Inhalation Sciences released its Q4 2023 report. The revenues came in at SEK5.5m (SEK4.1m), 24% lower than our revenue estimate of SEK7.2m. The gross margin came in at 85% (77%), higher than our gross margin estimate of 79%, and operating expenses amounted to SEK-5.4m (SEK-4.3m) compared to our OPEX estimate of SEK-3.8m. The main difference between the result and our estimates is that the revenues came in a bit lower than expected. Furthermore, OPEX was a bit higher on all line items.

Moreover, adjusted EBITDA came in at SEK-0.5m (SEK-0.8m), and EBIT was SEK-0.7m (SEK-1.1m), which was lower than our estimates of SEK2.2m and SEK1.9m, respectively.

Cash flow from operating activities was SEK-1.6m (SEK-1.4m), and by the end of the quarter, the cash and cash equivalents amounted to SEK7.8m. With an expected ramp-up in revenues and the company being close to breaking even, we argue the current cash position will be sufficient to cover future business activities. However, ISAB has low expenses overall. At most times, expenses often need to rise to increase revenues to another level. Therefore, there could be a scenario where ISAB needs to raise capital in order to expand the business. However, we would not see such a capital raising as negative, as the additional capital would probably add value in the long run.

Overall, the report came in a bit under our expectations. However, we still argue the results are solid as the company continues to grow and the demand for ISAB’s offering continues to increase. Moreover, we learned that the order backlog was approximately SEK9m, and outstanding offers were SEK32m at the end of the quarter. The order backlog consists of signed customer agreements that have not yet been invoiced to customers.

The report’s CEO message was positive, in our view, where the CEO is satisfied with the increased revenues and states that the company is close to break even, a significant milestone for the company. Moreover, we learn that ISAB received SEK2m during 2023 from the FDA in relation to the DissolvIt study and that the company expects the study to be finalized at the end of 2024. Furthermore, the company expects to receive data from its clinical phase-1 study during the following months, where positive results could open a much larger market for ISAB (four times larger than the current pre-clinical market).

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 included a PreciseInhale system and its cell exposure module. ISAB’s order flow was 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 the month. The project will carry out required regulatory testing through a trusted service partner, sourced by ISAB, that specializes in regulatory testing of inhalers.

ISAB announced another IRS order worth approximately SEK1.1m in November 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. Overall, we are positive about the order flow.

At the end of the quarter, ISAB signed a product service contract valued at EUR47,000 for its instruments stationed at a major European pharmaceutical company's facilities. The agreement reflects the client's ongoing reliance on ISAB's equipment for their portfolio of inhaled therapies.

As a longstanding customer, the client has utilized ISAB's instruments to advance their lineup of inhaled therapeutics. This new contract will address the service and maintenance needs of their in-house equipment, ensuring continued functionality.

In January, ISAB announced that it had signed a partnership agreement with the German-based inhalation development service provider Actarmo Medical. In terms of size, Actarmo is similar to ISAB and has an established client base and specialist expertise in formulation development, analytical testing under full GMP (Good manufacturing practice), MDR consultancy, and consultancy for all aspects of inhaler delivery devices. The partnership will include co-selling and co-marketing of ISAB’s and Actarmo’s offerings, which, combined, enable them to provide more end-to-end services.

We are positive about the partnership as it increases ISAB’s total addressable market by approximately 30%, exceeding EUR630m. We are also positive about how this collaboration could increase ISAB’s customer base. It is challenging to determine how much this agreement could affect ISAB’s future sales; however, the partnership aligns with ISAB’s strategy, and we believe we will receive a better picture of the collaboration during upcoming quarterly reports.

Overall, we endorse the partnership and look forward to hearing more about how it may affect ISAB’s sales in the future.

As the report came in a bit under our expectations, we make some changes to our 2024e-2025e estimates. Firstly, we lower our revenue estimate for 2024e from SEK43.1m to SEK38.3m and from SEK73.2m to SEK65.8m in 2025e. However, we increase our gross margin estimate, where we now expect a gross margin of 79% in 2024e and 77% in 2025e. The decreasing gross margin (compared to 2023) is because we expect an increasing percentage of ISAB’s revenues to come from PreciseInhale systems in the future. Moreover, we slightly change our OPEX estimate for 2024e, increasing administrative expenses from SEK-6.0m to SEK-6.9m. Overall, we still expect a solid revenue ramp-up in 2024e and 2025e (111% and 72%, respectively), based on increased demand for ISAB’s offering because of the entry into the clinical market, the potential validation of the DissolvIt module, and an increasing customer base.

We continue to expect a low OPEX during 2024e (SEK-22.1m), as we believe the company will try to be as cost-effective as possible to reach break-even and decrease the risk of a future capital injection. However, in order for revenues to increase to the next level, we argue expenses will need to rise. Therefore, we expect ISAB’s OPEX to increase significantly from 2025e when the company is profitable and ready to expand the business even further.

As previously stated, we have made some estimate changes for our 2024e-2025e estimates, mainly decreasing our revenue estimates during the period. As a result, our base case decreases from SEK17 to SEK16.5. Furthermore, our bull and bear cases of SEK27 and SEK4 remain the same.

The ISAB share is currently traded close to our bear case of SEK4. We argue that the current valuation of ISAB does not reflect the potential and the company’s progress. In general, small, unprofitable companies have had a negative share price trend during 2023. However, ISAB has increasing revenues, is close to becoming profitable, and does not need additional capital to cover future business activities. These three essential factors are not reflected in the current share price level, in our view.

Furthermore, we look forward to the upcoming clinical study data and the study result from the FDA at the end of the year. We argue that these two events, together with increasing revenues and upcoming profitability as solid triggers for the share, that we argue could decrease the gap between the current share price and our base case.