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Mauna Kea Technologies SA (MKEA-FR): Optical biopsies for increased diagnostic accuracy
Recommendation: OUTPERFORM
Target Price: EUR4.10
Current Price: EUR2.70 (COB on 11^th July 2018)

KEY TAKEAWAY

We initiate coverage of Mauna Kea Technologies with an OUTPERFORM recommendation and a target price of EUR4.10 per share. Mauna Kea is a commercial stage medical device company headquartered in Paris, France. The company's main product, Cellvizio, is a market-leading confocal laser endomicroscopy system used for in-depth analysis of cellular microstructure, facilitating the real-time identification of pre-cancerous lesions in anatomical tracts such as the gastrointestinal and pulmonary tract. In addition to Cellvizio, the company markets Cellvizio Dual Band for pre-clinical, non-human research, as well as a range of disposable probes for each of its systems. We believe the company is well-positioned to enter a period of accelerated growth, driven mainly by Mauna Kea's new business model in the US and improved reimbursement structures for procedures involving Cellvizio. We forecast strong revenue growth at a 2018E-2022E revenue CAGR of 27% and expect profitability from 2022E.

Improved reimbursement to drive integration of CLE into routine diagnostic regimens

US reimbursement rates for upper gastrointestinal confocal endomicroscopy procedures in hospitals have increased by 154% since 2016, highlighting the increasingly favourable compensation scenarios for healthcare providers and facilitating the integration of CLE into routine endoscopy regimens. We believe accelerated adoption of Cellvizio in the gastroenterology field will translate into increased utilisation in other medical specialities and enable the company to solidify its position as market leader in CLE.

New consignment business model in the US expected to boost adoption

Under the new pay-per-use business model recently implemented in the US, Cellvizio systems are provided to clinics and hospitals free of charge, and users are charged per procedure. This is expected to boost adoption of Cellvizio systems across the US by eliminating high upfront costs. Despite the initial drop in sales observed in 2017, we expect Mauna Kea to benefit from the new business model in the long term, providing the company with additional leverage to penetrate the US market.

Promising future prospects in a variety of medical specialities such as surgery

Technological advances and miniaturisation of equipment increase the need for tools that facilitate safe surgical intervention, carrying a lower rate of complications and reducing the risk of post-operative deficit. With a broad regulatory portfolio in place, Mauna Kea is well-positioned to explore a range of promising commercial avenues in the future.

Fair value suggests 46% upside to current levels

Our target price of EUR4.10 per share is based on an EV/Sales multiple approach using our EUR25.1m revenue estimate for 2022E, a multiple of 4.0x, a discount rate of 11% and a probability rate of 75%. In addition, we conducted a discounted cash flow model to better capture the long-term growth potential, which yields a fair value of EUR4.50 per share.

Kind regards,

Martin Brunninger | Analyst / Martin Piehlmeier | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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