initiation of coverage...2019/06/30 · redeye, mäster samuelsgatan 42, 10tr, box 7141, 103 87...
TRANSCRIPT
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Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Initiation of Coverage
Equity Research 30 June 2019
KEY STATS
Ticker AROC.ST
Market First North
Share Price (SEK) 2.6
Market Cap (MSEK) 103
Net Debt 19E (MSEK) -8
Free Float 88 %
Avg. daily volume (MSEK)
0.13
BEAR BASE BULL
0.9
3.5
10.5
KEY FINANCIALS (SEKm)
2017 2018 2019E 2020E 2021E 2022E
Net sales 1 1 1 4 19 62
EBITDA -17 -21 -24 -30 -32 -15
EBIT -17 -21 -24 -30 -32 -15
EPS (adj.)
2017 2018 2019E 2020E 2021E 2022E EPS (adj.) n/a n/a n/a n/a n/a n/a
EV/Sales n/a n/a 191.7 30.7 8.3 2.9
EV/EBITDA n/a n/a n/a n/a n/a n/a
EV/EBIT n/a n/a n/a n/a n/a n/a
P/E n/a n/a n/a n/a n/a n/a
ANALYSTS
Oscar Bergman
Anders Hedlund
Making its mark
Despite its lack of commercial success and continuing need for new capital, AroCell is
better positioned than before to enter the commercial stage. Thanks to its high potential
TK1 biomarker technology, new management and licensing deal with Roche we initiate
coverage with a positive stance.
Superior biomarker
AroCell’s technology measures cancer therapy response more accurately than
established biomarkers. It is especially sensitive in combination with others, which could
ease TK1’s path to becoming an established biomarker – one that AroCell would be in a
unique position to capitalize on.
Management upgrade
New management is now in place at the company with a more commercially-focused
strategy. AroCell has since their appointment formed an advisory board to spread
awareness of TK1 technology and added several distributors.
Positive partnership
The company’s non-exclusive licensing deal with Roche has great potential to further
clinically validate the technology, paving the way for AroCell to profit, specifically on their
product TK 210 ELISA. Though the partnership is a source of income from 2022, we
factor in low royalties and view its most important impact as being a stamp of approval
from a major player.
Potential upside but dilution awaiting
After the stock’s near-60% fall over the past year, it offers a significant upside to the Base
Case value of SEK 3.50 per share indicated by our DCF analysis. At current EV of 102
MSEK we see a potential upside of roughly 35 %. However, we expect a rights issue in
the next six months of SEK 30-50 million with a dilution of around 25 % of the shares. We
have not taken this assumed dilution into account for our calculations.
Making its mark
Despite its lack of commercial success and continuing need for new capital, AroCell is
better positioned than before to enter the commercial stage. Thanks to its high potential
TK1 biomarker technology, new management and licensing deal with Roche we initiate
coverage with a positive stance.
Superior biomarker
AroCell Sector: Diagnostics
REDEYE RATING
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AROC.ST VERSUS OMXS30FAIR
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REDEYE Equity Research AroCell 30 June 2019
2
Investment thesis
TK1 concentration
AroCell’s unique technology enables measurement of the protein thymidine kinase 1 (TK1)
concentration in blood. As the protein increases as cells repair and divide, analysing it can
provide insights in cancer therapy response.
There are several commercially available activity-based methods of measuring TK1.
However, measuring the concentration of the protein in the blood provides better results
more efficiently than measuring the activity. Measuring the TK1 concentration can give
important insights to therapy response of cancer treatments. The low concentration of TK1
in blood, its rapid half-life, enzyme structure, and aggregation of other molecules makes
concentration determination a challenge. AroCell’s unique technology has overcome this
and makes it the only company with a CE marked product to measure the concentration of
TK1. This gives AroCell a unique position to sell and license out a technology of a superior
analysis method.
Roche Diagnostics
The company’s non-exclusive licensing deal with Roche, which involves a fully financed
clinical validation of TK1 concentration analysis, could have a decisive impact on AroCell. A
positive outcome would primarily represent a stamp of approval, opening the way to
establishing the biomarker. In addition, royalties from the technology would help AroCell
fund sales of the product.
TK 210 ELISA
We estimate the US and EU-5 markets for therapy response analysis in breast and prostate
cancer at 4.5 and 2.1 million tests, respectively. We base these figures on data from
Datamonitor.
We estimate that AroCell can reach a market penetration of +10 % in 2025, increasing to
around 19 % in 2033. However, the royalties are expected to be low from the Roche deal,
and most of the income will be generated from TK 210 ELISA. We see a potential for
reaching (non-risk adjusted) revenues of SEK 89 million in 2022 with a CAGR of 16.8 %
until 2033, indicating revenues of SEK 490 million.
Establishing the biomarker
We argue that AroCell is now better positioned than before to make TK1 concentration an
established analysis for therapy response. The potential to capitalize on the Roche deal and
show the advantages of TK1 concentration with additional studies and increased marketing
efforts is significant. However, the technology will require further testing and evaluation
even after Roche’s potential implementation in 2022 to establish it clinically.
Valuation summary
We initiate coverage of AroCell with a Base Case of SEK 3.50 per share – some 35 %
above the current share price. In our view, investors are uncertain about the technology and
the company’s strategy. However, silence over the Roche deal, the change of management,
multiple rights issues, and a weak ownership structure have also weighed on the share’s
performance.
REDEYE Equity Research AroCell 30 June 2019
3
Key Catalysts
Below we list the most relevant catalysts of the case.
TK 210 ELISA sales growth
Stronger sales of TK 210 ELISA are important both to validate the technology and to
generate much-needed revenue. Sales growth would also reflect well on the new
management team’s capabilities. While we do not forecast any significant revenues until
2021, it is a catalyst for the coming twelve months.
Lead investor
The company’s ownership structure is sub-optimal. AroCell would benefit considerably if an
investor with experience of the industry and a good track record and network were to take a
substantial stake. In particular, this would enable it to attract more investors. We believe a
rights issue will be coming in the next six months, opening for the opportunity.
Clinical validation
As commercialization depends on clinical validation, clinical trials and proof of concept
studies that show positive results will be important for the case. A clinical study on prostate
cancer is expected in the next six to twelve months.
Roche Diagnostics
Further words from Roche Diagnostics that are positive of clinical validation or mentions
royalties can have a positive impact on our valuation. Especially considering the use of risk-
adjusted cash flows in our models. We see this as a catalyst stretching over a long period of
24 months.
FDA registration
As the US market is a key market for AroCell, initiating an FDA registration would signal that
the company is heading in the right direction. We see this as a catalyst over a period of 12
months.
Counter thesis
Below we list the most relevant risks and uncertainties of the case.
Need for cash
At the end of Q1 19, the company had SEK 25.3 million in cash. As we forecast that the
monthly cash burn will increase from Q1’s level, we anticipate that it will have to undertake
a rights issue of around SEK 30-50m before the end of the year.
Problems with FDA
For the company to fully capitalize on the US market, it requires FDA approval. Any delays
or problems over its application could hinder AroCell. We expect approval by the end of
2021.
Roche uncertainties
If Roche decides not to implement TK1 concentration tests after clinical validation, AroCell
will receive no significant revenue. Furthermore, it is very unlikely that other potential
partnerships over this method would go ahead if Roche turns it down.
