Biolidics Ltd - CGS-CIMB Research 2019-03-26: Liquid Could Be The New Solid

SGinvestors.io

BIOLIDICS LIMITED (SGX:8YY)

Biolidics Ltd - Liquid Could Be The New Solid

• We initiate on liquid biopsy diagnostic firm Biolidics Limited (SGX:8YY) with ADD and Target Price of S$0.32, based on 12x FY20F EV/Sales (below global peer average of 16.8x). 
• The company’s unique technology platform and strategic partnerships makes it a potential key beneficiary of the growing liquid biopsy industry. 
• We expect Biolidics’ net losses to narrow significantly in FY19-20F, with sales CAGR of 78% in FY19-21F and better cost management. 

BUSINESS OVERVIEW

• Established in 2009 and listed on the Singapore Exchange in Dec 2018, Biolidics Limited (SGX:8YY) (formerly known as Clearbridge Biomedics Pte Ltd) is a Singapore-based medical technology company that is focused on the development of cell enrichment systems that, when combined with other analytical tests, provide a wide range of applications for cancer diagnosis, prognosis, treatment selection and treatment monitoring. The company is a spin-off from the National University of Singapore (NUS) and Singapore-MIT Alliance for Research and Technology (SMART) research centre.
• Through investment of c.S$30m over a 10-year period, Biolidics has developed a fully-automated in vitro diagnostic (IVD) medical device, known as the “ClearCell® FX1 System” and its accompanying CTChip® FR1 biochip, which utilises novel, patented technology to separate and enrich cancer cells from blood (7.5ml of blood under two hours). This enables users of the system to perform liquid biopsies to test for the presence of cancer cells, specifically circulating tumour cells (CTCs, defined as cancer cells that detach from a primary tumour), in blood samples and to carry out further analysis. As at 15 Nov 2018, Biolidics owns a patent portfolio of 12 issued patents and 22 patent-pending applications relating to its ClearCell® FX1 System” and CTChip® FR1 biochip.
• To date, Biolidics has deployed more than 80 of its systems globally and carried out more than 170 tests in Singapore to detect breast, prostate and lung cancer.
• Backed by a single product which has a specificity rate of 95% (according to management), Biolidics’ business model revolves around three main revenue pillars:
  1. Sales of ClearCell® FX1 System;
  2. Sales of the accompanying CTChip® FR1 biochips and other consumables. Each biochip can only be used once for a liquid biopsy test; and
  3. Development of a wide range of clinical or laboratory-developed tests (LDTs), which will in turn promote higher usage of ClearCell® FX1 System.

Customers

• As at 15 Nov 2018, more than 80 ClearCell® FX1 Systems have been installed worldwide, in countries like Singapore, China, Hong Kong, Japan, the US and certain EU countries.
• While its key product was only commercialised in 2015, Biolidics continues to expand its customer pool (comprising academic and research institutions, hospitals and laboratories), with its major customers accounting for about 91.7%, 96.0% and 81.1% of FY15, FY16 and FY17 revenue, respectively.

Strategic shareholders

• Apart from ClearBridge Health Limited (SGX:1H3) which owns a 35.5% indirect stake in the company, Biolidics’ key shareholders include SEEDS Capital (Indirectly wholly-owned by Enterprise Singapore, a statutory board under the Ministry of Trade and Industry Singapore) and Professor Xie Tian, who is currently the Dean of the Department of Medical Oncology, Holistic Integrative Oncology Institutes and Holistic Integrative Cancer Center of Traditional Chinese and Western Medicine in Hangzhou Normal University.
• Prior to its listing, Biolidics had completed a few rounds of financing (Series A, B, B2 and C), raising total proceeds of S$34.3m from investors like Mitsubishi UFJ Life Science, Naga Capital Partners and BV Healthcare II (life science fund managed by BioVeda Capital).

