We attended a few webinars by Lighthouse Instruments, Gasporox’s main competitor, to better understand the regulatory changes related to EU Annex 1 revisions enacted in 2022 and the current state of the market for Container Closure Integrity Testing (CCIT).

The 2022 revision intends to eliminate inconsistencies and acknowledge technological advances. It came into effect on 25 August 2023, although section 8.21 will be enforced from 25 August 2024. However, the original Annex 1 has been in effect for much longer. Thus, we are cautious about the revision catalyzing adoption for Gasporox in the near term. Nevertheless, according to section 8.21 of annexin 1, containers closed by fusions, small and large volume parenteral bags, and glass or plastic ampoules should be subject to 100% integrity testing.

“8.21 Containers should be closed by appropriately validated methods. Containers closed by fusion, e.g. Blow-fill-seal (BFS), Form-Fill-Seal (FFS), Small and Large Volume Parenteral (SVP & LVP) bags, glass or plastic ampoules, should be subject to 100% integrity testing. Samples of containers closed by other methods should be taken and checked for integrity using validated methods. The frequency of testing should be based on the knowledge and experience of the container and closure systems being used. A scientifically valid sampling plan should be utilized. The sample size should be based on information such as supplier approval, packaging component specifications and process knowledge. It should be noted that visual inspection alone is not considered as an acceptable integrity test method.”

According to Lighthouse Instruments, the primary challenge for the industry will be to adapt to the 100% testing requirement for flexible packaging (bags in the above quote). While it is not rudimentary to implement 100% integrity testing for fixed vials, it would be complicated to conduct the tests of flexible packages at in-line speeds within the pharmaceutical industry. Lighthouse Instruments described 100% integrity testing for flexible packages as “very challenging.”

We believe Gasporox’s recently launched AutoMap provides a solution to this problem. AutoMap is an in-line headspace analyzer viable within the pharma and food segments and has a speed of about one bag per second. AutoMap was awarded the CPHI pharma award for its application in the pharmaceutical industry in October 2023. Thus, this is further evidence of Gasporox’s leading product portfolio and value proposition.

Lighthouse Instruments surveyed the industry between March 2019 and March 2020, highlighting the state of the market and its view on the potential preferred solution in the future. Lighthouse Instruments received 157 responses, which concluded blue dye tests were the standard at 66%. Headspace analysis (Gasporox offering) stood at 18%. The survey allowed multiple choices; thus, the percentages do not add to 100%.

We are surprised by the result, as our recent due diligence suggests that nearly 100% of the market has transitioned away from blue dye tests. However, we acknowledge that our due diligence involved significantly fewer responses. It could also be the case that this poll was conducted primarily in a laboratory setting, whereas our channel checks were focused on production-related applications.

From the same poll, we can also see that many actors are actively assessing whether they should implement 100% integrity testing.

This confirms that there is a shift towards 100% integrity testing, or deterministic methods, rather than probabilistic sampling. There is, however, a large share of participants in the poll who do not seem to believe that 100% CCI inspection is necessary. Although we would like to avoid hypothesizing based on this data, it seems likely that this fraction would decrease somewhat if the poll had been conducted after the 2022 revision of the EU Annex 1 described above.

Lighthouse Instruments believes that Headspace Laser-based headspace analysis will emerge as the best “all-around” solution for most actors. Thus, we believe Gasporox is well-positioned for the future of CCIT.

We are increasingly convinced Gasporox will struggle to show growth for H1 2024 due to the strong H1 2023. Additionally, we reduce our Q4 2023 estimate. Hence, we have lowered our Q4 2023 net sales estimate by 24% and 2024 net sales estimate by 21%. Due to operating leverage, our EBITDA estimates are reduced by 81% and 26% for Q4 2023 and 2024, respectively. We have increased our risk-free rate assumption from 2.5% to 3.0% due to higher interest rates. We remain confident that Gasporox can reach cash flow positive on its current funding. Due mainly to estimate changes, we reduce our fair value range from SEK12.0-45.0 with a base case of SEK25.0 to SEK9.0-36.0 with a base case of SEK21.0.

Our NTM quarterly estimates are as follows:

As we have not changed our expected growth rates, the estimates are reduced through our forecast period. Thus, we lower 2023e-2026e net sales between 14-23% while EBITDA is reduced between 26-39%.

Compared to peers, Gasporox trades at a slight premium on EV/S while on a more significant premium on EV/EBITDA and EV/EBIT. Our base case is in line with Gasporox’s historical EV/S median.