MagForce — Steady progress

MagForce has an approved nanotechnology-based medical device treatment for brain cancer. MagForce’s NanoTherm therapy is designed to directly affect the tumour from within, while sparing surrounding healthy tissue. Magnetic nanoparticles are directly injected into a tumour and are then heated in the presence of an external magnetic field generated by specialist equipment (NanoActivator). This can either sensitise a solid tumour for additional treatment, such as chemotherapy or radiotherapy, or thermally destroy it. The product is approved in Europe for the treatment of brain tumours, where management is working to drive uptake and acceptance of this therapy. NanoTherm therapy has the European CE mark (in 27 countries), so commercial patients can be treated at any of the centres. In addition, management is actively pursuing development in the US, with a clear path to market now established for prostate cancer, which could launch in 2018 and be a significant contributor to revenues in the longer term.

Our valuation is €225m or €8.8 per MagForce AG share, based on a risk-adjusted NPV analysis; this takes into account €3.4m net cash (€5m March convertible bond is netted out) held in MagForce AG at the end of June 2016, in addition to estimated net cash held in MagForce USA (which is not specifically disclosed in the financial statements – estimated at $11m [€10m]). We present a base case in both the EU and the US where the focus is specifically on GBM and prostate cancer, respectively. The breakdown of our rNPV valuation, which uses a 12.5% discount rate, is shown in Exhibit 2.

MagForce is subject to the usual risks associated with product development in healthcare, including clinical trial delays or failures, regulatory risks, competitor successes, partnering setbacks, financing and commercial risks. In the near term, defining the exact scope of the trials in the US, obtaining FDA approval for the trial design and starting trials will be critical. We expect updates on this process in coming months, with the pivotal prostate cancer trial expected to start by mid-2017. In addition, progress with the ongoing post-marketing GBM study in Europe and delivering on initial commercial revenues will help to increase confidence in management’s targets.

MagForce AG reported €3.4m cash at the end of June 2016, which combined with a €5m convertible bond (issued in March 2017) and a further €1.1m (shown as debt for illustrative purposes) should be sufficient to fund operations through to the end of 2017, including the redistribution of three German NanoActivators across Europe. In 2015, MagForce USA raised $15m (1.5m shares at $10/share) in a private placement; the leading investor was Mithril Capital Management. Following this fund-raise, MagForce AG owns 76.9% of MagForce USA. This cash should be sufficient to conduct the planned clinical study in prostate cancer. We note that as per the company accounts we do not consolidate the US into our financial model; however, we do include our assumed R&D, S&M and potential future sales revenue of MagForce USA in our valuation. Outstanding warrants of $15m (1.5m shares) held by investors would dilute MagForce AG’s holding in MagForce USA to 62.5% if exercised. Under the five-year strategic plan established in late 2013, MagForce AG (including Magforce USA) continues to target annual revenues of €100-150m by 2019. We are more cautious, assuming a slower initial NanoTherm sales ramp, and currently project that MagForce can achieve this target three years later.

MagForce installed the first NanoActivator in the US in Washington and a second NanoActivator in Texas in readiness for the planned start of the registration clinical trial in prostate cancer. Prostate cancer in the US presents a significant market opportunity, more so than GBM, and strategically makes sense as a first US indication, in our view. The start of the prostate cancer clinical trial (the focal thermal ablation study) with MagForce’s NanoTherm therapy will be dependent on securing IDE approval, which is anticipated in mid-2017 following filing in May 2015. Once approval is granted, we believe the trial should be able to start shortly thereafter. If the IDE approval is granted and the trial starts in a timely manner, we believe first prostate cancer sales are possible from 2018. On this basis, we expect at least one further installation in the near term and further installations of both the large and small NanoActivators in the future.

In November 2015, MagForce announced that the first NanoActivator had been installed in the US ahead of the start of the planned prostate cancer clinical trial. This NanoActivator is one of four machines that MagForce AG sold to its affiliate MagForce USA. The first machine has been installed in Seattle, Washington, and a second machine was recently installed at CHRISTUS Santa Rosa Hospital in San Antonio, Texas where Ian M Thompson Jr, MD, the co-principal investigator, is based. The clinical site incorporates a clinical office and the NanoActivator treatment centre. We anticipate at least one further machine will be installed in the US in the near term, taking the installed base to three for the purposes of running clinical trials.

