Inhalation Sciences released its Q3 2023 report. The revenues came in at SEK3.4m (SEK1.8m), 48% lower than our revenue estimate of SEK6.4m. The gross margin came in at 81% (76%), a bit higher than our gross margin estimate of 79%, and operating expenses amounted to SEK-3.7m (SEK-4.8m) compared to our OPEX estimate of SEK-4.9m. The main difference between the reported numbers and our estimates is the revenues. However, ISAB continues to be cost-effective, where OPEX was 23% lower compared to last year's quarter.

Moreover, adjusted EBITDA came in at SEK-0.7m (SEK-3.2m), and EBIT was SEK-1.0m (SEK-3.5m), which was lower than our estimates of SEK0.4m and SEK0.1m, respectively.

Cash flow from operating activities was SEK0.5m (SEK-1.4m), and by the end of the quarter, the cash and cash equivalents amounted to SEK9.7m. We argue that ISAB’s current cash position will be sufficient to cover future business activities and does not currently see any capital need. However, even if the company focuses on reducing costs, we expect costs to increase in the long run to grow the business. If the company needs to raise capital, we believe it will be in relation to expanding the business.

Overall, the report did not include any major surprises in our view. Revenues came in lower than expected; however, we highlight the order flow after the reporting period, where ISAB has already received projects worth SEK7m. Therefore, we have high expectations for Q4 2023e. Moreover, we highlight that ISAB expects to publish the data from last year’s clinical phase-I study in the coming months. We look forward to the data and how ISAB can use it to grow the business.

In September, we learned that ISAB had entered a collaboration agreement with a prominent Indian multinational pharmaceutical company specializing in respiratory products and operating in over 80 markets globally. This partnership marks ISAB's debut in the Indian market. The pharmaceutical company, renowned for its respiratory portfolio, has selected ISAB's advanced in vitro dissolution and absorption module, DissolvIt, for its Inhalation Research project. DissolvIt is uniquely designed for inhaled substances, offering precise data that closely aligns with clinical trial outcomes. This collaboration aims to enhance research accuracy, potentially reducing costs and risks in drug development.

The collaboration comes at a pivotal time for the Indian pharmaceutical industry, which is a major global exporter and one of the world's largest and fastest-growing markets. The industry has witnessed significant growth, thanks to increased investments in research and development (R&D) and innovation, both from the private sector and the government. The Indian pharmaceutical market's current value and anticipated growth underscore this collaboration's strategic importance in tapping into the industry's immense potential.

In our view, the partnership has high potential in the long term. We look forward to hearing more about the collaboration and how it may affect future revenues.

In October, ISAB announced it had received an order worth EUR188,900 (approximately SEK2.2m) from a top-five global generics manufacturer (returning customer). The IRS (Inhalation Research Services) project involves, once again, the DissolvIt testing module, where the project is a follow-up to a previous study and will compare a range of inhaled formulations. We are positive about the news, and the involvement of a returning customer highlights their satisfaction with ISAB's services. 

Moreover, ISAB announced it received an order worth approximately SEK3.2m from a large, returning European Pharma customer with a pipeline of inhaled therapies. The order includes a PreciseInhale system and its cell exposure module. ISAB’s order flow has been solid during November. Except for this order, the company received an order worth around SEK600,000 from a new European customer at the beginning of November. The project will carry out required regulatory testing through a trusted service partner, sourced by ISAB, that specializes in regulatory testing of inhalers.

This week, ISAB announced another IRS order worth approximately SEK1.1m from a European pharma company. The project involves ISAB’s XposeALI in vitro exposure module. The module is connected to PreciseInhale, which delivers a precise and dispersion of test aerosol particles directly onto the cell surface. The method significantly reduces the amount of test materials, which is positive from a cost and ethical perspective.

We are positive about the order flow. We have high expectations for Q4, where we estimate revenues of SEK7.2m, and argue these four orders in Q4 show that the company is on track to reach our estimate (however, we do not know how much of the orders that will be disclosed as revenues and how much that will be included in the order stock).

As mentioned, the report did not include any major surprises in our view. We expect ISAB to continue focusing on keeping costs at reasonable levels. Therefore, we have chosen to make some OPEX changes in our model for Q4 2023e and full year 2024e. Firstly, we decrease the OPEX for Q4 2023e as we believe it will be in line with the costs during Q3. Moreover, we do not change our revenue estimate of SEK7.2m as we have seen a solid order flow during the beginning of the quarter (however, note that the complete value of the orders will probably not be seen as revenues in the Q4 report). Secondly, we decrease our OPEX estimate for the full year 2024e from SEK-28m to SEK-21m, as we believe the company will continue with its cost-awareness next year as well.

As previously stated, we have made some estimate changes for Q4 2023e and full year 2024e. Moreover, due to an internal policy, we have increased the risk-free rate in our model from 2.5% to 3.0%, increasing the WACC from 13.5% to 14.0%. However, these changes do not render in an updated fair value range, including a base case of SEK17, a bear base of SEK4, and a bull case of SEK27.

ISAB’s share is currently traded close to our bear case of SEK4. We argue that the current valuation does not reflect the company’s potential and that ISAB is close to becoming profitable. We argue quarterly reports showing profitability, large orders, partnerships, and progress with the FDA could act as triggers for the share and should decrease the gap to our base case.

Concludingly, we believe the rest of 2023 and 2024 will be much interesting to follow.