An Attractive Valuation for a Small Biotech with Near Term Cash Flow and Diversified Pipeline - Speculative Buy, TP is A$0.039. [Current share price is $0.015].
A recent pullback in the share price of Cellmid (ASX: CDY) has created an attractive opportunity for investors looking to de-risk their small cap portfolio with Biotechnology / Healthcare stocks. Recent weakness in CDY share price is characteristic of early stage biotechnology stocks on the ASX, as investors were trying to avoid speculative stories with product pipelines in pre-clinical stage that have some way to go before commercialization (likewise Cellmid‟s therapeutic program).
However, we believe the market significantly undervalues Cellmid‟s diagnostics pipeline and hair loss business. Our conservative revenue model shows that Lung Cancer Dx (test that will be launched in 2H13 by Quest Diagnostics, NYSE: DGX) and Cxbladder (test that will be launched in 2H13 by Pacific Edge, NZE: PEB) worth A$0.021/sh and A$0.006/sh respectively.
In addition, we value Advangen International (Cellmid‟s wholly owned subsidiary) at A$0.012/sh using conservative revenue scenario for the hair loss products.
We currently do not attribute any value to Midkine therapeutic program that has two products in pre-clinical development.
Our Price Target of A$0.039 is Based on a DCF Analysis of Three Programs with Near Term Cash Flow
In 2009 and 2010 Cellmid licensed midkine as a biomarker for diagnosis of lung cancer and bladder cancer to Quest Diagnostics (NYSE: DGX) and Pacific Edge (NZE: PEB) respectively. Both tests are non-invasive and easy to use. In clinical studies both tests demonstrated superior specificity for detection of cancer comparing to current diagnostic options that often invasive (i.e. biopsies).
Both tests are on schedule to be launched in 2H2013 in US as a Laboratory Developed Tests (LTD) that will be regulated under Clinical Laboratories Improvement Amendment and thus do not require FDA approval.
Under both license agreements, Cellmid will receive milestone payments in addition to single digit royalties. Using conservative market penetration for the tests, low single digit royalties to Cellmid and 15% discount rate we value cash flows to Cellmid at A$0.021/sh and A$0.006/sh from the lung and bladder cancer tests respectively. Both tests are in the hands of experienced and reputable partners and we see very low downside risk to our estimates.
Advangen launched their hair loss products this summer and already have distribution agreements with 700 Australian pharmacies in addition to direct sales to hair salons and internet sales. Our market penetration estimates for Advangen hair loss products range from 0.2% in Year 1 to 2% in Year 10.
Our conservative model values Advangen at A$0.012/sh. We believe that profits from scientifically validated hair loss products could surprise Cellmid‟s investors on the upside.
Upside to Our Valuation from Therapeutic and Molecular Diagnostics Programs
We like the science behind Cellmid‟s CAB101 preclinical program for inflammatory diseases with diabetic nephropathy as a potential indication (market valued at $1.65B in 2010). We view this program and future partnerships in molecular diagnostics as an upside to our current target price, with strong IP around Midkine at the core of the business.