pvaurice@midcapp - deinove · 29/03/2018: release of 2017 annual results. operating loss reached...
TRANSCRIPT
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON
DEINOVE: new era for “natural”
The success of a unique innovation
Founded in 2006, DEINOVE is a French biotechnology company that has
developed an original technology allowing it to produce high value added bio-
sourced compounds (carotenoids, antioxidants) from a unique class of
bacteria. After years of intensive efforts in R&D and the development of
industrial procedures, the marketing of the first compounds from the
technological platform since April 2018 marks a major step in the Company's
history.
Very deep underlying markets
The target markets were not selected randomly by the Company. Above all,
they meet a significant need for the supply of natural, bio-sourced ingredients,
in line with current transformations (call for organic products, ethical
considerations, etc.) in a vast field of applications, including animal nutrition,
cosmetics and healthcare. These are tens of billion euro markets where there
is an undeniable premium for innovation.
The first commercial launches in 2018...
The different partnerships signed with major actors (Avril, Flint Hill Resources,
Greentech, Oléos) are now at the commercial launch stage, initially in
cosmetics (from April 2018) then animal nutrition (2019). These structuring
stages will more than validate the extremely innovative nature of the
approach defined by DEINOVE.
The Company also launched its first in-house cosmetic active ingredient, Phyt-
N-Resist, marking its unquestionable desire to capture a major share of the
value creation from its technological platform.
...will be true supports for the security's rise
The achievement of the commercial launches in the coming months is likely to
give the Company a more mature aspect, and reduce the speculation inherent
to the business model. As the share value is above all sensitive to the various
stock market sales communications, 2018 should see powerful catalysts to
stimulate trading in the security.
Considering the assumptions selected in our financial scenario, our prospective
value reaches €51 million, with an upside exceeding 30%. We are starting the
coverage of DEINOVE as a Buy with a Target price of €4.3 per share.
Market information
Industry
Share price (€)
Market cap (€m)
Market segment
Bloomberg ALDEI FP
Shareholders
Truffle Capital 11.6%
Management/Board 0.2%
Scientific founders 0.5%
Float 87.8%
€m (31/12) 2017 2018e 2019e 2020e
Sales (€m) 0.1 0.4 1.8 5.6
Chag -72.1% 477.5% 324.5% 212.2%
EBIT -9.7 -7.6 -10.8 -6.6
OP. margin n.s. n.s. n.s. n.s.
NI-Group -7.3 -5.1 -7.8 -4.8
EPS reported (€) -0.68 -0.43 -0.66 -0.40
EPS chg n.s. n.s. n.s. n.s.
Dividend (€) 0.00 0.00 0.00 0.00
Yield n.s. n.s. n.s. n.s.
FCF -8.1 -5.1 -8.0 -5.3
ROCE -110.3% -78.8% -117.5% -66.9%
EV/sales (x) 114.8 31.5 11.0
EV/EBIT (x) n.s. n.s. n.s.
P/E (x) n.s. n.s. n.s.
Net debt 5.7 9.3 17.3 22.6
Gearing 847% n.s. n.s. n.s.
Next event : H1 results - 27/09/18
Date Recommendation
15/05/2018
Analyst : Pierre VAURICE
Ewan CHESNAUD
Email : [email protected]
Tel : +33(0)155356931
Midcap Partners estimates
Past recommendations
Buy
Specialty chemicals
3.280
39.1
Euronext Growth
Recommendation: Buy Closing price at 14/05/2018: €3.28 Target: €4.3
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 2
Table of contents
I. THE BASICS 3
II. THE VALIDATION OF A SUCCESSFUL INNOVATION 4
A. The unexploited potential of a vast range of rare bacteria .............................................. 4
B. From the harvesting of raw materials to industrial production ...................................... 5
C. Success based on strong intellectual property .................................................................. 6
III. A PROMINENT PLACE IN VERY DEEP MARKETS 6
A. An acquired status in cosmetics ......................................................................................... 7
B. A boulevard in animal nutrition......................................................................................... 8
C. A vast field of discoveries in antibiotics ............................................................................. 8
IV. 2018, THE YEAR OF ACHIEVEMENT 10
A. Major partnerships validating the interest expressed in the offered innovation ......... 10
B. Financial balance achievable by 2021-2022 ..................................................................... 12
V. A PROSPECTIVE VALUATION OF €4.3 PER SHARE 13
A. A €3.8 per share valuation for the industrial activity..................................................... 13
B. A €0.50 per share prospective valuation for MCB3837.................................................. 14
C. A global valuation standing at €4.3 .................................................................................. 15
VI. APPENDICES 16
DISCLAIMER 17
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 3
I. The basics
The business News
Deinove is a biotechnology company specialising in the
development of production processes for speciality
ingredients mainly destined for animal nutrition and
cosmetics at this stage. Deinove bases its research on a
library of 6,000 rare bacterial strains, with interesting
metabolic characteristics, such as the deinococcus,
extremophile bacteria with considerable potential.
