kiwig - clio is on the money. This is an excerpt from the November report by MST (which came up with the measly income from royalties of $17m in FY24):
"MST forecasts assume RHY will partner with pathology service provider/s. Royalty streams are commonly in the 5%-15% range. The MST model assumes licensing agreements will be based on a 12% royalty stream for the Australian,US and EU markets. Royalties of 2% of all net sales are payable to CSIRO under the agreements. The valuation is based on a net ~10% to RHY. We forecast revenues of A$5.5m and A$17.0m for FY22 and FY23, recognising that time will be needed to establish supply and commercial partnerships and gain market acceptance.
The valuation is subject to the usual upside/downside risks of medical devices: trial failure, failure to gain approval,competition, poor market uptake, royalty streams, timing and pricing. The price of ColoSTAT® is yet to be confirmed. MST forecasts are built on US$38/A$50. The price is likely to reflect its clinical performance as established initially in Clinical Study 7."
Reversing the numbers in MST's presentation indicates to me that they are assuming that Rhythm will get A$6 per test in FY24 and that only 2.83m tests will be sold. For simplicity assume that all of those tests are carried out in the EU. 2.83m tests is only testing 5% of the normally screened population in the EU or less than 3% of the possible population in the EU. That is in FY24, years after ColoSTAT was awarded the CE Mark.
So what MST is assuming is that:
1. ColoSTAT gets the CE Mark in the first half of FY22 (which came through earlier this month - a big tick);
2. Authorities in all EU countries hold off placing any orders for ColoSTAT while they wait for favourable Clinical Study 7 results to be released, scheduled sometime in the second half of FY22 (that is, by June 2022).
3. By June 2022 the results of clinical study 7 do confirm the results from clinical study 6, at least in broad terms.
4. So, by June 2022 the Rhythm marketing team would be able to present the following pitch:
+ ColoSTAT is about a third more accurate than the currently used test in the EU ie, the faecal FIT test;
+ ColoSTAT is substantially cheaper than the currently used faecal test (I recall someone saying that the FIT test costs about $100 per test);
+ ColoSTAT is far more convenient than the FIT test (MST estimates the potential market is double that which the FIT test currently has);
+ ColoSTAT requires no additional procedures by either the people being tested or their GPs, It can be included as part of a regular blood test;
+ the path labs can begin using ColoSTAT immediately, the test requires no new equipment and is relatively straight forward;
+ manufacture of the ColoSTAT test kits can be ramped up quickly, with a global manufacturer already contracted and test kits already produced.
5. But even though all of that is in place by June 2022, MST is assuming that by June 2024 ColoSTAT will still only hold about 5% of the existing market and less than 3% of the potential market. And that is just in the EU (assuming zero uptake of ColoSTAT elsewhere).
Sorry but I find the scenario that MST has used a low probability scenario, at least in that timeframe and at least using those assumptions.
A point that I reckon MST has not factored in flows from their comment that they expect that contracts in the EU will be negotiated with national health authorities. If that is the case then there will be BIG contracts negotiated and announced prior to ColoSTAT being actually used in those countries. If say Germany announce that they have signed up for 5 million ColoSTAT kits each year for the next 5 years the market will crunch the numbers on that information not on the number of kits actually used in say FY24.
Also, I understand that a number of Asian countries accept the CE Mark as being sufficient for the use of medical devices in their countries. I have not seen this raised in relation to ColoSTAT but I know that is the case with the main product of Otto's other biosciences company.
All in all, I am really disappointed by the lack of vision being expressed from most of those that should know better about Rhythm and ColoSTAT. By all means, do the best case, worst case, most likely case scenarios. If ColoSTAT flops clinical study 7 then t could well be worthless. If a better test rushes to market in the next 24-48 months then Rhythm will be all dressed up but nowhere to go. I think it is crucial that investors understand that Rhythm is NOT a sure thing. And sure, the most likely case may be that the European health authorities will stuff around which will result in long delays in the take up of ColoSTAT. But on the other hand ColoSTAT does offer enormous hope to millions of people around the world and it does appear to be on the cusp of being commercialised. If Otto and co land ColoSTAT then it stands a real chance of being a blockbuster, in my honest opinion.
Please. Tell me what I have got wrong.
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