Advanced Oncotherapy PLC GPSL Research on Advanced Oncotherapy Plc

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Advanced Oncotherapy PLC

26 April 2018

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Advanced Oncotherapy (AVO-GB): Revamped particle therapy story 
 Recommendation: OUTPERFORM (from NON-RATED) 
 Target Price: 155p (from NIL) 
 Current Price: 46p 
 
 Click here for full PDF version 
 
 KEY TAKEAWAY 
 We upgrade AVO to OUTPERFORM with a fair value of 155 GBp. The company has significant growth 
 potential in the nascent Proton therapy ("PT") industry. The dented growth trajectory from 
 the industry leaders in PT signals the limitation of the conventional cyclotron technology 
 in PT. We are encouraged by AVO's technology to benefit from this bottleneck through delivery 
 of a better and easier-to-install technology with its PT Linac. Execution on scaling up production 
 will easily lower machine prices and therefore represents a significant opportunity to expand 
 margins on the services business, which will remain at a higher price level. We are also encouraged 
 by an upgraded management team, which is experienced in installations, service and sales - 
 OUTPERFORM. 
 Advanced Oncotherapy - Early stage but technological advantage of AVO's LIGHT. The PT incumbents, 
 IBA and Varian are far ahead of its competition dominating the market with a combined market 
 share of more than 70%. However, besides pricing, all PT players share one significant hurdle 
 for fast 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. AVO could carve out a significant 
 advantage with their modular system, which could in theory allow a much faster and easier 
 installation almost comparable with conventional Linac. AVO could tap into a new market for 
 mid-sized hospitals, which could be a significant volume play. 
 Fast and easy installation of LIGHT could take PT to a faster adoption rate with a higher 
 margin expansion opportunity vs. conventional cyclotron based PT. 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 this update report we have 
 compared cost of cancer treatments, which makes 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. 
 Reinforced management team changes the equity story significantly. AVOs management team has 
 changed the equity story significantly compared to 2016. While the patents and the promising 
 technology was already in place then, the company has added veterans of the PT industry from 
 science, engineering, installation, application experience and compliance. We feel that the 
 success of the industrialisation is entirely hinging on the top professionals. 
 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 amongst the most attractive subsectors 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. 
 Valuation - We upgrade our AVO recommendation to OUTPERFORM from NON-RATED and set a new target 
 price of 155 GBp based on new funding, strengthened management and a robust strategy. 
 Kind regards, 
 
 
 
 
 
Martin Brunninger | Analyst 
 Martin Piehlmeier | Analyst 
 Erland Sternby | Marketing Sales 
 
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April 26, 2018 08:50 ET (12:50 GMT)