These NanoActivators are similar in size and design to the machines currently installed in Germany for the treatment of brain cancer, but have been modified to conform to US market standards. More importantly, the machines can also be used for the treatment of prostate cancer, to prove the concept of NanoTherm therapy in treating this disease. We assume that the treatment of brain tumours will not be pursued in the US until NanoTherm for prostate cancer is commercially launched.

MagForce USA is continuing to develop pNanoActivators (ambulatory for outpatient care) for prostate cancer. The prototype design is similar to a dentist’s chair in appearance. We believe that MagForce will aim to sell, rather than place, these machines into clinics in future. The importance of these machines lies in their ability to be placed within smaller clinics, thus potentially widening outreach to the US patient pool in the longer term. MagForce AG will manufacture core components of the machine, while production of non-core components and assembly will be undertaken by MagForce USA.

NanoTherm therapy is regulated as a device, rather than as a drug in the US, and therefore follows a medical device regulatory route through to approval. As part of this pathway, in May 2015 MagForce filed an IDE with the US FDA. If approved, this will allow the first pivotal clinical trial with NanoTherm therapy to start in the US in prostate cancer. MagForce is currently working with the FDA and has updated preclinical study data conducted a decade ago to current FDA standards. In the last year, the company has already had a number of discussions with the FDA and obtained informal feedback on the submission.

Once approved, given two NanoActivators are already in place, the proposed focal thermal ablation registration trial could start shortly thereafter. MagForce anticipates the study to initiate by mid-2017. MagForce expects the trial to recruit up to 120 prostate cancer patients and to assess NanoTherm therapy as focal treatment for prostate cancer. Focal therapy aims to destroy localised tumours in the prostate in patients with intermediate-risk prostate cancer (those patients who are not severe enough to warrant aggressive therapy and instead are under active surveillance to monitor the tumour). By ablating the prostate cancer focally, MagForce anticipates that patients will be able to maintain active surveillance and avoid surgery and other treatment modalities which are associated with side effects such as impairment in urinary and sexual functions.

Assuming the trial takes around 12-18 months to complete, data could become available in 2018. This should be sufficient to support a pre-market approval application for the device (based on the larger NanoActivators), with the smaller ambulatory machines approved towards the end of the clinical trial via the 510k route (using the original NanoActivator as the predicate device). We assume approval and first sales from 2018 of the pNanoActivators, allowing time for filing and regulatory review following data in 2018. We assume that after the installation of the four larger NanoActivators (by the end of 2017) all future device sales will be the smaller pNanoActivators.

Based on the proposed design of the pNanoActivators, we assume that it should be possible to install 30 devices per year in the US at peak. However, we note that this number is difficult to predict at this stage and will depend on the successful uptake of the device (driven by the clinical trial data and the size of the salesforce). Without yet knowing the duration or number of sessions that might be needed in prostate cancer, we conservatively assume each prostate NanoActivator could treat around 150 patients per year (in line with GBM). A smaller quantity of nanoparticles will likely be required in prostate cancer; hence we assume a lower vial price of around a quarter of GBM, ie around $6k per vial. This price would position NanoTherm competitively with brachytherapy. Each prostate NanoActivator could therefore generate revenues of almost $1m per year, leading to a potential opportunity of $210m (€190m).

In Europe, where NanoTherm therapy is already approved via a CE mark to treat brain cancers, MagForce has six NanoActivators installed in Germany (in Berlin, Münster, Kiel, Cologne, Frankfurt, and Göttingen). With these installations, MagForce now has the capacity to continue with commercial treatments and the ongoing post-marketing GBM study. During 2015, MagForce initiated the first commercial treatment of GBM patients in Germany. Commercial therapy is currently available at three centres (in Münster, Berlin and Cologne), with all three having already treated patients. Although only a handful of patients were treated during 2015 and 2016, MagForce is investing in its commercial development team to drive the near-term commercial treatment rate through increasing its reach out to the medical community, patients and patient advocacy groups as well as working to streamline the reimbursement process. Additionally, the slow progress in Germany highlighted the reluctance of many of these seriously ill patients to travel to other countries for treatment; as such, MagForce now plans to roll out additional devices across Europe in order to improve patient access.

