Proteome Sciences
Corporate outlook
At the inflection point
Healthcare equipment & services 4 October 2013
Proteome Sciences made important progress towards becoming profitable. New biomarker assays were launched, including SysQuant and SensiDerm. Its stroke biomarkers were also shown to have promising utility. A new licensing deal was signed with Thermo Fisher Scientific in
Price
June. Major PS Biomarker Services contracts and biomarker licensing agreements are expected in the coming year, which are forecast to increase sales by almost threefold in FY13. There is also the prospect of its CK1d drug discovery programme being partnered.
Net debt (£m) at 30 June 2013
Market cap
£86m 7.3
Shares in issue
Revenue (£m)
PBT* (£m)
EPS* (p)
DPS (p)
P/E (x)
Yield (%)
12/11
1.0
(4.5)
(2.1)
0.0
N/A
N/A
12/12
1.2
(5.2)
(2.2)
0.0
N/A
N/A
12/13e
3.3
(2.8)
(1.1)
0.0
N/A
N/A
12/14e
8.4
1.6
1.3
0.0
33.8
N/A
Year end
44p
196.2m
Free float
67%
Code
PRM
Primary exchange
AIM
Secondary exchange
N/A
Share price performance
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.
More assays, more data raise prospects of deals Proteome Sciences doubled the number of assays that its PS Biomarker Services division offers over the last year. These include SysQuant for cancer drug discovery and SensiDerm, an in vitro allergy test for cosmetics and other products. Data on its ischaemic stroke biomarkers indicate that they could be used to increase the number of patients who could benefit from anti-thrombotic therapy by fivefold. New data are also expected this year on its Alzheimer’s disease biomarkers. All these advances could lead to major service contracts and biomarker licensing deals.
New Thermo Fisher Scientific partnership In June, Proteome Sciences formed a new collaboration worth $2.1m (cash and leasing of equipment to develop advanced kits for profiling cancer pathways with Thermo Fisher Scientific, which already markets Proteome Sciences’ TMT products. New kits could be launched in 2014.
Potential CK1d partnering The CK1d drug discovery programme is delivering promising results in preclinical studies. It aims to partner the programme in the next six months, which could result in the company receiving an upfront payment of over £5m. This programme shows that Proteome Sciences can rapidly discover drug targets and develop compounds, as well as identify potential biomarkers.
Valuation: DCF valuation of £152m We have increased our valuation by £26m to £152m. The key changes were a reduction in the tax rate due to the Patent Box, increasing TMT sales for the new Thermo Fisher Scientific deal and lower growth forecasts for PS Biomarker Services. We have reduced our estimates following the H113 results, but we are still forecasting sales to almost triple.
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1m
3m
12m
Abs
(4.8)
14.9
38.03
Rel (local)
(4.6)
10.5
22.4
52-week high/low
72.75p
32.00p
Business description Proteome Sciences is a protein biomarker contract research organisation. It has a broad patent portfolio covering isobaric mass-tagging in mass spectrometry and biomarkers for various neurological and oncology indications.
Next events AD biomarker data
H213
Analysts Dr Mick Cooper
+44 (0)20 3077 5734
Robin Davison
+44 (0)20 3077 5737
[email protected] Edison profile page
Proteome Sciences is a research client of Edison Investment Research Limited
Investment summary: Nearing the inflection point Company description: Protein biomarker CRO Proteome Sciences is a protein biomarker contract research organisation (CRO) that was founded in 1993 by its current CEO, Christopher Pearce, and subsequently listed on AIM in 1995. It employs c 40 people, including c 30 scientists who work in facilities in Frankfurt or Kings College, London, and two senior sales and marketing staff in Boston, US. The headquarters are in Cobham, UK. Its core expertise relates to analysing protein samples using various techniques including mass spectrometry. It has an extensive IP portfolio, which covers a method of analysing protein samples with mass spectrometers (isobaric mass tagging) and a broad range of protein biomarkers associated with various diseases, including Alzheimer’s disease (AD), stroke and cancer. Proteome Sciences carries out protein biomarker services for Eisai, Takeda, Janssen (J&J) and other companies and its range of TMT isobaric mass tagging products are sold by are sold by the leading scientific equipment company, Thermo Fisher Scientific. Proteome Sciences continues to expand its commercialisation activities, doubling the number of assays in FY12 to over 100 and many more being added in FY13.
Valuation: £152m by DCF valuation We have increased our sum-of-the-parts DCF valuation by £26m to £152m (77p per share). Although we are more conservative about the rate at which sales from PS Biomarker services will grow, the effect of this is more than offset by the impact of the second deal with Thermo Fisher Scientific, progress with the SysQuant assay and changes to future tax rates to reflect the UK’s Patent Box legislation, which came into effect in April 2013. There is also further upside to our valuation from the potential out-licensing of the CK1d drug discovery programme for AD. The next potential catalyst for the shares are its H113 results, the announcement of major PS Biomarker Services contracts, detailed data on its AD biomarkers and the potential out-licensing of the CK1d programme and stroke biomarkers.
Sensitivities: PS Biomarker contracts and licensing deals The key to Proteome Sciences’ long-term success is the signing of major contracts for PS Biomarker Services and the licensing of proprietary biomarkers to diagnostic companies for the subsequent use in their kits. Significant progress in these areas is expected over the next 12 months. PS Biomarker Services has expanded its product offering significantly during the last year and many pharmaceutical companies are using Proteome Sciences for pilot studies, so major contracts could follow. There is also growing evidence supporting the utility of its proprietary biomarkers (and more data on the utility of its AD biomarkers from a 1,000 patient trial should be available later this year), so further licensing deals could soon be signed.