Superior results vs traditional diagnostic methods

• Cancer is not easy to diagnose and manage, given its heterogeneity at the morphological, genetic and clinical levels. The current practice of diagnosing involves a tissue biopsy, or the surgical removal of tissue from a patient’s body, and the tissue sample is subsequently sent to a laboratory for examination. Special staining methods may also be employed to detect the amounts of certain proteins present in the tumour cells. A diagnostic report is then generated to determine if the cancer is invasive, its grade (how the cancer cells look compared with healthy cells) and mitotic rate (how quickly the cells are dividing), as well as the diagnosis.
• However, certain limitations exist that may inhibit the ease and usefulness of obtaining and analysing these tissue samples. For instance, the availability of tissue sample, quality and amount of tissue obtained.
• Tissue biopsy is an invasive procedure that is not typically performed on a recurring basis, hence restricting its usefulness for routine periodic patient monitoring and the possible personalisation of treatments. While liquid biopsies are increasingly favoured as simple and minimally-invasive alternatives to tissue biopsies, they have not taken off fully in cancer monitoring and management, due to the difficulty of isolating CTCs from other components of blood, plus the extremely rare occurrence of CTCs in blood (on average, only one CTC can be found in every billion blood cells).
• Unlike other methods for liquid biopsies currently available in the market, Biolidics’ CTChip® FR1 biochip uses a label-free approach to enrich circulating tumour cells (“CTCs”), to preserve them in their original state and viability for use in diagnostic tests. As a result, this takes away the need for a single biomarker and enables the isolation of CTCs across a heterogeneous population without bias.

Competition

• There are other companies that conduct research to develop and offer products and services for liquid biopsy in the oncology sector globally. These comprise systems that focus on the isolation of CTCs; and circulating tumour deoxyribonucleic acid (ctDNA), which is tumour-derived fragmented DNA in the bloodstream; as well as microRNA (miRNA) which are small, non-coding ribonucleic acid (RNA) that regulate gene expression. By biomarker type, the CTC segment dominates the global liquid biopsy market, accounting for close to 56% of the overall revenue share in 2018, according to the Market Research Future report issued in December 2018.
• Over 2017-18, Biolidics was identified by Galen Growth Asia and the Asian Scientist as one of the top 10 liquid biopsy start-ups in Asia and hottest biotech start-ups in Singapore, respectively. Below is a list of products by other companies that are similar to Biolidics’ products:
  • Similar products that focus on isolating CTCs via a microfluidic separation method are ANGLE PLC’s (AGL LN) Parsotix system and Celsee Diagnostics Inc’s PREP system;
  • Products that focus on isolating CTCs using other separation techniques include the CellCollector system by GILUPI GmbH and the DEPArray system offered by Menarini Silicon Biosystems Spa; and
  • Products that focus on the isolation of circulating tumour DNA comprise OncoDNA SA’s OncoTRACE and OncoDEEP, as well as Guardant360 offered by Guardant Health Inc (GH US).

INDUSTRY OUTLOOK

• Cancer is still the second-biggest cause of death globally.
• Rising awareness and adoption of liquid biopsies.
• Current applications of liquid biopsy are just scratching the surface of its market potential.
• Increased funding and M&As to accelerate overall sector development.
• Refer to attached PDF report for further details on industry outlook. 

COMPANY OUTLOOK

Foray into China’s liquid biopsy market

• Following its collaboration with the National Cancer Centre of Singapore, and BGI Genomics (a China-based genomics company) to co-develop a liquid biopsy system in 2014, Biolidics has extended its network of partners to Hunan Agen Medicine Laboratory Technology Co Ltd and Holistic Integrative Pharmacy Institute, Hangzhou Normal University, providing them with the ClearCell® FX1 System and CTChip® FR1 biochips for the development of CTC diagnostic services.
• As the group approaches the validation baseline in the Hunan lab (to collect a minimum number of 180 samples), we expect Biolidics to start charging for each lab developed test (LDT) carried out in 2H19F. Each LDT using Biolidics’ ClearCell® FX1 System is reasonably priced at S$170-200 (Rmb850-1,000) on average vs. the typical cost of S$700 (Rmb3,500) for other cancer diagnostic tests. This should translate into better acceptance by existing and potential users, in our view.
• We understand from management that Hunan Agen Medicine Laboratory Technology Co Ltd currently serves two reputable hospitals in the Hunan region that had a population of 68.6m as at 2017 - Xiangya Hospital Central South University and Hunan Cancer Hospital.
• As its platform continues to gain traction globally, we believe Biolidics will embark on similar tie-ups with other labs, academic institutions and multinational companies to drive sales of its proprietary system and biochips, before selling directly to hospitals and clinics.

Collaboration with Sysmex Corporation

• In Feb 2019, Biolidics announced the potential collaboration with Sysmex Corporation (6869 JP), the global leader in hematology, hemostasis and urinalysis, based on total instrument sales in 2018 (source: Sysmex).
• Not only will Biolidics jointly develop with Sysmex’s laboratory assays in the field of circulating tumour cells utilising the ClearCell® FX1 System and Sysmex’s molecular imaging flow cytometer MI-FCM, both parties will also promote laboratory assay developments, applications and market developments for the potential commercialisation of laboratory assays. Potential downstream applications that could be developed using Biolidics’ technology comprise:
  1. genetic analysis,
  2. in vitro or in vivo tumour models,
  3. immunofluorescence, and
  4. fluorescent in situ hybridisation (FISH).
• We believe Biolidics will benefit from this through greater sales of ClearCell® FX1 System as it enlarges the installed base in Sysmex’s Riken Genesis labs (currently two locations in Japan), and CTChip® FR1 biochips.
• See attached PDF report for Biolidics' SWOT analysis.