REDEYE Equity Research AroCell 30 June 2019
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Table of content Making its mark ...................................................................................................... 1
Investment thesis ................................................................................................... 2
Key Catalysts ....................................................................................................... 3
Counter thesis...................................................................................................... 3
Company profile ...................................................................................................... 5
Summary ............................................................................................................ 5
Product portfolio ................................................................................................... 6
Clinical validation ................................................................................................. 8
Strategy ............................................................................................................ 10
Market outlook ................................................................................................... 11
Partnership and distribution ................................................................................. 13
Competition ....................................................................................................... 14
Patents ............................................................................................................. 15
People ............................................................................................................... 16
Ownership ......................................................................................................... 17
Stock performance ............................................................................................. 18
Financial forecast ............................................................................................... 19
Valuation ........................................................................................................... 20
Scenarios .......................................................................................................... 21
Base Case scenario .......................................................................................... 21
Bear Case scenario .......................................................................................... 22
Bull Case scenario............................................................................................ 22
Peer valuation .................................................................................................... 23
Summary Redeye Rating ........................................................................................ 25
Redeye Rating and Background Definitions ............................................................... 27
Disclaimer ............................................................................................................ 29
REDEYE Equity Research AroCell 30 June 2019
5
Company profile
Summary
AroCell is an Uppsala-based diagnostics company that focuses on the research,
development and sales of an in vitro diagnostics product for cancer, called TK 210 ELISA,
and the licensing of the technology behind this. We believe the greatest potential for the
product and technology lies in breast and prostate cancer. AroCell was initially founded
under the name Xi Bao Research AB in 2003 but changed this in 2006. The company was
listed on the Spotlight Stock Market in 2011 and relisted on Nasdaq First North in 2015.
Its CE-approved TK 210 ELISA measures the concentration of a protein called thymidine
kinase 1 in blood samples, which can determine the efficiency of cancer therapy. It provides
this information quickly and with high sensitivity.
AroCell has spent several years on research and development and has published studies
on the TK1 protein and its TK210 ELISA product to demonstrate their benefits. Throughout
AroCell’s history, it has used rights issues to inject capital into the company five times. The
most recent was SEK 29 million after transaction costs in 2018. The latest capital injection
will finance the following in equal measure:
1. Clinical validation – Conduct more studies to show the advantage of TK 210 ELISA and the TK1 protein
2. Commercialization – More marketing efforts on congresses, exhibitions, webinars, distributors, and re-designing the website
3. Licensing and partnerships – Strengthen the portfolio of patents and establish partnerships with large IVD companies
REDEYE Equity Research AroCell 30 June 2019
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Product portfolio
Technology and a product
AroCell has two potential revenue generators: the TK 210 ELISA product itself and the
technology behind it. The technology, which measures TK1 concentration through dilution
buffers and patented antibodies, has the potential to be implemented in already installed
automated serum work areas (SWA). AroCell should be able to license the technology to
large IVD firms and receive royalties from this, while we also see great potential in
validating the technology. This could in turn boost sales of TK 210 ELISA. Although we see
higher revenues being generated from the product, penetrating the market substantially
would only be possible by licensing out to IVD firms’ automated platforms.
Today, AroCell has a non-exclusive licensing deal with Roche. We believe AroCell is trying
to sign with additional partners, among whom we expect a higher royalty than the 10% we
believe the Roche deal entails. The reason is that Roche is clinically validating the
technology and financing those studies itself, leaving less room for AroCell to negotiate. If
Roche achieves positive results and decides to implement the technology, more IVD firms
will be interested, and as they will not have to conduct any extensive clinical validation, we
believe these potential partnership deals would bring higher royalties. In our Base Case,
however, we only include the Roche deal; we see further IVD firms as a scenario in our Bull
Case.
Thymidine kinase 1
The thymidine kinase 1 protein (TK1) is a key enzyme in the structuring of DNA, responsible
for coupling a phosphate group from ATP to thymidine. This is an essential process to build
new DNA and repair old DNA. In the S phase of the cell life cycle, where DNA replication
occurs before the cell splits into two, the enzyme is upregulated. Normally, there are very
low levels of the protein in the blood due to proliferation, but when it reaches higher than
normal concentrations, it can be a sign of an irregularity due to abnormal cell turnover.
In cancer treatment using cytotoxic agents or radiation therapy, DNA is damaged and cells
are destroyed. This increases the concentration of TK1, which gets released into the blood.
Using TK1 as a biomarker to determine the efficacy of a certain treatment can be achieved
by measuring the concentration of the protein in blood samples.
To determine the therapy response, the concentration of the protein is measured before
treatment is initiated, then 24–48 hours after treatment, and again two to four weeks
afterward. As TK1 can be an early marker for disruption of dividing cells, it gives information
about the efficiency of the therapy. The first test acts as a benchmark, the second should
show an increased concentration of the protein, and the third test should show lower
concentrations than in the first test.
Activity versus concentration
TK1 can be quantified using two methods and technologies: measuring its activity, or its
concentration via an immunoassay. An immunoassay is a biochemical test to measure the
presence of, for example, a concentration in a solution using an antigen.
Studies have shown that TK1 immunoassays give higher sensitivity in a shorter time than
measuring the activity. However, in immunoassays of TK1, the protein circulates in serum in
complexes of enzyme activities and molecular weights, making it difficult to measure the
concentration. Therefore, there have not historically been any particular advancements
using TK1 as a biomarker for cancer diagnostics.
REDEYE Equity Research AroCell 30 June 2019
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The graphs above show how TK 210 concentration increases the sensitivity by almost
100% compared with TK1 activity, with an AUC of 0.90 versus 0.79.
TK 210 ELISA
AroCell has reduced the problem of measuring TK1 concentration in blood samples by pre-
incubating the sample with buffer agents that break up the high molecular weight
complexes. After this, the samples are put onto a microtiter plate coated with antibodies and
washed, before a second antibody is added. They are later washed again. After some time,
the sample will develop a stronger color, indicating the concentration of TK1 in the sample.
This whole process is carried out using the TK 210 ELISA product.
TK 210 ELISA can be used to determine the response of cancer treatment. A blood sample
is analyzed before initiation of the therapy, 24–48 hours after it has been initiated, and then
two to four weeks after the first treatment. The concentration of TK1 provides details about
the efficiency, which can save a patient’s life, as it is of utmost importance to understand
which therapy is working.
The product is based on the well-established and standardized ELISA platform that is found
in most clinical laboratories. The platform is a microtiter plate with 96 docks that has been
used for decades, with the benefits of easy transportation and adaptation. The product
achieved CE approval in 2015 but with no commercial success. We argue that this can be
attributed to the following factors:
1. Too little effort expended on communicating its advantages
2. Distributors not working in line with AroCell’s needs
AroCell’s focus over the past few years has been on clinical validation, with the company
concluding several positive studies. However, the results of these have not been
communicated well enough to entice additional partners or drive sales. Moreover,
distributors have been few, increasing AroCell’s dependency on them. In its 2017 annual
report, the company argued that Green Cross Cell held great potential and was a way into
the Asian market for AroCell. However, when considering the sales, the distributor has not
proven successful since 2017. Although AroCell did sign a partnership with Roche in 2018,
REDEYE Equity Research AroCell 30 June 2019
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it has established no more IVD partnerships, even though it communicated its plans to do
so in 2017.