2018 will be a pivotal year for the Company with the first
commercial launches from its technological platform.
DEINOVE is eligible for French Share Savings or Company
Savings Plans (PEA-PME).
16/04/2018: DEINOVE and GREENTECH announced the launch of HEBELYS, first cosmetics compound as part of the strategic collaboration.
13/04/2018: acquisition of the MORPHOCHEM’s clinical-stage antibiotic compound MCB3837. Phase-2 ready, MCB3837 aims to target severe gastrointestinal infetions caused by Clostridium difficile.
10/04/2018: commercial launch of Phyt-N-Resist (Phytoène pur & concentrated), natural antioxidant dedicated to cosmetics.
29/03/2018: release of 2017 annual results. Operating loss reached €9.7m (vs. €7.7m). Cash position stood at €4.9m as of 31
st December 2017.
Forecasts for world fish production/consumption Breakdown of the beauty market ($205bn)
Strengths Weaknesses
Deep reservoir of bacteria
Cutting-edge technology in the selection of high potential bacteria
A promising natural positioning
Partnerships with key players in the cosmetics & agro-food industries
Ability to sign value creative agreements in antibiotics
DEINOVE reached commercial step for its first compounds
Still limited number of partnerships
Development hazard for the antibiotics business
Dilutive impact in case of success for developing MCB3837 but high value creation in parallel
Recurring need to raise capital
Opportunities Threats
Enormous potential target markets
Regulations promoting organic products
Industrial actors active in R&D
The only French company to develop an antibiotic
Very competitive market
1Source: Company
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 4
II. The validation of a successful innovation
A. The unexploited potential of a vast range of rare bacteria
Founded in 2006 by Dr Philippe Pouletty (co-founder and CEO of Truffle Capital) and Pr Miroslav Radman (Grand Prix Inserm 2003, member of the Academy of Sciences, Faculty of Medicine of Paris-Descartes University), DEINOVE is a French biotechnology company specialising in the design and development of production processes for bio-sourced ingredients from renewable resources.
The Company's innovation builds on Pr Radman's research work, highlighting the exceptional natural properties of a specific class of bacteria, such as its ability to resuscitate and to produce certain high value-added molecules when subjected to situations of stress (irradiation, high temperatures, dessication). DEINOVE's development efforts have enabled it to produce new natural ingredients and bring them to the commercialisation stage.
Amongst the 6,000 bacterial strains in the bank owned by the Company, two bacteria classes complement each other: the deinococcus genus, the main subject of Pr Radman's research, and a vast range of rare and ultra-resistant bacteria.
The deinococcus is the oldest bacteria on our planet. This bacteria has shown incomparable resistance to climate change over the different geological ages. This specificity enables it, notably, to develop in environments with nuclear waste. When this bacteria is subjected to situations of stress, it has the ability to produce molecules of interest, such as carotenoids or antioxidants used in the cosmetics and animal nutrition sectors.
Carotenoids are the plant pigments responsible for the red, orange, yellow and green colours that we find in fruit, vegetables, flowers and algae. They are used on a very wide scale in the agro-food industry as natural colorants.
At a time when considerations turn to natural products, these bacteria represent strong substitutes in the production of natural ingredients compared to oil-sourced processes. Even more important, these bacterial "factories" have shown superior productivity compared to the current offer based on more general bacteria, making them even more interesting.
Unlike yeast which can only ferment animal or plant-based raw materials, deinococcus bacteria have a significant ability to recycle non-food waste (plant biomass, bioethanol). There are numerous potential applications: green chemistry (cosmetics, pharmaceuticals, food industries), natural ingredients, ethanol, etc.
DEINOVE's true know-how is based on its ability to 1/ collect and select bacterial strains of interest, 2/ direct bacteria production towards these interesting compounds through cutting-edge genetic engineering, 3/ optimise production yields of these bacteria to provide a greater economic advantage and 4/ successfully carry out the change in production scale, from laboratory pilots to industrial as it has just been proven with Phyt-N-Resist.
Today, to our knowledge, DEINOVE is the only company that focuses its research and development efforts on deinococci and other rare bacteria.
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 5
B. From the harvesting of raw materials to industrial production The business model developed by DEINOVE resolutely focuses on the highest value creation activities, i.e.
more technological (screening, metabolic engineering) and less industrial (large-scale production). The graph
below provides a fair representation of the carotenoid development value chain.
Carotenoid development value chain
Source: Markets & Markets Research
A presence in the early phases of development
As we indicated previously, DEINOVE's developments are based on ultra-resistant bacteria, which have
lived/survived in often hostile environments, such as deserts, tropical forest, lagoons or volcanoes. DEINOVE's
first step is to collect specimens of bacterial strains - 6,000 strains in the portfolio today, including 2,500
deinococcus genus and 3,500 rare strains - then to isolate them in order to select only the resistant and
thermophile strains (that need a high temperature of over 45°C to live).
Upstream development process
Source: DEINOVE
The next development stage is to select the best-performing strains through a set of genetic (genome
sequencing and computer analysis) and high-rate metabolic analyses (bacteria growth rate tests in different
environments).