The current CE mark in Europe is for brain cancers, and NanoTherm therapy can therefore be used to treat primary and recurrent brain tumours. MagForce is focused on attracting patients from across the brain cancer spectrum, rather than just on recurrent disease, thereby enlarging the patient population who could benefit from this treatment.

The post-marketing GBM study is still ongoing (the first patient was enrolled in March 2014). Although NanoTherm is already approved in Europe, the study was planned to drive wider acceptance, awareness and uptake of NanoTherm. Installation of the current NanoActivators in Germany, in addition to familiarisation with their operation, has been facilitated by this study. Although the study has yet to yield any data, the benefits are already being realised through commercial treatment of patients (around 50 patients to date). We do not expect any data in the near term from the study and as it is not required for any regulatory purposes we do not expect the data to have a significant impact on the uptake and use of NanoTherm therapy. Instead, we believe this will be realised through ongoing commercial efforts; however, lack of granularity with regards to future commercial strategy make this difficult to assess.

We expect that MagForce will look to accelerate installations of NanoActivators outside of Germany this year, as physicians gain more experience of the therapy and more data become available. We believe that installing a further 20-25 NanoActivators across the major European countries over the next five to 10 years seems achievable. Each NanoActivator costs around €400k, which we capitalise as a tangible fixed asset, depreciating the cost over 10 years. We assume MagForce is able to recoup this initial outlay via an arrangement with the hospital where each large NanoActivator is placed through a pay per use fee. It could also adopt a standard leasing agreement over five years.

Our European revenue forecasts are based on the number of NanoActivators that MagForce could install in Germany and Europe. Based on similar assumptions to the US in terms of each NanoActivator treating around 150 patients at peak per year and each vial of NanoTherm priced at €20k rather than €6k for prostate cancer due to higher quantity required for treatment of brain cancer, this would lead to annual revenues of around €3m per NanoActivator.

In Germany we assume three of the six NanoActivators will be redeployed to other European countries. With €3m of annual revenue possible from each machine (based on 150 patients at peak per year and each vial of NanoTherm priced at €20k), this therefore equates to c €10m of revenue possible in Germany alone in GBM.

Beyond Germany we continue to include a contribution from other countries, assuming installations occur more broadly in Europe. With understanding gained from marketing in Germany that seriously ill GBM patients are reluctant to travel across borders, the placement of devices throughout Europe is vital in driving revenues. We assume peak sales of c €65m in the broader EU assuming 20-25 machines are installed over the next five to 10 years and we expect the first revenues to begin to be booked in FY17. We expect three of the NanoActivators in Germany to be redeployed across separate European countries in FY17. These estimates suggest NanoTherm therapy would be treating fewer than 4,000 GBM patients in Europe in the future per year at peak levels. This should be seen in the context of around 25k new cases of brain cancer in the EU5 (the United Kingdom, France, Germany, Italy and Spain) per year.

GBMs arise from astrocytes and are usually highly malignant due to the speed at which they grow. At any time a large number of cancer cells are dividing and expanding; this growth is driven by a substantial blood supply, which nourishes the tumour cells. GBMs can be divided into two types: the more common faster growing primary tumours and slower but still aggressive secondary tumours. Primary tumours make up about 90% of all GBMs and are the focus of MagForce’s NanoTherm therapy.

Standard GBM treatment involves tumour resection followed by postoperative radiotherapy combined with temozolomide. GBM tumours consist of about 15% of all primary brain cancers. The WHO reported approximately 250,000 new cases of brain or nervous system cancer worldwide in 2012, while mortality was around 190,000. Survival rates are some of the lowest among all cancers (three-year survival of c 10%).