According to the company, the best use of TK 210 ELISA is in the following three fields:
1. Measuring the efficiency of cancer therapy
2. Detecting recurring cancer quickly
3. Monitoring cancer patients over time
However, focus is on the first point, measuring the efficiency of cancer therapy. We believe
AroCell will need to establish a market presence in this field before moving into additional
areas.
The company has stated that TK 210 ELISA is best suited for breast and prostate cancer
diagnostics, but it has also conducted studies with Hodgkin’s lymphoma, non-Hodgkin’s
lymphoma, leukemia, liver cancer and sarcoma. In all three of the scenarios above,
however, we assume that AroCell will focus on breast and prostate cancer.
Clinical validation
AroCell has produced clinical trials together with several hospitals in Sweden, Slovenia and
Finland. The focus on these trials has been on breast cancer with two publications, prostate
cancer with one publication, hematologic malignancies and sarcoma. An ongoing study on
prostate cancer is expected to be finished before the end of the year with results published
in H1 2020.
The publications of the breast cancer and prostate cancer studies have been published in
well-known journals, such as The Prostate and Tumor Biology. Publishing the studies in
journals and promoting the results at congresses will increase the awareness of the
technology and the protein. Furthermore, the studies can be used in the regulatory
processes and to attract IVD partnerships.
Before year’s end AroCell aims to release two publications, one on sarcoma and one on
hematologic malignancies. However, we argue that the clinical trial for prostate cancer
mentioned above is of more interest as we expect breast and prostate cancer to be the two
clinically practiced indications for AroCell.
REDEYE Equity Research AroCell 30 June 2019
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TK1 as a complementary biomarker
Although a single biomarker may provide valuable information about a cancer, biomarkers
can be combined to increase the sensitivity of the diagnosis test. This, we argue, could
allow TK1 to piggyback ride on the more established CA 15-3, CEA, and HER2 biomarkers
for breast cancer and PHI, PSA, and PSAD for prostate cancer.
Breast cancer and TK1
A 2016 study conducted by Kumar et al. published in Tumor Biology including 124 patients,
found that TK 210 ELISA gave a 0.92 AUC (area under curve) value of T2 (tissue spread
stage II) breast cancer patients. This was compared to the most established breast cancer
biomarker CA 15-3, which had an AUC value of 0.82. What was also found in the study was
that CA 15-3 combined with TK 210 ELISA increased the AUC value to 0.94.
CA 15-3 is the most used biomarker for breast cancer; however, it has a low sensitivity and
poor specificity, i.e. true negative rate for early-stage tumors. CA 15-3 is mostly used for
monitoring therapy of advanced stages of breast cancer. Increasing the sensitivity by
combination with TK1 allows for analysis on early-stage tumors as well. In addition to this,
the same study found that TK1 concentration demonstrated high sensitivity and specificity in
all stages of breast cancer. This opens up for a broad use of TK1 concentration tests.
Studies that combined CA 15-3, CEA and HER 2 increased the sensitivity to 64 % in
metastatic patients, compared to the range of 20 - 50 % as CA 15-3 has demonstrated as
its overall sensitivity on its own.
Prostate cancer and TK1
A 2018 study conducted by Kumar et al. published in The Prostate including 140 patients,
found that TK 210 ELISA increased the AUC in combination with other biomarkers. In the
study, TK1 concentration showed to increase diagnostic accuracy when combined with PHI
and PSAD. AroCell has an on-going clinical trial for prostate cancer at Södersjukhuset in
Sweden, where cancer patients with a more aggressive prostate cancer will be studied.
A problem with prostate cancer diagnosis is that the biomarkers used today struggle with
specificity. As a result, a lot of unnecessary biopsies are executed, which may damage the
prostate. It is estimated that 50 % of those who are examined with a prostate biopsy does
not have cancer. To be able to determine this earlier would have a great socioeconomic
benefit. TK1 concentration, as has been demonstrated in the studies, increase the accuracy
when combined with PSA biomarkers. In our view, this can decrease the number of
biopsies carried out through the patients’ treatments.
Going forward, we expect potential positive results from the study conducted at
Södersjukhuset to further raise the awareness of the protein. As prostate cancer is one of
the most common cancer types and its struggles with specificity with PSA, we believe TK1
concentration can contribute to the area.
REDEYE Equity Research AroCell 30 June 2019
10
Strategy
AroCell has recently changed its management to gain more commercial focus on its strategy. The company has communicated three steps for bringing large-scale rollout of TK 210 ELISA and the technology for licensing:
1. Improving the communication of the advantages of TK1 concentration and TK 210 ELISA by being clearer and more simple
2. Increasing marketing efforts 3. Clinically validating TK 210 ELISA and registering the product for introduction on the US
IVD market In addition to this, AroCell will strengthen its patent portfolio, aim to establish partnerships with large IVD companies, begin the FDA registration process, and get reimbursement in place. This strategy is the same as the former management held; however, the new CEO emphasizes the fact that commercialization needs to be given more attention. However, the new management has already made progress by signing with Gongyingshi and Inveniolife as well as the CRO Corgenix.
We argue that the most important factor for the company’s ability to greatly capitalize on its unique
technology is partnering up with large IVD firms. Furthermore, we do not expect the new
management to make any drastic strategy changes this early on in its tenure.
Commercialization strategy
TK 210 ELISA is currently marketed for clinical development researchers and to
pharmaceutical development companies focusing on oncology. Its strategy is to achieve
clinical validation through research and development, to raise awareness and validation for
clinical practice further down the road.
While the use of TK 210 ELISA is manual and semi-automatic for the two early target
business areas, clinical practice will mostly be carried out via large IVD firms’ automated
platforms. This implies that TK 210 ELISA will not be sold on a large scale, although its
technology can be implemented for large-scale operations.
We want to see increased sales of TK 210 ELISA for AroCell in the coming 12 months.
These sales would not only generate revenues for the company but would also signify that
the technology can be clinically utilized. We believe the protein can fill an important role in
cancer therapy response analysis, and that it is now time to execute.
Approvals, registrations and reimbursement
While the company already does have a CE approval for TK 210 ELISA, it does not yet
have an FDA approval. Currently TK 210 ELISA is sold for Research Only Use in the US.
We expect AroCell to initiate the FDA registration shortly and that it will be approved at the
end of 2021. Furthermore, AroCell has no reimbursement in place, but we assume it will be
in line with the FDA approval.
AroCell has not yet communicated if the FDA approval will be approached via a 510(k) or a
De Novo. A 510(k) compares the device to other devices while a De Novo does not. A
510(k) is less time consuming while a De Novo can strengthen the clinical documentation
through rigorous clinical trials. This is a process carried out in dialogue with the US
authorities, making it difficult to say how it will be approached. However, we expect it will be
using a 510(k).
With an FDA approval and reimbursement in place, AroCell will be able to control the
pricing to a much higher degree when sold for clinical praxis. For Roche to use the
technology for clinical praxis in the US, FDA approval is also required. The US market is the
largest for IVD companies and is essential for AroCell to grow. Furthermore, the rest of the
REDEYE Equity Research AroCell 30 June 2019
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world is watching the US. This makes the market not only important financial-wise but can
help shorten down the processing time for registration on other markets.