Financials: Forecasts reduced, but strong growth still expected We have reduced our revenue estimates for FY13 to £3.3m following the H113 results, but we still forecast revenues to increase almost threefold during the year with Proteome Sciences becoming cash generative in FY14. Our forecasts assume that Proteome Sciences signs major contracts for PS Biomarker services and signs new biomarker licensing deals, with the precise timing of these events expected to have a significant impact on the company’s actual results. Proteome Sciences’ cash position was strengthened to c £2.5m in August by an unknown institutional investor approaching the company to make an investment of £1.6m (3.75m shares at 41.5p). The extra capital will be used as additional working capital to support the company’s growth.
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Outlook: Poised to fulfil its potential Proteome Sciences is continuing to expand its range of services and biomarker tests, which should lead to it becoming increasingly profitable, albeit more slowly than we previously forecast. It has continued to develop the range of services that it can provide by creating new biomarker assays, including SysQuant, which could be of particular interest to companies developing oncology treatments. A new licensing deal was signed with Thermo Fisher Scientific, which appears to be increasing its marketing of TMT kits. Cosmetics Europe has identified Proteome Sciences’ SensiDerm assay as one of the most promising in vitro assays to replace animal testing. All of these advances could enable Proteome Sciences to achieve sustainable profitability in FY14, and there could also be a windfall from the partnering of the CK1d programme for Alzheimer’s disease (AD) in the next six months.
Commercialising the IP portfolio Over the last few years, Proteome Sciences has moved its focus to commercialising its broad patent portfolio, although it continues to develop new IP where it supports marketing activities. The company’s IP primarily covers mass spectrometry (MS) techniques and protein biomarkers (especially for neurological indications such as AD), identified by MS. Proteome Sciences’ core proprietary technology enables protein samples from different people to be analysed in detail simultaneously. This technique is called isobaric mass tagging (Exhibit 1 provides a detailed explanation of MS, isobaric mass tagging and other MS techniques). Before Proteome Sciences developed this method of analysing protein samples, researchers were limited to looking at samples one at a time, which took longer, was more costly and had higher error rates. Isobaric mass tagging is cheaper and less time consuming than antibody-based methods; it is also unbiased and can identify biomarkers that cannot be found with antibodies (eg. different phosphorylation forms) and processes multiple analyses in a single experiment. The company is monetising its IP by:
Providing protein biomarker services to biotech and pharmaceutical companies though PS Biomarker Services.
Licensing agreements with Thermo Fisher Scientific to sell kits containing Proteome Sciences’ isobaric mass tags with the TMT (Tandem Mass Tag) brand.
Licensing proprietary biomarker for use in diagnostic kits.
There is also the prospect of Proteome Sciences out-licensing a preclinical drug discovery programme for CK1d inhibitors, which have potential in AD and other neurological indications. Despite this project, Proteome Sciences has no intention of becoming a biotech company with drug discovery activities and the work on CK1d inhibitors was initially conducted as a case study to show the capabilities of the company as a protein biomarker contract research organisation (CRO).
PS Biomarker Services PS Biomarker Services carries out a variety of protein biomarker CRO services for many pharmaceutical and biotechnology companies (Exhibit 2). So far, contracts have mainly been for pilot programmes and hence limited revenues have been generated to date. However, many of the pilot studies will have reached the stage at which companies will be deciding how they want to expand current programmes. We consider it likely that some contracts will be converted into major collaborations, due to the growing interest in protein biomarkers and Proteome Sciences’ proprietary assays and proteomics analysis techniques. The company has also more than doubled the number of standard biomarker assays that it can offer to >100 during the last 12 months, and has a broad patent portfolio covering isobaric mass tagging.
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Exhibit 1: Background information on mass spectrometry and isobaric mass tagging What is mass spectrometry?