With NanoTherm nanoparticle-based therapy for cancer prostate cancer now advancing in the US, this indication could also be developed in Europe, utilising data from the US to help secure approval. The smaller NanoActivators (pNanoActivators) currently under development by MagForce USA could potentially be sold in Europe in the future, helping to drive this market. At this early stage, we attribute no value to prostate cancer in Europe due to the company’s focus on GBM in Europe and no information on timelines with regards to the indication.

After lung cancer, prostate cancer is the most common cancer among men. In 2012, worldwide there were 1.1m reported new cases of prostate cancer with 307.5 thousand deaths. Treatment of prostate cancer depends on the progression of the disease; for localised cancer, surgery is commonly utilised, with chemo, radiation, hormone and biologic therapy combinations also utilised for more advanced cases. Prostate cancer has surgical treatment rates of around one in 10 patients, representing a significant patient population. Surgical treatments commonly involve a radical prostatectomy: the complete removal of the prostate including surrounding tissue. Two types exist: retropubic (incision in the abdomen) or perineal (incision in the area between the scrotum and anus) prostatectomy. Common problems after surgery include impotence, inguinal hernia (bulging of fat/small intestine through weak muscle) and leakage of urine.

MagForce’s upcoming prostate cancer study in the US plans to enrol 120 patients who have grade 7 (Gleason score) prostate cancer and are under active surveillance. Grade 7 defines a moderate growing tumour, one that can be readily operated on. The NanoTherm therapy will be used to ablate cancer lesions.

The destruction or treatment of cancerous cells with heat is well established, commonly through laser or microwave irradiation. Current techniques can often be intrusive and can suffer from unfocused heat distribution. Cancer cells are more susceptible to heat then healthy cells; while it is dependent on cell type it is generally believed healthy cells can survive at temperatures around 42°C, temperatures at which cancerous cells undergo necrosis (cell death). Temperature increases up to approximately 43°C result in hyperthermia associated cell death, while temperatures above 43°C result in thermoablation, which causes irreversible destruction of both healthy and cancerous cells. MagForce’s NanoTherm therapy is utilised to ablate cancerous cells at the core of a tumour while generating lower temperatures in the hyperthermia region on the edges of the tumour, minimising healthy cell damage. The NanoTherm therapy consists of three main components: NanoTherm, NanoPlan and NanoActivator.

NanoTherm consists of magnetic nanoparticles suspended in a liquid (ferrofluid) that are injected directly into tumour tissue. These nanoparticles are activated with an alternating magnetic field; this activation generates heat. The nanoparticles consist of an iron oxide core with a patented aminosilane coating. These nanoparticles are suspended in water and form a colloidal dispersion.

Structure and stability of nanoparticles is dependent on their size and morphology. Different synthesis techniques may generate particles of similar size but varying magnetic properties. Manufacturing of nanoparticles produces a distribution of sizes; minimising this range allows more control over key properties and is vital in delivering consistent treatment.

The applied magnetic field from the NanoActivator gets converted to heat by the hysteresis of the magnetic nanoparticles. Magnetic hysteresis produces heat, which is undesirable in most applications; however, for the treatment of tumours this effect can be taken advantage of.

Thermal distribution of the nanoparticle heat can vary depending on the type of tissue, heating time and nanoparticle composition. A balance between heat generation in the particles and the flow to the surrounding tissues must be achieved. Along with the heterogeneity of tissues, nanoparticle distribution will vary across compartments of a tumour. Once injected into the tumour, the nanoparticles aggregate and have been shown to remain where they have been injected. These nanoparticles are then exposed to a magnetic field of enough strength to produce heat. This heat either kills the tumour cells or sensitises them to other treatments (radio therapy/chemotherapy).

NanoPlan is a software package that calculates the strength of magnetic field needed for the magnetic nanoparticles to reach the required temperature. The software takes into account the size and location of the tumour and the distribution of nanoparticles to determine the strength of the magnetic field. This information is critical for the correct application of the technology and is fed in from either magnetic resonance imaging or positron tomography data.

