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Date : 27/04/2021

Cyclopharm Ltd

ASX :

CYC

Market Cap : $237.12 Million

Buy

52 Week Range : $1.16 - $3.45

Share Price : $2.58

Cyclopharm has demonstrated a consistent ability to deliver record revenues despite the global pandemic. We think Cyclopharm’s is set for tremendous long-term growth and issuing a “Buy” recommendation for CYC.

Company Analysis

Cyclopharm Ltd. (ASX: CYC) is engaged in the manufacture and sale of medical equipment and radiopharmaceuticals, including associated research and development. The Company operates in two business segments: Technegas segment and the Molecular imaging segment. The Technegas segment is a supplier of diagnostic equipment and consumables used by physicians in the detection of pulmonary embolism. The Molecular Imaging segment produces radiopharmaceuticals used by physicians in the detection of cancer, neurological disorders, and cardiac diseases. The Company offers Technegas for lung imaging, and Molecular Imaging/Positron Emission Tomography radiopharmaceuticals, which are used in cancer, brain, and cardiac imaging. The Company formed a joint venture with Alfred Health Solutions and Macquarie University Hospital to provide various imaging services on-site at the hospital. The Company’s Ultralute is a device that extends the useful life of Molybdenum-99 (Mo-99) generators.

Exceptional FY20 for Cyclopharm with recorded sales of its core Technegas products likely to continue throughout FY21 with the company’s prospective entry into the U.S. market

During FY20, Cyclopharm recorded solid sales of its core Technegas products in 60 countries. The company focuses on the development of a set of medical products from imaging and diagnostic equipment to consumables to diagnose and treat Pulmonary Embolism (PE). Furthermore, the company recently decided to leverage its platform to expand the use of its technology to other medical conditions and is rapidly progressing with its “Beyond PE” research and development initiatives. The expansion of Cyclopharm’s products line allowed the firm to generate new revenue streams by leveraging its high-quality global distribution capabilities. The company’s flagship Technegas has now been used in over 4.3 million patient procedures worldwide.

Cyclopharm has demonstrated a consistent ability to deliver record revenues, despite the global pandemic.

The company has shown resilience facing the COVID-19 crisis by creating new revenue streams from third party distribution agreements in Europe as well as developing the clinical importance of its product Technegas in supporting the treatment of COVID-19 patients.

The U.S. market represents an immense potential for Cyclopharm, thus, the nuclear medicine ventilation imaging for Pulmonary Embolism (PE) in the United States is estimated to be about A$ 231 million annually. Recognising this opportunity, during FY20, Cyclopharma laid the groundwork to secure approval from the U.S. FDA to commence sales of Technegas in the U.S. market. The approval of Technegas for the U.S. market is progressing rapidly with the FDA currently conducting an in-person site inspection of the company’s manufacturing facility in Sydney. In preparation for a rapid entry into the U.S. market, early in the second half of FY21, the business has been investing to build inventory, sales capabilities, and infrastructure. Cyclopharm is also progressing the company’s Beyond PE strategy with multiple studies underway to demonstrate the potential of Technegas as a diagnostic tool that can be deployed in the treatment of conditions such as Chronic Obstructive Pulmonary Disease (COPD).

We believe Cyclopharm exhibits a massive potential beyond its current scope on the treatment of Pulmonary Embolism (PE) and it is reflected by the company’s recent “Beyond PE” initiatives.

We are confident in the capability of Cyclopharm to significantly expand its flagship product Technegas with revenue and profitability over the medium to longer-term in indications valued at A$ 1.15 billion per annum.

All in all, FY20 has been a productive year for Cyclopharm with the company’s effort to secure approval from the U.S. FDA to expand sales to the U.S. market. The company tremendously advanced as well on its “Beyond PE” initiative and delivered solid sales and earnings that even supported Cyclopharm to maintain its dividend payments. Cyclopharm exhibited resilience despite the difficult environment due to COVID-19, hence, we are convinced that Technegas and Patient Administrative Set (PAS) sales in existing markets is expected to continue to rebound along with the growth of third-party distribution revenues throughout FY21.

FY20, Cyclopharm got its approval to file its new drug application from the FDA in the United States, a huge market opportunity ahead.

