Inhalation Sciences released its Q1 2023 report. The net sales came in at SEK3.2m (SEK2.1m), 28% lower than our sales estimate of SEK4.5m. The gross margin came in at 79% (90%), in line with our gross margin estimate of 79%, and operating expenses amounted to SEK-4.4m (SEK-5.2m) compared to our OPEX estimate of SEK-5.3m. We are positive that ISAB has decreased its costs compared to last year, which will be essential for a break-even quarter at the end of the year. Moreover, EBIT came in at SEK-2.1m (SEK-3.4m), which was in line with our estimate of SEK-2.0m.

Cash flow from operating activities was SEK-2.0m (SEK-3.1m), and by the end of the quarter, the cash and cash equivalents amounted to SEK3.6m. In May, the company received SEK13.7m (before issue-related costs) from its rights issue. We believe the cash position should be sufficient until break even; however, note that it highly depends on the company's sales as well as keeping the costs at low levels. There could be a scenario where the company needs to raise a small amount of cash again.

Overall, the report did not include any major surprises in our view. Sales came in slightly lower than anticipated; however, OPEX was also a bit lower. Moreover, we learn that the order backlog was SEK11.2m (SEK8.4m) at the end of the quarter. The company has a primary objective to disclose a positive cash flow at the end of the year. We argue this is reasonable; however, the sales must increase during the following quarters in order to do so.

In late January, ISAB secured a contract worth over 914,000 SEK from a US-based pharmaceutical firm that specializes in developing antiviral therapies. The project will utilize ISAB's DissolvIt module, known for its accuracy, to conduct dissolution testing for the antiviral drug development process. This marks the first project for the new customer and highlights the potential of the DissolvIt module to reduce risks and improve efficiency in drug development.

In February, A returning US client of Inhalation Sciences AB (ISAB) booked lab time and facilities in April 2023 for an Inhalation Research Services’ (IRS) R&D project by paying a EUR50,000 deposit. We learned a month later that the client confirmed the entire IRS order, totaling EUR118,484. The client has chosen ISAB's high-precision, specially tailored Isolated Perfused Lung (IPL) method for the project, which is specially designed for aerosols generated by the company's PreciseInhale system.

Moreover, ISAB secured an order worth EUR35,000 from a global generics company for an Inhalation Research Services (IRS) project. The client had opted for ISAB's DissolvIt system due to its exceptional precision in evaluating generic formulations against originator products. This accuracy is crucial for determining bioequivalence and, potentially, In Vitro In Vivo correlation (IVIVC) – both important factors in generic drug development. The client's development team is well-versed in Pharmacokinetics (PK), bioequivalence, and dissolution studies, and they have specifically chosen ISAB's DissolvIt for testing the bioequivalence of their generic candidates.

ISAB announced it has received a green light from the FDA for the experimental phase of the dissolution research project 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.

The DissolvIt Dissolution Module simulates the dissolution and absorption of aerosol particles in the lungs. The study will evaluate DissolvIt’s ability to demonstrate in vitro in vivo correlation (IVIVC) and bioequivalence and detect small formulation differences in a wide range of APIs.

As an FDA-recommended standard research method, we believe the demand will increase significantly for DissolvIt, and we are positive that the project will proceed according to the plan. The project is expected to continue until September 2024, and we look forward to the results.

A couple of weeks ago, ISAB announced the outcome of its rights issue of shares. The rights issue was subscribed to approximately 23.0% in total. Of this, approximately 14.2% were subscribed with the support of subscription rights, while approximately 8.8% were subscribed without subscription rights. Underwriters subscribed for approximately 57.0% of the total volume. The company raised approximately SEK13.7m through the rights issue before the deduction for issuing costs (estimated to be SEK3.5m). The funds will primarily be used to expand existing services and the relevant organization.