Advisory board
The company recently established an advisory board intending to attract key opinion
leaders and other professionals who have a vast knowledge of the protein. The purpose of
the advisory board is to spread the knowledge of TK1 concentration. Although former board
member Johan van Heijne with a great IVD product experience is the only KOL, we expect
more KOLs to be added. Given the management’s relevant industry experience and
studies, we do not believe it will be especially difficult.
Market outlook
As cancer patients respond very differently to different therapies, there is a need for
individualized treatments. Therapy response today is mostly monitored through imaging
technologies such as MRI-, CT-, PET scans or x-rays, though increasingly being combined
with biomarkers. The use of biomarkers increases the possibilities for individualized
treatment as it can provide test results faster and to lower costs.
According to Kalorama, the IVD oncology market is today valued at around 8.3 billion USD
and has an expected CAGR of 5-6 % in the coming five years. We believe AroCell has the
possibility to capitalize on this trend and expect the US and EU-5 to be focus markets for
the company. Furthermore, we argue that prostate and breast cancer are the two
indications that will be targeted considering past clinical trials, communicated focus and
market value.
Breast cancer
One out of eight women will be diagnosed with breast cancer in their lifetime. With over
500.000 incidences expected in 2019 for EU-5 and the US, breast cancer is the second
most common cancer type for women. The relative survival rate is quite high after five, ten
and fifteen years after diagnosis (90 %, 85 %, 78 %). However, since it typically produces
no symptoms, regular targeted screenings are highly important. Today it is typically
discovered through a combination of physical examination and mammography.
After breast cancer is first suspected, diagnosis is performed through a combination of
tissue biopsy, biomarkers, typically the established CA 15-3, and imaging technologies.
Through AroCell’s clinical trials and studies, it has been found that TK1 concentration has a
greater sensitivity than CA 15-3 and even great sensitivity when combined. Therapy
response analysis of breast cancer is conducted through the same methods as for
diagnosing; imaging technologies, tissue biopsies and biomarkers.
We believe TK1 can be used for breast cancer patients to determine the therapy response
through all stages of the disease. We expect AroCell to be granted an FDA approval in late
2021, opening up for sales in early 2022. We also believe that the technology will be applied
for therapy response analysis and expect nine tests per patient related to this, with three
tests per treatment response analysis. One test to prior to the therapy begins, one test 24-
48 hours after and the last test two to four weeks after the initiation.
According to Datamonitor, breast cancer in the US has an incidence of 269.000 for 2019
with an expected annual incidence growth of 5 %, for EU-5 the number is 231.000 for 2019
with an expected annual incidence growth of 4 %. We see a possibility of ramped up sales
in EU-5 before the US considering the CE approval. However, we expect the same market
penetration for EU-5 as for the US over time.
REDEYE Equity Research AroCell 30 June 2019
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Prostate cancer
Affecting one in nine men, prostate cancer is the second most common cancer type
affecting men. Over 474.000 new incidences are expected in 2019 for EU-5 and the US.
The relative survival rate is high after five, ten and fifteen years after diagnosis (99 %, 96%,
96%). Only an estimated 50 % of the diagnosed patients will undergo any treatment, as the
aggressiveness of the cancer often is low. A great problem with prostate cancer is the poor
specificity in diagnosis. The false positives cause unnecessary procedures that impose the
risk of damaging the prostate, when there is, in fact, no cancer present. Just as for breast
cancer, regular targeted screenings are important with a physical examination.
Diagnosis is performed through a combination of tissue biopsy, PSA biomarkers and
imaging technologies. A great problem for prostate diagnosis is the poor specificity of PSA
biomarkers, which often results in unnecessary and dangerous biopsies that can damage
the prostate. Therapy response analysis is done in the same way as diagnosis; imaging
technologies, tissue biopsy and biomarkers.
Clinical trials by AroCell has found that TK1 in combination with prostate cancer biomarkers
have a great impact on the sensitivity. The studies also found that TK1 concentration has a
higher sensitivity than established prostate cancer biomarkers on its own.
Just as for breast cancer we believe that TK1 concentration can be used to analyze therapy
response; however, unlike breast cancer patients, there is only about 50 % of the diagnosed
patients that undergo treatment. For the treated patients we also assume nine tests per
patient divided on three treatment response analysis cycles.
Datamonitor estimates the number of incidences in the US to reach 138.000 in 2019 with a
annual incidence growth of 1,5 % the coming years. For EU-5 the estimation is 336.000 for
2019 with an annual incidence growth of 1,8 %. Just as for breast cancer, we expect sales
to begin earlier in the EU-5 and we believe that over time the market penetration will be the
same for both markets.
Opportunity
We believe AroCell with its technology, clinical validation and the Roche licensing deal has
the potential to gain substantial market share on these indications. However, in our view we
see that the most important factor is not related to the technology or the studies, but to the
management. We want to see AroCell put the pedal to the metal on its key drivers; clinical
validation, partnerships, distributors and increased sales of TK 210 ELISA to raise
awareness.
We believe that the implementation of the technology and the sales of TK 210 ELISA that
will follow will increase in stages. This assumption is based on the idea that a new clinical
practice of TK1 concentration, will have to undergo rigorous controls and evaluations even
after its initial roll-out. In our estimations we expect the technology to go through three rapid
implementation stages. The first, we expect, will be in 2022, followed by 2025 and 2031.
In our estimations, breast cancer will be the main source of income for AroCell with a 67 %
average of total income. This is mainly because of two things; 1) only 50 % undergo
prostate cancer treatment and 2) there is a great gap between prostate cancer incidence in
EU-5 and the US. This results in a greater potential in breast cancer for AroCell.
While the incidence of breast cancer is relatively similar for EU-5 and the US market, there
is a great gap for prostate cancer between the two geographical markets, as mentioned
above. The EU-5 is expected to have a 153 % higher incidence rate compared to the US,
even though the population is similar. We believe this is mainly due to more screenings in
the EU-5 as well as being behaviour influenced. However, increased awareness of prostate
REDEYE Equity Research AroCell 30 June 2019
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cancer in the US is likely during the coming decade. This implies that the total market for
prostate cancer is likely to be understated, which could increase the market for AroCell
going forward.
Partnership and distribution
Today, the company has six distributors in place, and we expect one or two more to be
signed during the remainder of the year. Its partnership with Roche is highly important for
the success of AroCell, in our opinion.
Roche Diagnostics
In April 2018, AroCell entered into a non-exclusive licensing agreement with Roche, which
holds a 20% share of the IVD market and has operations around the globe.
The licensing agreement gives Roche the right to use the TK1 concentration analysis
technology, for which AroCell will receive a royalty. Given the rigorous clinical validation
process, economical evaluation by Roche, and wide implementation potential, we believe
no royalties from Roche are likely until 2022. In addition, no details regarding the royalty
have been provided, and as the licensing agreement is non-exclusive, we argue this implies
low expected royalties, likely around 10%. Should Roche use AroCell’s technology on its
Cobas platform, we believe sales would ramp up shortly thereafter.
The Cobas platform is a series of modular analyzers, specifically four different types of
systems. The different systems are installed and used in larger hospitals and offer an
automated, scalable module-based serum work area (SWA). The different systems offer a
range of volume workloads of 50 to more than 500 samples per hour.
