pvaurice@midcapp - deinove · 29/03/2018: release of 2017 annual results. operating loss reached...

MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON

DEINOVE: new era for “natural”

The success of a unique innovation

Founded in 2006, DEINOVE is a French biotechnology company that has

developed an original technology allowing it to produce high value added bio-

sourced compounds (carotenoids, antioxidants) from a unique class of

bacteria. After years of intensive efforts in R&D and the development of

industrial procedures, the marketing of the first compounds from the

technological platform since April 2018 marks a major step in the Company's

history.

Very deep underlying markets

The target markets were not selected randomly by the Company. Above all,

they meet a significant need for the supply of natural, bio-sourced ingredients,

in line with current transformations (call for organic products, ethical

considerations, etc.) in a vast field of applications, including animal nutrition,

cosmetics and healthcare. These are tens of billion euro markets where there

is an undeniable premium for innovation.

The first commercial launches in 2018...

The different partnerships signed with major actors (Avril, Flint Hill Resources,

Greentech, Oléos) are now at the commercial launch stage, initially in

cosmetics (from April 2018) then animal nutrition (2019). These structuring

stages will more than validate the extremely innovative nature of the

approach defined by DEINOVE.

The Company also launched its first in-house cosmetic active ingredient, Phyt-

N-Resist, marking its unquestionable desire to capture a major share of the

value creation from its technological platform.

...will be true supports for the security's rise

The achievement of the commercial launches in the coming months is likely to

give the Company a more mature aspect, and reduce the speculation inherent

to the business model. As the share value is above all sensitive to the various

stock market sales communications, 2018 should see powerful catalysts to

stimulate trading in the security.

Considering the assumptions selected in our financial scenario, our prospective

value reaches €51 million, with an upside exceeding 30%. We are starting the

coverage of DEINOVE as a Buy with a Target price of €4.3 per share.

Market information

Industry

Share price (€)

Market cap (€m)

Market segment

Bloomberg ALDEI FP

Shareholders

Truffle Capital 11.6%

Management/Board 0.2%

Scientific founders 0.5%

Float 87.8%

€m (31/12) 2017 2018e 2019e 2020e

Sales (€m) 0.1 0.4 1.8 5.6

Chag -72.1% 477.5% 324.5% 212.2%

EBIT -9.7 -7.6 -10.8 -6.6

OP. margin n.s. n.s. n.s. n.s.

NI-Group -7.3 -5.1 -7.8 -4.8

EPS reported (€) -0.68 -0.43 -0.66 -0.40

EPS chg n.s. n.s. n.s. n.s.

Dividend (€) 0.00 0.00 0.00 0.00

Yield n.s. n.s. n.s. n.s.

FCF -8.1 -5.1 -8.0 -5.3

ROCE -110.3% -78.8% -117.5% -66.9%

EV/sales (x) 114.8 31.5 11.0

EV/EBIT (x) n.s. n.s. n.s.

P/E (x) n.s. n.s. n.s.

Net debt 5.7 9.3 17.3 22.6

Gearing 847% n.s. n.s. n.s.

Next event : H1 results - 27/09/18

Date Recommendation

15/05/2018

Analyst : Pierre VAURICE

Ewan CHESNAUD

Email : [email protected]

Tel : +33(0)155356931

Midcap Partners estimates

Past recommendations

Buy

Specialty chemicals

3.280

39.1

Euronext Growth

Recommendation: Buy Closing price at 14/05/2018: €3.28 Target: €4.3

MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 2

Table of contents

I. THE BASICS 3

II. THE VALIDATION OF A SUCCESSFUL INNOVATION 4

A. The unexploited potential of a vast range of rare bacteria .............................................. 4

B. From the harvesting of raw materials to industrial production ...................................... 5

C. Success based on strong intellectual property .................................................................. 6

III. A PROMINENT PLACE IN VERY DEEP MARKETS 6

A. An acquired status in cosmetics ......................................................................................... 7

B. A boulevard in animal nutrition......................................................................................... 8

C. A vast field of discoveries in antibiotics ............................................................................. 8

IV. 2018, THE YEAR OF ACHIEVEMENT 10

A. Major partnerships validating the interest expressed in the offered innovation ......... 10

B. Financial balance achievable by 2021-2022 ..................................................................... 12

V. A PROSPECTIVE VALUATION OF €4.3 PER SHARE 13

A. A €3.8 per share valuation for the industrial activity..................................................... 13

B. A €0.50 per share prospective valuation for MCB3837.................................................. 14

C. A global valuation standing at €4.3 .................................................................................. 15

VI. APPENDICES 16

DISCLAIMER 17


I. The basics

The business News

Deinove is a biotechnology company specialising in the

development of production processes for speciality

ingredients mainly destined for animal nutrition and

cosmetics at this stage. Deinove bases its research on a

library of 6,000 rare bacterial strains, with interesting

metabolic characteristics, such as the deinococcus,

extremophile bacteria with considerable potential.

2018 will be a pivotal year for the Company with the first

commercial launches from its technological platform.

DEINOVE is eligible for French Share Savings or Company

Savings Plans (PEA-PME).