Mass spectrometry is a method of separating compounds according to their mass and the charge they carry. Essentially, molecules are ionised on entry into a mass spectrometer, the resulting ions are separated by electromagnets according to their mass and charge and a detector records the relative amounts of each ion. Mass spectrometry This is a technique used to work out the amino acid sequence of peptides and to discover if any of the amino acids have been with proteins phosphorylated, acetylated or glycosylated. Protein samples need to be pre-treated, often with proteases (to break the proteins down into smaller fragments, peptides) and other methods to enrich a sample (eg to select mainly phosphorylated peptides). There are also various types of mass spectrometry techniques used depending on the analysis required. These include MALDI, ESI, MS2 and MS3. What is isobaric Isobaric mass tagging, in which samples are labelled with a different isobaric mass tag before undergoing MS2 or MS3, is a method of mass tagging? analysing several protein samples at one time. Simple protein mass spectrometry provides an indication of relative abundance of the proteins within a sample, but it is impossible to compare accurately two samples that have been run through a mass spectrometer at different times. Isobaric mass tagging overcomes this limitation of mass spectrometry as different protein samples can be analysed during the same run of a mass spectrometer. This means that it is possible to compare accurately protein samples from patients with a disease and healthy people to identify disease biomarkers, disease mechanisms and potential drug targets. Main versions of iTRAQ – isobaric tags for relative and absolute quantitation – are produced and sold by AB Sciex (under licence from Proteome isobaric mass Sciences/Thermo Scientific). There are duplex, four-plex and eight-plex versions of the product. These products do not include an tagging unlabelled version of the iTRAQ isobaric mass tag, so that it is not possible to progress directly from biomarker identification to biomarker assay development. (SRM or MRM assays, see below). AB Sciex sells related mTRAQ products for use in SRM/MRM. TMT – tandem mass tagging – is produced by Proteome Sciences. Standard kits are sold by Thermo Fisher Scientific, and bespoke kits are sold by Proteome Sciences. Duplex and six-plex TMT versions are currently available, and a 54-plex is expected to be launched soon. TMT isobaric mass tags are designed to allow a smooth workflow from biomarker identification to SRM/MRM development. Alternatives to SILAC – stable isotope labelling by amino acids in cell culture. Different cell cultures are grown in identical media except that each culture isobaric mass uses different labelled amino acids (different isotopes in specific positions). A limitation of this approach is that it requires the labelled amino tagging acids to be incorporated into proteins, so it is only really suitable for comparing samples from cell cultures, but not for analysing human samples. Isotopic labelling (including ICAT, isotope-coded affinity tags) – proteins from different samples are labelled with tags with different isotopes, and the samples are then analysed in a MS in a similar method to those labelled with SILAC. The main limitation with this approach is that it is only possible to compare up to three samples. AQUA – absolute quantification – is a form of MRM, with heavy isotopes of specific peptides so that it is possible to measure the exact quantities of certain peptides in a sample. It is only possible to analyse one sample at a time and it cannot be used to identify totally original biomarkers. Limitations of An important limitation of isobaric mass tagging was that it was not able to measure accurately protein quantities because of ratio distortion; isobaric mass however this has recently been resolved by MS3. Now the main issue appears to be cost; Orbitrap MS (or equivalents), which are required tagging for the analysis, cost c $1m. However, the prices of new generation routine MS machines with high performance are available at around a quarter of the price, and a TMT six-plex kit for five experiments costs c £1,400, although the per sample price is not expensive. What is SRM? SRM is selective reaction monitoring. It is an assay to detect the precise amount of a certain peptide in a sample by MS. This can be carried out in a triple quadruple MS machine (cost: c $300k), which are used routinely in CROs and diagnostic labs. TMT-SRMs are Proteome Sciences’ proprietary SRMs. What is MRM? MRM is multiple reaction monitoring, and is the same as SRM, but measures the levels of more than one peptide. IP covering isobaric Proteome Sciences owns the core patents covering isobaric mass tagging; the first of which expires in 2023. A third party, believed to be mass tagging ABI, vigorously challenged the patents during the issuing process, but without success. It also has several other patents, both methods of use patents covering techniques associated with isobaric mass tags and composition of matter patents for its TMT isobaric mass tags, some of which run beyond 2030. Source: Edison Investment Research, Proteome Sciences
Exhibit 2: Disclosed PS Biomarker Services clients and alliances Company Icon
Relationship Service alliance with a CRO
Parexel
Service alliance with a CRO
CHDI
Biomarker services client
Eisai
Biomarker services client
Janssen (J&J)
Biomarker services client
Siena Biotech
Biomarker services client
Takeda
Biomarker services client
GSK (Cellzome)
Supply agreement
Notes Proteome Sciences and Icon have a strategic alliance to provide pharmaceutical companies with expanded biomarker solutions. Alliance formed in November 2011. Proteome Sciences is Parexel’s preferred provider of protein biomarker services, helping the latter’s clients with the discovery of biomarkers and subsequent qualification in clinical trials. Alliance formed in February 2010. Proteome Sciences will carry out detailed proteomic analysis of cell lines with different CAG-repeat lengths, which are linked to the development of Huntington disease. Contract started in August 2012. Proteome Sciences will use its AD-TMT-SRM assay to measure the levels of various candidate AD biomarkers in human samples. Contract started in January 2011. Proteome Sciences provides protein biomarker discovery services to Janssen. Contract started in December 2010. Proteome Sciences is Siena Biotech’s preferred provider of protein and peptide biomarker services for its drug development programmes. Master service agreement signed in August 2011. Proteome Sciences provides protein biomarker services to Takeda. The most recent contract was signed in March 2011. Proteome Sciences provides GSK with TMT products after the acquisition of Cellzome in May 2012 for £61m. Cellzome was a drug discovery company that used proprietary Kinobeads to develop kinase inhibitors for inflammatory diseases and oncology. Agreement with Cellzome signed in April 2008.