The screening that follows enables the detection of value-creating activities, i.e. assessing the potential
production of compounds of interest, such as antibiotics, antioxidants, anti-inflammatories, etc. To date, some
400 deinococcus strains naturally produce carotenoids, including deinoxanthin, which has antioxidant
properties that play an essential role in protecting skin against UVs and other oxidant stress.
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 6
The development of industrial-scale procedures
Following the discovery and identification of production processes for compounds of interest, DEINOVE's
second strategic know-how is based on its ability to bring its compound portfolio to the industrial production
stage. To date, the Company has successfully followed the different scale-up stages, from laboratory fermenter
(1-2 litres) to the production of several kilogrammes.
This is a precious engineering stage as higher-level production requires meeting the complexity associated
with the different parameters (several tens or hundreds) of sterilisation, aeration and mixing which change
when we increase the volume, diameter and height of the bioreactor (fermenter), without sacrificing
production yields. Today, DEINOVE is able to multiply production of bacteria by a factor of six to eight, thus
validating the economic equation that allows it to include the ingredients produced in different applications
without affecting the profitability of the finished product.
This latter point is essential as the successful integration of compounds strongly depends on alternative
solutions, and particularly the oil-sourced offer. DEINOVE was penalised by this in 2016 after taking the
reasonable decision to stop development of bioethanol as the oil barrel price levels were so low that they
considerably reduced the economic advantage of ingredients from green chemistry. The Company is not the
only one to have backpedalled.
However, DEINOVE was able to capitalise on this setback. The expected sale in the very short term of its first
ingredients will enable it to come out on top and will validate the proof of tangible interest shown by the major
actors in the different targeted sectors.
C. Success based on strong intellectual property
With one exception, DEINOVE's economic model is based on value creation through the sale of its
technological patents to third party industrial suppliers for final market leaders. This sale generates different
types of revenues: 1/ upfront revenue at the signature of a partnership contract for development financed
entirely or partly by DEINOVE and 2/ royalties (several hundred euros per kg depending on the product
delivered: purified molecule, bacterial extract, etc.) directly correlated to the sale of the final products in which
the different ingredients will be included.
To maximise the value creation provided by the company, intellectual property is a powerful lever on which
the business model is based. Today, DEINOVE has a very powerful arsenal of intellectual protection including
over 130 patents spread across the 20 major families. The patents cover the entire value chain, from the
collection of strains to selection methods (for example, selection of strains based on irradiation), culture,
optimisation and of course, the final applications.
III. A prominent place in very deep markets
Whilst confronted with a setback in biofuels, where the low oil price removed all competitive advantages
compared to oil-sourced compounds, the potential applications remain wide-ranging, notably in the markets
targeted by DEINOVE in the short term, i.e. cosmetics and animal nutrition.
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 7
A. An acquired status in cosmetics
The beauty market, estimated at over €205 billion, is dominated by the "skincare" segment. The cosmetics
market is a supply market, driven by a premium for innovation to satisfy the expectations of consumers that
are constantly looking for high-quality, high-performance products. Deinove's contribution to the cosmetics
segment is fully in line with this qualitative, innovative approach.
An immense and dynamic beauty market...
...dominated by the "skincare" segment
Source: L’Oréal Source: L’Oréal
A increasingly organic carotenoid market
Source: Deinove – Persistence Market Research
Strong growth for organic cosmetics
Source: Persistence Market Research – Grand View Research
0.04%
0.05% 5%
0.03%
0.01%
0.04% 0.05% 0.05%
0.04% 0.04% 0.04% 0.04%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Market growth
24% 32%
76% 68%
0%
20%
40%
60%
80%
100%
2017 2026
Synthetic carotenoids market Natural carotenoids market
11 15.98
22
0
5
10
15
20
25
2016 2020 2024
Global organic beauty market (B$)
The cosmetics market does not escape the
development of organic and natural products.
This strong underlying trend has increased over
the years. Combined with a constantly renewed
need for bio-sourced active ingredients,
particularly antioxidants - a market estimated at
around $3 billion (which should double by 2022) -
the drivers are not lacking. Population ageing,
changes in life styles and environmental factors
stimulate demand for natural products. The
recent health scandals (Paraben, endocrine
disruptors, etc.) have largely contributed to
accelerating the switch to organic products.
This is especially the case as the new generations,
including millennials, are more attached to products
that are not only natural, but showing ethical
qualities.
Organic products are becoming more
democratised, and are no longer a niche market.
The race for innovation has pushed green chemistry
to the forefront, relegating the "historical"
petrochemicals in a near future. True natural
alternatives will indisputably be the key to powerful
competitive advantages in a market that should
double by 2024.
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 8
B. A boulevard in animal nutrition
Animal nutrition has become a major challenge due to the different health scandals and public opinion's
increased awareness of the sustainable agriculture issue. The gradual prohibition of antibiotics for farmed
animals has led the industry to provide solutions for this issue. The use of additives will partly substitute for
traditional antibiotics. Amino acids, enzymes and now carotenoids offer additional solutions and relevant
alternatives.