16/04/2018: DEINOVE and GREENTECH announced the launch of HEBELYS, first cosmetics compound as part of the strategic collaboration.

13/04/2018: acquisition of the MORPHOCHEM’s clinical-stage antibiotic compound MCB3837. Phase-2 ready, MCB3837 aims to target severe gastrointestinal infetions caused by Clostridium difficile.

10/04/2018: commercial launch of Phyt-N-Resist (Phytoène pur & concentrated), natural antioxidant dedicated to cosmetics.

29/03/2018: release of 2017 annual results. Operating loss reached €9.7m (vs. €7.7m). Cash position stood at €4.9m as of 31

st December 2017.

Forecasts for world fish production/consumption Breakdown of the beauty market ($205bn)

Strengths Weaknesses

Deep reservoir of bacteria

Cutting-edge technology in the selection of high potential bacteria

A promising natural positioning

Partnerships with key players in the cosmetics & agro-food industries

Ability to sign value creative agreements in antibiotics

DEINOVE reached commercial step for its first compounds

Still limited number of partnerships

Development hazard for the antibiotics business

Dilutive impact in case of success for developing MCB3837 but high value creation in parallel

Recurring need to raise capital

Opportunities Threats

Enormous potential target markets

Regulations promoting organic products

Industrial actors active in R&D

The only French company to develop an antibiotic

Very competitive market

1Source: Company


II. The validation of a successful innovation

A. The unexploited potential of a vast range of rare bacteria

Founded in 2006 by Dr Philippe Pouletty (co-founder and CEO of Truffle Capital) and Pr Miroslav Radman (Grand Prix Inserm 2003, member of the Academy of Sciences, Faculty of Medicine of Paris-Descartes University), DEINOVE is a French biotechnology company specialising in the design and development of production processes for bio-sourced ingredients from renewable resources.

The Company's innovation builds on Pr Radman's research work, highlighting the exceptional natural properties of a specific class of bacteria, such as its ability to resuscitate and to produce certain high value-added molecules when subjected to situations of stress (irradiation, high temperatures, dessication). DEINOVE's development efforts have enabled it to produce new natural ingredients and bring them to the commercialisation stage.

Amongst the 6,000 bacterial strains in the bank owned by the Company, two bacteria classes complement each other: the deinococcus genus, the main subject of Pr Radman's research, and a vast range of rare and ultra-resistant bacteria.

The deinococcus is the oldest bacteria on our planet. This bacteria has shown incomparable resistance to climate change over the different geological ages. This specificity enables it, notably, to develop in environments with nuclear waste. When this bacteria is subjected to situations of stress, it has the ability to produce molecules of interest, such as carotenoids or antioxidants used in the cosmetics and animal nutrition sectors.

Carotenoids are the plant pigments responsible for the red, orange, yellow and green colours that we find in fruit, vegetables, flowers and algae. They are used on a very wide scale in the agro-food industry as natural colorants.

At a time when considerations turn to natural products, these bacteria represent strong substitutes in the production of natural ingredients compared to oil-sourced processes. Even more important, these bacterial "factories" have shown superior productivity compared to the current offer based on more general bacteria, making them even more interesting.

Unlike yeast which can only ferment animal or plant-based raw materials, deinococcus bacteria have a significant ability to recycle non-food waste (plant biomass, bioethanol). There are numerous potential applications: green chemistry (cosmetics, pharmaceuticals, food industries), natural ingredients, ethanol, etc.

DEINOVE's true know-how is based on its ability to 1/ collect and select bacterial strains of interest, 2/ direct bacteria production towards these interesting compounds through cutting-edge genetic engineering, 3/ optimise production yields of these bacteria to provide a greater economic advantage and 4/ successfully carry out the change in production scale, from laboratory pilots to industrial as it has just been proven with Phyt-N-Resist.

Today, to our knowledge, DEINOVE is the only company that focuses its research and development efforts on deinococci and other rare bacteria.


B. From the harvesting of raw materials to industrial production The business model developed by DEINOVE resolutely focuses on the highest value creation activities, i.e.

more technological (screening, metabolic engineering) and less industrial (large-scale production). The graph

below provides a fair representation of the carotenoid development value chain.

Carotenoid development value chain

Source: Markets & Markets Research

A presence in the early phases of development

As we indicated previously, DEINOVE's developments are based on ultra-resistant bacteria, which have

lived/survived in often hostile environments, such as deserts, tropical forest, lagoons or volcanoes. DEINOVE's

first step is to collect specimens of bacterial strains - 6,000 strains in the portfolio today, including 2,500

deinococcus genus and 3,500 rare strains - then to isolate them in order to select only the resistant and

thermophile strains (that need a high temperature of over 45°C to live).

Upstream development process

Source: DEINOVE

The next development stage is to select the best-performing strains through a set of genetic (genome

sequencing and computer analysis) and high-rate metabolic analyses (bacteria growth rate tests in different

environments).

The screening that follows enables the detection of value-creating activities, i.e. assessing the potential

production of compounds of interest, such as antibiotics, antioxidants, anti-inflammatories, etc. To date, some

400 deinococcus strains naturally produce carotenoids, including deinoxanthin, which has antioxidant

properties that play an essential role in protecting skin against UVs and other oxidant stress.


