RHYTHM BIOSCIENCES LIMITED ASX:RHY

Excellent prognosis: An attractive medical diagnostics technology company

Authored by N.A.S. at Sprout8.com

Date: 13/5/2018
Current Price: $0.18

If you only have 5 minutes, we recommend you read:

  • Investment View;
  • Critical Path to Commercialisation, including our perceived risk levels; and
  • Valuation.

Investment view – superior sensitivity at a lower manufacturing cost

We believe this stock is well placed to capitalise on the:

  1. 13 years of CSIRO research, thus relative short time to market compared to typical clinical development timeline;
  2. The well experienced management team and board;
  3. Market Opportunity: Colorectal cancer is a significant global health risk. Colorectal cancer is the third most common cancer with nearly 1.4 million new cases diagnosed annually, and the the third largest cause of cancer related mortality, with approximately 694,000 deaths recorded worldwide that same year;
  4. The IP they control with patents in Australia, Europe, Japan and China, and various pending applications in other jurisdictions including the US;
    1. At risk population of circa 250M people per annum between the age of 50 – 75 in Australia, Europe and US, leading to a potential end market of $12.5 billion at $50 per patient;
  5. Government and philanthropic support due to the distribution of cure rates, if detected early, can be as high as 90%. However, this falls to less than 10% when cancers are detected late (colorectal cancer is the 2nd largest cancer by volume in Australia, Europe (EU) and the United States (US), and 3rd largest cause of cancer related deaths globally);
  6. More palatable testing methodology than current Fecal immunochemical test (FIT) leading to participation (screening rates) of the conventional FIT testing as low as 38%;
  7. Importantly, the efficacy compared to other screening tests (73% sensitivity at 95% specificity) at a substantially lower cost than molecular blood tests:
    1. comparing performance of ColoSTAT™ to FIT and the leading melecular candidate, Colvera on the same patients showed sensitivities of
      1. Colvera:           All stage cancer, 62% at 91.8% specificity;
      2. FIT (80ug/g):   All stage cancer, 63.6%; at 91.9% specificity; versus
      3. ColoSTAT™: All stage cancer, 73% at 95% specificity.

Consequently, it is our view that RHY represents a low risk investment with significant upside potential. Beyond that we like that this technology has the potential to save a lot of lives.

Understanding the Opportunity & Background

December 2017 – The company raised $9m in the IPO ($8.239 remained as at end of the March quarter) – 100.75M shares on issue ($18M Market Capitalisation). Current Enterprise Value of circa $10M.

7 December 2017 – on listing the share price opened at $0.30, reached a high of $0.365 and closed at $0.32, representing a 60% increase on the IPO price ($0.20).

Between 8 December and 9 February – the share trended downwards to close at $0.20.

From 12 February 2018 to 11 May 2018 the share price has traded within a range, around the IPO price of $0.20, with a 3 month Volume Weighted Average Price of $0.1724 over the period, compared with $0.1751 last week.

We believe that the share price will rerate based on (including but not limited to) the following:

 i) A small number of holders forming unrealistic price expectations
 ii) In the period post listing the market sentiment changed materially
 iii) scenario i) & ii) created fear and anxiety which lead to investors reducing risk & position sizes

Expected near term news flow:

  1. Updates on the reagent development (End of May)
  2. IVD kit development, and
  3. Enrolment of study 7 Clinical Trial Sites and Potential for Early Patient Recruitment (We expect given the previous interest by BUPA & the fact that colorectal cancer is the third largest cause of cancer related mortality that there may be some government support to accelerate commercialisation).

Given the technology was developed and tested by CSIRO for over 13 years, the main period which is commonly void of news and the highest risk is behind the company:

  • Pilot Study (2003-04);
  • Study 1 (2005-06);
  • Study 2 (2007-08);
  • Study 3 (2010-11);
  • Study 4 (2013-14); and
  • Study 5 (a clinical trial funded by BUPA, 2015-16)

We believe that due to the listing price, the relative short time frame on market, the lack of understanding of biotechnology valuation and clinical development by many participants within the Australian share-market (bias towards resources stocks), the above activities are not reflected in the price.

Rhythm Biosciences targeting the screening and early detection of colorectal cancer

Rhythm Biosciences is developing and commercialising Australian medical diagnostics technology for sale to national and international markets.