The constraints add together in a sector undergoing profound changes. Thus the players must now include the
responsible and rigorous management of water resources, availability of land, volatile raw materials, with the
resulting optimisation required in terms of resources, and specifically animal food resources.
An expanding additive market … …driven by ever more vigorous global consumption
Source: Markets & Markets Research Source: FAO Stat
The forecast growth of this market will be particularly sustained, stimulated by demographic expansion and
stricter regulations that promote the use of natural and organic solutions.
To address ever-increasing consuming needs, it is anticipated that aquaculture will exceed traditional fishing
(capture) in volumes by 2021 (see chart above), accelerating consequently the large need for additives. The
different partnerships signed with animal nutrition industry leaders (Avril, Flint Hills Resources, etc.) confirm
Deinove's relevant positioning and innovative solutions.
C. A vast field of discoveries in antibiotics
Research and development of antibiotics has been largely abandoned by the major players in the
pharmaceutical industry since the 1980s. As an example, Bedaquiline, the only medicine effective against
tuberculosis, was approved by the FDA over 40 years ago. The fact that research has been abandoned in this
area has undoubtedly allowed bacteria to adapt, thus considerably reinforcing their defence mechanisms.
21.77
28.22
0
5
10
15
20
25
30
2016 2022
Feed additives market (B$)
20.0
20.2
20.4
20.6
20.8
21.0
21.2
21.4
21.6
21.8
50
60
70
80
90
100
20162017201820192020202120222023202420252026
Production from capture (millions of tons - left axis)
Production from aquaculture (millions of tons - left axis)
Consumption per capita (kg -right axis)
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Timeline of antibiotic resistance by antibiotic class Source: Public Health England
Resistance to antibiotics promises to be one of the most significant challenges of this century. In 2016,
Margaret Chan, Director-General of the WHO launched a call before the United Nations to warn against the
dangerously dry world pipeline, talking about a “slow-moving tsunami” when describing the increasing
resistance phenomenon against actual antibiotics. Only two new classes of antibiotics have arrived on the
market over the last 50 years. Too few to escape the announced scourge.
A dry world pipeline
Change in the nb of antibiotics approved by the FDA
Source: WHO Report December 2017 Source: US Food & Drug Administration - Reuters
However, it appears that this call has been heard, at least by part of the industry. This is the case with GSK, a
rare big pharmaceutical company active in this area. Europe has not been idle either. The ND4BB (New Drugs
for Bad Bugs) programme, implemented five years ago, also aims to provide medical responses to the problem
of antibiotics resistance. With a budget of around €700 million, ND4BB contributes to research and the
financing of innovative entities to make up the drastic current shortfall.
Ultimately, the call has been heard, and the return to research on antibiotics and antibiotic resistance has
started, but there are enormous needs for a world antibiotics market estimated at between $40 billion and $50
billion. The antibiotic activity of bacteria offers considerable potential, and the 6,000 strains in Deinove's
library are a definite catalyst, especially when a part of the AGIR’s project aims to incorporate thousands
aditional strains within the next 5 years (cf. release, link).
-1
1
3
5
7
9
11
13
15
Phase 1 Phase 2 Phase 3
PPL antibiotics TB antibiotics
C. diff. Antibiotics Biologicals
0
5
10
15
20
25
1980-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15
Number of antibiotics approvals
Date of discovery
Date of identification of resistance
1928
1953 1940
1948
1993
1981985
1985
30 years since the last
introduction of a new class of
antibiotics 1920 1990 1940 1960 1950
Penicillin Tetracyclines
Macrolides
Fluorquinolones Carbapenems
Class of antibiotic:
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IV. 2018, the year of achievement
A. Major partnerships validating the interest expressed in the offered innovation
As indicated above, DEINOVE is at the heart of a pivotal year. Whilst from the start, its compounds produced
from rare and resistant bacteria raised considerable interest from the major players in final markets, 2018
promises to be the validation of all the efforts undertaken up to now.
Consecration of innovation in cosmetics and animal nutrition
Building on the major partnerships signed over several years, from the second quarter of 2018, we should see
the achievement of the first commercial launches (provision of samples, inclusion in final products) in
cosmetics and animal nutrition. The first income should be recorded during the first months of 2019.
Amongst these major contracts, the COLOR2B project signed in 2017 between DEINOVE and the Avril Group
(formerly Sofiprotéol) is based on the development of a natural additive production process for animal
nutrition. The two partners are today at the third and final stage, which aims to prepare industrialisation with a
commercial launch expected for the end of the year. Still in animal nutrition, the partnership signed with Flint
Hill Resources (FHR) on nutrients of interest is at an advanced stage with a launch expected for 2019. Note
that FHR contributes financially to this project by covering the R&D expenses.