FINANCIALS

Revenue to double per annum over FY19-20F

• Biolidics currently sells its ClearCell® FX1 System at an average list price of S$100k (depending on each market), and in certain cases, loans its machines to institutes for them to carry out further analysis and development. Given the new partnerships and distribution agreements it has entered into, we expect improvement in Biolidics’ pricing power and sales volumes of ClearCell® FX1 System (historically 10 machines were sold per annum, on average, in FY15-18).
• As the group reaches an earnings inflection point (validating a minimum number of clinical trials in China) and its IVD medical device becomes more widely adopted, we think sales of its CTChip® FR1 biochips should grow exponentially, in tandem with the number of tests carried out.
• We forecast Biolidics to recognise S$0.3m-1.2m of project-related revenue p.a. in FY19-21F, arising from the development work it is engaged in with Sysmex. All these underpin our robust revenue CAGR projection of 78% over FY18-21F for the group.

We expect reported net loss to halve in FY19-20F

• Apart from annual sales growth of 24-130% over FY19-21F, we think Biolidics’ bottomline would improve due to cost savings from two main areas:
  1. absence of financing costs and fair value (FV) changes for financial liabilities because all of its convertible loans and redeemable convertible preference shares have been fully exercised; and
  2. reduction in other expenses (no more listing and professional fees).
• This will, however, be offset by marginally-higher staff expenses as they increase headcount in China for sales reps and scientists.
• We project research and development (R&D) expenses to be stable at S$1.0m- 1.2m per annum, as Biolidics focuses on:
  1. developing clinical applications for its ClearCell® FX1 System, and
  2. expanding product pipeline through the development of next-generation systems and tests.
• There is potential for gross margin expansion from cheaper outsourcing of production for its systems and chips, which we have yet to include in our FY19-20F forecasts.
• Overall, we still expect Biolidics to incur net losses over the next two years before recording net profit of S$1.1m in FY21F, but these losses should narrow significantly from S$6.3m in FY18 to S$2.9m in FY19F and S$1.3m in FY20F (Figure 19).

Healthy net cash position

• With the conversion of convertible loans/redeemable convertible preference shares to equity and IPO net proceeds of S$6.1m, Biolidics has net cash of S$11.5m as at end-2018. We think this is sufficient for its near-term working capital needs, with some headroom for potential synergistic M&As.
• Our FY19- 21F earnings forecasts assume capex of S0.3m p.a. and capitalisation of development costs as intangible assets of S$0.1m p.a., mainly for purchases of equipment and to facilitate R&D work.

VALUATION AND RECOMMENDATION

Initiate coverage with ADD and a target price of S$0.32

• Backed by its strong R&D capability and patented technology, we like Biolidics for its unique exposure to the growing global liquid biopsy market, thanks to technological advancements and increasing adoption. Its strategic partnerships with Sysmex, Hunan Agen Medicine Laboratory Technology Co. Ltd and Holistic Integrative Pharmacy Institute will enable it to leverage on their distribution network and expertise, for potential earnings turnaround in FY20F. Hence, we initiate coverage of the stock with an ADD rating and target price of S$0.32, pegged to 12x FY20F EV/sales, which is at a 30% discount to global peers’ average of 16.8x.
• We also think Biolidics could make an attractive target for large pharmaceutical or life sciences companies. The group could also explore alternative listings in other markets (such as Nasdaq) to raise its profile and valuations, which could be a catalyst for the stock, in our view.
• Other re-rating catalysts include faster-than-expected take-up of its platform and further strategic partnerships.
• Downside risks to our ADD call could come from unexpected project delays or regulatory changes.
• See attached PDF report for comparison of Biolidics with its global peers. 

KEY RISKS

• Technological obsolescence. 
• Reliance on two third-party manufacturers. 
• Subject to legal and regulatory requirements. 
• Inadequate protection of patents and intellectual property rights. 
• Reliant on relationships with strategic partners. 
• Difficulty in gaining commercial acceptance. 
• Refer to attached PDF report for further details. 

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-26

SGX Stock Analyst Report ADD INITIATE ADD 0.32 SAME 0.32