For Rhythm Biosciences, ColoSTAT™ is the first proposed product-in-development, intended as a simple blood test, ColoSTAT™, for the reliable early detection of colorectal cancer. ColoSTAT™ is based on protein which means it is a low cost of manufacture and utilises ELISA assays using specific antibody binding sites to detect a protein, which are common in diagnostic labs without the need to purchase additional equipment.

The intention of most governments in the target jurisdictions (AU & EU) is for the at risk population to have an annual FIT test. Currently there is participation rates as low as 40% (Europe). This is most likely due to the nature and inconvenience of the current test.

 

Beyond the convenience and low participation rates, the sensitivity (the measure of the test’s ability to correctly detect patients who have colorectal cancer) is low, especially at the early stages of the disease. Remember, cure rates, if detected early, can be as high as 90%. However, this falls to less than 10% when cancers are detected late! Due in part to the current testing toolkit and sensitivities for early detection, there are approximately 694,000 deaths recorded worldwide per year.

A colonoscopy is currently the most reliable diagnostic test for colorectal cancer. However, it is expensive, invasive and carries a risk of complications including a risk (albeit very low) of mortality.

Whether used as a ‘first-step’ screening test or in the triage of persons with a positive FIT to colonoscopy, ColoSTAT™ could play an important role in reducing the morbidity, mortality and healthcare costs associated with colorectal cancer by reducing unnecessary (costly and risky) colonoscopies associated with false positives in FIT in patients with other risk factors. This has the potential to be an affordable and more effective way to prioritise patients for colonoscopy.

ColoSTAT™ is envisaged as a simple, affordable and effective diagnostic ‘first step’ test to augment any national, state or philanthropic screening programs. This test may be of value to those people who are at risk of developing colorectal cancer, particularly those who choose not to participate in standard screening programs for various reasons.

Key Management

Trevor Lockett – CEO & Managing Director

  • Over 30 years of research experience, predominantly at the CSIRO where he has led multidisciplinary research efforts in the areas of prostate cancer gene therapy, colorectal cancer prevention and the promotion of gastrointestinal health.
  • Before leaving CSIRO to join Rhythm Trevor, as Theme Leader, Colorectal Cancer and Gut Health and Group Leader for Personalised, oversaw, the research into the technology that is to become ColoSTAT™.  He voluntarily moved from CSIRO to continue to nurture, develop and commercialise ColoSTAT™.
  • Trevor is an inventor of seven active patent families, all of which have been licensed. Trevor has previously served on the leadership executive team of business units within CSIRO and has a strong commitment to improving human health and wellbeing through the translation and commercialisation of scientific discovery into innovative products and services.

Shane Tanner – Chairman

  • Shane has considerable experience at both senior executive and board level, being Chairman of ASX listed Paragon Care Limited and Zenitas Healthcare Limited, two successful healthcare businesses where he was the Co-Founder of each. Shane is also Chairman of ASX listed Funtastic Limited. Previously, Shane was CEO of Symbion Health (formerly Mayne Nickless Diagnostic Services), one of Australia’s largest diagnostic businesses, CFO of Mayne Group and Chairman of Vision Eye Institute.

Lou Panaccio

  • A chartered accountant with extensive management experience in business and healthcare services. He is currently on the boards of ASX listed companies Sonic Healthcare Limited, Genera Biosystems Limited and Avita Medical Limited. Lou is also on the board of Unison Housing Limited.
  • Lou has more than twenty years’ experience as a board member of both public and private, for profit and not for profit companies. Previously, Lou was the CEO of Melbourne Pathology and Monash IVF, and also executive Chairman of Health Networks Australia.

In terms of their “skin in the game”:

Trevor Lockett – 0 FPO*
Shane Tanner – 1,500,000
Lou Panaccio – 500,000
Adrien Wing – 11,900,000

CSIRO – 2,500,000

Out of 100,750,000 Shares on issue.

We have reviewed the top 50 as at the 26th of April 2018 and the directors holdings have remained consistent. We note some additional holders on the Top 20 of the register since the IPO.