In the shorter term, DEINOVE's first achievements will be found in cosmetics. The partnership with Greentech
is based on the co-development and commercial launch of new active ingredients for skincare. The
technological transfer to Greentech is on-going, and the commercial launch under the name HEBELYS® has just
been announced mid-April (link). We can also add the latest partnership announced in January 2018 with
Oléos, for the development of a stable oily active ingredient with innovative properties.
Partnerships signed to date Partner Product Start Type Stage of development
Avril
COLOR2B project
Natural
additives for
animal
nutrition
August 2014
DEINOVE provides
a purified
molecule
Preparation of industrialisation
Launch 2019
Flint Hill Resources
Natural
additives for
animal
nutrition
November
2015 Co-development
Optimisation of fermentation parameters
Definition of production conditions
Launch beginning 2019
Greentech
Ingredients for
skincare
products
March 2017 Co-development Technology transfer on-going
Commercial launch April 2018
Oléos
Oily active
ingredient for
cosmetics
January
2018
DEINOVE provides
the bacteria
Optimisation of production performance for the
bacterial strain
Commercial launch end 2018
Source: DEINOVE
In addition to its development efforts with leading partners, DEINOVE has launched the commercialisation of
its own in-house development, Phyt-N-Resist, an innovative carotenoid for cosmetics with particularly
attractive antioxidant and healing properties. The choice of launching this new ingredient in-house reflects
the desire to retain part of the added value. Commercial success could lead to future developments based on
this strategy.
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The final highlight to date for DEINOVE's first carotenoid is the announcement of successful industrial scale
production by SAS Pivert, a company with a recognised track record in industrialising green chemical
innovations. This event led to a 73% increase in the share price, in a trading session, testifying to the
perception of the market's faith. This active ingredient has been launched in April at the in-cosmetics trade
show in Amsterdam (17-19th
April).
Development portfolio
Source: DEINOVE
A significant lever in antibiotics
Now a wholly consolidated subsidiary in DEINOVE following the takeover at the beginning of 2017 of the 72%
not previously owned, DEINOBIOTICS provides intensive efforts to develop a new molecule with therapeutic
interest, thus breaking with the antibiotic development desert of the last years.
The evident need for the development of a new class of antibiotics in a context of increasing resistance to
existing antibiotics offers a real financing opportunity. For this reason, DEINOVE and the Charles Violette
Institute, whose employees are spread between Lille University and DEINOVE's premises, are part of the AGIR
project, which aims to identify, collect, cultivate, screen, optimise and assess rare bacterial strains in order to
develop new antibiotic structures.
This project received €14.6 million from BPI France through the Investments for the Future programme, and
includes staggered payments, conditioned on the success of the different stages of development. Given the
early stage of this project (pre-clinical stage), we have chosen not to include it in our financial modelling or
valuation.
Clear proof of the interest aroused by the identification & development technological platform of DEINOVE,
the Italian company NAICONS will provide its portfolio of bacteria strains, 400 first on a total of 45,000, so as to
detect high potential compounds that, in case of success, will be subject to a licencing agreement between the
two companies (see release: link).
Still in the strategy to expand the platform oriented to antibiotics, DEINOVE signed a licencing option (valid
until the end-2018) with REDX PHARMA to acquire its anti-infectious programme NBTI (Novel Bacterial
Topoisomerase Inhibitor) targeting gram negative bacteria like legionellosis.
In order to fill a non mature portfolio, DEINOVE announced the acquisition of the German company
MORPHOCHEM that holds an antibiotic, MCB3837, to treat severe gastrointestinal infetions caused by
Clostridium difficile, that is in a more advanced stage, phase-2 ready (clinical study on humans). It is worth
noting that this programme qualified for QIDP status (Qualified Infectious Disease Product) & the Fast Track
designation by the FDA.
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The acquisition of MORPHOCHEM relies on a contribution-in-kind transactionof 500,001 shares created,
avoiding any cash out, with 8 million warrants. Those 8 million warrants can be exercised at each key step of
development:
Source: DEINOVE
It should be added that the validation of each step will trigger an important dilutive impact on the capital
structure with warrants that can reach 8 million, i.e. a 42% dilution (based on actual total of shares) if all
warrants are exercised. That being said, it will come along the significant value creation if each step results in a
positive way.
B. Financial balance achievable by 2021-2022
The monetisation of the first commercial sales should initiate a real take-off from 2019. In addition to the
different partnerships (FHR, Avril, Oléos, Greentech and the cosmetic active ingredient developed in-house, we
forecast five new launches per year during the period under consideration (2019-2029). Over the period 2018-
2021, we expect annual average income growth of 183%.