The development of industrial-scale procedures

Following the discovery and identification of production processes for compounds of interest, DEINOVE's

second strategic know-how is based on its ability to bring its compound portfolio to the industrial production

stage. To date, the Company has successfully followed the different scale-up stages, from laboratory fermenter

(1-2 litres) to the production of several kilogrammes.

This is a precious engineering stage as higher-level production requires meeting the complexity associated

with the different parameters (several tens or hundreds) of sterilisation, aeration and mixing which change

when we increase the volume, diameter and height of the bioreactor (fermenter), without sacrificing

production yields. Today, DEINOVE is able to multiply production of bacteria by a factor of six to eight, thus

validating the economic equation that allows it to include the ingredients produced in different applications

without affecting the profitability of the finished product.

This latter point is essential as the successful integration of compounds strongly depends on alternative

solutions, and particularly the oil-sourced offer. DEINOVE was penalised by this in 2016 after taking the

reasonable decision to stop development of bioethanol as the oil barrel price levels were so low that they

considerably reduced the economic advantage of ingredients from green chemistry. The Company is not the

only one to have backpedalled.

However, DEINOVE was able to capitalise on this setback. The expected sale in the very short term of its first

ingredients will enable it to come out on top and will validate the proof of tangible interest shown by the major

actors in the different targeted sectors.

C. Success based on strong intellectual property

With one exception, DEINOVE's economic model is based on value creation through the sale of its

technological patents to third party industrial suppliers for final market leaders. This sale generates different

types of revenues: 1/ upfront revenue at the signature of a partnership contract for development financed

entirely or partly by DEINOVE and 2/ royalties (several hundred euros per kg depending on the product

delivered: purified molecule, bacterial extract, etc.) directly correlated to the sale of the final products in which

the different ingredients will be included.

To maximise the value creation provided by the company, intellectual property is a powerful lever on which

the business model is based. Today, DEINOVE has a very powerful arsenal of intellectual protection including

over 130 patents spread across the 20 major families. The patents cover the entire value chain, from the

collection of strains to selection methods (for example, selection of strains based on irradiation), culture,

optimisation and of course, the final applications.

III. A prominent place in very deep markets

Whilst confronted with a setback in biofuels, where the low oil price removed all competitive advantages

compared to oil-sourced compounds, the potential applications remain wide-ranging, notably in the markets

targeted by DEINOVE in the short term, i.e. cosmetics and animal nutrition.


A. An acquired status in cosmetics

The beauty market, estimated at over €205 billion, is dominated by the "skincare" segment. The cosmetics

market is a supply market, driven by a premium for innovation to satisfy the expectations of consumers that

are constantly looking for high-quality, high-performance products. Deinove's contribution to the cosmetics

segment is fully in line with this qualitative, innovative approach.

An immense and dynamic beauty market...

...dominated by the "skincare" segment

Source: L’Oréal Source: L’Oréal

A increasingly organic carotenoid market

Source: Deinove – Persistence Market Research

Strong growth for organic cosmetics

Source: Persistence Market Research – Grand View Research

0.04%

0.05% 5%

0.03%

0.01%

0.04% 0.05% 0.05%

0.04% 0.04% 0.04% 0.04%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Market growth

24% 32%

76% 68%

0%

20%

40%

60%

80%

100%

2017 2026

Synthetic carotenoids market Natural carotenoids market

11 15.98

22

0

5

10

15

20

25

2016 2020 2024

Global organic beauty market (B$)

The cosmetics market does not escape the

development of organic and natural products.

This strong underlying trend has increased over

the years. Combined with a constantly renewed

need for bio-sourced active ingredients,

particularly antioxidants - a market estimated at

around $3 billion (which should double by 2022) -

the drivers are not lacking. Population ageing,

changes in life styles and environmental factors

stimulate demand for natural products. The

recent health scandals (Paraben, endocrine

disruptors, etc.) have largely contributed to

accelerating the switch to organic products.

This is especially the case as the new generations,

including millennials, are more attached to products

that are not only natural, but showing ethical

qualities.

Organic products are becoming more

democratised, and are no longer a niche market.

The race for innovation has pushed green chemistry

to the forefront, relegating the "historical"

petrochemicals in a near future. True natural

alternatives will indisputably be the key to powerful

competitive advantages in a market that should

double by 2024.


B. A boulevard in animal nutrition

Animal nutrition has become a major challenge due to the different health scandals and public opinion's

increased awareness of the sustainable agriculture issue. The gradual prohibition of antibiotics for farmed

animals has led the industry to provide solutions for this issue. The use of additives will partly substitute for

traditional antibiotics. Amino acids, enzymes and now carotenoids offer additional solutions and relevant

alternatives.

The constraints add together in a sector undergoing profound changes. Thus the players must now include the

responsible and rigorous management of water resources, availability of land, volatile raw materials, with the

resulting optimisation required in terms of resources, and specifically animal food resources.

An expanding additive market … …driven by ever more vigorous global consumption

Source: Markets & Markets Research Source: FAO Stat

The forecast growth of this market will be particularly sustained, stimulated by demographic expansion and

stricter regulations that promote the use of natural and organic solutions.