Compensation for the guarantee commitments amounts to 15% of the guaranteed amount in cash or 18% in the form of newly issued shares in the company. Underwriters can choose between cash payment or shares as compensation. Any shares issued as guarantee compensation had a subscription price of SEK3.60 per share. The total number of new shares that may be issued as guarantee compensation is up to 593,469.

Following the rights issue, ISAB's share capital increased by SEK1,516,761.20, from SEK4,550,293.60 to approximately SEK6,067,054.80. The number of shares increases from 11,375,734 shares to 15,167,637 shares, resulting in a dilution effect of approximately 25.0 %.

Moreover, the company received a new order valued at EUR53,000 from a regular client. The client is a prominent global player in the field of inhaled therapies and is based in Europe with a strong development pipeline. The order entails additional modules and accessories that will expand the client's existing PreciseInhale systems. This client has been a loyal customer of ISAB and already possesses two PreciseInhale systems. They utilize these systems to conduct advanced in vivo work on New Chemical Entities, leveraging the highly accurate preclinical data generated by PreciseInhale. This data plays a vital role in reducing risk during the later clinical stages of their inhaled therapy development process.

We are positive that ISAB receives orders from returning customers as it shows the strength of the offering as well as the clients are satisfied with the experience at ISAB.

Last week, we learned that ISAB has received a grant of EUR125,000 for its participation in the research project 'New Inhalation Formulations for Improved Delivery of Antimicrobials' (APRINHA). This collaborative project involves seven organizations, including ISAB and RISE (the Research Institutes of Sweden). ISAB and RISE jointly submitted a funding proposal for the project on June 9, 2022. The project, coordinated by the University of Zurich (UZH), will span 36 months.

The project addresses the urgent need for targeted and effective inhaled antibiotic treatments for patients hospitalized with lower respiratory tract infections (LRTIs), which has become more evident due to the impact of the Covid-19 pandemic. APRINHA aims to develop new inhaled antibiotic formulations that not only treat LRTIs but also help combat antibiotic resistance. These formulations aim to enhance drug deposition, retention, and penetration in the respiratory system.

Within the consortium, ISAB will collaborate with RISE's inhalation team and utilize its in vivo PreciseInhale equipment in RISE research facilities. This collaboration will enable ISAB to conduct pharmacokinetic (PK) studies on the new formulations. All the participating organizations possess significant expertise in inhalation and pulmonary drug delivery, with a strong track record of contributing to multidisciplinary cross-border research projects.

In our view, the report did not include any major surprises. We continue to expect sales to increase during the coming quarters; however, we make minor adjustments in our sales estimates for 2023-2025e, resulting in FY’23 sales of SEK22.2m (previous estimate of SEK26.5m) and a decrease of c6% for 2024e and 2025e. Moreover, we believe OPEX will be at similar levels during the next quarters. Therefore, we also make slight changes in our OPEX estimates for the rest of the year and 2024e (decrease from SEK-23.6m to SEK-20.6m in 2023 and SEK-31.3 to SEK-28.0 in 2024e).

ISAB received cSEK10.2m from the rights issue (after issue-related costs). We believe the capital could be sufficient until break even; however, it depends on increasing sales and keeping costs reasonable. ISAB’s share price has declined significantly during 2022 and 2023, where we believe the reasons are an unstable market, where investors have been more careful investing in smaller, non-profitable companies, and that investors have had higher expectations of ISAB’s growth. However, we believe ISAB has long-term potential, and the share price decline has been too massive. We argue the current valuation is too low and believe large orders and a break-even quarter could act as catalysts for the share.

We have adjusted our model with an updated cash position and made some changes in our sales, and OPEX estimates for 2023-2025e. The changes do not render in any changes in our fair value range, including a base case of SEK17 and a bull and bear case of SEK27 and SEK4, respectively.

The share is currently traded lower than our bear case of SEK4. We believe that the market does not have high expectations of ISAB and that strong quarters and a more stable market, in general, could change the declining share price trend.