Description

Intro

Photocure is a specialty pharmaceutical company focused on the bladder cancer market. Its main commercial product, Hexvix (called Cysview in the US), improves the diagnosis of the disease by causing tumor cells to glow under blue light. The current standard of care uses white light and can miss 25-35% of cancer tumors. The company is commercial stage with its product approved and sold globally. Geographic expansion represents a material growth opportunity for the company. Its products are used in 5% of cystoscopies in the US versus 65%+ in Norway and Denmark. In 2018, the drug received favorable a reimbursement ruling which should set the stage for accelerating growth over the next few years. 2020 was impacted by COVID but the company still managed to grow unit sales in the US. I expect growth to accelerate considerably next year. The management team is targeting revenue in the range of NOK 1 billion and EBITDA margins at 40% in 2023 vs a current EV of 2,820 NOK. If the company comes close to those targets the stock should at least be a double with potential for upside beyond that.

Bladder Cancer Market

Bladder cancer ranks as the sixth most common cancer worldwide with 1,650,000 prevalent cases (5-year prevalence rate), 550,000 new cases and almost 200,000 deaths annually in 2018. Bladder cancer has the highest lifetime treatment costs per patient of all cancers. Patients have to undergo multiple cystoscopies due to the high risk of recurrence. There is a need to improve both the diagnosis and the management of bladder cancer for the benefit of patients and healthcare systems alike. 

Bladder cancer is classified into two types, non-muscle invasive bladder cancer (NMIBC) and muscle-invasive bladder cancer (MIBC), depending on the depth of invasion in the bladder wall. NMIBC are the most common (75%) of all bladder cancer cases. In MIBC the cancer has grown into deeper layers of the bladder wall and is more likely to spread and harder to treat. It is important to catch the disease before it has progressed to MIBC.

Hexvix

Photocure’s drug Hexvix improves the diagnostic process by causing cancer cells to glow under blue light. Traditionally, bladder cancer diagnosis was conducted through white light cystoscopy where a urologist uses a cystoscope with a lens and a white light to identify suspicious lesions. Once lesions are identified, the urologists can surgically remove cancerous tissues, through a procedure called a transurethral resection of the bladder tumor (TURBT). However, there is a risk of missing tumors, (estimated to be as many as 25-35%) especially the flat and aggressive carcinoma in situ (CIS) lesions. The blue light cystoscopy (BLC) technology allows one to easily detect tumors that would otherwise be ignored under the white light cystoscopy. These overlooked CIS lesions are often the culprit for progressing non-muscle invasive bladder cancer (NMIBC) to muscle invasive bladder cancer (MIBC). The below image shows the same bladder and lesions with white light and blue light with Hexvix. 

A 2018 study of blue light cystoscopy in surveillance of intermediate and high risk NMIBC showed that 20.6% of malignancies were identified only by blue light cystoscopy. An additional study demonstrated that recurrence rates for patients that were evaluated with BLC were considerably lower than white light. 

This link provides a review of the clinical evidence: https://www.nature.com/articles/s41585-019-0184-4?draft=collection#Abs1

Growth Runway

The product has been around since 2004 which naturally begs the question of “why now?”. In early 2018 the company received a positive reimbursement change which has been an important factor in accelerating the business in the US. The company’s current CEO also joined in 2018 and has taken a number of steps to improve the growth profile of the business. He has professionalized the sales organization and emphasized a consultative approach with doctors to drive blue light adoption. Although Hexvix is a pharmaceutical, it is sold very much like a medical device given its use is dependent on the availability of a blue light cystoscope. As the below graphic demonstrates blue light tower installations have grown significantly in the last three years setting the stage for Hexvix volume growth in the coming years. COVID impacted 2020 but the total number of BLC towers placed will still be higher than any year prior to 2018. 

The US remains very under-penetrated should provide a long growth runway. Prior to the pandemic, the company was growing 30-40% in the US. I think the company can accelerate this growth over the next few years given the step up in BLC placements and improved sales focus. 

Europe

Last spring the company announced that it had bought back the distribution rights for Hexvix in Europe from Ipsen. Partner revenue from Ipsen over the past few years has been stagnant and the number of BLCs placed in Europe has not grown in a decade. I think Photocure taking control of the sales activity in Europe represents a material opportunity to reaccelerate growth. Relative to its total revenue base, Hexvix was immaterial to Ipsen and likely did not receive the type of focus needed to realize its growth potential. By implementing a similar consultative sales approach that has been effective in the US, I think Photocure can begin to close the penetration gap in Europe vs its home territories in the Nordics.

Valuation

Given the rapid growth profile, valuation is much more art than science. Shares currently trade at 16x consensus 2022 EV/EBITDA. On management’s 2023 targets, shares trade at 7x EBITDA. I think this is too cheap given the growth runway. 

Disclaimer: The views and opinions expressed in this report are those of the author only and do not reflect the views and opinions of the author’s current employer. This material is being provided for informational purposes and is not to be considered an offer to sell or a solicitation of an offer to buy any investments referred to herein.

Catalyst

Reacceleration of growth

US Listing