Advanced Oncotherapy PLC GPSL Research on Advanced Oncotherapy Plc
April 26 2018 - 8:50AM
RNS Non-Regulatory
TIDMAVO
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
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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
goetzpartners securities Limited
The Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.
T +44 (0) 203 859 7725 | healthcareresearch@goetzpartners.com / martin.brunninger@goetzpartners.com
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