Before any sales can come from the licensing agreement, Roche will be responsible for
clinical validation and financing of clinical trials, before potentially launching it on its Cobas
platform, which has more than 35,000 installations. If it does so, AroCell will have virtually
no costs related to the deal, thanks to very high operating leverage. We argue that this
would provide resources for AroCell to increase sales of TK 210 ELISA further and would
offer important validation of the technology.
Other partnerships
According to AroCell’s three-part strategy, signing more partnerships with large IVD
companies is a goal. Although the non-exclusive licensing deal with Roche implies low
royalties, it still allows AroCell to sign additional partners. Potential names are Beckman
Coulter, Bio-Rad Laboratories, bioMériex, Abbott Laboratories, Thermo Fisher Scientific,
and DiaSorin to name just a few.
One IVD firm that is of particular interest is DiaSorin, the Italian diagnostics specialist, to
which Staffan Eriksson has already licensed out an activity-based technology for TK1. As
there is already a connection between DiaSorin and AroCell’s founder, we see this
company as a likely candidate for a possible partnership on TK 210 ELISA.
REDEYE Equity Research AroCell 30 June 2019
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If Roche were to use the method, it would send a great signal to other potential IVD
partners. The large-scale IVD firms may be waiting for Roche to progress further, though.
Distribution
Recently, AroCell entered into a distribution agreement with Chinese biomedical research
service provider and distributor Gongyingshi and with Inveniolife Technology in India. It now
has a total of six distributors of TK 210 ELISA.
As of April 2019, AroCell had distributors covering 13 countries in North America, Europe,
Northern Africa, and Asia. The distributors will help AroCell to gain knowledge and to reach
customers in their respective markets. The company has mentioned that it will increase its
efforts to gain more distributors, and so we expect this during the remainder of the year.
Moreover, we believe AroCell will, in part, sell directly on at least one main market, most
likely the US.
Distributor Markets
Eagle Biosciences US, Mexico, Canada
Pathway Diagnostics UK, Ireland
Eurobio Scientific Switzerland, France, Tunisia, Morocco, Algeria
Gongyingshi China
Green Cross Cell Corp. South Korea, China
Inveniolife India
Source: Redeye Research
Competition
There is a misconception that imaging technologies are competitors to biomarkers.
Developments in imaging technologies provide an increased overall opportunity to detect
cancer, which in turn boosts the use of biomarkers. Imaging technologies and biomarkers
complement one another.
Direct competitors could also be argued to be other biomarkers. However, studies have
found there is a great benefit of using TK1 concentration in combination with other
biomarkers. We believe this could imply that clinical practitioners are likely to ask for it to be
combined. Moreover, we argue that focus should be shifted towards companies with
technologies based on the same protein.
TK1 competitors
Biovica and DiaSorin are two companies offering analysis based on TK1, although several
others offer TK1 analysis, such as Abcam and Nordic BioSite. These latter companies
solely target R&D, clinical development, and research though. The two most important
competitors for AroCell are Biovica and DiaSorin, where we even see DiaSorin as a
potential partner.
Biovica
Biovica is better positioned for growth than AroCell in one context, but we argue that its
offering is inferior to TK 210 ELISA. While Biovica has filed an FDA registration, it also has
a strong ownership structure with solid insider holdings, as demonstrated in a direct rights
issue in April this year. However, we believe AroCell has a superior product that is based on
TK1 concentration, rather than activity. Furthermore, Biovica lacks a partnership with an
IVD firm and is solely focused on metastatic breast cancer.
REDEYE Equity Research AroCell 30 June 2019
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Moreover, we argue that any market presence in the US initiated by Biovica is bound to
benefit AroCell as well. Biovica can increase the awareness of TK1, while AroCell can show
the advantages of concentration over activity.
DiaSorin
Italian IVD company DiaSorin offers an activity-based test on the manually handled
LIAISON platform, which is not sold for clinical practice. The interesting part is that its
solution was invented by Staffan Eriksson, founder of AroCell.
Competitive advantages
To conclude, the main competitive advantages of TK1 and TK 210 ELISA are:
1. Measuring TK1 concentration rather than activity gives higher sensitivity and in a
shorter time period
2. Measuring TK1 concentration instead of more established biomarkers for breast
and prostate cancer increases the sensitivity
3. The TK 210 ELISA is based on the standardized, well-established ELISA microtiter
plate, which lowers the threshold for researchers
4. Potential to scale by licensing out technology to IVD firms
A big barrier protecting AroCell is its expertise and knowledge of TK1 after decades of
studies, specifically by Staffan Eriksson. As we do not expect revenues until 2022, though,
the competitive landscape may change and further hinder AroCell from capitalizing on these
strengths. For example, Biovica may attract a leading IVD firm taking away attention from
concentration-based methods, or Roche may decide on changes of prioritization.
Patents
AroCell has a patent portfolio of six approved patents with expiration in 2024-2034. In
addition to this, it has three patents pending. The patents protect the methods and use of
different antibody-based tests for cancer diagnostics. The geographical regions covered by
the patents include the US, parts of Europe and parts of Asia (such as China and Japan).
Source: AroCell
REDEYE Equity Research AroCell 30 June 2019
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People
Management has changed since the end of last year, with the arrival of a new CEO,
Michael Brobjer, and a new CFO, Anders Hultman. They both purchased stock in the
company when they were appointed their new roles, although these were not very large
purchases. Together they bring decades-long experience from the life science and
pharmaceutical industry and in finance, sales, and marketing. We want to see increased
sales of TK 210 ELISA to demonstrate that the new management can do what the old team
did not.
Name Position Holdings Experience
Management
Michael
Brobjer
CEO 42,818
shares
Michael Brobjer, who took office as CEO of AroCell in 2018, is a
business-oriented and flexible leader with extensive experience
from the life science and pharmaceutical industry. He initiated
his career in the life science industry at KabiGen in the mid-
1980s and worked within Kabi, Pharmacia&UpJohn and
Biovitrum for over 20 years. Prior to joining AroCell, he was CEO
of Karessa Pharma, a Swedish clinical-stage pharma
development company.
Anders
Hultman
CFO 60,000
shares
Anders Hultman started at AroCell in 2018 and has more than
15 years of experience in managerial and executive positions in
finance, sales, and marketing. He holds a BSc in Business
Administration and Economics from Uppsala University. Prior to
joining AroCell, Anders was CFO/financial director at Pharmalink
(Calliditas)
Sources: AroCell (2019), Redeye Research
While management changed in late 2018, the board of directors has also seen a lot of
change since 2017. Of the five board members, three joined in 2017 and one joined in May
of this year. The board member with the longest tenure is Staffan Eriksson, the founder and
fifth-largest shareholder in the company.
Name Position Holdings Experience
Board of
Directors
Claes Post Chairman - Claes Post joined AroCell's Board of Directors in 2017 and has
extensive experience from several leading positions in Big
Pharma and startups in pharmaceutical fields. He has a Master
of Pharmacy from Uppsala University, Pharm Dr from Linköping
University, and Associate Professorship in Neuropharmacology
and Anaesthesiology from Uppsala University. Furthermore,
Claes is currently a board member for four life science
companies.
Staffan
Eriksson
Board
member
1,108,630
shares
Staffan Eriksson is one of the founders of AroCell and has
served as CSO and board member since 2003. He has more
than 35 years of experience in medical biochemistry and cell
biology, with a Ph.D. and an MD from Karolinska Institute.