Ramp-up of sales over the period 2018-2023 (€M) Year 2018 2019 2020 2021 2022 2023
In-house cosmetic ingredient (revenue, launched April 2018) 0.2 1.2 3.0 3.0 3.0 3.0
New in-house cosmetic active ingredients (revenue) 0.0 0.3 1.5 4.5 7.5 10.5
Avril (royalties) 0.2 0.2 0.5 0.5 0.5 0.5
FHR (royalties) 0.0 0.0 0.1 0.2 0.2 0.2
Greentech (royalties) 0.0 0.1 0.2 0.2 0.2 0.2
Oléos (royalties) 0.0 0.0 0.1 0.2 0.2 0.2
New developments (royalties) 0,0 0,0 0,3 1,1 1,8 2,6
Total revenue 0.4 1.8 5.6 9.5 13.3 17.0
change n.s. +325% +212% +70% +39% +28%
Source: Midcap Partners
The cost base should scarcely change as the company no longer has to cover R&D expenses once the patents
for the active ingredients have been sold to the partners. For the carotenoid developed in-house, we have
included the distributor expenses and costs for raw materials due to the production being carried out by SAS
Pivert (gross margin estimated at 70%).
In addition to the AGIR project for antibiotics, note that DEINOVE is eligible for non-dilutive financing resources
as illustrated by the DEINOCHEM programme that aims to produce original carotenoids in a competitive way.
DEINOVE was eligible and received a €5.9 million financial support from ADEME and the CGI. To date, the
Company has received multiple payments for a total amount of €4.8 million as part of this programme.
For the MCB3837’s development, our assumptions rely on €3 million expenses related to the phase 2 clinical
trial from end-2018 to early-2020.
1st patient recruted
500 001 new shares
Beginning of the phase IIb/III of the pivotal
trial or phase 3
2 300 000 new shares
End of positive phase IIb/III of the pivoltal
trial or phase 3
2 300 003 new shares
FDA approval of the regulatory filing for a
first marketing
1 399 998 new shares
1st approval for marketing at least in the US or in one or
more countries
1 499 998 new shares
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Growth and profitability scenario over the period 2018-2023 (€m) Year 2018 2019 2020 2021 2022 2023
Revenue 0.4 1.8 5.6 9.5 13.3 17.0
change n.s. 324% 212% 70% 39% 28%
Op. expenses -6.5 -9.5 -10.6 -11.7 -12.8 -13.0
EBITDA -6.1 -7.7 -5.0 -2.2 0.5 4.0
D&A -1.1 -1.1 -1.1 -1.2 -1.2 -1.2
EBIT -7.1 -8.8 -6.1 -3.3 -0.7 2.8
EBIT margin n.s. 24% -31% n.s. -80% -521%
Source: Midcap Partners
Our financial forecasts present cash self-sufficiency to ensure operations up to the end of 2018. These
forecasts do not take into account the payments conditional on the different stages of the DEINOBIOTICS
project as this very early stage of development has a high development failure rate. In the event of success, it
will, however, be a fairly significant upside.
Add to this that the Company contracted an equity line in 2014 with Kepler Cheuvreux for a maximum amount
of €15 million divided into four tranches. To date, tranches 1 and 2 have been used, tranche 3 has a balance of
€1.4 million and tranche 4 around €4 million. Their activation would provide additional financial resources,
which could, however, weigh on the share price.
V. A prospective valuation of €4.3 per share
Our valuation model is based on the sum of the historical activity (€3.83 per share) et the project MCB3837
recently acquired (€0.50 per share). This prospective valuation does not consider the upcoming capital raising,
announced by management, that aims to finance a part of the “industrial activity” (ex-MORPHOCHEM) before
reaching the cash breakeven and the phase 2 clinical stage of MCB3837. We anticipate a 8 to 10 million euros
capital increase that could bring enough visibility to finance the activity for the next 24 months.
A. A €3.8 per share valuation for the industrial activity
2018 will no doubt be a year of achievement for DEINOVE. The speculative nature of the project will be
reduced once the supply contracts for the major sector players materialise. This will considerably reduce the
risk premium for this project.
Given the still early nature of the Company's financial history pending the strong take-off of sales and thus the
difficulty in applying multiples, we have selected only the DCF method which seems to us to be the most
appropriate.
Our valuation method by discounting future flows leads us to a prospective value of €47 million, i.e. €3.84 per
share (the number of shares selected is based on a dilutive base including the BSPCE but not BSA as their
striker is far higher than the actual price). Our scenario is based on the following assumptions:
- a dynamic increase in sales from 2019 supported by new launches in addition to those already known
(FHR, Avril, Oléos, Greentech, in-house cosmetic ingredient);
- a growth rate to infinity of 3% reflecting the strong potential for discoveries and development of new
high value added compounds;
- a cost base that we change on average by 2% per year over the period considered, excluding
purchases associated with the in-house ingredients which are linear along with the sales trend;
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 14
- a discount rate of 12.0% taking into account a risk-free rate of 1.1%, a risk premium of 5.9%, a beta of
1.0x (beta FactSet five years vs CAC Small) and a specific risk premium of 6% for the early stage of the
Company's development.
