Opthea Limited

Company Overview: Opthea Limited (ASX: OPT), a drug advancement company, is engaged in expanding innovative, biologics-centered therapies for the treatment of eye infection. The company’s intellectual property is held within its wholly owned subsidiary, Vegenics Pty Ltd. Its product development programs are primarily aimed at improving OPT-302 for wet age-related macular degeneration (wet AMD) and diabetic macular edema (DME).

OPT Details 

OPT Rides on Higher Investments and Strong Liquidity Position: Opthea Limited (ASX: OPT) is engaged in developing and commercialising therapies, primarily for eye disease. The company is engaged in controlling global rights to a substantial intellectual property portfolio of VEGF-C, VEGF-D and VEGFR-3. Recently, the company provided encouraging top-line results of its Phase 1b/2a clinical study trial assessing safety and effectiveness of OPT-302 in treating refractory patients with constant diabetic macula edema (DME). The data has been presented at the 2020 American Society of Retina Specialists (ASRS) Virtual Annual Meeting. Notably, approximately 27.3% of refractory DME patients earned more than or equal to 10 letters of gain in Best Corrected Visual Acuity at week 12, subsequent to the OPT-302 combination therapy. Further, the test results revealed that around 9.1% of the patients gained more than or equal to 15 letters from baseline to week 12 in the OPT-302 combination group.

Earlier, the company had provided encouraging top-line results of its Phase 2a trial, with approximately 52.8% of refractory DME patients earning more than or equal to 5 letters of gain in Best Corrected Visual Acuity at week 12, following the treatment. These results of OPT-302 signify a step forward for the treatment of patients with retinal eye diseases, such as wet AMD and DME. Hence, the positive outcomes of the study reflected a major milestone for Opthea and place the company as a key global player in ophthalmology.

In today’s world, several patients remain untreated and have very limited options for anti-VEGF-A therapies. The need for more effective and durable therapies for DME keeps increasing with time. The company’s OPT-302 holds the potential to improve vision and meet the rising unmet needs of patients, suffering from such illnesses. The company added that a commercial assessment of OPT-302, which was performed by an independent research firm, expects worldwide annual peak sales of OPT-302 for wet Age-related macular degeneration (AMD) and Diabetic Macular Edema (DME) to be US$5.3 billion.

Markedly, the company’s efforts to advance the clinical development of OPT-302 by progressing patient recruitment into the company’s Phase 1b/2a and 2a clinical trial, demonstrate its strong financial position. Going forward, OPT is currently planning to rapidly advance OPT-302 into pivotal, registrational Phase 3 development, including regulatory engagement in the US and Europe, on the back of strong clinical data. OPT enjoys a decent financial position to undertake this planning and complete the DME trial.

In December 2019, the company undertook a capital raising program. Notably, the company raised $50 million equity capital in a placement backed by Australian and UK based institutional investors. In September 2019, the company received a $14.6 million R&D tax credit from the Australian Taxation Office. The funds garnered under the offer make the company fully funded to carry out the completion of the Phase 2a clinical trial. Also, the funds would be deployed to progress Phase 3 preparatory activities, which incorporate the manufacturing of OPT-302 and initiation activities for a Phase 3 program in wAMD. Further, the available funds will also be used towards working capital, costs of the offer, further preclinical studies, etc. Henceforth, the fund raising will further strengthen liquidity position and makes it more effective to undertake business transactions which can prove to be beneficial over the long-term.

Coming to the past three-years performance over the period covering FY16 to FY19, OPT witnessed a top-line CAGR of ~6.1%. This reflects that OPT can make deployments towards its business activities which might help it in tapping long-term growth prospects.

Past Performance (Source: Company Reports)

1HFY20 Key Financial Highlights:  OPT declared its interim results wherein, the company reported total revenues of $273,115, as compared to $480,338 reported in the year-ago period. During the period, the company reported a loss of $7,620,018, which decreased from a loss of $11,281,819 reported in the year-ago period. In 1HFY20, majority of the expenditure of the group was on Research & Development (R&D) at $8,340,640 as compared to $17,352,777 in 1HFY19. Costs associated with R&D were related to the Phase 2a, Phase 2b and Phase 1b/2a clinical trials of OPT-302 for wet AMD and DME, and sourcing of standard of care anti-VEGF-A agents, used in the clinical studies. Other important expenses were related to patent and intellectual property costs, and administrative expenses that amounted to $203,982 and $2,416,266, as compared to costs of $149,768 and $2,073,462, respectively, in 1HFY19. During the period, the company received a R&D tax incentive claim of $14,636,973.