Staffan is a leading scientist in the structure and function of
Thymidine Kinase 1, with more than 100 publications to his
name during the last ten years.
Agneta
Franksson
Board
member
- Agneta Franksson holds an MBA from Uppsala University and
an MSc from the Royal Institute of Technology in Stockholm.
Since 2006 she has run her own management consulting firm
and has served on several boards. Agneta is currently a
member of the board of Blekinge Institute of Technology and
REDEYE Equity Research AroCell 30 June 2019
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serves as the Chairman of the Board of Directors of Specialplast
Wensbo AB and HoofStep AB.
Karin
Eriksson-
Widblom
Board
member
- Karin Eriksson-Widblom has worked as a Sales and Marketing
Director at Fujirebio Diagnostics AB for several years and has
held several other positions at, among others, EniChem and
Nolato Medical. Karin has therefore extensive experience in
marketing and sales of biomarkers focused on oncology
Gunnar
Steineck
Board
member
- Gunnar Steineck has more than 30 years’ experience of
research in the medical field. In 2004 he accepted a Professor’s
Chair in Clinical Cancer Epidemiology at Gothenburg University.
The focus of the present research program is cure from cancer
with restored health. Gunnar Steineck has been a board
member at AroCell since 2017.
Sources: AroCell (2019), Redeye Research
Ownership
The ownership structure is suboptimal, in our view, mostly consisting of private investors,
with a lack of institutional investors. Founder and board member Staffan Eriksson only holds
2.81% of the shares. Furthermore, the new management team has very low insider
ownership. We would like to see them open their wallets once more and dig deeper to
assure their commitment to shareholders. We would also strongly prefer a lead investor to
step in and take a significant holding in the company, naturally in the rights issue we expect
shortly.
The company’s shareholders have seen a dilution of over 400 % since AroCell’s IPO in
2011.
Top 10 owners Stocks % Capital
Avanza Pension 4,540,727 11.52%
Nordnet Pensionsförsäkring 2,022,947 5.13%
Jon Eiken 1,300,000 3.30%
Bernhard Tribukait 1,296,796 3.29%
Gunvald Berger 972,920 2.47%
Olle Stenfors 945,000 2.40%
Lena Lindqvist Design AB 686,180 1.74%
Mikael Jacobsson 438,000 1.11%
Staffan Eriksson* 422,450 1.07%
Swedbank Försäkring 390,433 0.99%
Source: Holdings
*Staffan Eriksson also owns shares through Lena Lindqvist Design AB
REDEYE Equity Research AroCell 30 June 2019
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Stock performance
Performance and capital need
AroCell had a very volatile first year of trading, up 140 % from SEK 2.31 in the IPO to SEK
7.9 in less than five months. Though it peaked in October 2015 with a share price of SEK
16.6, it is today trading at levels below its IPO price. The last three years the stock is down
60 %, with a spike to 8.16 in May 2018 when the Roche deal was announced. Since the
end of June 2018, the stock has continued its decline by around 50 %. However, since the
beginning of 2019 the stock has been traded between the range of SEK 2.44-3.15, up some
20 %. We believe the stock has been trading in this range as there is uncertainty about the
capital need, or rather when AroCell is expected to announce it.
Since its IPO, AroCell has injected capital on five occasions leading to a dilution of over 400
%. The company has raised an accumulated SEK 143.5 million. In 2015 a rights issue
brought in SEK 44 million after transaction costs, diluting the shares by 22 %. The latest
capital injection in 2018 raised SEK 29 million after transaction costs with a dilution of 24 %
of the shares.
We believe AroCell will raise capital of SEK +50 million in the coming six months. Moreover,
we estimate a dilution of around 25 %. However, it is not yet included in our calculations.
Furthermore, in our view, AroCell will need to make an additional capital raise in a couple of
years of a similar size. We believe AroCell is likely not attractive enough for investors to
invest the entire capital need of around SEK 90 million. Therefore, AroCell is better suited to
do it on two occasions.
Better positioned now
While the stock rallied several hundred percents to SEK 16.8 per share from its IPO, the
company has made its most promising commitments during the last three years. Since 2016
most of the distributors, as well as Roche, has been signed and more clinical studies have
been initiated and published. We believe investors misjudge AroCell’s position and
technology and that the share should be valued at SEK 3.50 per share, according to our
calculations.
REDEYE Equity Research AroCell 30 June 2019
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Financial forecast
Our financial estimates are based on the growth prospects we see for AroCell in the area of
initial cancer therapy for breast and prostate cancer in the US and EU-5.
As our financial forecasts for AroCell are heavily dependent on the potential implementation
of the technology by Roche, we choose to risk-adjust the case with a 70% likelihood to play
out in our Base Case.
We argue that 100% likelihood that Roche implements the technology is too far-fetched,
while 50% is unreasonable considering the TK1 concentration analysis’ advantages and
benefits, and so we assume a 70% likelihood. As new clinical data is published and 2022
draws closer, it is possible that we will adjust this likelihood, depending on the basis given.
We will follow communication regarding the Roche deal closely, however, we see a risk for
delay, considering what was stated in the Q1 report.
Incidence and test per patient
To determine the size of the market for therapy response analysis, we must estimate the
number of times a patient is tested. We approximate that a cancer patient will undergo two
modifications to their therapy, totaling three rounds of tests. Based on three tests per
analysis cycle, we estimate that each cancer patient is tested a total of nine times. We
make this approximation for both breast and prostate cancer but acknowledge that only
50% of prostate cancer patients will undergo treatment.
Attractive pricing per test
Our estimates include a price per test of USD 100, and so at USD/SEK of 9.48, we assume
a price of SEK 948 per test. This assumption is peer-based and bolstered by AroCell’s
unique position with the technology, the clinical use that TK1 concentration demonstrates in
the studies, and that a reimbursement system is applied for AroCell/Roche. Moreover, we
assume that the price per test will be 50% lower for Roche’s offering, considering its
scalability.
Market penetration
We expect most of the market share for AroCell will be through Roche. In total, we estimate
that TK1 concentration will be used in around 19 % of the tests in 2033, up from 4 % in
2022.
We believe that the acceptance for TK1 will be increased in stages as it will undergo
rigorous validations and control before becoming an established biomarker in clinical
laboratories.
REDEYE Equity Research AroCell 30 June 2019
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The US market will be the most important market for breast cancer, while the EU-5 market
is a much larger market for prostate cancer. Of the two incidences, breast cancer will make
up, on average, 67 % of our estimated sales during the period.
Source: Redeye research
We believe sales will ramp up impressively already in 2021 from TK 210 ELISA on the
European market. In 2022, when we believe Roche may implement the technology, we
again forecast a great increase in revenues, as we believe the analysis method will be
applied for clinical practice. For 2025, we approximate that sales will increase as the
method gets more widely implemented.
Operating leverage from Roche
Although the Roche deal will not generate huge royalties, it will have an impact on gross
profits, as we do not expect any costs for AroCell related to the licensing deal. This allows
AroCell to have an average gross margin of 68% for 2022–2030.
Valuation
We value the case from three different scenarios with the Base Case as our most likely
scenario to play out. The Bear and Bull case scenarios represent a pessimistic and more
optimistic view of the case.
In our Base Case, we assume sales will ramp up in 2021 and take off even more in 2022.
From 2022 to 2033 we expect a CAGR of 16.8 % on sales and a market penetration to
increase from 4 % to around 19 %.