To address ever-increasing consuming needs, it is anticipated that aquaculture will exceed traditional fishing

(capture) in volumes by 2021 (see chart above), accelerating consequently the large need for additives. The

different partnerships signed with animal nutrition industry leaders (Avril, Flint Hills Resources, etc.) confirm

Deinove's relevant positioning and innovative solutions.

C. A vast field of discoveries in antibiotics

Research and development of antibiotics has been largely abandoned by the major players in the

pharmaceutical industry since the 1980s. As an example, Bedaquiline, the only medicine effective against

tuberculosis, was approved by the FDA over 40 years ago. The fact that research has been abandoned in this

area has undoubtedly allowed bacteria to adapt, thus considerably reinforcing their defence mechanisms.

21.77

28.22

0

5

10

15

20

25

30

2016 2022

Feed additives market (B$)

20.0

20.2

20.4

20.6

20.8

21.0

21.2

21.4

21.6

21.8

50

60

70

80

90

100

20162017201820192020202120222023202420252026

Production from capture (millions of tons - left axis)

Production from aquaculture (millions of tons - left axis)

Consumption per capita (kg -right axis)


Timeline of antibiotic resistance by antibiotic class Source: Public Health England

Resistance to antibiotics promises to be one of the most significant challenges of this century. In 2016,

Margaret Chan, Director-General of the WHO launched a call before the United Nations to warn against the

dangerously dry world pipeline, talking about a “slow-moving tsunami” when describing the increasing

resistance phenomenon against actual antibiotics. Only two new classes of antibiotics have arrived on the

market over the last 50 years. Too few to escape the announced scourge.

A dry world pipeline

Change in the nb of antibiotics approved by the FDA

Source: WHO Report December 2017 Source: US Food & Drug Administration - Reuters

However, it appears that this call has been heard, at least by part of the industry. This is the case with GSK, a

rare big pharmaceutical company active in this area. Europe has not been idle either. The ND4BB (New Drugs

for Bad Bugs) programme, implemented five years ago, also aims to provide medical responses to the problem

of antibiotics resistance. With a budget of around €700 million, ND4BB contributes to research and the

financing of innovative entities to make up the drastic current shortfall.

Ultimately, the call has been heard, and the return to research on antibiotics and antibiotic resistance has

started, but there are enormous needs for a world antibiotics market estimated at between $40 billion and $50

billion. The antibiotic activity of bacteria offers considerable potential, and the 6,000 strains in Deinove's

library are a definite catalyst, especially when a part of the AGIR’s project aims to incorporate thousands

aditional strains within the next 5 years (cf. release, link).

-1

1

3

5

7

9

11

13

15

Phase 1 Phase 2 Phase 3

PPL antibiotics TB antibiotics

C. diff. Antibiotics Biologicals

0

5

10

15

20

25

1980-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15

Number of antibiotics approvals

Date of discovery

Date of identification of resistance

1928

1953 1940

1948

1993

1981985

1985

30 years since the last

introduction of a new class of

antibiotics 1920 1990 1940 1960 1950

Penicillin Tetracyclines

Macrolides

Fluorquinolones Carbapenems

Class of antibiotic:

http://www.deinove.com/en/news/all-press-releases/deinove-collaborates-naicons-discover-new-antibiotics-frame-agir-project


IV. 2018, the year of achievement

A. Major partnerships validating the interest expressed in the offered innovation

As indicated above, DEINOVE is at the heart of a pivotal year. Whilst from the start, its compounds produced

from rare and resistant bacteria raised considerable interest from the major players in final markets, 2018

promises to be the validation of all the efforts undertaken up to now.

Consecration of innovation in cosmetics and animal nutrition

Building on the major partnerships signed over several years, from the second quarter of 2018, we should see

the achievement of the first commercial launches (provision of samples, inclusion in final products) in

cosmetics and animal nutrition. The first income should be recorded during the first months of 2019.

Amongst these major contracts, the COLOR2B project signed in 2017 between DEINOVE and the Avril Group

(formerly Sofiprotéol) is based on the development of a natural additive production process for animal

nutrition. The two partners are today at the third and final stage, which aims to prepare industrialisation with a

commercial launch expected for the end of the year. Still in animal nutrition, the partnership signed with Flint

Hill Resources (FHR) on nutrients of interest is at an advanced stage with a launch expected for 2019. Note

that FHR contributes financially to this project by covering the R&D expenses.

In the shorter term, DEINOVE's first achievements will be found in cosmetics. The partnership with Greentech

is based on the co-development and commercial launch of new active ingredients for skincare. The

technological transfer to Greentech is on-going, and the commercial launch under the name HEBELYS® has just

been announced mid-April (link). We can also add the latest partnership announced in January 2018 with

Oléos, for the development of a stable oily active ingredient with innovative properties.

