Inhalation Sciences Q2’22: Our comments
Research Update
2022-08-29
14:55
Redeye comments on Inhalation Sciences Q2’22 report. We are positive about the order backlog decrease but hope to see an increased order intake going forward. Overall, we are excited about ISAB’s second half of the year as we hope to see activity with current and new customers. We make slight adjustments in our FY’22 forecast and reiterate our Base Case to SEK 23.
GM
Gustaf Meyer
Sales in Q2’22 increased by over 220% compared to the same period last year. However, the order intake of SEK 0.8m (1.2m) was lower than last year, and the increase in sales resulted from a decreased order backlog. We hope the low order intake is temporary as we continue to the second half of the year and that ISAB will continue lowering the order backlog.
In May, ISAB announced that it had received positive feedback from the FDA regarding the DissolvIt application. After the reporting period, we learned that FDA approved ISAB’s proposal for a research study aiming to validate the in vitro lung simulation model as an FDA-recommended dissolution technology. The study will also be co-financed by the FDA with up to USD 250,000 annually for up to two years. We look forward to hearing more about the study and are excited about the result in around two years.
We estimate sales of SEK 18.7m for the 2022 full year. As we expect the order intake to increase during the second half of the year and a decreasing order backlog, we remain with our sales estimates. However, OPEX has been slightly higher than we expected, resulting in some changes in our FY estimates. The estimate changes do not render a new fair value range where we reiterate our Base Case of SEK 23.
Earlier today, ISAB released its Q2’22 report. Sales came in at SEK 4.2m (1.3m), resulting in total half-year sales of SEK 6.3m (4.1m). We learned from the Q1’22 report that the order backlog (signed customer contracts for both products and services that have not yet been invoiced to customers) amounted to SEK 8.4m. The increased sales during the second quarter resulted from a decreased order backlog, which amounted to SEK 4.3m (0.9m) at the end of the reporting period. We are positive about the order backlog decrease; however, note that the order intake of SEK 0.8m (1.2m) during the reporting period is lower than last year. We hope to see an increased order intake during the next quarter and a continued decrease in the order backlog.
Operating expenses during the reporting period amounted to SEK -7.3m (-6.1m). However, the R&D costs for the first half year of 2022 totaled SEK -4.8m (4.8m). This was higher than we expected (we expected SEK -2.6m for the full year) and we believe that R&D costs will increase more during the second half of the year. EBIT came in at SEK -4.0m (-5.5m) during the quarter and SEK -7.4m (-9.1m) for the first half year.
Cash flow from operating activities came in at SEK -3.8m (-5.3m), and by the end of the quarter, cash and cash equivalents amounted to SEK 5.0m (20m). During the quarter, ISAB secured a credit facility of SEK 10m from a consortium of lenders. We note that the loan has not been used yet and believe the current cash position should be sufficient for the rest of 2022. With the credit facility in mind, we do not see any imminent need for capital, and ISAB’s cash position (including the loan) will be sufficient for 2023 as well, even if that also depends on future sales activity where we expect ISAB to have sales of SEK 35m in 2023.
Source: Inhalation Sciences, Redeye Research
In April, ISAB announced that it had signed two new distribution agreements with Omicron Research Ltd and Quantaflux Industrial Co. Ltd. Omicron Research is a UK-based Labtech supplier and a leading supplier of dissolution, chromatography, and spectroscopy instruments and has a solid customer base in the UK and Ireland. The agreement span all ISAB’s products and services, including PreciseInhale systems and contract research offering within the IRS segment. In addition, the distribution agreement with Quantaflux Industrial Co. Ltd. covers China, Hong Kong, and Macau.
In May, we learned that ISAB had received positive feedback from the FDA on its white paper proposal submitted on January 17, 2022 and had been invited to submit a full proposal, addressing the panel’s specific questions, by June 4, 2022. The white paper submission aimed to establish the DissolvIt lung model as an FDA-recommended standard method for inhaled drug development in the US.
Later in May, ISAB secured a credit facility of SEK 10m from a consortium of lenders to keep the company financed over the coming 12-14 months. One of the lenders is Chairman Daniel Spasic, who will be lending SEK 1m through his company S-Growth Capital LLC. The credit line term is from July 1, 2022, to June 30, 2023, and an origination fee of 6% will be charged. Interest on the volume drawn through March 21, 2023, is charged at 1.5% per month, while interest volume drawn from April 1, 2023, to June 30, 2023, is charged at 2% per month.
In early June, ISAB released positive news about the collaboration with RISE regarding the first proposal for a global project on antibiotic resistance. The project is called APRINHA and is carried out by JPIAMR (the Joint Programming Initiative on Antimicrobial Resistance) to explore the potential of inhaled antibiotics. We are encouraged to hear the positive feedback from JPIAMR and that the project has potential for other multiresistant bacteria. We look forward to seeing the results and the continued partnership between ISAB and RISE.
At the beginning of August, ISAB announced that the FDA will support and co-finance the research study aiming to validate DissolvIt as an FDA-recommended dissolution technology. Ultimately, this could lead DissolvIt to become the new golden standard for dissolution testing for inhaled drugs. Upon that, the FDA will co-finance the study with up to USD 250,000 annually for two years, where we believe payments as the study is ongoing. We believe this is an essential milestone for ISAB and increases its future potential. We also want to point out that the approval validates the need for solutions to in vitro lung data and the high performance of DissolvIt.
As individual sales orders can significantly affect the result, we believe quarterly estimates are challenging at the current phase of ISAB. Therefore, we provide yearly estimates instead and review the quarterly reports as progress toward our full-year estimates.
We estimate FY’22 sales of SEK 18.7m. The total sales for the first half-year totaled SEK 6.3m (4.1m) with an order backlog of SEK 4.3m. We still believe that the sales activity during the second half of the year will increase and that most of the backlog will be realized. Therefore, we will remain with our FY’22 sales estimate of SEK 18.7, but note that we expect to see higher sales in the Q3’22 report.
The gross margin of the first half year of 2022 came in at 81%. This results from ISAB’s increased focus on IRS sales, resulting in lower COGS. Therefore, we have changed our 2022 gross margin from 65% to 75%. Moreover, we have made some slight estimate changes in R&D costs. We estimated full-year R&D costs to SEK -2.6m which is less than ISAB reported in this report (SEK -4.8m for H12022). We have increased our estimates as we expect R&D costs to increase during the second half of the year; however, not at the same pace as before.
Overall, we believe that the report did not include any major surprises except a lower order intake than we expected. We look forward to the second half of the year when we expect increased sales activity as current collaborations continue and, hopefully, new customers added to the customer base. The estimate changes do not render a new fair value range, where we reiterate our Base Case of SEK 23
Source: Redeye Research
Case
An innovative medtech company facilitating the development of inhalation therapies
Evidence
Strong underlying growth
Challenge
Lengthy negotiations
Challenge
Production hurdles
Valuation
Compelling entry point for the long-term investor
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