DCF Scenario Year 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Revenue 0.4 1.8 5.6 9.5 13.3 17.0 20.8 24.5 28.3 31.7 35.0 38.4
EBITDA -6.1 -7.7 -5.0 -2.2 0.5 4.0 7.5 11.0 14.5 17.6 20.6 23.8
D&A -1.1 -1.1 -1.1 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.3
EBIT -7.1 -8.8 -6.1 -3.3 -0.7 2.8 6.3 9.8 13.2 16.4 19.4 22.5
Taxes 1.8 2.2 1.5 0.8 0.2 -0.7 -1.6 -2.4 -3.3 -4.1 -4.8 -5.6
CAPEX -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2
FCF -5.5 -6.7 -4.7 -2.5 -0.5 2.1 4.7 7.3 9.9 12.3 14.6 16.9
Discounted FCF -5.0 -5.5 -3.4 -1.6 -0.3 1.1 2.2 3.0 3.7 4.0 4.3 4.4
Source: Midcap Partners
Calculation of value/security WACC parameters
Sum of discounted FCF (€M) 2.4 Stock market capitalisation (€M) 38.6
Discounted terminal value (€M) 50.7 Risk-free rate (French 10-year
Treasury bond - OAT) 1.0%
Enterprise value (€M) 53.1 Beta (FactSet 5 years vs CAC
Small) 1.0x
Net debt (€M, 31/12/2017) 5.7 Market risk premium 5.9%
Provisions (€M, 31/12/2017) 0.2 Specific risk premium 6.0%
Equity (€M) 47.2
Number of diluted shares (M) 12.3
Value/security (€) 3.84 Discount rate 12.0%
Source: Midcap Partners Source: Midcap Partners
Our assumptions lead to a valuation of €47 million. However, remember that this value is largely subject to the
different anticipated commercial successes, both in terms of number of launches, associated volumes and the
ability to negotiate attractive levels of royalties.
As we indicated, our prospective valuation takes into account the dilutive factors (BSPCE) Excluding dilutive
factors, our valuation presents an upside of 40%.
WACC sensitivity table/normalsed growth
WACC
Growth to infinity 9.0% 10.0% 11.0% 12.0% 14.0% 15.0% 16.0%
1% 56.8 49.5 43.0 37.2 27.4 23.3 19.6
2% 63.0 55.1 48.0 41.7 31.1 26.6 22.5
3% 70.6 61.9 54.1 47.2 35.5 30.6 26.2
4% 80.1 70.4 61.8 54.1 41.1 35.6 30.7
5% 92.3 81.4 71.7 63.0 48.3 42.1 36.6
Source: Midcap Partners
The table above highlights the valuation's sensitivity to the selected discount rate. Recording of the first
invoicing for the different active ingredients marketed will enable the specific risk premium for DEINOVE's
business model to be reduced significantly, thus exercising a strong leverage effect on the potential rise. With a
WACC reduced to 10%, this could exceed €60 million.
B. A €0.50 per share prospective valuation for MCB3837
Our modelling for MCB3837 reached to a €10m, that means €0.50 par share, considering the following
assumptions:
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 15
- The management of the phase 2 clinical trial pour an amount of €3m, then the transfer of development
rights to a partner in case of success,
- A commercial launch in 2023 with a peak sales at €150m four years later,
- Patent expiration in 2042, year from which sales are expected to lower drastically,
- A 15% royalties rate,
- A 15% discount rate,
- A cumulated success probability at 25%.
In order to obtain the valuation per share, we integrate all the dilutive instruments associated to the project,
i.e. the 8 million additional shares liked to the warrants.
C. A global valuation standing at €4.3
Many catalysts are expected that will support the stock during short & medium term. The history of the
company is currently changing with the concrete achievements of its development, that is to say, the
commercial launches of its own compounds that validate the success of its disruptive technological platform.
At the same time, the company will need to raise money until the cash breakeven that we anticipate in 2022.
Nonetheless, the value creation is expected to be significant as sales will accelerate for cosmetics et animal
nutrition as well as the potential that could increase from the development steps in antibiotics.
Synthèse de valorisation
Method Value/share Historical activity €3.8 MCB3837 €0.5 Prospective valuation €4.3
Source: Midcap Partners
We are starting the coverage of DEINOVE as a Buy with a Target Price of €4.3 per share.
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 16
VI. Appendices
Sources: DEINOVE – Midcap Partners
P&L (€m) 2015 2016 2017 2018e 2019e 2020e
Operating income 0.5 0.8 0.2 3.0 1.9 5.7
chg 215.4% 61.2% -72.9% 1305.4% -36.8% 198.9%
of which sa les 0.2 0.3 0.1 0.4 1.8 5.6
chg 60.8% 25.4% -72.1% 477.5% 324.5% 212.2%
Operating expenses -7.8 -7.8 -8.8 -9.6 -11.6 -11.2
chg 17.2% -0.9% 13.9% 8.4% 21.5% -3.6%
EBITDA -7.3 -7.0 -8.6 -6.6 -9.7 -5.5
% sales n.s. n.s. n.s. n.s. n.s. n.s.
D&A -0.6 -0.7 -1.1 -1.1 -1.1 -1.1
EBIT -8.0 -7.7 -9.7 -7.6 -10.8 -6.6
% sales n.s. n.s. n.s. n.s. n.s. n.s.