Partnerships signed to date Partner Product Start Type Stage of development

Avril

COLOR2B project

Natural

additives for

animal

nutrition

August 2014

DEINOVE provides

a purified

molecule

Preparation of industrialisation

Launch 2019

Flint Hill Resources

Natural

additives for

animal

nutrition

November

2015 Co-development

Optimisation of fermentation parameters

Definition of production conditions

Launch beginning 2019

Greentech

Ingredients for

skincare

products

March 2017 Co-development Technology transfer on-going

Commercial launch April 2018

Oléos

Oily active

ingredient for

cosmetics

January

2018

DEINOVE provides

the bacteria

Optimisation of production performance for the

bacterial strain

Commercial launch end 2018

Source: DEINOVE

In addition to its development efforts with leading partners, DEINOVE has launched the commercialisation of

its own in-house development, Phyt-N-Resist, an innovative carotenoid for cosmetics with particularly

attractive antioxidant and healing properties. The choice of launching this new ingredient in-house reflects

the desire to retain part of the added value. Commercial success could lead to future developments based on

this strategy.

http://www.deinove.com/en/news/all-press-releases/deinove-and-greentech-announce-launch-hebelysr-first-cosmetic-active-ingredient-resulting-their-collaboration


The final highlight to date for DEINOVE's first carotenoid is the announcement of successful industrial scale

production by SAS Pivert, a company with a recognised track record in industrialising green chemical

innovations. This event led to a 73% increase in the share price, in a trading session, testifying to the

perception of the market's faith. This active ingredient has been launched in April at the in-cosmetics trade

show in Amsterdam (17-19th

April).

Development portfolio

Source: DEINOVE

A significant lever in antibiotics

Now a wholly consolidated subsidiary in DEINOVE following the takeover at the beginning of 2017 of the 72%

not previously owned, DEINOBIOTICS provides intensive efforts to develop a new molecule with therapeutic

interest, thus breaking with the antibiotic development desert of the last years.

The evident need for the development of a new class of antibiotics in a context of increasing resistance to

existing antibiotics offers a real financing opportunity. For this reason, DEINOVE and the Charles Violette

Institute, whose employees are spread between Lille University and DEINOVE's premises, are part of the AGIR

project, which aims to identify, collect, cultivate, screen, optimise and assess rare bacterial strains in order to

develop new antibiotic structures.

This project received €14.6 million from BPI France through the Investments for the Future programme, and

includes staggered payments, conditioned on the success of the different stages of development. Given the

early stage of this project (pre-clinical stage), we have chosen not to include it in our financial modelling or

valuation.

Clear proof of the interest aroused by the identification & development technological platform of DEINOVE,

the Italian company NAICONS will provide its portfolio of bacteria strains, 400 first on a total of 45,000, so as to

detect high potential compounds that, in case of success, will be subject to a licencing agreement between the

two companies (see release: link).

Still in the strategy to expand the platform oriented to antibiotics, DEINOVE signed a licencing option (valid

until the end-2018) with REDX PHARMA to acquire its anti-infectious programme NBTI (Novel Bacterial

Topoisomerase Inhibitor) targeting gram negative bacteria like legionellosis.

In order to fill a non mature portfolio, DEINOVE announced the acquisition of the German company

MORPHOCHEM that holds an antibiotic, MCB3837, to treat severe gastrointestinal infetions caused by

Clostridium difficile, that is in a more advanced stage, phase-2 ready (clinical study on humans). It is worth

noting that this programme qualified for QIDP status (Qualified Infectious Disease Product) & the Fast Track

designation by the FDA.

http://www.deinove.com/en/news/all-press-releases/deinove-collaborates-naicons-discover-new-antibiotics-frame-agir-project


The acquisition of MORPHOCHEM relies on a contribution-in-kind transactionof 500,001 shares created,

avoiding any cash out, with 8 million warrants. Those 8 million warrants can be exercised at each key step of

development:

Source: DEINOVE

It should be added that the validation of each step will trigger an important dilutive impact on the capital

structure with warrants that can reach 8 million, i.e. a 42% dilution (based on actual total of shares) if all

warrants are exercised. That being said, it will come along the significant value creation if each step results in a

positive way.

B. Financial balance achievable by 2021-2022

The monetisation of the first commercial sales should initiate a real take-off from 2019. In addition to the

different partnerships (FHR, Avril, Oléos, Greentech and the cosmetic active ingredient developed in-house, we

forecast five new launches per year during the period under consideration (2019-2029). Over the period 2018-

2021, we expect annual average income growth of 183%.

Ramp-up of sales over the period 2018-2023 (€M) Year 2018 2019 2020 2021 2022 2023

In-house cosmetic ingredient (revenue, launched April 2018) 0.2 1.2 3.0 3.0 3.0 3.0

New in-house cosmetic active ingredients (revenue) 0.0 0.3 1.5 4.5 7.5 10.5

Avril (royalties) 0.2 0.2 0.5 0.5 0.5 0.5

FHR (royalties) 0.0 0.0 0.1 0.2 0.2 0.2

Greentech (royalties) 0.0 0.1 0.2 0.2 0.2 0.2

Oléos (royalties) 0.0 0.0 0.1 0.2 0.2 0.2

New developments (royalties) 0,0 0,0 0,3 1,1 1,8 2,6

Total revenue 0.4 1.8 5.6 9.5 13.3 17.0

change n.s. +325% +212% +70% +39% +28%

Source: Midcap Partners

The cost base should scarcely change as the company no longer has to cover R&D expenses once the patents

for the active ingredients have been sold to the partners. For the carotenoid developed in-house, we have

included the distributor expenses and costs for raw materials due to the production being carried out by SAS

Pivert (gross margin estimated at 70%).