Source: Redeye research
We forecast a long-term gross margin of 65 % for TK 210 ELISA. However, the licensing
deal with Roche has a great impact on the gross profit as no cost for AroCell will be related
to the licensing of the technology.
The selling and marketing expenses are expected to be high in relation to sales in 2022-
2024; however, in 2025 going forward we expect it will decrease from 18 % of sales to 10 %
in 2031-2033. We believe AroCell will make some expansion regarding personnel and
expect administration costs to double until 2022. From there, we assume that the company
will not have to make any significant expansions to their staff, considering its scalable
business model. We assume administration costs to be 20 % of sales in 2022, decreasing
to 7 % in 2033.
REDEYE Equity Research AroCell 30 June 2019
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AroCell has tax losses has been stated by the management to currently be worth SEK 67.1
million. According to our calculations, taxes will not have to be paid until 2026 and then only
for a small portion of the profit. The new company tax of 20.6 % will be applied to the entire
net profit from 2027 going forward.
Capital need
According to our calculations, AroCell will need to raise capital of around SEK 90 million
until they become cash flow positive in 2025. However, we expect the company to do so
over at least two rights issues and expect a cumulative stock dilution of around 50 %. In our
view, however, around SEK +50 million will keep the company afloat until 2022, where we
expect another rights issue to take place.
Scenarios
We use a fundamental Discounted Cash Flow (DCF) framework on our three scenarios:
• Base Case (most likely)
• Bear Case (pessimistic)
• Bull Case (optimistic)
Our DCF valuation indicates a range of SEK 0.90-10.50 with a Base Case of SEK 3.50 per
share.
Key model assumptions
Roche Diagnostics
All three scenarios are based on the likelihood of the Roche Diagnostics license deal’s
potential implementation.
2022
The most important catalyst, Roche, will allow for AroCell to grow quickly in 2022.
Therefore, we see sales increase in 2022 and thereafter. However, we also expect sales to
increase in 2021, the year before the potential Roche implementation.
Wacc
A central part of our valuation is the weighted average cost of capital (WACC). In our rating
of AroCell, we estimate a WACC of 16%, which is used in all three scenarios.
Tests per patient
For cancer therapy response analysis, we approximate nine tests per patient, for both
breast and prostate cancer.
Base Case scenario
We assume a 70 % likelihood that Roche will implement the technology. We assume that
breast cancer will generate most of the income for AroCell, on average, 67 % in the period
2022-2033. During the same period, the Roche deal will make up 15 %, on average, of the
total income. We expect AroCell to reach a market penetration of 19 % in 2031, up from 4
% in 2022.
REDEYE Equity Research AroCell 30 June 2019
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Bear Case scenario
We assume a 50 % likelihood that Roche will implement the technology. We assume that
breast cancer will generate most of the income for AroCell, on average, 67 % in the period
2022-2033. During the same period, the Roche deal will make up 13 %, on average, of the
total income. We expect AroCell to reach a market penetration of 10 % in 2031, up from 4
% in 2022.
Bull Case scenario
We assume a 70 % likelihood that Roche will implement the technology. We assume that
breast cancer will generate most of the income for AroCell, on average, 63 % in the period
2022-2033. During the same period, the Roche deal and another assumed IVD partnership
will make up 15 % of the total income in 2022, reaching 47 % in 2033. We expect AroCell to
reach a market penetration of 26 % in 2031, up from 4 % in 2022 in the market of cancer
therapy response analysis. In our Bull Case, we estimate a market penetration of 9 % in
2033 for the market of both prostate and breast cancer monitoring, up from 2 % in 2025.
REDEYE Equity Research AroCell 30 June 2019
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Peer valuation
In addition to our DCF model, we present a peer valuation that is not included in our
scenarios. We do this to put the valuation of AroCell through another perspective and to
channel check the reasonability of our valuation deriving from our DCF. For investors, peer
valuation can be particularly interesting to see how a company could be valued, given
parameters similar to that of a compared company.
In our peer valuation, we focus on comparing with Biovica rather than looking at a cluster of
similar companies. The reason behind this is that there are obvious similarities between
AroCell and Biovica – specifically their technologies, positions and potentials. Below we
present a table showing the key points for a comparison between the two.
PEER analysis
Biovica AroCell
Based on TK1 Yes Yes
Based on TK1 concentration No Yes
FDA registration in process Yes No
Significant insider ownership Yes No
Lead investor Yes No
Long tenure management Yes No
IVD partnerships No Yes
Capital need No Yes
Biovica AroCell
Cash position MSEK 69 25
Sales 2018 MSEK 3 0,78
Source: Biovica Annual Report 2018/2019, Redeye Research
It can be argued that Biovica, in our view, is better positioned as an organization to face
potential high growth. This manifest itself particularly in the perspective of ownership and
management, as well as having a cash rather high cash position. Furthermore, looking at
the historical enterprise values of the two companies, there has been a premium to
Biovica’s valuation compared to AroCell’s of 23 %. However, we can now see that the EV
for both companies are closing on on each other.
REDEYE Equity Research AroCell 30 June 2019
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When looking at the EV since Q1 2019, we can see that Biovica has come down towards
AroCell. Based on this peer valuation, we cannot, at this point, make any assumptions that
the company is justified a higher share price when comparing to Biovica. However, this
valuation is limited to only looking at Biovica and, furthermore, is not included in our
scenarios based on our DCF analysis.
REDEYE Equity Research AroCell 30 June 2019
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Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.
Rating changes in the report
Management: 6.0
The new management has proved to execute well on company strategies, however, their short tenure has yet to
show further positive actions. The management has vast industry relevant industry experience.
Ownership: 1.0
AroCell is lacking institutional and leading investors, furthermore, its insider ownership is weak. We would like to
see a higher level of insider ownership going forward.
Profit Outlook: 5.5
AroCell is well-positioned to grow with partnerships on a large market. In our view TK1 concentration has good
potential to be implemented in therapy response analysis for breast and prostate cancer. We believe AroCell can
start to grow significantly in 2022 and generate both a net profit and a free cash flow in 2025.
Profitability: 0.0
This is an early-stage commercial diagnostics company without a history of particular revenues.
Financial Strength: 1.0
The company will require capital injection before turning cash flow positive, furthermore, current revenues are too
small to provide any return on several measures.
