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Epigenomics (ECX-DE): Liver boost - less dependency on epiColon
Recommendation: OUTPERFORM
Target Price: EUR6.82
Current Price: EUR2.36 (cob on 9^th August 2018)

KEY TAKEAWAY

The financial results were slightly better than we expected with disciplined cost management in R&D and SG&A. The main value of Epigenomics lies within the health economic value of its two main tests. We feel that investors are under appreciating the significant value to healthcare systems world-wide. The reimbursement is hinging on robust data and the demonstration of real cost savings. While the concept of avoiding metastatic liver and colon cancer by testing is clear, we believe. Thus, current trading levels represent an attractive value proposition over a two to three-year period.

Results and Guidance - Epigenomics has maintained its guidance for the full year with revenues to come in between EUR2.0m and EUR4m. Management expects EBITDA before share-based payment expenses to be in a range EUR-11.5m and EUR-14.0m in 2018

Pricing of the test - Price increase in the US remains a positive - CMS published preliminary rate for Epi proColon screening test. The proposed reimbursement rate is $192 per Epi proColon test. Based on the proposed preliminary rate, CMS will determine the final rate. The publication of the final rate is expected in November 2018 - As a reminder, on 22nd September 2017 the US CMS published their decision on test code and reimbursement price for Epi proColon, which was cross walked to a different test code. The newly determined payments rates according to PAMA see the price increasing to $124 (from $83), a 50% upside.

Liver - the new kid on the block - We are excited by the company's new liver test. we see a double benefit coming from this test. Firstly, the most obvious upside on population health by catching a significant number of cancer risk patients early. Secondly, we believe that reimbursement could be supported by a significant decrease of redundant MRI/CT scan following an inaccurate ultrasound ("US") test, which leads to many false positives. The significant higher specificity and sensitivity of US combined with EpiLiver will reduce diagnostic tests for liver cancer significantly. We have seen plenty of examples in Europe, where new test has arrived to national guidelines after showing cost benefits on the diagnostics level.

Commercialisation of EpiLiver - Epigenomics, will aim to obtain the CE mark for its liver cancer detection by year-end 2018 for detecting liver cancer of cirrhosis patients. There will be a prospective clinical trial in the U.S. commencing in early 2019 to support its submission to the FDA. Epigenomics is evaluating a go to market strategy in China. The liver cirrhosis cancer testing market could yield up to ten million tests per annum. This would result in a multibillion market potential.

Decreased dependency on epiColon - The test still needs to progress through the US national coverage determination following inclusion into medical guidelines. Epi proColon is the first blood-based biomarker test approved by the US FDA for CRC screening. It improves on convenience, acceptance, is less embarrassing and avoids the need for multiple tests. Epi proColon is in the process of being incorporated into US medical guidelines and now the price for reimbursement is set.

Valuation - ECX share price became undemanding, in our view. Guidance was maintained and diversification if its tests is the right strategy. However, the variables of national coverage determination and medical guideline incorporation still need to be met. The commercial potential of Epi proColon and proLiver is highly attractive. Despite the near-term revenue visibility is not clear over the next 12 months, we believe that the value of such a test for a third party is significantly above the current trading price. Although, shares will come under pressure if there is a negative reimbursement decision, the potential takeout scenario provides a valuation floor and future upside to today's trading levels. We maintain and reiterate both our OUTPERFORM recommendation and DCF-derived target price of EUR6.82.

Kind regards,

Martin Brunninger | Analyst
goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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