In addition to the AGIR project for antibiotics, note that DEINOVE is eligible for non-dilutive financing resources

as illustrated by the DEINOCHEM programme that aims to produce original carotenoids in a competitive way.

DEINOVE was eligible and received a €5.9 million financial support from ADEME and the CGI. To date, the

Company has received multiple payments for a total amount of €4.8 million as part of this programme.

For the MCB3837’s development, our assumptions rely on €3 million expenses related to the phase 2 clinical

trial from end-2018 to early-2020.

1st patient recruted

500 001 new shares

Beginning of the phase IIb/III of the pivotal

trial or phase 3

2 300 000 new shares

End of positive phase IIb/III of the pivoltal

trial or phase 3


FDA approval of the regulatory filing for a

first marketing


1st approval for marketing at least in the US or in one or

more countries



Growth and profitability scenario over the period 2018-2023 (€m) Year 2018 2019 2020 2021 2022 2023

Revenue 0.4 1.8 5.6 9.5 13.3 17.0

change n.s. 324% 212% 70% 39% 28%

Op. expenses -6.5 -9.5 -10.6 -11.7 -12.8 -13.0

EBITDA -6.1 -7.7 -5.0 -2.2 0.5 4.0

D&A -1.1 -1.1 -1.1 -1.2 -1.2 -1.2

EBIT -7.1 -8.8 -6.1 -3.3 -0.7 2.8

EBIT margin n.s. 24% -31% n.s. -80% -521%


Our financial forecasts present cash self-sufficiency to ensure operations up to the end of 2018. These

forecasts do not take into account the payments conditional on the different stages of the DEINOBIOTICS

project as this very early stage of development has a high development failure rate. In the event of success, it

will, however, be a fairly significant upside.

Add to this that the Company contracted an equity line in 2014 with Kepler Cheuvreux for a maximum amount

of €15 million divided into four tranches. To date, tranches 1 and 2 have been used, tranche 3 has a balance of

€1.4 million and tranche 4 around €4 million. Their activation would provide additional financial resources,

which could, however, weigh on the share price.

V. A prospective valuation of €4.3 per share

Our valuation model is based on the sum of the historical activity (€3.83 per share) et the project MCB3837

recently acquired (€0.50 per share). This prospective valuation does not consider the upcoming capital raising,

announced by management, that aims to finance a part of the “industrial activity” (ex-MORPHOCHEM) before

reaching the cash breakeven and the phase 2 clinical stage of MCB3837. We anticipate a 8 to 10 million euros

capital increase that could bring enough visibility to finance the activity for the next 24 months.

A. A €3.8 per share valuation for the industrial activity

2018 will no doubt be a year of achievement for DEINOVE. The speculative nature of the project will be

reduced once the supply contracts for the major sector players materialise. This will considerably reduce the

risk premium for this project.

Given the still early nature of the Company's financial history pending the strong take-off of sales and thus the

difficulty in applying multiples, we have selected only the DCF method which seems to us to be the most

appropriate.

Our valuation method by discounting future flows leads us to a prospective value of €47 million, i.e. €3.84 per

share (the number of shares selected is based on a dilutive base including the BSPCE but not BSA as their

striker is far higher than the actual price). Our scenario is based on the following assumptions:

- a dynamic increase in sales from 2019 supported by new launches in addition to those already known

(FHR, Avril, Oléos, Greentech, in-house cosmetic ingredient);

- a growth rate to infinity of 3% reflecting the strong potential for discoveries and development of new

high value added compounds;

- a cost base that we change on average by 2% per year over the period considered, excluding

purchases associated with the in-house ingredients which are linear along with the sales trend;


- a discount rate of 12.0% taking into account a risk-free rate of 1.1%, a risk premium of 5.9%, a beta of

1.0x (beta FactSet five years vs CAC Small) and a specific risk premium of 6% for the early stage of the

Company's development.

DCF Scenario Year 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Revenue 0.4 1.8 5.6 9.5 13.3 17.0 20.8 24.5 28.3 31.7 35.0 38.4

EBITDA -6.1 -7.7 -5.0 -2.2 0.5 4.0 7.5 11.0 14.5 17.6 20.6 23.8

D&A -1.1 -1.1 -1.1 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.3

EBIT -7.1 -8.8 -6.1 -3.3 -0.7 2.8 6.3 9.8 13.2 16.4 19.4 22.5

Taxes 1.8 2.2 1.5 0.8 0.2 -0.7 -1.6 -2.4 -3.3 -4.1 -4.8 -5.6

CAPEX -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2

FCF -5.5 -6.7 -4.7 -2.5 -0.5 2.1 4.7 7.3 9.9 12.3 14.6 16.9

Discounted FCF -5.0 -5.5 -3.4 -1.6 -0.3 1.1 2.2 3.0 3.7 4.0 4.3 4.4


Calculation of value/security WACC parameters

Sum of discounted FCF (€M) 2.4 Stock market capitalisation (€M) 38.6

Discounted terminal value (€M) 50.7 Risk-free rate (French 10-year

Treasury bond - OAT) 1.0%

Enterprise value (€M) 53.1 Beta (FactSet 5 years vs CAC

Small) 1.0x

Net debt (€M, 31/12/2017) 5.7 Market risk premium 5.9%

Provisions (€M, 31/12/2017) 0.2 Specific risk premium 6.0%

Equity (€M) 47.2

Number of diluted shares (M) 12.3

Value/security (€) 3.84 Discount rate 12.0%

Source: Midcap Partners Source: Midcap Partners

Our assumptions lead to a valuation of €47 million. However, remember that this value is largely subject to the

different anticipated commercial successes, both in terms of number of launches, associated volumes and the

ability to negotiate attractive levels of royalties.

