CYCLOPHARM: RESEARCH TIP UPDATE

Medical technology

Radiology services

Shares of Cyclopharm have been volatile since our last recommendation, but this is to be expected from a stock that has exposure to a binary outcome. In Under the Radar’s view the financial impact of a positive outcome far outweighs the negative, but the odds of either cannot readily be estimated. That is a recipe for a volatile stock as sentiment ebbs and flows for either outcome among the interested investors.

Although the historic financial results are of less importance, they do provide evidence that this is a viable business. FY19 sales revenue was up only 2% at $13.4m, earning $1.9m EBITDA in its Technegas division. Generator sales were up 13% to $1.7m, while PAS (“patient administration set”) consumables represented the balance. Excluding Germany where problems have been around for a couple of years, PAS revenues increased 8.4%, and with gross margins of 81%. This recurring revenue is very valuable.

Progress is being made on getting US FDA approval for Technegas, which is encouraging. About $5.5m of the expected $7.5m cost has already been spent on these efforts. The company is pursuing a two-pronged approach. Firstly, 176 patients have now been enrolled in the Phase 3 trial. The second approach is known as 505(b)(2) application, which if successful would lead to a faster and cheaper route to approval. We think there are some expectations in the market that the FDA will reach a positive decision this calendar year, and there may be room for some delay and disappointed expectations.

The contrast with Medical Developments (MVP) remains interesting. Like MVP, CYC has an existing commercially product available which is popular among clinicians and provides an alternative treatment or diagnostic choice without some of the poor outcomes associated with the existing choice. Both companies are taking a product that has been approved and proven to be effective in various countries, and making applications to access the critically important American market where the financial rewards for success are so compelling. Not only is the US the biggest economy in the world but it spends the largest proportion of economic activity on health care and health outcomes. This may change but not any time soon. And in both cases, the companies can offer compelling benefits over existing choices, so even in a tougher sales environment, gaining traction should still be possible.

Optionality into indications beyond Pulmonary Embolism and chronic respiratory disease management could deliver exponential growth, and with a relatively small market cap against a large potential market, we remain cautiously positive.

**FY20 Forecast

RADAR RATING: Cyclopharm is positioned to grow its market by 60% if it gains approval into the giant US market. It’s already profitable, pays dividends and is great value if it gets US FDA approval. SPEC BUY.