Australian Equity Research 31 October 2018 BUY unchanged PRICE...

Australian Equity Research
31 October 2018
BUY
unchanged
PRICE TARGET
unchanged
Price (31-Oct) Ticker
A$0.35
A$0.07 AXP-ASX
Matthijs Smith, Ph.D., MBA | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.3.8688.9107
Company Update
Focused on expansion
Investment Thesis
Yesterday's quarterly result was in line with the guidance provided by the company on its recent roadshow. Sales were essentially flat on the Jun-Q at US$2.1M (v US$2.0M, +3%), reflecting the seasonally weaker Sep-Q combined with changes to the sales effort implemented during the quarter. AXP reduced its net cash burn by 14% to US $6.1M (v US$7.0M) with further reductions expected in the coming quarters. On this basis, and with growing sales, the cash reserves of US$14.8M should be sufficient to cover the company's operations to early Q3 2019. The company will need to access additional capital before that time. The Dec-Q is typically the strongest quarter. With the rejuvenated sales infrastructure in place, we are expecting a material tick-up in sales growth. If this is combined with ongoing improvements in cash expenditure, we believe the company should be able to access the additional capital it needs, particularly given its currently low valuation. We maintain our BUY rating for AXP with a price target of $0.35 which is based on a blended DCF valuation and 15x multiple of 2023 earnings.
Key Points
Quarter of consolidation and regrouping - The focus for AXP during the Sep-Q was
on putting in place the final elements of its revised sales and market strategy and the ongoing reduction of its operating cash requirements. The company has fully transitioned to a direct sales effort that now comprises 24 staff (17 reps, 3 sales leaders and 4 clinical specialists). Non-performing reps, particularly on the West Coast, have been managed out and replaced. Furthermore, the sales process has been refined to include training and education of radiation oncologists to whom plastic surgeon customers refer patients. This ensures the radiation oncologists are familiar with AeroForm and how to develop a treatment plan for patients implanted with the device. These should all help
to drive sales growth in the Dec-18 and subsequent quarters. The cash outflows were slightly higher than we were expecting based on the Jun-Q report (US$8.4M v $7.7M). The discrepancy was primarily due to costs associated with the renegotiated terms for the Oxford debt financing instrument (US$375K) and slightly higher administration costs (US$1.2M v US$0.9M). The company is estimating gross cash outflows of US$7.7M
for the Dec-Q which include one-off transaction costs of US$0.6M pertaining to the US $14.8M placement during the Sep-Q. We are expecting the net cash burn for the Dec-Q to be US$5.0M-$5.5M including this one-off cost.
Reasons to be cheerful - While this has been a tumultuous 6 months for AXP, several metrics support that there is still strong underlying demand for AeroForm which should translate to sales growth in the coming quarters. Despite the changes to the sales effort, AXP signed up 34 new customers during the quarter (nearly 3/week), bringing the total number of new customers added this year to 92. The number of active accounts (those who have purchased in the last 6 months) increased by 13% to 148. As 220 customers have purchased the product since its launch in Jan-17, a number of customers are clearly still working through the adoption process and have only trialed the product on one or two patients. Finally, the company has reported that its program of providing training, education, and data has been effective in getting a number of customers who were pushing back due to concerns around ability to treat patients with radiation, to now routinely use the AeroForm tissue expander.