REDEYE Equity Research AroCell 30 June 2019
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PROFITABILITY 2017 2018 2019E 2020E 2021E ROE 0% -41% -55% -184% 0%
ROCE -74% -41% -55% -108% -133%
ROIC 0% -71% -95% -128% -151%
EBITDA margin -3439% -2654% -4747% -741% -168%
EBIT margin -3439% -2654% -4747% -741% -168%
Net margin -3442% -2656% -4747% -741% -168%
Please comment on the changes in Rating factors……
INCOME STATEMENT 2017 2018 2019E 2020E 2021E Net sales 1 1 1 4 19
Total operating costs -18 -22 -24 -34 -51
EBITDA -17 -21 -24 -30 -32
Depreciation 0 0 0 0 0
Amortization 0 0 0 0 0
Impairment charges 0 0 0 0 0
EBIT -17 -21 -24 -30 -32
Share in profits 0 0 0 0 0
Net financial items 0 0 0 0 0
Exchange rate dif. 0 0 0 0 0
Pre-tax profit -17 -21 -24 -30 -32
Tax 0 0 0 0 0
Net earnings -17 -21 -24 -30 -32
BALANCE SHEET 2017 2018 2019E 2020E 2021E Assets
Current assets
Cash in banks 17 30 8 3 0
Receivables 1 1 1 1 3
Inventories 2 2 3 1 2
Other current assets 0 0 0 0 0
Current assets 20 32 11 4 4
Fixed assets
Tangible assets 0 0 0 0 0
Associated comp. 0 0 0 0 0
Investments 0 0 0 0 0
Goodwill 0 0 0 0 0
Cap. exp. for dev. 0 0 0 0 0
O intangible rights 0 0 0 0 0
O non-current assets 29 25 24 24 24
Total fixed assets 30 25 24 24 24
Deferred tax assets 0 0 0 0 0
Total (assets) 50 57 35 28 28
Liabilities
Current liabilities
Short-term debt 0 0 0 0 0
Accounts payable 3 3 4 4 4
O current liabilities 0 0 0 0 0
Current liabilities 3 3 4 4 4
Long-term debt 0 0 0 23 54
O long-term liabilities 0 0 0 0 0
Convertibles 0 0 0 0 0
Total Liabilities 3 3 4 27 58
Deferred tax liab 0 0 0 0 0
Provisions 0 0 0 0 0
Shareholders' equity 47 55 31 1 -30
Minority interest (BS) 0 0 0 0 0
Minority & equity 47 55 31 1 -30
Total liab & SE 50 57 35 28 28
FREE CASH FLOW 2017 2018 2019E 2020E 2021E Net sales 1 1 1 4 19
Total operating costs -18 -22 -24 -34 -51
Depreciations total 0 0 0 0 0
EBIT -17 -21 -24 -30 -32
Taxes on EBIT 0 0 0 0 0
NOPLAT -17 -21 -24 -30 -32
Depreciation 0 0 0 0 0
Gross cash flow -17 -21 -24 -30 -32
Change in WC 0 0 1 2 -3
Gross CAPEX -30 5 1 0 0
Free cash flow -47 -16 -22 -28 -35
CAPITAL STRUCTURE 2017 2018 2019E 2020E 2021E Equity ratio 94% 95% 87% 5% -110%
Debt/equity ratio 0% 0% 0% 1,727% -179%
Net debt -17 -30 -8 20 55
Capital employed 29 25 23 21 24
Capital turnover rate 0.0 0.0 0.0 0.1 0.7
GROWTH 2017 2018 2019E 2020E 2021E Sales growth 12,450
% 56% -37% 706% 373%
EPS growth (adj) 0% 0% 0% 26% 7%
DATA PER SHARE 2017 2018 2019E 2020E 2021E EPS 0.00 0.00 -0.60 -0.75 -0.80
EPS adj 0.00 0.00 -0.60 -0.75 -0.80
Dividend 0.00 0.00 0.00 0.00 0.00
Net debt 0.00 0.00 -0.20 0.50 1.39
Total shares 0.00 0.00 39.43 39.43 39.43
VALUATION 2017 2018 2019E 2020E 2021E EV -17.2 -29.7 95.1 122.6 157.6
P/E 0.0 0.0 -4.4 -3.5 -3.2
P/E diluted 0.0 0.0 -4.4 -3.5 -3.2
P/Sales 0.0 0.0 207.5 25.7 5.4
EV/Sales -34.4 -38.0 191.7 30.7 8.3
EV/EBITDA 1.0 1.4 -4.0 -4.1 -5.0
EV/EBIT 1.0 1.4 -4.0 -4.1 -5.0
P/BV 0.0 0.0 3.3 78.7 -3.4
SHARE INFORMATION Reuters code AROC.ST
List First North
Share price 2.6
Total shares, million 39.4
Market Cap, MSEK 102.9
MANAGEMENT & BOARD CEO Michael Brobjer
CFO Anders Hultman
IR
Chairman Claes Post
FINANCIAL INFORMATION Q2 report August 21, 2019
Q3 report November 15, 2019
ANALYSTS Redeye AB
Oscar Bergman Mäster Samuelsgatan 42, 10tr
[email protected] 111 57 Stockholm
Anders Hedlund
SHARE PERFORMANCE GROWTH/YEAR 16/18E 1 month -10 % Net sales -0.6 %
3 month -3.7 % Operating profit adj 16.8 %
12 month -56 % EPS, just 0.0 %
Since start of the year +13% Equity -18.6 %
SHAREHOLDER STRUCTURE % CAPITAL VOTES Avanza Pension 11.5 % 11.5 %
Nordnet Pensionsförsäkring 5.1 % 5.1 %
Jon Eiken 3.3 % 3.3 %
Bernhard Tribukait 3.3 % 3.3 %
Gunvald Berger 2.5 % 2.5 %
Olle Stenfors 2.4 % 2.4 %
Lena Lindqvist Design AB 1.7 % 1.7 %
Mikael Jacobsson 1.1 % 1.1 %
Staffan Eriksson 1.1 % 1.1 %
Swedbank Försäkring 1.0 % 1.0 %
DCF VALUATION CASH FLOW, MSEK WACC (%) 16.0 % NPV FCF (2018-2020) -66
NPV FCF (2021-2027) 26
NPV FCF (2028-) 150
Non-operating assets 30
Interest-bearing debt 0
Fair value estimate MSEK 139
Assumptions 2017-2023 (%)
Average sales growth 168.8 % Fair value e. per share, SEK 3.5
EBIT margin -813.7 % Share price, SEK 2.6
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Redeye Rating and Background Definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or
operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of
the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation.
Owner commitment and expertise are key to a company’s stability and the board’s ability to take action.
Companies with a dispersed ownership structure without a clear controlling shareholder have historically
performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership
structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 –
Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does
not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess
Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit
margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 –
Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary
events.
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Redeye Equity Research team
Management
Björn Fahlén
Håkan Östling
Technology Team
Jonas Amnesten
Henrik Alveskog
Dennis Berggren
Havan Hanna
Kristoffer Lindström
Fredrik Nilsson
Tomas Otterbeck
Eddie Palmgren
Oskar Vilhelmsson
Viktor Westman
Linus Sigurdsson (Trainee)
Editorial
Jim Andersson
Eddie Palmgren
Mark Sjöstedt
Johan Kårestedt (Trainee)
Life Science Team
Anders Hedlund
Arvid Necander
Erik Nordström
Klas Palin
Jakob Svensson
Ludvig Svensson
Oscar Bergman
Alexander Ribrant (Trainee)
REDEYE Equity Research AroCell 4 July 2019
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Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:
• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, effective from 30 days before its covered company comes with financial reports, such as quarterly reports, year-end reports, or the like, to the date Redeye publishes its analysis plus two trading days after this date.
• An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any remuneration directly linked to such transactions.
• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.
Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2019-07-04)
Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.
Rating Management Ownership Profit outlook Profitability Financial Strength
7,5p - 10,0p 54 54 21 12 22
3,5p - 7,0p 95 87 128 43 60
0,0p - 3,0p 14 22 14 108 81
Company N 163 163 163 163 163
CONFLICT OF INTERESTS
Oscar Bergman owns shares in the company: No Anders Hedlund owns shares in the company: No Redeye performs/have performed services for the Company and receives/have
received compensation from the Company in connection with this.