  • CitiCorp Nominees – 2,170,000
  • Brispot Nominees – 1,610,031
  • Alitime Nominees – 1,220,000

The following have increased since the top 20 as at December 2017, published here https://www.rhythmbio.com/wp-content/uploads/2017/10/Rhythm-Biosciences-Replacement-Prospectus-301017.pdf:

  • Northern Star Nominees +100,000
  • Mrs Sarah Cameron +350,000
  • Giokir – +375,000
  • CS Fourth Nominees +468,347
  • Mr Gregory Maurice Pinkus & Mrs Lisa Marie Pinkus +250,000

The following holders appear to be reducing or exiting:

  • Merrill Lynch (Australia) Nominees – 221,579 units remain versus 1550000 in the IPO
  • CS Third Nominees – have decreased their holding by -398,231 units
  • Morgan Stanley Australia Securities (Nominee) – Have reduced -13,072 units
  • Aust Executor Trustees – have exited from 1,500,000 to nil

We note that Trevor Lockett, a Director of the Company does not hold ordinary shares, however holds 2,000,000 options that vest on 29 August 2018 with exercise price of $0.30.

This represents a strong alignment of interests with IPO investors and anyone entering at the time of this publication <=$0.30. This represents a 66% upside from the current share price at the time of publication ($0.18) before his options are even “in the money”.

In summary, Management are solid (with capabilities far beyond what you would typically expect of a company with an $18M market cap), poised to take ColoSTAT to commercialisation. The key is with Lockett and CSIRO staying involved. A common challenge with these plays is that they lose access to personnel and the know how following IP transfer or licence agreement for royalties alone. We view the capital structure with CSIRO on the register their knowledge and relationships with diagnostics companies such as Melbourne Pathology, Melbourne IVF and Sonic Healthcare (ranked number 71 out of all companies in Australia with revenue of $5,122,143,000, approximately 82% of its revenue is from pathology services with a domestic market share: 46.6%).

Perception trails reality – ColoSTAT development is well advanced (Critical Path to Commercialisation, including our perceived risk levels):

  1. Reagents: Establish Rhythms own sources of antibodies and target antigen materials.
    RISK: Low
  2. IVD: ELISA assays to be developed using these new reagents for commercial scale production.
    RISK: Low
  3. Clinical Trial: Clinical performance study 7 to support applications for CE mark in the EU and TGA approval in Australia.
    RISK: Low to Medium Low
  4. Regulatory submissions: First in the EU followed by Australia.
  5. Go To Market: Business development and marketing, getting acceptance and sales from the labs (commercialisation).
    RISK: Low in Australia, Low in EU, Medium in the US.

If you’d like to read the full detail behind each step please read page 30 of the RHY prospectus here. https://www.rhythmbio.com/wp-content/uploads/2017/10/Rhythm-Biosciences-Replacement-Prospectus-301017.pdf

For the purposes of this report, we will outline why we have ranked the risk at the levels we have below.

1. Reagents

We have spoken to the company and validated with industry experts the process and risk of developing their own reagent, noting that the company have the necessary monoclonal antibody pairs for 2 out of 3 (that is in layman’s terms, ⅔ reagents have been finalised, with the final reagent being currently being prepared by the CSIRO), we do not see any risk finalising the final reagent. We expect an update from the company on the progress of the third by the end of June.

In terms of the effects of the reagent development on overall sensitivity in study 7 when a larger trial is conducted and note that while the reagents are new and the company will need to optimise new ELISA assays based on these new reagents, despite the individual assays being difference, these will be dealt with adjustments to the algorithm that calculates the risk score in accordance with Study 6, to ensure equal or better clinical performance with the new reagents, for substantially less cost.

In the event there was a reduction in clinical performance in Study 6, we envisage the company would merely remove the poorly performing reagent and substitute the commercially available reagent that was used in the previous five studies, before commencing Study 7; however we do not expect that to occur.

2. IVD

We believe this is the simplest part of the process. This is like an architect handing over a working drawing to a proven and reputable builder. The risk is very low. Once the reagents are developed and test kits are designed contract manufacturers can easily and cheaply replicate and scale up production.