Cyclopharm laid the groundwork during FY20 to accelerate the company’s penetration into the U.S. market. The company has achieved a major milestone by receiving approval to file its New Drug Application (NDA) for Technegas with the U.S. regulator. Cyclopharm is advancing rapidly toward its final major procedural step for approval. As a result, we have strong confidence that Cyclopharm will be able to begin Technegas sales in the United States by the second half of FY21. The current market for nuclear medicine ventilation imaging for Pulmonary Embolism in the U.S. is estimated to be about A$ 115 million annually and we believe Cyclopharm can potentially achieve a 50% market share over the next 2 to 3 years and 80% market share over the next 5 to 7-year period.

Cyclopharm fully funded and ready for rapid commercialisation of its flagship product Technegas

Cyclopharm is fully funded following its successful capital raising of A$ 33 million early FY21 which comprises an institutional placement of A$ 30 million and a heavily oversubscribed retail share purchase plan which added another A$ 3 million to the company’s capital. The raised fund will support the expected rapid commercialisation of Cyclopharm flagship product Technegas in the U.S. as well as for the research and development to expand the use of Technegas beyond the Pulmonary Embolism treatment to larger growth opportunities through the “Beyond PE” initiative.

The combination of the Company’s resilient financial performance and successful capital raising in February 2021 provides Cyclopharm with a strong capital position allowing the company to maintain a consistent dividend distribution. Cyclopharm maintains at A$ 0.5 cents per share, giving a total dividend for FY20 of A$ 1 cent per share.

Resilience through diversification proved to be effective even during the challenges imposed by the pandemic

Cyclopharm has demonstrated an exceptional ability to adapt to different economic conditions. Despite the difficulties most businesses encountered during FY20 due to the COVID-19 pandemic, Cyclopharm was able to generate A$ 2.2 million of revenues on top of its Technegas core product. The company has also leveraged its knowledge and technology to contribute to the effort of fighting against the coronavirus. Cyclopharm diversified its revenue stream through third party distribution products across Europe on behalf of Jubilant Draximage Inc. of Canada, TEMA Sinergie based in Italy and ROTOP Pharmaka from Germany. These additional revenues helped the business to deliver record revenues during FY20, despite the COVID-19 pandemic.

Company Updates


Source: Tradingview.com

Growth strategy: Huge opportunity ahead of FY21 for Cyclopharm with the prospective entry to the U.S. market

Cyclopharm plans to grow with a very clear strategy, to leverage its position as a leading player in the global nuclear medicine imaging market and lung health space to expand the use of its proprietary products by introducing new innovative technology. The company’s approach will be executed in three phases. The first one is to attain approval to distribute its flagship product Technegas in the United States, which is a high potential growth market. Secondly, Cyclopharm considers expanding its product lines, leveraging its existing Technegas platform to go beyond the traditional diagnosis of pulmonary Embolism into significantly larger applications such as Chronic Obstructive Pulmonary Disease (COPD) and Asthma, lung cancer and Pulmonary Hypertension for both diagnosis and patient management. Furthermore, the Cyclopharm is developing and commercialising complementary innovative technology such as Ultralute which allows increasing productivity of TC-99 generators.

Backed by recent studies and publications, Technegas has shown the effectiveness of application in the diagnosis of Pulmonary Embolism (PE). Furthermore, Cyclopharm is looking to leverage Technegas to apply to a wider range of diagnosis and monitoring such as COPD and various other respiratory diseases which we believe will create opportunities to materially expand the market for Technegas. Cyclopharm estimates the global COPD market to be approximately 30 times the size of the PE market and over 500 million patients suffering from COPD and Asthma could benefit from the use of Technegas in diagnosis and ongoing patient management. Cyclopharm is involved with several Beyond PE clinical research projects using Technegas in a range of respiratory diseases.

Patient recruitment for these research initiatives decelerated during the first half of FY20 and in some cases research trials were put on hold in response to COVID-19. During FY20 Cyclopharm invested over A$ 170,000 in Beyond PE trials, which follows on from approximately A$ 350,000 in FY19. Moreover, the Company has received enquiries from several third parties in the U.S. interested in conducting trials on Technegas, including with patients who had contracted COVID-19. Advancing these initiatives could expand the use of Technegas by improving the diagnosis and management of patients with COPD and various airways diseases and those who are recovering from COVID-19 related lung injuries. We believe Cyclopharma is well-positioned to continue its growth trajectory even though a return to normal may not be expected until FY22. Hence, the company has shown resilience during the peak of the COVID-19 crisis and has demonstrated its capabilities to adapt to the situation and strive in different economic environments.

