This equity research note was formally published on 16th November 2017 at 2.21pm.

Epigenomics (ECX-DE): Good entry point for the long term investor

Recommendation:  OUTPERFORM (from NEUTRAL)
Target price: EUR6.82
Current price (as at 16th Nov 2017): EUR4.13
 

Upgrade to OUTPERFORM from NEUTRAL. Our upgrade is driven by a significant share price decline, improvement in pricing and sufficient liquid assets to prepare for commercialisation in the US. While US reimbursement decision is a binary event and represents uncertainty for this region, the health economic value of this test is of significant value to healthcare systems world-wide. We see a potential takeover attempt from existing or new investors as a possible scenario. Thus, current trading levels represent an attractive value proposition over a two to three-year period.

Results and Guidance - The company has improved profit guidance for the full year by EUR2.0m based on deferred investments in its commercialisation platform due to delayed product reimbursement set up in the US. Revenues are expected to come in between EUR1.0m to EUR1.5m for 2017. The company has issued a convertible bond of EUR7.1m and has liquid assets of EUR16.9m. The average monthly burn rate has come down to EUR0.77m in 2017 (from EUR0.98m in 2016). We believe, the current cash reserves will take the company comfortably through 2018.

Pricing of the test - Price increase in the US remains a positive - As a reminder, on 22nd September this year the US CMS published their decision on test code and reimbursement price for Epi proColon, which was cross walked to a different test code. The newly determined payments rates according to PAMA see the price increasing to $124 from $83, a 50% upside. This is an important milestone in the CMS reimbursement process.

Reimbursement and Guidelines - The test still needs to progress through national coverage determination following inclusion into medical guidelines. Epi proColon is the first blood-based biomarker test approved by the US FDA for CRC screening. It improves on convenience, acceptance, is less embarrassing and avoids the need for multiple tests. Epi proColon is in the process of being incorporated into US medical guidelines and now the price for reimbursement is set.

Distribution Agreement - ECX has a US distribution deal with lead player Polymedco. Leading US laboratory company LabCorp has also launched Epi proColon. In China, a strategic collaboration is in place with Biochain, a leading distributor of laboratory testing which commenced commercialisation in 2015.

Valuation - ECX share price became undemanding in our view. Profitability guidance was raised and we view the pricing as a step in the right direction. However, the variables of national coverage determination and medical guideline incorporation still need to be met. The commercial potential of Epi proColon is highly attractive. Despite the near-term revenue visibility is not clear over the next 12 months, we believe that the value of such a test for a third party is significantly above the current trading price. Although, shares will come under pressure in a negative reimbursement decision the potential takeout scenario provides a valuation floor and future upside to today's trading levels. Hence, we upgrade our recommendation to OUTPERFORM (from NEUTRAL), but maintain our DCF-derived target price of EUR6.82.

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