Source: Edison Investment Research, Proteome Sciences
The use of protein biomarkers historically has been limited by the complexity, cost and time to develop tests and the ability to develop assays to detect small changes in proteins. Protein
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biomarker tests have been dependent on the development of monoclonal antibodies, which can take over a year to produce and cost several $100,000s and it is not always possible to generate suitable antibodies because of issues associated with immunogenicity or post-translational modifications (eg phosphorylation and glycosylation). Proteome Science has largely overcome these issues with isobaric mass tagging and can develop a validated test for a novel biomarker in under eight weeks. Biomarker assays Proteome Sciences has developed over 100 MS assays (SRM assays, see Exhibit 1) to measure accurately the levels of specific protein biomarkers. In 2011 it only had two such assays. A client can select which tests it wants carrying out by selecting them from the following biomarker panels:
CNS (AD, Tau phosphorylation, brain damage, stroke, quality control of cerebral spinal fluid [CSF] samples and amyloid beta isoforms)
Cancer (breast cancer, cancer pathways and SysQuant [assay to measure level of phosphorylation at over 1,000 sites])
Safety tox (acute liver failure)
Dermatology (SensiDerm, in vitro assay to detect allergenic chemicals)
All of these panels include MS assays, except for the one for identifying whether a patient has suffered a stroke, which is an antibody based ELISA test. The tests we believe will have most demand are the AD panels, SensiDerm and SysQuant. AD is an area of major unmet medical need, which many of the pharmaceutical companies are targeting, and one of the key challenges for drug development companies is to identify which patients have the disease, especially in the mild-to-moderate setting when it appears to be easier to treat. Proteome Sciences’ biomarker tests should help companies recruit the correct patients (subjective assessments cannot differentiate between patients with early AD and those with mild cognitive impairment, and PET scans and amyloid imaging techniques cannot be used), and also to detect the potential efficacy of a drug in Phase I and Phase II more quickly and accurately than functional and cognitive tests that are currently used (in Phase III, biomarkers would be valuable for patient selection but regulators require functional or cognitive efficacy endpoints). SensiDerm is an in vitro biomarker assay for identifying chemicals that are allergenic and there could be significant demand for the test as the animal testing of cosmetics was banned in Europe in July 2013. The assay was created to measure eight biomarkers identified by Proteome Sciences during the European Union-funded Sens-it-iv programme to develop in vitro methods of detecting allergenic chemicals. The European trade association for the cosmetics industry, Cosmetics Europe (COLIPA), has selected SensiDerm as one of the leading assays to replace animal testing, after analysing the results of using this assay on 10 blinded samples of cultured skin cells that had been exposed to different, known sensitisers. Cosmetics Europe will now fund the final development and validation of SensiDerm. If the assay continues to demonstrate that it can accurately identify allergenic chemicals, it could become a standard test for new cosmetic ingredients (there were c 5,000 sets of animal tests pa conducted with cosmetics before the ban), and potentially any new compound used in a household product and also in non-European countries. SysQuant could be very useful for any company developing drugs and especially in oncology. Tumours (and many diseases) occur because cell signalling pathways are active inappropriately causing specific proteins to be phosphorylated (have phosphate groups attached) incorrectly. Some oncology drugs work by inhibiting proteins called kinases, which phosphorylate certain proteins. But it is challenging to understand fully the precise mechanism of action of some drugs, because the signalling pathways in a cell are complex and interact with one another. This makes it difficult to predict which tumours might respond to a compound in development and the effects of the product. Potentially, SysQuant will be able to provide drug development companies with a better
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understanding of the potential of a compound, by mapping its activity in different tumour types during preclinical and clinical development. However SysQuant’s greatest value could be as a standard diagnostic test for patients with cancer and possibly other indications. The assay has the potential to provide accurate and timely information about the underlying nature of disease, including how it is evolving, so that patients can be better treated, with changes to medication over time as appropriate. Proteome Sciences is in discussion currently with key stakeholders and expects to initiate early stage clinical trials in 2014. The cost of an assay will depend on its complexity and size of any contract. However, we estimate that on average cost of most tests will be £500, so Proteome Sciences could earn c £1.0m pa from a 1,000-patient Phase III study in AD with biannual biomarker testing (NB Eisai, which started to use Proteome Sciences in January 2011 to analyse human samples for AD biomarkers, markets donepezil [Aricept] and has BAN2401 in Phase II and E2609 in Phase I for AD), or $1.3m pa from SensiDerm, based on this assay being used in combination with other in vitro assays to replace the 5,000 sets of animal tests in Europe. The complexity of the SysQuant test means that it could cost c £4,000, so that it could earn c £1m from analysing only 250 samples. This provides an indication of the revenue potential from its standard biomarker assays, if the tests are fully validated and recognised by regulators and become widely adopted. Bespoke PS Biomarker Services Proteome Sciences can also develop bespoke biomarkers for clients. This might be because assays have not already been developed for the specific indication or a company wants proprietary biomarkers for use with a product to provide added IP protection. Its CK1d inhibitor programme also shows that pharmaceutical companies could use its services to identify novel drug targets. There is a clear cost and time advantage of Proteome Sciences’ approach to identifying biomarkers compared to most other companies, especially those dependent on antibody-based methods, and its success in identifying novel biomarkers. However, the challenge for Proteome Sciences is to convince potential clients of its capabilities. Its success in developing SensiDerm and continued identification of novel biomarkers (new AD biomarkers were presented in July at the Alzheimer’s Association International Conference [AAIC]) should help overcome concerns about Proteome Sciences and its MS techniques. PS Biomarker Services has also been awarded ISO9001:2008 certification, after demonstrating its robust processes and its consistent results. Finally, there are many pilot studies ongoing with major pharmaceutical companies and CROs (Exhibit 2), so it is possible that some of these relationships could be converted into material contracts. A biomarker discovery project is estimated to cost c £500k for a six-month project, depending on the size and complexity. Its main competitors are Evotec, which has an oncology biomarker alliance with Roche, and Caprion, which provides proteomics services to over 50 pharmaceutical and biotechnology companies. Despite, the strong relationships and reputations of Evotec and Caprion, Proteome Sciences’ proprietary expertise in the field of isobaric mass tagging and technical advantages means that many companies will probably prefer to work with Proteome Sciences.
