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GPSL Research - Flash Note on AVO

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RNS Number : 9951C
Advanced Oncotherapy PLC
04 October 2018

Free to access research and investor meetings in a post-MiFID2 world.

This research report is intended for use only by persons who qualify as professional investors or eligible counterparties (institutional investors) in the applicable jurisdiction, and not by any private individuals or other persons who qualify as retail clients.

Published to the market and investors on 28th 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 27th September 2018): 42p


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.£40m 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.£40.0 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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