AVO.L Regulatory News (AVO)

Advanced Oncotherapy (AVO-GB): Revamped particle therapy storyRecommendation: OUTPERFORM (from NON-RATED)Target Price: 155p (from NIL)Current Price: 46pClick here for full PDF version

KEY TAKEAWAY

We upgrade AVO to OUTPERFORM with a fair value of 155 GBp. The company has significant growth potential in the nascent Proton therapy ("PT") industry. The dented growth trajectory from the industry leaders in PT signals the limitation of the conventional cyclotron technology in PT. We are encouraged by AVO's technology to benefit from this bottleneck through delivery of a better and easier-to-install technology with its PT Linac. Execution on scaling up production will easily lower machine prices and therefore represents a significant opportunity to expand margins on the services business, which will remain at a higher price level. We are also encouraged by an upgraded management team, which is experienced in installations, service and sales - OUTPERFORM.

Advanced Oncotherapy - Early stage but technological advantage of AVO's LIGHT. The PT incumbents, IBA and Varian are far ahead of its competition dominating the market with a combined market share of more than 70%. However, besides pricing, all PT players share one significant hurdle for fast adoption rate. The cyclotron technology involves lengthy and complicated building preparation. Heavy cyclotrons and large concrete bunkers make the installation a major building project, which is, regardless of pricing, often a big hurdle. AVO could carve out a significant advantage with their modular system, which could in theory allow a much faster and easier installation almost comparable with conventional Linac. AVO could tap into a new market for mid-sized hospitals, which could be a significant volume play.

Fast and easy installation of LIGHT could take PT to a faster adoption rate with a higher margin expansion opportunity vs. conventional cyclotron based PT. The advantage of AVO's technology being faster and less complicated combined with a cheaper production process could give the company a fast head-start with a future margin expansion opportunity driven by an attractive service revenue stream.

Price of PT machines is not the biggest hurdle. While the current debate in the clinical community is about pricing and clinical evidence, we believe that the above-mentioned installation hurdles are more significant in holding back a faster adoption rate. In this update report we have compared cost of cancer treatments, which makes PT look less expensive over a longer time period compared to drug-based approaches. We feel that the pricing element will become even less of an issue once the read out of trials comparing PT vs. Radiotherapy ("RT") in 2020 brings clinical evidence to light. Should PT machines stay at the $15m price band by 2030, margins could look significantly more attractive for the whole PT industry.

Reinforced management team changes the equity story significantly. AVOs management team has changed the equity story significantly compared to 2016. While the patents and the promising technology was already in place then, the company has added veterans of the PT industry from science, engineering, installation, application experience and compliance. We feel that the success of the industrialisation is entirely hinging on the top professionals.

The Proton therapy industry offers significant structural growth. We assume a PT conversion rate of 15% by 2030, which would make it a c.$8.0bn market ($4.5bn for 380 machines in that year sold and $3.5bn for the service of all machines installed up to 2030 (c.2,900 PT vs. c.16,500 conventional PT machines)). PT is amongst the most attractive subsectors in Medtech, which grows significantly above the sluggish Medtech sector with low single digit top line growth. Medtech as a whole has lost its steam due to lack of innovation, which was followed by price pressure from payers, who no longer pay top dollar for commoditised devices and instruments.

Valuation - We upgrade our AVO recommendation to OUTPERFORM from NON-RATED and set a new target price of 155 GBp based on new funding, strengthened management and a robust strategy.

Kind regards,

Martin Brunninger | AnalystMartin Piehlmeier | AnalystErland Sternby | Marketing Salesgoetzpartners securities LimitedThe Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.T +44 (0) 203 859 7725 | healthcareresearch@goetzpartners.com / martin.brunninger@goetzpartners.comwww.goetzpartnerssecurities.comRegistered in England No. 04684144.Managing Directors: Dr Stephan Goetz, Martin Brunninger and Ulrich Kinzel.GPSL publishes and distributes "Investment" Research and "Corporate Sponsored" Research. Our Corporate Sponsored Research and investor meetings (e.g. NDRs, 1 to 1 meetings) are free to access and attend and is not classified as an inducement in a post-MiFID2 world. GPSL does not offer any execution or market making services. This is a marketing communication as defined by the Financial Conduct Authority ("FCA"). The information herein is considered to be an acceptable minor non-monetary benefit as defined under FCA COBS 2.3A19(5).To be added, or to change your subscriptions or be removed / unsubscribed entirely from our CRM, please e-mail: ResearchProduction@goetzpartners.comAbout GPSL: goetzpartners securities Limited is a member of the goetzpartners group and a leading true pan European investment bank and research firm. We bring together a wide range of expertise, insights and innovations to advance the interests of our clients around the world. The fast changing environment brings challenges for businesses and investors. Research innovation, digital transformation and disruptive business ideas reshuffle the corporate world in a yet unexperienced pace. Our sector knowledge and our global footprint bring together deep understanding of the industry, corporate intelligence and a wide network of top decision makers.This research report is intended for use only by persons who qualify as professional investors or eligible counterparties (institutional investors) in the applicable jurisdiction, and not by any private individuals or other persons who qualify as retail clients.This e-mail (including any attachments) from goetzpartners securities Limited ("GPSL") is confidential and may contain information which is proprietary, privileged or otherwise legally protected against unauthorised use or disclosure. If you receive this e-mail in error or are not the intended recipient of this e-mail, please delete and destroy all copies in your possession, notify the sender that you have received this e-mail, and note that any review or dissemination of, or the taking of any action in reliance on this e-mail is expressly prohibited. GPSL shall not be liable for the improper or incomplete transmission of the information contained in this e-mail nor for any delay in its receipt or damage to your system. GPSL does not guarantee that the integrity of this e-mail has been maintained nor that this e-mail is free of viruses, interceptions or interference and makes no warranties in relation to these matters. This is not an offer or a solicitation to buy or sell securities or investment products, or an official confirmation. GPSL record electronic and phone communications in accordance with FCA and MiFID2 regulations, they will be monitored for regulatory and training purposes. GPSL is authorised and regulated by the Financial Conduct Authority of the United Kingdom (Firm Reference Number: 225563).GPSL Equity Research publications are available on the following aggregators and via news distribution circuits (For Institutional Use Only): AlphaSense, Bloomberg (GOET), Capital IQ, EQS, FACTSET, RNS Reach and Thomson Reuters.