FY21 Outlook: Solid foundation for future growth

We expect FY21 to be the culmination of many years of Cyclopharm discipline in following its growth plan, starting with the beginning of sales of the company’s flagship Technegas in the U.S. The U.S. market is a massive opportunity for the firm which we are convinced will significantly improve the underlying profitability of Cyclopharm. Additionally, we anticipate sales of Technegas to continue to grow in its existing markets from the rebound as the world is expected to emerge from the COVID-19 pandemic by Q4-FY21. Furthermore, the company has developed solid third-party distribution revenues which we think may importantly contribute to Cyclopharm’s earnings. The company is also developing its third-party distribution in Australia which is expected to add extra earnings during FY21. All in All, we see five criteria that support Cyclopharm’s future growth. Firstly, the company is generating cash and is issuing dividends consistently. Secondly, Cyclopharm is well-established in many geographies with sales in more than 60 countries with over 4.2 million studies to date. The revenue model is also robust with consumables like an annuity model. The company is also on the brink of growth as it is expanding to the U.S. and sales might take place early as the second half of FY21. Finally, the business is resilient as Cyclopharm is diversifying its line of products through the expansion of its existing technology Technegas beyond PE to tackle a wider range of respiratory disease diagnosis and treatment which could deliver exponential growth.

Source: Cyclopharm Ltd, Company’s Data

Industry Analysis

The initial existing market for nuclear medicine ventilation imaging in the United States for Pulmonary Embolism (PE) alone is estimated to be approximately A$ 231 million annually. Cyclopharm plans to penetrate this market in two stages. The first stage is the current addressable existing market of A$ 115 million, which represents more than 600,000 individual procedures. Cyclopharm has a proven experience with the Canadian market and accordingly, we are confident in the company to introduce its Technegas product and achieve a 50% market share in the U.S. market over the next 2 to 3 years and subsequently 80% market share over the next 5 to 7 years.

Source: Cyclopharm Ltd, Company’s Data

The second stage will be increasing the pulmonary embolism diagnostic market imaged through nuclear medicine from 15% to 30%. In the USA, 85% of all imaging to rule out PE is performed with CT Pulmonary Angiogram (CTPA). Based on global experience, the unique properties of Technegas and the reliability of imaging outcomes enabled by Cyclopharm’s product, it is projected that the U.S. nuclear medicine market will adopt the 3-D imaging technique referred to as Single Photon Emission Tomography (SPECT) as opposed to the current 2-D imaging or Planar Imaging predominantly being used in the United States. SPECT imaging provides superior outcomes to both Planar and CTPA in the diagnosis of PE.

Investment Thesis

FY20, Financial Summary

For the fiscal year ended 31 December 2020, Cyclopharm revenues increased by 4% to A$ 14.7 million. Net loss increased from A$ 2.9 million to A$ 6 million. Revenues reflect the Molecular Imaging segment which increases from A$ 2,000 to A$ 154,000. Higher net loss reflects employee benefits expenses which contributed to a surge in expenses by 38% to A$ 7.1 million.

Source: Cyclopharm Ltd, Company’s Data

Solid operating results despite challenges induced by COVID-19

In FY20, Cyclopharm generated total sales revenues of A$ 14.68 million, with sales revenues from the company’s core Technegas business rebounding strongly in 2HFY20. Consumable revenues in the second half of FY20 were A$ 5.4 million, 45.9% higher than during the first half of FY20. The increase in revenue was driven by the resumption of orders in all markets. The second-half recovery was underpinned by improved patient processing procedures and availability of personal protection equipment for health care workers that allowed imaging procedures to take place, following a global trend to delay them in response to COVID-19 during 1HFY20.

Cyclopharm realised substantial earnings from the distribution of third-party products during the second half, reporting A$ 1.5 million which helped establish a new revenue stream that contributed A$ 2.2 million throughout FY20. However, Cyclopharm recorded a loss before tax of approximately A$ 5.84 million, which is an increase of A$ 3.42 million in FY19. This performance primarily reflects the ongoing investment required for Cyclopharm to meet global regulatory requirements and complete the FDA approval process for the U.S. market.

