Description

Maxcyte (MXCT) is a provider of electroporation tools for cell and gene therapy (CGT). Because of the weak biotech funding environment in 2023, MXCT has faced slowing demand which has led to multiple base business guidance downgrades (initially 20-25% growth, . MXCT is also expected to continue burning cash through 2024 which is a problem for investors.

However, MXCT is an attractive way to take advantage of the biotech bear market. The company has a strong competitive position in electroporation, a critical technique for CGT and poised for explosive growth.  The company also has a hidden strategic asset in its strategic platform licenses (SPLs) which have the potential to generate huge returns for the company as its customers’ drugs (over 125 under SPL) come to market. These SPLs provide investors a way to make a diversified bet on the success of CGT with many shots on goal as opposed to having to pick specific drugs that are successful.

MXCT’s SPLs could be worth almost $20 on their own, significant upside from $3.10 with downside protected at ~$2.50.  One single successful SPL drug has the potential to be worth MXCT’s current EV and the company has over 125 drugs in its SPLs so there are a lot of potential lottery tickets.

Cell & Gene Therapy

CGT involves repairing or reprogramming living human cells and then transferring those cells into patients to help cure a disease.  The CGT market is expected to grow massively over the next few years.

Electroporation

Electroporation is the use of high volatage pulses applied to a the membrane of a cell to destablize it and make it permeable and allow molecules to enter the cell. 

Electroporation is a non-viral method of cell transfection as opposed to the viral vectors that have been used previously.  Advantages of non-viral methods include the ability to handle larger payloads, better safety, lower cost, and a faster, more efficient method for scale manufacturing.  Non-viral is current ~40% of the CGT market and is expected to grow to 60% by 2026.

MXCT’s ExPERT platform has been developed for more than 20 years and provides a proprietary and patented method of Flow Electroporation.  Flow Electroporation continuously pumps a fixed volume of cells from a larger suspension into an electroporation chamber. This method generates significantly larger volumes than static electroporation and allows cost-effective commercial manufacturing as opposed to other machines that are better suited for research environments only.

Competitive Environment

MXCT competes with electroporation devices from Lonza, Miltenyi, Thermo Fisher, Bio-Rad and BTX.  

MXCT has an enviable competitive position as by far the strongest player in electroportation which is taking share from viral delivery technologies.  MXCT's solution offers significantly higher viability (80-90% vs. 50-60%) and scalability, making it the only electroporation solution viable to commercialization. MXCT has estimated that it controls ~50% market share, making it the largest player in the space.

Industry experts have consistently commented that no other current technologies are comparable to the MXCT platform and are generally used in the lower performance research field rather than in potential commercial manufacturing.

MXCT remains unique among competition in its transfection efficiency across cell lines and utility in mammalian cells.- Biotech Virologist Developing Cancer Therapies

MaxCyte's platform is the best because it is the most efficient, most responsive, and he gets the best support from MaxCyte. -European Researcher

That's a big plus because if you are a cell manufacturer and you want to go for electroporation, basically you have to go for MaxCyte- Manager at Competitor

For the big clinical biopharma and biotech, I would say that, at this point, MaxCyte has stranglehold on that market because of their offering and because of the fact that they have GMP instrument that can be put into a GMP suite for cell manufacturing and because they have a device record file with the FDA.- Former MXCT employee

Another of MXCT’s key competitive strengths is its FDA MasterFile which was first established in 2002.  This document provides confidential information about the technology and its safety features allows MXCT customers to streamline their path through the clinic.  Over 45 clinical trials have already been initiated using it which gives it a lot of evidence with the FDA.

Furthermore, MXCT’s technology is formally included in regulatory filings.  Thus, if a customer moved to a different provider after entering the clinic, they would have to completely resubmit for new FDA approval.  This regulatory inclusion makes MXCT’s products incredibly sticky with its existing clients.

Strategic Platform Licenses (SPLs)

The key part of MXCT’s business model is its Strategic Platform Licenses (SPLs).  If a customer wishes to use MXCT products in clinical evaluation, they must enter an SPL with MXCT.  In these SPLs MXCT leases its instruments to customers and provides significant technical and regulatory support. In exchange, MXCT receives license fees (~$250k), consumable spend, payments upon achievement of pre-commercial milestones and royalties on the sale of the therapies with a total spend in the low-to-mid single digits as a % of sales between royalties and sales of systems/consumables. 

MXCT currently has 23 SPLs that cover 125+ programs with 16 currently in clinic.  Even while industry demand has been subdued, MXCT has had significant success in SPLs by signing 5 new partnerships in 2023. Continued addition of SPLs is a critical KPI for MXCT.