3. Clinical Trial Risk

Given the trials listed below, we believe the period of the highest risk is now behind the company:

  • Pilot Study (2003-04);
  • Study 1 (2005-06 looked at 14 biomarkers in 102 samples (~51 cases and 51 controls);
  • Study 2 (2007-08 Study 2 , 32 biomarkers, 108 samples (~54/54 case/control);
  • Study 3 (2010-11Study 3, 46 biomarkers, 145 samples (95/50, cases/controls);
  • Study 4 (2013-14 Study 4, 20 biomarkers, 197 samples (99/98, cases/controls); and
  • Study 5 (2015-16 a large clinical trial funded by BUPA, large case/control study of 543 patients (yet unpublished).

For instance, by way of a primer on Clinical development pipeline success rates. The overall likelihood of approval (LOA) is 9.6% from Pre clinical.

Unlike the biotech drug clinical development pathway, RHY as it is categorised as a medical device, is just required to complete a single trial, replicating similar results as Study 1-4 for approval. In this way, we’re at the equivalent of Phase III, but are even further de risked as the company has successfully completed five studies.  While the results of Study 5, a large clinical trial funded by BUPA, remain unpublished, the authors believe given the timing 2015-16 preceded the decision to vend into Rhythm and for Trevor Lockett to depart a CSIRO, that these results were compelling. Each time a company successfully completes a trial, the candidate becomes de-risked and Rhythm have completed 5 studies with high statistical significant outcomes (i.e. very low p-values of <0.0001). This on top of the much lower time frame and cost for trials relating to screening as opposed to the treatment of conditions (single blood test vs circa 6-months of treatment, per patient). The cost for Rhythm will also be substantially lower, and as such, in accordance with the disclosures in the reports and prospectus, we understand that the company is fully funded to complete the trial.

In terms of the efficacy of previous trials:

Clinical data results on ColoSTAT published by CSIRO detected colorectal cancer with a sensitivity for all stage cancer of 73% at 95% specificity.  When broken down by cancer stage this 3 marker panel detected Stage I (earliest), Stage II, Stage III and Stage IV (late stage metastatic) cancers with mean sensitivities averaged of 58%, 80%, 73.5% and 83% respectively, all measured at 95% specificity (Fung et al. (2015) Blood-Based Protein Biomarker Panel for the Detection of Colorectal Cancer. PLoS ONE 10(3): e0120425).  The coefficient of variation for each of the biomarker tests used to create the published data was around 10%. P values for the 73% sensitivity values were <0.0001! (this published data refer to trials 3 and 4 of this series).

By comparison to highlight the significant advantage of ColoSTAT’s clinical performance to that of the existing competitors, a related publication comparing performance of ColoSTAT to FIT (The incumbent) performed on the same patients showed sensitivities:

4. Regulatory Submissions

The company’s strategy is to complete a single trial with 1,000 participants to be used for approval in Australia and to secure a CE for regulatory approval in the EU. We note that the frequency of people with colon cancer in the target population (50-74) in Australia is around 7 per 1,000 screened and that for approval the company want to have at least 100 cancer samples in study 7.  They will therefore be supplementing the study 7 population with blood samples from an additional ~100 patients known to have bowel cancer in a blinded fashion. This approach is often used and has been used by others for regulatory approval in the EU and in Australia so we do not anticipate difficulties in these jurisdictions.

An equally critical thing about the prospective study, however, will be that the vast majority of these people will be cancer free or have non-cancer gastrointestinal problems so we will get a far more realistic picture of the false positive rate for our test. In the US this is different.  They will need trials performed on normal risk subjects that includes appropriate representation by members of their major ethnic groups. Here studies typically involve around 10,000 subjects. Europe is moving towards an American model and this will be in place by about 2022. To be able to maintain a CE mark for CRC  screening beyond 2022 we understand we will need to have data on around 10,000 patients by that time to support the case for continuing sale of product in Europe but these issues will need to be funded by cash-flow or a follow up round of funding. Given the GANTT chart in the prospectus (pg 31) and the company is tracking within that schedule, we expect the company to be revenue generating CY20 and therefore can avoid a follow up round of funding, if they wish.