NanoActivator is a free-standing, room-sized device that generates and applies a magnetic field to a patient. This magnetic field induces an oscillation in the iron oxide nanoparticles, which in turn generate heat, which either kills or sensitises the tumour cells. To measure the exact temperature change, a thermometry catheter is inserted into the tumour via a minimally invasive surgical procedure alongside the administration of the nanoparticles. Alongside the original NanoActivator, MagForce is developing a more compact version for specific use in the US prostate market.

Data from the largest trial to date utilising NanoTherm therapy was published in 2010. A total of 66 GBM patients were enrolled in a single-arm study in two centres. The trial utilised a combination of NanoTherm therapy and radiotherapy. The primary endpoint was overall survival following diagnosis of first tumour recurrence, with the secondary endpoint being overall survival after primary tumour diagnosis. The primary endpoint demonstrated a 13.4-month median overall survival, while secondary endpoint data demonstrated a 23.2-month median overall survival; no control arm was present in the study so it is difficult to compare both endpoints with other treatments. However, a review of therapeutic options demonstrates that the median overall survival for patients treated after reoccurrence falls between six and 12 months, and for patients after initial tumour diagnoses between 15 and 18 months. A trial cited by MagForce as a historical control demonstrated that the median survival for 573 newly diagnosed patients utilising a combination of radiotherapy and temozolomide was 14.6 months.

MagForce is subject to the usual risks associated with product development in healthcare, including clinical trial delays or failures, regulatory risks, competitor successes, partnering setbacks, financing and commercial risks.

In the near term, defining the exact scope of the trials in the US, obtaining FDA approval for the trial design and starting trials will be critical. We expect the pivotal prostate cancer trial to start in mid-2017; however, further delays would have an impact on our valuation, given the NanoTherm US prostate indication contributes ~56% to our valuation, or €4.9 share. In addition, progress with the ongoing post-marketing GBM study in Europe and delivering on initial commercial revenues will help to increase confidence in management’s targets. Any delays could affect expected revenue generation and this could translate to further funding requirements.

Our updated valuation is €225m or €8.8 per MagForce AG share, based on a risk-adjusted NPV analysis. It is centred on NanoTherm therapy, risk-adjusted to reflect the current development status and the respective core strategies for the EU and US. We value only GBM in the EU and prostate cancer in the USA, although we recognise MagForce’s future intention to treat additional indications in each region. In each indication and region, our valuation includes our revenue forecasts and estimates for costs, including R&D and S&M. This includes €3.4m net cash held in MagForce AG at end June 2016, in addition to estimated net cash held in MagForce USA (which is not specifically disclosed in the financial statements). We utilise a $1.1/€ spot rate. Note that while we value MagForce USA, as per company reporting, it is not consolidated into our financial model. The breakdown of our rNPV valuation, which uses a 12.5% discount rate, is shown in Exhibit 2.

In Germany, we assume three of the six NanoActivators will be redeployed to other European countries. With €3m of annual revenue possible from each machine (based on 150 patients at peak per year and each vial of NanoTherm priced at €20k), this therefore equates to c €10m of revenue possible in Germany alone in GBM.

Beyond Germany we include a contribution from other countries, assuming installations occur more broadly in Europe. With understanding gained from marketing in the German market that seriously ill GBM patients are reluctant to travel across borders, the placement of devices throughout Europe will be vital in driving revenues. We forecast peak sales in 2025 of c €65m in the broader EU, assuming 20-25 machines are installed over the next five to 10 years, and we expect revenues to begin to be booked in late FY17. We do not value prostate cancer in Europe; while potential remains in this indication, lack of clarity with regards to strategy make its value unclear at this time.

For the US opportunity, our valuation is wholly dependent on the prostate indication. While future value could be obtained from GBM and/or solid tumours, they are not the core focus in the US and, as such, timelines and strategy remain unclear. We believe this indication has a high probability of success (70%) due to the clinical benefit demonstrated in GBM. Additionally following the successful completion of US preclinical trials we believe the FDA will approve the clinical trial shortly. MagForce is prepared and ready to initiate the trial upon approval and we expect this could produce data in H118, with a potential launch by year end. We expect 30 pNanoActivators to be installed per year. We believe this is realistic given the time it has taken to place devices in Europe; we note that the cheaper compact pNanoActivators should make this task more straightforward than has been in the EU. We forecast peak sales of c $210m (€191m) in 2025. We note significant assumed costs related to sales and marketing in our valuation. We assume €5m and €10m in S&M in 2017 and 2018, respectively.