Currently MXCT SPLs have over $2.0bln in potential pre-commercial milestone payments as well as significant potential sales-based payments depending on the revenue generation of approved drugs.

Below is the revenue potential for a MXCT SPL. It is important to note that MXCT has yet to have a drug reach the “Approval” stage when revenue explodes as a result of the sales-based payments. MXCT’s first drug CRISPR’ Exa-Cel for Sickle Cell is expected to reach approval in Q4 2023 with another drug reaching approval in 2024 and 7 potential approvals between 2025 and 2027.

For the value of a commercial drug, we can look at sell-side analysts for Exa-Cell to estimate.  Using a 2.5% royalty rate and 1.5% sales of machines/consumables (equates to mgmt guidance for low-mid single digits total revenues), then Exa-Cel looks like it would be worth somewhere between $175-230mln in discounted value to MXCT without considering any other value that would come from the rest of the drugs in the SPL.

It should also be noted that in 2021, Vertex acquired a 10% interest (moving from 50-60%) in CTX001 (Exa-Cel) from CRISPR for a $900mln upfront payment and $200mln on first regulatory approval, showing that a knowledgeable player afforded a value of ~$10bln to this drug.

Capitalization and Valuation

MXCT has 103.5mln shares and 14mln options with a $5.94 strike price.  Assuming ~4mln option dilution, the company would have 107.5mln shares for a $335mln market cap at $3.10.  Net cash at the end of the year is expected to be 200mln (~$1.85 per share) and I expect another $50mln of burn in total between 2024-25 for an adjusted cash of $150mln ($1.40 per share) and a total EV of 185mln. MXCT’s cash position provides a multi-year runway for the company.  2023 revenues are expected to be $45mln (4.1x) and 2023 GP is 39mln (4.7x).

Upside

The biggest source of value is MXCT's SPLs where they have partnered with cell therapy developers as they work to develop their drugs.  MXCT has estimated that its weighted average SPL is worth $85mln on a risk-weighted NPV which would suggest that 23 SPLs could be worth ~$2.0bln or ~$16 per share. 

These estimates are based on the idea that each SPL has 6 programs of which 2 fail in pre-clinical, 4 enter clinical and 1 reaches commercial and then discounts the cash flows back at 10%.  The company has noted that its current pre-commercial milestones are worth ~$2bln with further upside from the royalties.

Obviously, these SPL valuations are very rough estimates.  That being said, I do think it shows the potential for significant value. Using MXCT’s SPL estimated value and some value for the base business (non-SPL sales are growing and high margin) suggest a ~$20 share price is possible. Please note that I am also using 120mln shares to account for current and future option dilution.

Further upside would come from future SPL signings as the company believes there are >75 potential SPL partners and successfully added 5 in 2023.  Validation of the SPL model should come in 2024 when the first SPL partner Exa-Cel is commercialized (PDUFA Dec 8) and starts generating royalty revenue for the company. 

MXCT traded over $17 in 2021 when people were more optimistic about biotechnology and more forgiving of loss-making companies. 

Downside

MXCT expects to exit 2023 with $200mln of cash.  However, I think it is possible that the company could burn another $50mln over the next 2 years leaving them with $150mln of adjusted net cash ($1.40 per share).  Even with that burn, MXCT remains well capitalized and has a multi-year runway.

While the company is not yet profitable, it does generate strong gross margins (~85-90%) and has strong IP and customer relationships.  If we value 2023 GP at 3x then the stock would be worth ~$2.50.  3x GP seems inexpensive for this quality and also provides 0 value for the company's SPLs.

Another way to think about the value is that $2.50 is effectively the net cash post additional burn plus a low-end value of Exa-Cel (~$100mln) while providing no value for the base business or any other SPL success.

Risks

1)      Competition- MXCT faces large players in its fields.  While it has a tech advantage currently, it could certainly be leapfrogged in the future which would make it harder for the company to generate additional SPLs and would hurt the base business

2)      Electroporation Alternatives- Advances in other methods of transfection (viral, chemical, new?) could obsolete electroporation as a key component of gene therapy.

3)      Time- While Exa-Cel and other pre-commercial milestone payments can happen in 2024, most of the SPL value comes in 2025+.

4)      Still burning cash and probably does so through 2024.

Maxcyte Corporate Presentation

Catalyst

*Exa-Cel approval proves SPL model

*Other SPL drugs continue to advance at clinic

*Biotech industry recovery