5. Go To Market

Reimbursements: Our expectation is this is low risk as there are examples of other tests also attracting reimbursement with lower specificity and sensitivity attracting higher costs. While we note when there are already reimbursed products in the same general diagnostic area, there needs to be a differentiator, RHY has three (we understand one alone would be adequate):

  1. Significant cost savings;
  2. Will increase levels of adoption in high risk age brackets. Greater public acceptance of blood tests compared with the current FIT test (fecal); and
  3. Greater sensitivity and accuracy.
    1. Colvera:           All stage cancer, 62%; Stage1, 41.2%; Stage II, 76%; Stage III, 59% and StageIV 71.4%, all at 91.8% specificity
    2. FIT (80ug/g):   All stage cancer, 63.6%; Stage 1, 58.8%; Stage II, 68%; Stage III, 58.8% and Stage IV, 71.4%, all at 91.9% specificity.
    3. ColoSTAT™: All stage cancer, 73%; Stage 1, 58%; Stage II, 80%; Stage III, 73.5% and Stage IV, 83%, all at 95% specificity.

This data suggests a similar performance to FIT for Colvera (a model of a leading DNA and sequencing-based, blood based diagnostic) and a superior performance for ColoSTAT

Symonds et al.  A Blood Test for Methylated BCAT1 and IKZF1 vs. a Fecal Immunochemical Test for Detection of Colorectal Neoplasia. Clinical and Translational Gastroenterology (2016) 7, e137; doi:10.1038/ctg.2015.67, and

Fung et al. (2015) Blood-Based Protein Biomarker Panel for the Detection of Colorectal Cancer. PLoS ONE 10(3): e0120425.

Cover by insurers: Looking at the current state, annual FIT is recommended by the American College of Gastrointestinal Endoscopy.  Due to the untested population (unmet need) and the improved performance of ColoSTAT vs FIT in study 1-4, in terms of sensitivity and specificity, one might reasonably expect the periodicity of any reimbursement for ColoSTAT to reflect that for FIT.

In the United states, Cologuard at A$900, is fully covered on Medicare, once per 3 years. Since ColoSTAT appears equivalent in terms of sensitivity and significantly better in specificity at 1/10th the cost, this reinforces our view that the full cost of ColoSTAT is likely to be covered.

In Europe FIT is the only test recommended for screening across all countries. Periodicity varies between 1 and 2 years by country.  Again assuming equivalence of performance between FIT and ColoSTAT, periodicity of reimbursement is likely to reflect that recommended by the relevant European country.  Given low cost, we will assumed the reimbursement may be linked to the maximum paid for FIT, which we understand to be between A$30-50 per patient, per year or two years.  

Acceptance by labs: In our view, ColoSTAT technology fits perfectly into existing lab based ELISA type technology without the need to purchase new equipment or hire specialist staff, will give a competitive cost advantage.

The Management team have intimate relationships within the current diagnostic market within Australia (Melbourne Pathology, Melbourne IVF and a current director of the international diagnostic giant, Sonic Healthcare). We can assume this deep understanding coupled with strong relationships will allow Management to achieve the appropriate go-to-market strategy.

In relation to overseas markets, Sonic Healthcare (RHY Director Lou Panaccio is currently on the board of Sonic) provides pathology services in Australia, the United States, Europe and New Zealand. Sonic Healthcare has concentrated on expanding its pathology operations overseas over the past five years. Sonic Healthcare acquired United States-based Central Coast Pathology Consultants in February 2011 and German pathology provider Labco in September 2013. The company acquired Switzerland-based pathology provider Medisupport, which consists of laboratory operations in 10 cities, for about $385 million in June 2015. The company has also acquired several smaller pathology businesses in Europe over the past five years.  As a side note, we consider Rhythm an attractive M&A target from the likes of Sonic Healthcare.

As you would expect given the teams intimate knowledge of existing diagnostic companies, the test is being developed to utilise ELISA assays using specific antibody binding sites to detect a protein, which are commonly used in the majority of diagnostic labs globally (according to industry experts we’ve spoken to, the vast majority of diagnostic immunoassays performed in diagnostic laboratories are performed on serum so ColoSTATTM  fits well)

Patient and physician acceptance: Only a small volume of serum is required for each test (less than 0.1 mL) meaning the test can be easily added to a panel of standard blood tests being ordered by a physician as part of a patient’s annual check-up without the need for its own specific blood draw.  Compared to around 4 mL of blood plasma to run molecular tests where DNA is extracted from blood plasma, meaning it is not easily run currently as an adjunct to another panel of tests performed on the same blood draw.

Our Valuation

Rhythm’s Intellectual property

The Company holds granted patents in Australia, Europe, Japan and China, and various pending applications in other jurisdictions including the US.