1HFY20 Key Financial Highlights (Source: Company Reports)

Robust Liquidity Position: The company reported $79.5 million of total current assets as at 31 December 2019. Cash and cash equivalents at the end of the period were reported at $75.1 million as compared to $21.5 million at the end of 30th June 2019. Receivables for the period were reported at $315,937, as compared to $295,786 as of 30^th June 2019. Net tangible asset backing per share as on December 31, 2019 was reported at $0.27 as compared to $0.12 as of 30 June 2019. Lease liabilities at the end of the period stood at ~$0.39 million. Net cash inflow from operating activities came in at $3,910,355 while net cash inflow from investing activities was $478,819.

Recent News: 

(a) The company recently announced that it has confidentially submitted a draft registration statement on Form F-1 with the U.S. Securities and Exchange Commission (the "SEC") relating to the proposed public listing of its American Depositary Shares (“ADSs”) in the U.S. Subject to market and other conditions, the public listing is likely to take place after the SEC finalises its review process. Consequently, OPT’s share will continue to be listed on the Australian Securities Exchange, with concurrent listing of its ADSs on the NASDAQ stock market. This initial public offering of ADS in the U.S. is likely to aid OPT’s cost of capital, consequently strengthening the balance sheet and supporting growth. Notably, the proceeds from the offering will support the company’s product development activities, which includes its Phase 3 trials of OPT-302 for the treatment of wet AMD.

(b) In another update, the company stated that it has positively finalised End-of-Phase 2 meetings with the U.S. FDA, and a Scientific Advice meeting with the European Medicines Agency (EMA), to gain guidance on Phase 3 clinical development plans of OPT-302 for the treatment of wet AMD. The company is on-track to begin Phase 3 trials in early 2021. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 46.3% of the total shareholding.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics:  In 1HFY20, the company had a current ratio of 12.46x, higher than the industry median of 4.58x, representing a sound liquidity position. Debt to Equity ratio for 1HFY20 stood at 0.01x, lower than the industry median of 0.23x. The company is optimistic about business growth, looking at the potential contribution of clinical trials and lower debt levels.

Key Metrics (Source:  Refinitiv, Thomson Reuters)

Key Risks: The main risks arising from the company’s financial assets and liabilities are interest rate risk, foreign currency risk, equity securities price risk and liquidity risk. The company’s investment in listed shares is exposed to equity securities price risk and their fair values are exposed to fluctuations as a result of changes in market prices. Also, the increased costs related to developing a drug using a costly technology and pipeline setbacks are few potential headwinds.

What to Expect: The company’s capital raising initiatives and its focus towards delivering on the pipeline of catalysts will aid future growth prospects. Moreover, the company is spending millions to improve its product pipeline with pathbreaking technology, inducing a huge R&D expenditure. Positive data from the trials, encouraging pipeline progress and favorable regulatory updates are likely to aid the company in the near future. Further, mergers & acquisitions have been an essential trend in this vibrant sector as prominent pharma/biotech companies looking to expand their revenue bases. In addition, coronavirus pandemic is unlikely to have a material long term impact on the business. Subsequent to the completion of its capital raise, OPT has reported a strong cash position that is likely to fully fund the company through to the completion of its phase 3 trials.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As per ASX, the share price has fallen ~25.15% in the past six months. Currently, the stock is trading slightly below the average of its 52-week trading range of $1.165 - $4.15. The company’s positive outcomes of the Phase 2a study and a successful capital raising program remain key growth catalysts. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). For the purpose, we have considered peers such as Clinuvel Pharmaceuticals Ltd (ASX: CUV), Mayne Pharma Group Ltd (ASX: MYX), Probiotec Ltd (ASX: PBP), to name few. Thus, considering the large market opportunity for OPT-302, decline is losses, and a decent liquidity position, we recommend a “Buy” rating on the stock at the current market price of $2.40, down 1.639% as on 26 August 2020.

OPT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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