As we indicated, our prospective valuation takes into account the dilutive factors (BSPCE) Excluding dilutive

factors, our valuation presents an upside of 40%.

WACC sensitivity table/normalsed growth

WACC

Growth to infinity 9.0% 10.0% 11.0% 12.0% 14.0% 15.0% 16.0%

1% 56.8 49.5 43.0 37.2 27.4 23.3 19.6

2% 63.0 55.1 48.0 41.7 31.1 26.6 22.5

3% 70.6 61.9 54.1 47.2 35.5 30.6 26.2

4% 80.1 70.4 61.8 54.1 41.1 35.6 30.7

5% 92.3 81.4 71.7 63.0 48.3 42.1 36.6


The table above highlights the valuation's sensitivity to the selected discount rate. Recording of the first

invoicing for the different active ingredients marketed will enable the specific risk premium for DEINOVE's

business model to be reduced significantly, thus exercising a strong leverage effect on the potential rise. With a

WACC reduced to 10%, this could exceed €60 million.

B. A €0.50 per share prospective valuation for MCB3837

Our modelling for MCB3837 reached to a €10m, that means €0.50 par share, considering the following

assumptions:


- The management of the phase 2 clinical trial pour an amount of €3m, then the transfer of development

rights to a partner in case of success,

- A commercial launch in 2023 with a peak sales at €150m four years later,

- Patent expiration in 2042, year from which sales are expected to lower drastically,

- A 15% royalties rate,

- A 15% discount rate,

- A cumulated success probability at 25%.

In order to obtain the valuation per share, we integrate all the dilutive instruments associated to the project,

i.e. the 8 million additional shares liked to the warrants.

C. A global valuation standing at €4.3

Many catalysts are expected that will support the stock during short & medium term. The history of the

company is currently changing with the concrete achievements of its development, that is to say, the

commercial launches of its own compounds that validate the success of its disruptive technological platform.

At the same time, the company will need to raise money until the cash breakeven that we anticipate in 2022.

Nonetheless, the value creation is expected to be significant as sales will accelerate for cosmetics et animal

nutrition as well as the potential that could increase from the development steps in antibiotics.

Synthèse de valorisation

Method Value/share Historical activity €3.8 MCB3837 €0.5 Prospective valuation €4.3


We are starting the coverage of DEINOVE as a Buy with a Target Price of €4.3 per share.


VI. Appendices

Sources: DEINOVE – Midcap Partners

P&L (€m) 2015 2016 2017 2018e 2019e 2020e

Operating income 0.5 0.8 0.2 3.0 1.9 5.7

chg 215.4% 61.2% -72.9% 1305.4% -36.8% 198.9%

of which sa les 0.2 0.3 0.1 0.4 1.8 5.6

chg 60.8% 25.4% -72.1% 477.5% 324.5% 212.2%

Operating expenses -7.8 -7.8 -8.8 -9.6 -11.6 -11.2

chg 17.2% -0.9% 13.9% 8.4% 21.5% -3.6%

EBITDA -7.3 -7.0 -8.6 -6.6 -9.7 -5.5

% sales n.s. n.s. n.s. n.s. n.s. n.s.

D&A -0.6 -0.7 -1.1 -1.1 -1.1 -1.1

EBIT -8.0 -7.7 -9.7 -7.6 -10.8 -6.6

% sales n.s. n.s. n.s. n.s. n.s. n.s.