A worldwide exclusive licence, is held over the intellectual property developed by CSIRO (inventors of WiFi, Equivac HeV: Hendra virus vaccine, soft contact lense and much more) that underpins the ColoSTAT™ solution.

U.S. patent risk (Medium): Whilst we think what RHY have is likely to get through based on the involvement of Trevor Lockett and CSIRO (Who we note has successfully commercialised and gained regulatory approval for Colvera). The authors are aware that there are some challenges. For this purpose we will exclude the US from our evaluation module of this report.

Prevalence of Colorectal cancer

  1. Colorectal cancer is a significant global health risk.
  2. In Australia: 12.3% of all new cancers are colorectal.
  3. Estimated % of all deaths from cancer in 2018 is expected to be 8.5% from Colorectal cancer.
  4. 4,129 Australians (2,124 males & 2,005 females) are estimated to die of Colorectal cancer in 2018.
  5. Globally, colorectal cancer is currently the 2nd largest cancer by volume in Europe (EU) and the United States (US), and 3rd largest cause of cancer related deaths globally.
  6. The risk of developing colorectal cancer rises dramatically above the age of 50. In countries including Australia, UK and US, colorectal cancer screening is recommended for everyone between the ages of 50 and 74 years.


Source: AIHW.

  1. The majority of this elevated-risk section of the population remain under-screened. In target territories this is estimated to be 132.1 million people.

Key attraction is the addressable market in colorectal screening.

Thus Market Size

Population between 50-74 years old Estimated screening participation rate Unscreened population
Australia 6,400,000 46.6% 3,417,000
Europe 153,400,000 38.2% 94,801,000
USA* 91,200,000 62.6% 34,108,000
Japan* 41,407,000 37.95% 25,693,000
China* 353,722,000 19% 286,555,000
Total 644M 40.87% 442M

*Our valuation includes attribution of only 50% of our NPV for the Australian market, 25% European and 0% for USA, China and Japan. If the company successfully secures a USA patent we will increase the valuation accordingly. +While we have been unable to determine the actual screening % for coleorectal cancer within the at-risk population in China, we note that Recent reports from the World Health Organization (WHO) showed that the incidence of colorectal cancer is rapidly rising in China. Early screening appears to be low with 60 percent of Chinese patients diagnosed of the disease until after middle or terminal stage. Consequently, the five-year survival for colorectal cancer patients is only 31 percent in China, while it is 67 percent in the United States. We believe this combined with the continuous rise of colorectal cancer in this region will have important implications on government funding towards screening programs. For the purposes of this we have estimated that the screening rate in China is approximately 50% of Japan.

Further to the table above, we expect that this market will continue to grow based on the following factors:

  1. Population growth

  2. The “demographic cliff” – ageing population in Australia, Europe, China & Japan.
  • Ageing population has increased the prevalence of chronic illnesses, which has lifted strong underlying demand for health services and referrals for pathology services over the past five years. The prevalence of chronic illnesses increases with age. Demand for pathology services strengthens in line with the ageing of Australia’s population. A rise in the 50+ population is likely to lift revenue growth for the company. In 2017-18, the median age of the population is expected to rise slightly before rising sharply in 2021-22.

     3. General visits to the GP will increase

  • Pathology practitioners and other specialist medical practitioners. An increase in total visits to a general practitioner typically increases demand for industry services. General practitioner visits have trended upwards over the past five years and a further increase in total visits is expected in 2017-18. This should see an uptick in screening of at risk population from current levels.
  • The key to finding the right biotech is all about management, the core drugs or products being commercial, and the end markets in those products being multiple billion markets as that is what attracts big pharma in the end to the product or company.
  • At the current market cap of $18m Rhythm has the best risk reward of the biotech world we have looked at and in our view, Rhythm’s shares are poised to materially re-rate as awareness of the company increases.  

