Life Sciences Analyst Mark Brewer of Hardman and Co caught up with DirectorsTalk for an exclusive interview to discuss Advanced Oncotherapy Plc (LON:AVO)
Q1: Today we’re discussing Advanced Oncotherapy, a company you say uses unique technology with the respect of the competition. What do you mean by that?
A1: Advanced Oncotherapy (AVO) is developing a proton therapy system for the treatment of cancers. What’s unique amongst its peers is that it utilises a linier accelerator unlike its competitors which are all based on cyclotrons or essentially circular accelerators and these require much more extensive radiation shielding and typically dedicated facilities to house them. The Advanced Oncotherapy system called LIGHT is linear, doesn’t have that extent of shielding and is modular in nature enabling the operator greater flexibility in terms of their purchasing decision.
Q2: So, with it not requiring all this shielding, I suppose it’s a much smaller unit?
A2: It is a much smaller unit, it’s typically 25-30% the size of a historic system which would take up the size of a football pitch and might be 20-30 metres high in terms of the building in which it was being housed.
Q3: What is the size of the proton therapy market and its growth drivers?
A3: In 2014, the market was worth around $680 million and it was growing at about 14-15%. There are currently 9 suppliers of which the latest is Advanced Oncotherapy to that market and the largest of which is a company called IBA in Belgium which has about 50% of the market but the key drivers that we see are likely to be driven by the greater affordability of the system. Advanced Oncotherapy has sold the system for $40 million inclusive of all the ancillary equipment which compares with historic proton therapy centres which might cost $200-250 million. In addition, it’ll be driven by increased market awareness, cancer patients are starting to self-refer and they understand the benefits of the proton therapy. In addition to that, there’s a replacement cycle that’s likely to help the proton therapy, there are currently about 13,500 x-ray systems that typically have a working life of 10 years and as they come up for replacement, I think a lot of people will be looking to replace those potentially with proton systems. In addition and one of the major driver is increased clinical validation, there are over 140 clinical trials looking at proton therapy and its benefits, both in terms of safety profile or lower side effect profile and also comparing it with traditional x-ray therapy, these are the key drivers.
Q4: On the flip side then, what do you consider the key risks for AVO?
A4: In my mind, the key risk is one of execution. They are intent at the moment on installing their first proton therapy system into Harley Street in London with the first patient being treated in 2017. This risk, in my view, is mitigated by the fact that the company is utilising a partnership supply model with key industry suppliers such as Toshiba which have all the relevant experience and certifications within the proton therapy field. I think in terms of technology risk, it’s very low or non-existent given that proton therapy has been used since the 1950’s and has treated over 150,000 patients so really the key risk is one of execution but I think , as I say, those risks are mitigated.
Q5: Now you have mentioned Harley Street, a recent announcement from AVO was that it was creating a Joint Venture with Circle Holdings to operate a proton therapy facility in Harley Street. Now it could prompt questions in the market as to its strategic intentions to be a manufacturer or operator, what do you make of this?
A5: It’s an interesting point because a number of people have sort of questioned ‘are they moving into being an operator’, may view is that the business model remains one of being a manufacturer and selling of fully integrated LIGHT system. However in this particular case, I think the company has deemed it sufficiently important to have a vested interest in the operational success of the Harley Street facility, given the fact that the LIGHT system is not yet on the market. Additionally, I think it’s also because the associated cash-day in being associated with a proton therapy centre on one of the world’s most pre-eminent medical address so strategically it remains a manufacturer but in this case, I think the fact that they’ve set up this operational Joint Venture, it’s not something that’s going to tear them from their core focus.
Q6: So pretty much hands-on because it’s the first and it is Harley Street?
A6: Exactly, yes.
Q7: What do you consider AVO’s outlook and investment case?
A7: I think the commercial momentum, it’s certainly building. They announced their first purchase order from a group called Sinophi Healthcare in March this year for $40 million, they should have their second order from the Joint Venture for Harley Street, once the Joint Venture has finalised its financing options and they’re currently reviewing a number of vendor financing proposals. In addition to that, it has a pipeline of interest which amounts to a further 9 systems, which if they all converted to order, would amount to $360 million. The market itself is on the cusp of steepening adoption curve, there are around 4 million patients in the developed world who are suitable for radiotherapy and up to 20% of these patients could benefit from proton therapy which would imply the need to treat around 800,000 patients. This in itself would require a 20 fold increase in the number of proton centres in the world, there are currently 50 and you probably need to see round about 1,000 proton centres to treat that number of patients. It’s early days, the market is not going to get there immediately and this is something that should happen over the next 10 years but it’s a very exciting place for Advanced Oncotherapy Plc to be with the technology that they have.