TMT kits The TMT kits are the off-the-shelf products for isobaric mass tagging experiments for research use. Thermo Fisher Scientific, a leader in the field of mass spectrometry, started to market these products under licence from Proteome Sciences in June 2008. Since the launch, the product pipeline has gradually been extended and now includes 2-plex, 6-plex and 10-plex TMT reagents. New products will continue to be added. For example, we expect Thermo Fisher Scientific to start marketing products that can analyse more than 10 samples at the same time (Professor Steven Gygi, associate professor at Harvard Medical School, has presented data with 54 samples being analysed simultaneously [54-plexing]).
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A new agreement was signed in June 1013 with Thermo Fisher Scientific under which Proteome Sciences will develop standard kits to profile cancer pathway activity. The contract follows on from Proteome Sciences’ SysQuant and is valued at $2.1m (cash and no-cost leasing of mass spectrometers). We estimate that the first new assays could be launched late in 2014. Revenues from TMT kits have been growing rapidly albeit from a modest base, and there is good reason to believe that the strong growth will be maintained. The product range has grown and some technical limitations have been overcome (quantification issues caused by ratio distortion are resolved by three-stage mass spectrometry [MS3]). It also appears that Thermo Fisher Scientific has increased its marketing efforts for the products, as it highlighted in the Q213 results conference call the potential of its new Orbitrap Fusion Tribrid mass spectrometer, designed for cell biologists to conduct experiments in parallel which need the TMT products. So a greater focus by Thermo Fisher Scientific on its new mass spectrometer will also require greater marketing of the TMT products.
Biomarker out-licensing A major part of Proteome Sciences’ strategy is to out-license the use of proprietary biomarkers on non-exclusive bases to established diagnostics companies (eg Abbott and Lab Corp) for use in diagnostic kits for physicians. Proprietary biomarkers for AD and stroke could be of particular interest to diagnostic companies. Exhibit 3 lists some of its key proprietary biomarkers, most of which have patent protection beyond 2025. Exhibit 3: Key protein biomarkers covered by Proteome Sciences’ patents by therapeutic area Alzheimer’s disease Clusterin (including glycosylated forms) Desmoplakin Alpha-2-macroglobin Complement C3 Serum Amyloid Protein Ceruloplasmin Complement factor H Tau (including phosphorylated forms)
Stroke Nucleoside diphosphate kinase A Fatty Acid Binding Proteins (FABP) Prostaglandin D synthase Neurofilament L Calcyphosine Peroxiredoxin 5 Glutathione S transferase P DJ-1
Oncology Annexin 1 & 2 autoantibodies Calponin-2 Serpin C1 Peripherin Alpha-2-macroglobulin Apolipoprotein A Serotransferrin Haptoglobin precursor
Source: Edison Investment Research, Proteome Sciences
The first licensing deal, from which we expect Proteome Sciences to generate significant revenues, is with Randox, a privately-owned UK diagnostic company. There was an earlier deal in 2009 with a small diagnostic company, Oncimmune, for the Annexin 1 autoantibody cancer, but the biomarker was removed from the diagnostic test (possibly because of financial considerations). The Randox agreement covers the use of stroke biomarkers and Proteome Sciences could receive licence and development milestones of over $1m, and double-digit royalties. Stroke biomarkers Proteome Sciences’ stroke biomarkers enable ischaemic strokes (85% of strokes) to be rapidly identified so that patients can be treated effectively using recombinant plasminogen activator (rt-PA) therapy. Currently, not all patients who might benefit are treated with rt-PA, because they need to receive the therapy within 4.5 hours (3 hours in the US) of stroke onset, which is not known in up to 25% of the time, but treatment with rt-PA does increase the risk of serious bleeding. A paper in the 1 journal PLoS ONE with two patient cohorts of 103 and 155 patients suggests that the GST-π, DJ1 and NDKA are promising blood biomarkers for detecting whether a patient has had an ischaemic stroke within three hours, especially levels of GST-π, which are elevated initially and return to normal levels after about six hours (high sensitivity test [GST-π >17.7μg/L]: sensitivity – 91.7%, specificity – 45.6%; High specificity test: sensitivity – 58.3%, specificity – 89.3%). The biomarkers will be assessed in larger clinical trials to validate their utility, but data recently presented by 1
(2012) Blood Glutathione S-Transferase-π as a Time Indicator of Stroke Onset. PLoS ONE 2012 Sept: 7(9): e43830
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Randox at the AACC (American Association of Clinical Chemistry) meeting in July endorsed Proteome Sciences results. These trials could lead to stroke tests marketed by Randox and potentially other companies, which use Proteome Sciences’ biomarkers, could become standard assays for anyone suspected of having a stroke and enable five times as many patients to benefit from treatment with rt-PA. Randox is expected to launch the stroke tests for research use only prior to filing for IVD (in vitro diagnostic) status. Alzheimer’s disease biomarkers Data on Proteome Sciences’ AD biomarkers is also very promising. The full data from a 1,0002 patient blinded clinical trial, assessing over 20 potential blood biomarkers (including clusterin and 3 phosphorylated tau ), is expected to be published this year, but an initial press release in March 2012 states that three biomarker panels can distinguish patients with MCI, AD and the control group. Assuming that the different tests are validated and it is proven that their sensitivity and specificity are sufficiently high (>80%), the assays could meet an increasing demand for an accurate, minimally invasive and cheap method of identifying people with early-stage AD. The most promising treatments for AD, Lilly’s solanezumab and Roche’s gantenerumab, are being developed for this stage of AD as it appears that at later stages of AD, patients are not able to respond to these monoclonal antibodies against β-amyloid, but it is only possible to diagnose accurately patients with early-stage AD using lumbar punctures. Even if the sensitivity and specificity of the biomarker panels is <80%, they