	(838)
Deferred income		(2,927)	(3,045)	(4,393)	(4,393)	(4,393)
Long Term Liabilities		(1,535)	(27,788)	(29,072)	(30,417)	(31,825)
Long term borrowings		(1,000)	(27,255)	(28,539)	(29,884)	(31,292)
Other long term liabilities		(535)	(533)	(533)	(533)	(533)
Net Assets		23,039	10,894	18,486	13,588	13,087

CASH FLOW
Operating Cash Flow		(7,431)	(14,871)	(3,035)	(1,348)	1,884
Net Interest		(238)	(1,494)	(2,997)	(3,138)	(3,286)
Tax		1,637	3,247	3,437	4,000	4,000
Capex		(5,577)	(16,716)	(7,000)	(1,000)	(1,000)
Acquisitions/disposals		0	0	0	0	0
Financing		22,582	144	17,501	0	0
Dividends		0	0	0	0	0
Other		53	38	15	15	15
Net Cash Flow		11,026	(29,652)	7,921	(1,471)	1,613
Opening net debt/(cash)		(2,169)	(13,195)	17,900	11,263	14,079
HP finance leases initiated		0	0	0	0	0
Other		0	(1,443)	(1,284)	(1,345)	(1,409)
Closing net debt/(cash)		(13,195)	17,900	11,263	14,079	13,875

Source: Oxford BioMedica, Edison Investment Research.

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