Starting first with the Australian and European jurisdictions where we believe the program is two years away from a launch (completion of Study 7, followed by between 6 to 12 months for regulatory matters (CE mark in the EU and TGA approval here in Australia):

  • We have modelled that sales hit peak market penetration of 10% in the 2nd year in Australia (for the purposes of this analysis, we have used a CAGR of 3%; though for the three (3) factors identified above, we believe that is will grow at a much higher rate);
  • In Europe we have estimated a peak market penetration of 5% and sales peaking in year 5, ramping evenly
  • We have modelled a “useful life” of eight (8) years from launch, before declining to nil. In terms of precedent, the incumbent has been the market leader for ten (10)+ years. It is worth noting that while there is some excitement about DNA and sequencing-based, liquid biopsy-focussed diagnostic tests there is currently no evidence in the diagnostic area (as opposed to infectious agent assays) that indicates they have any greater accuracy or sensitivity than immuno-assays (in face the leader in this space has demonstrated lower sensitivity vs ColoSTAT). In the event of a breakthrough, we anticipate ColoSTAT will still have a material cost advantage and combined with the conservative peak market figures, the model is robust.
Market Population between 50-74 years old Peak Market Penetration Estimated Launch Years to Launch
Australia
 
    6,400,000
10% 2021 3
Europe 153,400,000 5% 2021 3
United States 91,200,000 0% 2023 5
Japan 41,407,000 0% 2025 7
China 353,722,000 0% 2025 10

N.b. If ColoSTAT’s performance in Study 1-4 is repeated in Study 5-7, the market share will be much higher, taken from both the incumbent and uplift unscreened population to screened.  It would also increase the ramp-up period velocity. However, in the spirit of this analysis, which we wish to keep conservative, we will keep with 10% AU and 5% EU (plus exclude U.S., Japan and China) “peak” sales until we get further verification e.g. once Study 5 is published, or we see other signs that the sensitivity or cost advantages are further derisked).

In terms of costs:

  • We’ve included an additional $4MM for a second clinical trial in Europe for when the EU moves to an American model of clinical trials. We expect this will be in place by about 2022. To be able to maintain a CE mark for CRC screening beyond 2022-23 the company will need to have data on around 10,000 patients which we believe they are likely to have from the sale of product in Europe by that point; however we have incorporated a follow up funding round.
  • Finally, we used a 30% profit margin (we expect this margin may increase markedly once costings and distribution model are finalised by the company e.g. the margin is a buffer as it may be required to pay for distribution costings), and
  • Finally, we have used a $90 cost price and a discount rate of 18%.  

This yields a “pure” NPV of nearly $1.22 per share (based on 100.750MM shares outstanding and with a discount rate of 18%). Due to the de-risked nature of ColoSTAT, we then applied a success rate of 67.5% (75% Study 7 and 90% Regulatory Approvals) – this compares to 9.63% from phase 1 to successful approval in drug development), leaving a risked price target of A$0.82.

NPV $                    1.22
Risked NPV (67.5%) $                0.82
Current Price $                0.18
Upside 458%
Current Market Cap $         18,135,000
Implied Market Cap $         83,102,612
Discount Rate 18%

 

For many reasons, covered throughout this report, we believe that this is conservative. Further we have not assigned any value to the China or Japan patents or USA market (we believe Japan and the USA are reasonable chances, especially given we understand the board have significant experience in the latter jurisdictions).

By comparison on the ASX:

  1. Botanix Pharmaceuticals Ltd (BOT.AX) is Phase II ready, meaning it still has to complete a Phase II (the phase with the lowest success rate, with only 30.7% advancing to Phase III), followed by a Phase III with 58% success rate and finally regulatory approval with the FDA at 85% (cumulative success rate is only 19.53%), despite that they have a diluted market capitalization of $94MM. The incumbent in the competitive acne field, Epiduo and Duac, had peak sales of $450MM, and
  2. Noxopharm Ltd (NOX.AX) remains in Phase I at $123MM despite being oncology, in the clinical area which has the highest failure rate with <5.1% probability of success..

In conclusion, we cannot find a company globally that has market leadership (efficacy compared to other screening tests, convenience and at a substantially lower cost than molecular blood tests) in a $18B revenue end market (Australia, China, Europe and Japan’s screened populations and a further $39B unscreened) for an $18MM Market Capitalisation/$10MM Enterprise Value.

Disclosure Section:

The information and opinions in the above research report prepared by Sprout8 are for the sole purpose of educating family and friends. Do your own independent research. The above should not be treated as financial advice.
The analysts N.A.S. at Sprout8 hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received direct compensation in exchange for expressing specific recommendations or views in this report.
The authors of this post hold securities in ASX: RHY.