could still become valuable tests to be used with other diagnostic tests so that patients receive the correct therapy with medication and/or counselling. The patents protecting the company’s AD biomarkers could prove to be its most valuable biomarker IP, given the number of people with AD (>5m people in the US). Also Eli Lilly acquired Avid Radiopharmaceuticals in December 2010 for $300m and up to $500m in milestones to obtain control of the amyloid-plaque imaging agent, Florbetapir, even though its use requires a PET scan. We estimate that Proteome Sciences could grant licences to diagnostic companies for use of its AD biomarkers by the end of FY14, after the detailed data from the 1,000-patient trial is disclosed. Biomarker alliances Proteome Sciences is continuing to develop its biomarker portfolio, as demonstrated by the posters published at the AICC conference in July. This is being assisted by the added sensitivity of the new mass spectrometers, including its new Orbitrap Fusion Tribrid from Thermo Fisher Scientific, and collaborations with universities (Exhibit 4). Proteome Sciences also has an alliance with EMD Millipore, with the latter developing biomarker immunoassays for its Luminex platform. Exhibit 4: Proteome Sciences’ biomarker partners Company Buck Institute
Relationship Discovery collaboration
Moffitt Cancer Center
Discovery collaboration
King’s College, London
Discovery collaboration
EMD Millipore
Development partner
Notes Collaboration with Professor Chris Benz to develop a new biomarker test to identify women with breast cancer who will respond to anti-oestrogen therapies (eg tamoxifen). Research is focused on posttranslational modifications of the oestrogen receptor, which cannot be detected in genomic assays. Collaboration began in July 2011. Collaboration with Dr John Koomen to develop MS biomarker assays in oncology to allow better selection of treatments and to monitor treatment response. Research is focused on identifying changes in certain signalling and repair pathway proteins, including posttranslational modifications. Collaboration began in July 2011. Proteome Sciences has a long running partnership with the Institute of Psychiatry at King’s College, London, and has a research lab on its campus. Their research collaboration covers a broad range of indications, including AD, stroke, Huntingdon’s Disease, arterial thrombosis and acute liver failure. EMD Millipore has the exclusive rights on the Luminex platform to develop immunoassays for Proteome Sciences’ proprietary biomarkers for AD for research applications only. EMD Millipore is developing Luminex bead-based immunoassays for AD. Agreement signed in July 2009.
Source: Edison Investment Research, Proteome Sciences
2
Both common variations and rare non-synonymous substitutions and small insertion/deletions in CLU are associated with increased Alzheimer risk. Mol Neurodegener. 2012 Jan 16; 7:3.
3
Tau mediated neurodegeneration: an insight into Alzheimer's disease pathology. Neurochem Res. 2011 Aug; 36(8):1329-35. Epub 2011 Apr 21.
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CK1d Inhibitor Proteome Sciences initiated a drug discovery primarily to demonstrate the strength and capabilities of its technology platforms, but it has led to the company developing a number of small molecules, which have demonstrated promising efficacy in pre-clinical in vivo models for AD. Despite this success, the company does not plan to carry out significant further investment in this programme and has no intention to initiate new proprietary drug discovery programmes. From detailed analysis of changes in phosphorylation patterns on the tau protein in patients with AD, Proteome Sciences identified CK1d (casein kinase 1 delta) as a protein that appears to play an important role in the progression of AD. From this finding, the company identified specific inhibitors of CK1d from compound libraries, optimised the initial molecules and conducted initial preclinical studies, with the assistance of CROs. Proteome Sciences aims to partner the CK1d programme now. It is difficult to assess the size and timing of a potential deal at this stage of development, given the limited and early stage of the data. The deal terms for licensing agreements with preclinical assets range from c $1m upfront payment, c $25m in milestone payments and low-single-digit royalties to c $10m upfront, c $250m in milestones and mid-single digit royalties. The promising results to date with the CK1d inhibitors, the renewed focus of various large pharmaceutical companies on AD (eg Roche and Lilly) and the size of the AD market means that Proteome Sciences could license the programme on favourable terms. The lead products (PS110 and PS278-05) still need to complete additional preclinical testing, but one of these products could enter clinical development in 2015.
Sensitivities The two key issues that affect Proteome Sciences’ long-term prospects are its ability to sign major contracts for PS Biomarker Services and license its proprietary biomarkers for diagnostic tests. PS Biomarker Services over the last two years has extended the range of services it can provide. At the same time it has conducted pilot programmes for a large number of potential clients. The division’s limited revenues are understandable so far given Proteome Sciences and its novel services are not well known. However, the potential of PS Biomarker Services as a protein biomarker CRO and generator of profits should become apparent over the next 18 months. There is also increasing data highlighting the potential utility of some of the biomarkers that Proteome Sciences has patented, especially in the fields of stroke and AD. So, the company should now be in a position to sign more licensing deals in the coming year, similar to the Randox deal. Other issues that will affect the company’s value are Thermo Fisher Scientific’s marketing success with the TMT products; Proteome Sciences’ skill in protecting its broad patent estate (it has already successfully fought challenges to its core isobaric mass tagging patents); and the company’s ability to partner the CK1d programme on attractive terms. Finally, Proteome Sciences has a loan of c £7.8m from Christopher Pearce, CEO, who has the right to ask for c £5.0m of debt to be repaid or converted into shares at any time; however, Mr Pearce also owns 16.4% of the company so his interests are closely aligned with those of shareholders.
