Advanced Oncotherapy PLC GPSL Research - Flash Note on AVO

TIDMAVO

Advanced Oncotherapy PLC

04 October 2018

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Published to the market and investors on 28(th) September 2018 @ 4.58pm (London time).

 
Advanced Oncotherapy (AVO-GB): On Track - H1 recovery - solid H2 outlook 
 Recommendation: OUTPERFORM 
 Target Price: 155p 
 Current Price (as at COB on 27(th) September 2018): 42p 
 
 KEY TAKEAWAY 
 AVO reported its H1/2018 results today. The company has managed to turn the corner with a 
 solid financial position and its completion of c.GBP40m financing round and ending the share 
 overhang from debt equity facilities. The beam testing is progressing, and company's outlook 
 confirmed first patient treatment with LIGHT by H2/2020. The new commercial distribution agreement 
 in Asia with Liquid Harmony put the company in a robust commercial position. LIGHT has a greater 
 potential than PT cyclotrons to replace a significant share of Photon Linacs. We feel that 
 cyclotron manufactures have seen their peak a couple of years ago with a limited chance of 
 recovery. The replacement power from LIGHT is based on technical superiority, price and easy 
 instalment. We maintain and reiterate both our OUTPERFORM recommendation and target price 
 of 155 GBp. 
 AVO has made significant progress on all fronts in H1/2018 - The company has managed a major 
 turnaround of its dire financial situation from last year. The project is now well financed 
 with c.GBP40.0 from its recent fund raising. We see progress on the technical side with its 
 first customer well on track and the experimental beam at CERN has reached its milestone of 
 achieving high enough energy levels to treat superficial tumours. We expect the ADAM team 
 to get to the next stage achieving the energy level for its commercial product by year end. 
 RaySearch partnership is a key achievement in 2018. Software is the key differentiation factor 
 for medical instruments and AVO has chosen the best TPS on the market - We believe LIGHT and 
 laser-based PT have the greatest potential to replace a significant share of photon linac 
 and the cyclotron dinosaurs. While laser-based technology is a decade away from delivering 
 a commercial product, AVO's LIGHT enjoys a prime market position. Software is driving the 
 performance of medical instruments and has become the most important differentiation factor 
 for stale hardware innovation. 
 Accelerated installation of LIGHT could take it to a faster adoption rate. The cyclotron technology 
 involves lengthy and complicated building preparation. Heavy cyclotrons and large concrete 
 bunkers make the installation a major building project, which is, regardless of pricing, often 
 a big hurdle. The advantage of AVO's technology being faster and less complicated combined 
 with a cheaper production process, could give the company a fast head-start with a future 
 margin expansion opportunity driven by an attractive service revenue stream. 
 Price of PT machines is not the biggest hurdle. While the current debate in the clinical community 
 is about pricing and clinical evidence, we believe that the above-mentioned installation hurdles 
 are more significant in holding back a faster adoption rate. In our previous update report 
 (23rd July 2018) we compared cost of cancer treatments, which made PT look less expensive 
 over a longer time period compared to drug-based approaches. We feel that the pricing element 
 will become even less of an issue once the read out of trials comparing PT vs. Radiotherapy 
 ("RT") in 2020 brings clinical evidence to light. Should PT machines stay at the $15m price 
 band by 2030, margins could look significantly more attractive for the whole PT industry. 
 The Proton therapy industry offers significant structural growth. We assume a PT conversion 
 rate of 15% by 2030, which would make it a c.$8.0bn market ($4.5bn for 380 machines in that 
 year sold and $3.5bn for the service of all machines installed up to 2030 (c.2,900 PT vs. 
 c.16,500 conventional PT machines)). PT is among the most attractive sub-sectors in Medtech, 
 which grows significantly above the sluggish Medtech sector with low single digit top line 
 growth. Medtech as a whole has lost its steam due to lack of innovation, which was followed 
 by price pressure from payers, who no longer pay top dollar for commoditised devices and instruments. 
 We maintain and reiterate both our OUTPERFORM recommendation and target price of 155 GBp. 
 Kind regards, 
 
 
 
 
 
Martin Brunninger | Analyst 
 Martin Piehlmeier | Analyst 
 Erland Sternby | Marketing Sales 
 
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October 04, 2018 06:07 ET (10:07 GMT)