In February 2021, Cyclopharm announced it had successfully raised A$ 33 million via an oversubscribed institutional placement and retail share purchase plan. The placement and the purchase plan were made at a discount of 10.2% to the company’s volume-weighted average closing price of a share traded on the ASX over the five trading days before the announcement of the capital raising. The funds raised, after costs, will be used to support the rapid commercialisation of Technegas in the U.S. following the American FDA approval, expected for the second half of FY21. Besides, some of the proceeds will be selectively invested into new larger growth opportunities for Technegas in the “Beyond PE” respiratory medicine market as well as ongoing research and development activities and working capital.

Source: Cyclopharm Ltd, Company’s Data

Patient Administration Set (PAS) sales declined in every region, however, there was an increase in Technegas generator sales across the Asia Pacific region and the initiation of new third party sales of ROTOP, TEMA and Draximage products, initially in Europe which contributed to a 3% increase in total sales. Canada returned as the largest country market by volume in FY20 with 696 PAS kits sold, down 23%, while generator sales declined by two to seven to give a 31% decline in total sales year-over-year. The resumption of sales in France with 600 PAS kits sold made it the biggest European market for FY20. PAS sales in Germany increased by 22% year-over-year, while PAS sales in Scandinavia were in line with FY19.

Overall sales of Technegas products and services in Europe declined by 5%. The Asia Pacific region delivered a resilient performance in FY20 with generator sales up by 30% to 10 units driven by three additional generator sales in Australia. In the Rest of the world, PAS sales in Latin America were down 74%, from 117 to 34, and generator sales declined 88%, from eight to one in FY20. In South Africa, PAS sales declined as well by 73% from 56 to 15 during the period, with no generator sales.

Source: Cyclopharma Ltd, Company’s Data

Technical Analysis

Trend

Cyclopharm is currently trading sideways since its first attempt at its all-time high at A$ 3.45 per share. CYC is trapped between A$ 2.4 and 2.8 per share between the two Fibonacci levels of 23.6% and 38.2% from the COVID-19 sell-off peak of March and January 2021 all-time high. CYC current market structure is neutral, however, a price breakout may emerge from the formation of a symmetrical triangle on the daily timeframe. Volume is building up around A$ 2.5 per share suggesting market participants taking positions in anticipation of an imminent rebound. We have recognised a confluence area at A$ 2.4 level which may offer a fair price for a buy signal. The 2.4 level coincides with the 38.2% Fibonacci retracement and the base of the symmetrical triangle which act as the long-term support.

Key price levels

The key levels to monitor are the lower and upper range of the current sideways price action. The support level is slightly underneath the current market price at A$ 2.4 per share which is a key level for a potential rebound. On the other hand, the A$ 2.8 level may slow down the upside progression of CYC in the near term. A clear breakout of the A$ 2.8 per share may trigger a rally toward the all-time high at A$ 3.45 and eventually toward the target above A$ 4 per share. On the other hand, a breakdown of the A$ 2.4 key support level may prompt market participants to sell their positions which may drag the price back to A$ 2 per share at the base of the October 2020 gap.

Volume and momentum

Volume increases significantly since the last 200-day with the 20-day volume average up by 57%. The price action remains neutral in the near term, evolving in a range between A$ 2.4 and 2.8 per share.

Trade consideration

  • Market participants might be interested to enter at a key support level: A$ 2.4 and A$ 2.2 per share.
  • Primary target price above $A 4 per share
  • Secondary target price at $A 5 per share
  • Consider reducing exposure below A$ 2 per share
  • It is recommended exiting the trade below A$ 1.8 per share

Recommendation

We are issuing a “Buy” recommendation for CYC as we witnessed the company’s strong ability to navigate in troubled waters during a challenging year. Cyclopharm has demonstrated a consistent ability to deliver record revenues, despite the global pandemic. The company has shown resilience facing the COVID-19 crisis by creating new revenue streams from third party distribution agreements in Europe as well as developing the clinical importance of its product Technegas in supporting the treatment of COVID-19 patients. We think Cyclopharm’s is set for tremendous long-term growth. Firstly, the company is generating cash and is issuing dividends consistently. Secondly, Cyclopharm is well-established in many geographies with recurring revenue models from consumables. The company is also on the brink of expansion as it is expanding to the U.S. and sales might take place early as the second half of FY21. Finally, the business is resilient as Cyclopharm is diversifying its line of products through the development of its existing technology Technegas beyond PE to tackle a wider range of respiratory disease diagnosis and treatment which could deliver exponential growth.

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