Valuation We have increased our valuation of Proteome Sciences by £26m to £152m or 77p per share based on a sum-of-the-parts DCF valuation (Exhibit 5). There is uncertainty about the timing of potential contracts and licensing deals, which is why we have risk-adjusted revenue streams as indicated.
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There is additional upside from the CK1d programme, which is not included in our valuation due to its early stage, and as the timing of any deal or the potential terms are difficult to predict. Exhibit 5: Financial summary Value (£m) 39.5
Value driver TMT sales PS Biomarker services
45.7
Alzheimer's disease biomarkers*
47.0
Stroke biomarkers*
57.8
Cancer biomarkers*
25.2
Grants and licence fees Admin Tax Capex Net cash Total
Value per share (p) Notes 20 Based on Proteome Sciences revenues from TMT increasing from c £0.5m in FY12 to £4.5 in FY16. All revenues treated as royalties. 23 Based on PS Biomarker Services revenues increasing from c £0.3m in FY12 to £9.0m in FY16 (4x £500k biomarker services contracts and 20k x £250 biomarker assays); gross margin: 85%, risk adjustment: 75% 24 Cost per test: $750; market penetration 10%; peak sales: $760m; launch date: 2017; risk adjustment: 30%; royalty: 10% 29 Cost per test: $750; market penetration 10%; peak sales: $495m; launch date: 2015; risk adjustment: 40%; royalty: 10% 13 Cost per test: $6,400; market penetration of breast and lung cancer markets: 10%; peak sales: $580m; launch date: 2017; risk adjustment: 30%; royalty: 10% 2 (25) (6) Tax paid from 2018 at 10% tax rate (1) (3) Forecast net cash at H113e including £1.57m equity raise 77
4.4 (48.6) (12) (1.5) (4.1) 151.6
Source: Edison Investment Research; Note: WACC of 12.5% is used, peak sales of biomarkers at five years after launch. *The value of potential royalties for Proteome Sciences biomarkers, including SysQuant for cancer, in diagnostic kits.
The main changes to our valuation are:
A reduction in the value of the PS Biomarker Services business from £70m to £53m because of the slower than expected revenue growth.
A reduction in tax rate from 21% to 10% because of the UK Patent Box legislation covering profits derived from IP developed in the UK after the tax losses have been utilised, which we estimate will occur in 2019).
Increasing the value of TMT sales from £35m to £40m to take into account the second agreement with Thermo Fisher Scientific.
Increasing the value of cancer biomarkers from £12m to £25m, to reflect that the potential price of a SysQuant test which is now estimated to be $6,400 (£4,000) instead of $2,250.
The next catalysts for the shares are the financial results, the potential licensing agreements for biomarkers or CK1d, major PS Biomarker Service contracts or detailed data on its AD biomarkers.
Financials We continue to believe that Proteome Sciences is at an inflection point and that there will be a near tripling in sales in FY13, albeit less than previously modelled (Exhibit 6), and be cash generative from FY14. We have reduced our forecasts following its H113 results as deals have taken longer than expected to be completed. Exhibit 6: Summary of changes to estimates
2013e 2014e
Old 6.5 10.3
Sales New 3.3 8.4
% chg. (49.6) (19.1)
Old 0.4 3.4
PBT New (2.8) 1.6
% chg. N/A (52.0)
Old 0.3 1.9
EPS New (1.1) 1.3
% chg. N/A (31.6)
Source: Edison Investment Research; Note: Figures in £m except per share data.