We forecast that Magforce will receive approval for the use of its NanoActivators in prostate cancer in 2018, with a commercial launch shortly after. We predict peak sales of up to $210m possible (€190m at current FX).

Our financial model incorporates 2014, 2015 and H116 reported financial results. MagForce reports financial results according to Handelsgesetzbuch (HGB), the German Commercial Code, as a small company; under these provisions majority or fully owned subsidiaries and affiliates are not consolidated. Additionally no cash flow statement is published. Hence the accounts represent MagForce AG alone and do not include any contribution from MagForce USA, which is majority owned (76.9%) by MagForce AG. Due to the lack of clarity regarding the US Magforce accounts, its cash and our projected revenue and cost assumptions are included in our valuation but not in our financial model.

In 2015 MagForce commenced initial commercial treatment with NanoTherm therapy in a handful of patients (number not disclosed), leading to small sales to the tune of €0.16m, which at a ~€20,000 cost per patient implies eight patients received treatment. Utilising the same assumptions, we estimate that up to 30 patients were treated in H116; however, due to uncertainty with regards to the breakdown of the revenues in H116, the number of patients treated could be lower. NanoTherm sales also include those on a cash basis and by reimbursement; as such the sale price will vary. In addition, during FY15 MagForce AG sold four NanoActivators to MagForce USA, which we estimate at around €600k each. FY15 revenues were €2.576m, with the bulk from the sale of these four machines (two of which were held on the balance sheet in inventories at the end of 2014). No sale of NanoActivators was booked in H116.

Under the five-year strategic plan established in late 2013, MagForce continues to target annual revenues of €100-150m in 2019. We believe this is an ambitious target and are slightly more cautious, assuming a slower initial NanoTherm sales ramp, currently projecting that MagForce can achieve this target three years later (2022).

With 2015 results, MagForce also recorded a €3m accounting income (non-cash) in operating income to reflect an expansion of MagForce USA’s rights to NanoTherm therapy to now include Mexico and Canada. €6.9m was recorded in 2014 and €5.1m in 2013 related to the same out-licensing deal. We include these as exceptional items in our financial forecasts (hence they do not appear in normalised numbers). There was no income accounted for from the rights in Mexico and Canada in H116.

Operating expenses (which are classified according to nature rather than by function) have remained tightly controlled, with only €6.6m spent in 2015 (including €3.0m personnel expenses and €3.2m other operating expenses). H116 operating expenses were €4.1m, a small decrease from H115 (€4.5m). Our 2016 operating expenses have been reduced to reflect the 2015/H116 trend, with total operating expenses for 2016 forecasted at €6.7m.

MagForce had reported cash and equivalents of €3.4m at end June 2016 versus €1.4m at end 2015. In addition, the company had no short-term loan receivables in H116 (disclosed in the notes to the financial statements) compared with €3.1m at end-2015. In the recent shareholder letter (March 2017), MagForce announced the issuance of a three-year €5m convertible bond with a 5% interest rate and a €5.0/share conversion price.

We forecast that the main driver of costs in 2017 and 2018 will be sales and marketing in Europe as MagForce looks to move into more markets; we predict these will be €2.5m and €3.5m, respectively. Our forecasts include an illustrative financing (which for simplicity we classify as long-term debt) of c €1m in 2017 (on top of the €5m convertible bond), to keep operations running until year end.

Cash and equivalents held in MagForce USA are not disclosed in the financial statements; we estimate these are currently c €10m (c $11m) as we assume only minimal use of the proceeds from the $15m fund-raise in August 2014, with spend only on purchasing the four NanoActivators and minimal operating expenses in the absence of any ongoing clinical trials in the US. We believe MagForce USA has sufficient funds in place to conduct the planned prostate trial once IDE approval is granted.