Financia l result 0.0 0.0 0.0 0.0 0.0 0.0

Non-recurrent i tems 0.0 0.3 0.3 0.0 0.0 0.0

Corporate tax 1.6 1.1 2.4 2.5 3.0 1.9

Amortization of goodwi l l 0.0 0.0 0.4 0.0 0.0 0.0

NI -6.4 -6.3 -7.3 -5.1 -7.8 -4.8

Minori ty interests 0.0 0.0 0.0 0.0 0.0 0.0

NI-group -6.4 -6.3 -7.3 -5.1 -7.8 -4.8

Balance Sheet (€m) 2015 2016 2017 2018e 2019e 2020e

Intangible assets 0.1 0.2 3.6 3.6 3.6 3.6

Tangible assets 1.1 0.9 2.0 2.0 1.9 1.8

Financia l assets 0.8 1.3 0.1 0.1 0.1 0.1

Deferred tax assets 0.0 0.0 0.0 0.0 0.0 0.0

WC 0.7 6.8 0.4 0.4 0.6 1.2

Year-end accruals 0.0 0.0 0.5 0.5 0.5 0.5

Assets 2.7 9.2 6.6 6.5 6.6 7.1

Equity 8.1 2.6 0.7 -3.0 -10.8 -15.6

Provis ions 0.0 0.0 0.2 0.2 0.2 0.2

Deferred tax l iabi l i ties 0.0 0.0 0.0 0.0 0.0 0.0

Net debt -5.4 6.6 5.7 9.3 17.3 22.6

Liabi l i ties 2.7 9.2 6.6 6.5 6.6 7.1

Cash Flow Statement (€m) 2015 2016 2017 2018e 2019e 2020e

CF before ∆WC -5.6 -5.8 -6.2 -3.8 -6.5 -3.5

∆WC -0.7 0.1 -0.8 0.0 -0.2 -0.6

CF after ∆WC -6.3 -5.7 -6.9 -3.8 -6.8 -4.1

Acquis i tions -1.8 -2.0 -1.2 -1.2 -1.2 -1.2

Free Cash Flow -8.2 -7.6 -8.1 -5.1 -8.0 -5.3

Disposals 0.9 0.9 -2.6 0.0 0.0 0.0

Other changes 1.3 0.0 0.0 0.0 0.0 0.0

CF from investing activi ties 0.4 -1.1 -3.8 -1.2 -1.2 -1.2

Capita l increase 14.3 0.8 6.6 0.0 0.0 0.0

BSA subscription 0.0 0.0 0.0 1.5 0.0 0.0

Debt i ssuance 2.0 2.9 0.0 0.0 0.0 0.0

Debt reimbursement -0.1 0.0 -0.3 0.0 0.0 0.0

CF from financing activi ties 16.2 3.7 6.3 1.5 0.0 0.0

Other changes 0.0 0.0 0.0 0.0 0.0 0.0

Change in debt 10.2 -3.1 -4.4 -3.6 -8.0 -5.3


Disclaimer

This document may refer to valuation methods defined as follows: 1/DCF Method: discounting future cash flows generated by the business's operations. Cash flows are determined using the analyst's financial forecasts and models. The discount rate used is the weighted average cost of capital, defined as the weighted average cost of the company's borrowings and the theoretical cost of its equity as estimated by the analyst; 2/Comparables method: application of stock-market valuation multiples, or multiples observed for recent transactions. These multiples may be used as benchmarks and applied to the company's financial aggregates to determine its valuation. The sample is constituted by the analyst according to the company's characteristics (size, growth, profitability, etc.). The analyst may also apply a premium/discount based on his perception of the company's characteristics; 3/Asset-based method: estimation of the value of the equity on the basis of the revalued assets and corrected for the value of the liability; 4/Discounted dividend method: discounted future value of estimated dividend flows. The discount rate used is generally the cost of capital; 5/The sum of the parts: this method consists of estimating the different activities of a company, by using the most appropriate assessment method for each, then calculating the total. Recommendation scale: Buy: expected over-performance above 10% compared to the market within 6 to 12 months Neutral: expected to outperform or under-perform the market within a range of +10% and -10%, within 6 to 12 months Sell: expected to under-perform the market by more than 10% within 6 to 12 months Detection of conflicts of interest:

Business entity Closing price (€) Recommendation Warning

DEINOVE 3.28 Buy G A LOUIS CAPITAL MARKETS – MCP or any legal entity related to it holds more than 5% of the issuer's total issued capital; B The issuer holds over 5% of the totality of capital issued by LOUIS CAPITAL MARKETS - MCP or a related legal entity; C LOUIS CAPITAL MARKETS - MCP, alone or with other related legal entities, is related to the issuer through other significant financial interests; D LOUIS CAPITAL MARKETS - MCP or any legal entity related to it is a market maker or a liquidity provider with which a liquidity contract has been concluded in relation to the issuer's financial instruments; E LOUIS CAPITAL MARKETS - MCP or any legal entity related to it has, within the last twelve months, acted as lead manager or joint lead manager for an offer relating to the issuer's financial instruments, and that offer has been made public; F LOUIS CAPITAL MARKETS - MCP or any legal entity related to it is a party to any other agreement with the issuer concerning the provision of investment services relating to the corporate activity; G LOUIS CAPITAL MARKETS - MCP and the issuer have agreed on the supply by the former to the latter of a service for the production and circulation of the investment recommendation concerning the said issuer.

Breakdown of recommendations At 01/05/2018, the recommendations issued by the Midcap research team at LOUIS CAPITAL MARKETS – MCP break down as follows:

Recommendation Businesses tracked of which "Corporate" businesses

Buy 67% 76%

Hold 32% 24%

Sell 1% 0%

The reference prices used in this document are the closing prices. Any opinion given in this document reflects our current judgement and may be modified at any time without prior notice. LOUIS CAPITAL MARKETS - MCP has adopted effective administrative and organisational arrangements, including information barriers to prevent and avoid conflicts of interest in relation to investment recommendations. The remuneration of the financial analysts involved in drafting the recommendation is not tied to the corporate finance business. Past performance cannot be relied on as an indicator of future performance.

pvaurice@midcapp - deinove · 29/03/2018: release of 2017 annual results. operating loss reached...

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