In H113, sales increased by 10% to £0.89m with revenues from licenses/sales/ services growing by 50% to £0.75m. Tight cost control meant that the loss after tax was still £1.6m, despite increased marketing efforts. In H213, we expect to see the benefits of the company’s broader product offering and marketing. It is challenging to forecast exactly when Proteome Sciences will grow materially, so
Proteome Sciences | 4 October 2013
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sales growth and improvements in profitability could vary substantially depending on the timing of contracts for PS Biomarker Services, or a licensing agreement for its biomarkers or CK1d. Proteome Sciences set up a complex organisation of subsidiaries (six active divisions) for such a small company so that its IP resides in UK companies. The benefits of this forethought should be enhanced by the UK Patent Box legislations, which means that Proteome Sciences will only have a c 10% tax rate once it is has used up its tax losses (estimated to be in 2019). The company’s cash position rose to c £2.5m in August by the issuing of 3.75m new shares at 41.5p (£1.57m raised) to an institutional investor, who approached the company. This capital will primarily be used as additional working capital to support the growth of the business, and we estimate that the company should not need to raise any more equity to become cash generative. Exhibit 7: Financial summary 2010 IFRS
2011 IFRS
2012 IFRS
2013e IFRS
2014e IFRS
2015e IFRS
450 (105) 345 (4,488) (4,656) 0 9,530 4,874 (285) (4,941) 4,589 (26) (4,967) 4,563
1,021 (257) 764 (4,136) (4,341) 0 0 (4,341) (169) (4,510) (4,510) 553 (3,957) (3,957)
1,153 (385) 767 (4,838) (5,004) 0 0 (5,004) (191) (5,195) (5,195) 942 (4,254) (4,254)
3,260 (627) 2,633 (2,437) (2,622) 0 0 (2,622) (223) (2,845) (2,845) 762 (2,083) (2,083)
8,352 (952) 7,400 2,023 1,883 0 0 1,883 (234) 1,648 1,648 993 2,641 2,641
10,580 (1,287) 9,293 3,650 3,500 0 0 3,500 (237) 3,263 3,263 579 3,843 3,843
163.6 (3.0) 2.8 0.0
192.2 (2.1) (2.1) 0.0
192.5 (2.2) (2.2) 0.0
193.7 (1.1) (1.1) 0.0
196.2 1.3 1.3 0.0
196.2 2.0 2.0 0.0
77% N/A N/A
75% N/A N/A
67% N/A N/A
81% N/A N/A
89% 24% 23%
88% 34% 33%
BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Other Current Assets Stocks Debtors Cash Current Liabilities Creditors Short term borrowings Other Long Term Liabilities Long term borrowings Other long term liabilities Net Assets
5,659 4,218 677 764 9,938 209 185 9,544 (8,228) (1,491) (6,333) (404) (150) 0 (150) 7,219
5,642 4,218 661 764 5,267 301 903 4,064 (7,431) (692) (6,526) (213) (180) 0 (180) 3,299
4,713 4,218 495 0 2,237 331 1,047 858 (7,414) (479) (6,726) (209) (303) 0 (303) (767)
4,603 4,218 385 0 3,169 368 804 1,997 (9,127) (946) (7,950) (231) (219) 0 (219) (1,573)
4,591 4,218 373 0 5,337 368 2,059 2,909 (9,414) (993) (8,190) (231) (219) 0 (219) 295
4,635 4,218 416 0 9,072 368 2,609 6,095 (9,710) (1,043) (8,436) (231) (219) 0 (219) 3,778
CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Other Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)
4,117 (285) 185 (631) 0 11,515 0 0 14,902 11,656 0 (36) (3,210)
(5,143) 24 (23) (206) 0 0 0 8 (5,340) (3,210) 0 (332) 2,462
(4,210) 9 856 (15) 0 24 0 0 (3,335) 2,462 0 (71) 5,868
(1,402) 1 (6) (43) 0 1,570 0 0 121 5,868 0 (206) 5,953
1,035 6 0 (128) 0 0 0 0 912 5,953 0 (240) 5,281
3,370 9 0 (193) 0 0 0 0 3,186 5,281 0 (246) 2,341
Year end 31 December PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before GW and except.) Intangible Amortisation Exceptionals Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)
£'000s
Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - FRS 3 (p) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)
Source: Edison Investment Research, Proteome Sciences
Proteome Sciences | 4 October 2013
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Contact details
Revenue by geography
Downside Bridge Road Cobham, Surrey KT11 3EP United Kingdom +44 (0)1932 865065 www.proteomics.com
N/A
CAGR metrics
Profitability metrics
EPS 10-14e EPS 12-14e EBITDA 10-14e EBITDA 12-14e
N/A N/A N/A N/A
ROCE 13e Avg ROCE 10-14e ROE 13e Gross margin 13e 108% Operating margin 13e 170% Gr mgn / Op mgn 13e
Sales 10-14e Sales 12-14e
Balance sheet metrics N/A N/A N/A 81% N/A N/A
Gearing 13e Interest cover 13e CA/CL 13e Stock days 13e Debtor days 13e Creditor days 13e
Sensitivities evaluation N/A N/A N/A N/A N/A N/A
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Management team CEO: Christopher Pearce
Chairman: Steve Harris
Christopher Pearce founded Proteome Sciences in 1993, and has since been CEO. He was previously co-founder and executive chairman of Fitness First plc, a fitness chain.
Steve Harris became non-executive chairman in 2004. He has worked in the pharmaceutical industry for 45 years, and has worked for Medeva, ICI, Merck Sharp & Dohme, Eli Lily, Boots and Reckitt. He is a director of Advanced Medical Solutions, Phynova and chairman of Cyprotex.
CFO: James Malthouse
COO: Ian Pike
James Malthouse became CFO in 1993. He is a chartered accountant and has a Ian Pike has over 20 years’ experience working in the diagnostics and background in corporate finance. He was chairman and finance director of biotechnology sectors. He has a PhD in Medical Microbiology and has worked at Unigroup plc and finance director of Harcourt Group plc. Wellcome Diagnostics, Technology Transfer Office of the UK Medical Research Council and most recently at Cancer Research Ventures managing intellectual property and performing business development activities in Europe and the US. Principal shareholders
(%)
Vulpes Investment Management Christopher Pearce Mark Staveley IS Partners Investment Solutions
17.0 16.4 5.1 3.0
Companies named in this report Caprion, Eisai (TYO: 4523), EMD Millipore, Evotec (FR: EVT), GlaxoSmithKline (LN:GSK), Icon, J&J (NYSE: JNJ), Parexel (NYSE: PRXL), Roche (SW: ROG), Siena Biotech, Takeda (FRA: TKD), Thermo Fisher Scientific (NYSE: TMO)
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