Financia l result 0.0 0.0 0.0 0.0 0.0 0.0
Non-recurrent i tems 0.0 0.3 0.3 0.0 0.0 0.0
Corporate tax 1.6 1.1 2.4 2.5 3.0 1.9
Amortization of goodwi l l 0.0 0.0 0.4 0.0 0.0 0.0
NI -6.4 -6.3 -7.3 -5.1 -7.8 -4.8
Minori ty interests 0.0 0.0 0.0 0.0 0.0 0.0
NI-group -6.4 -6.3 -7.3 -5.1 -7.8 -4.8
Balance Sheet (€m) 2015 2016 2017 2018e 2019e 2020e
Intangible assets 0.1 0.2 3.6 3.6 3.6 3.6
Tangible assets 1.1 0.9 2.0 2.0 1.9 1.8
Financia l assets 0.8 1.3 0.1 0.1 0.1 0.1
Deferred tax assets 0.0 0.0 0.0 0.0 0.0 0.0
WC 0.7 6.8 0.4 0.4 0.6 1.2
Year-end accruals 0.0 0.0 0.5 0.5 0.5 0.5
Assets 2.7 9.2 6.6 6.5 6.6 7.1
Equity 8.1 2.6 0.7 -3.0 -10.8 -15.6
Provis ions 0.0 0.0 0.2 0.2 0.2 0.2
Deferred tax l iabi l i ties 0.0 0.0 0.0 0.0 0.0 0.0
Net debt -5.4 6.6 5.7 9.3 17.3 22.6
Liabi l i ties 2.7 9.2 6.6 6.5 6.6 7.1
Cash Flow Statement (€m) 2015 2016 2017 2018e 2019e 2020e
CF before ∆WC -5.6 -5.8 -6.2 -3.8 -6.5 -3.5
∆WC -0.7 0.1 -0.8 0.0 -0.2 -0.6
CF after ∆WC -6.3 -5.7 -6.9 -3.8 -6.8 -4.1
Acquis i tions -1.8 -2.0 -1.2 -1.2 -1.2 -1.2
Free Cash Flow -8.2 -7.6 -8.1 -5.1 -8.0 -5.3
Disposals 0.9 0.9 -2.6 0.0 0.0 0.0
Other changes 1.3 0.0 0.0 0.0 0.0 0.0
CF from investing activi ties 0.4 -1.1 -3.8 -1.2 -1.2 -1.2
Capita l increase 14.3 0.8 6.6 0.0 0.0 0.0
BSA subscription 0.0 0.0 0.0 1.5 0.0 0.0
Debt i ssuance 2.0 2.9 0.0 0.0 0.0 0.0
Debt reimbursement -0.1 0.0 -0.3 0.0 0.0 0.0
CF from financing activi ties 16.2 3.7 6.3 1.5 0.0 0.0
Other changes 0.0 0.0 0.0 0.0 0.0 0.0
Change in debt 10.2 -3.1 -4.4 -3.6 -8.0 -5.3
MIDCAP PARTNERS • LOUIS CAPITAL MARKETS • 42 RUE WASHINGTON • PARIS • 130 WOOD STREET • LONDON 17
Disclaimer
This document may refer to valuation methods defined as follows: 1/DCF Method: discounting future cash flows generated by the business's operations. Cash flows are determined using the analyst's financial forecasts and models. The discount rate used is the weighted average cost of capital, defined as the weighted average cost of the company's borrowings and the theoretical cost of its equity as estimated by the analyst; 2/Comparables method: application of stock-market valuation multiples, or multiples observed for recent transactions. These multiples may be used as benchmarks and applied to the company's financial aggregates to determine its valuation. The sample is constituted by the analyst according to the company's characteristics (size, growth, profitability, etc.). The analyst may also apply a premium/discount based on his perception of the company's characteristics; 3/Asset-based method: estimation of the value of the equity on the basis of the revalued assets and corrected for the value of the liability; 4/Discounted dividend method: discounted future value of estimated dividend flows. The discount rate used is generally the cost of capital; 5/The sum of the parts: this method consists of estimating the different activities of a company, by using the most appropriate assessment method for each, then calculating the total. Recommendation scale: Buy: expected over-performance above 10% compared to the market within 6 to 12 months Neutral: expected to outperform or under-perform the market within a range of +10% and -10%, within 6 to 12 months Sell: expected to under-perform the market by more than 10% within 6 to 12 months Detection of conflicts of interest:
Business entity Closing price (€) Recommendation Warning
DEINOVE 3.28 Buy G A LOUIS CAPITAL MARKETS – MCP or any legal entity related to it holds more than 5% of the issuer's total issued capital; B The issuer holds over 5% of the totality of capital issued by LOUIS CAPITAL MARKETS - MCP or a related legal entity; C LOUIS CAPITAL MARKETS - MCP, alone or with other related legal entities, is related to the issuer through other significant financial interests; D LOUIS CAPITAL MARKETS - MCP or any legal entity related to it is a market maker or a liquidity provider with which a liquidity contract has been concluded in relation to the issuer's financial instruments; E LOUIS CAPITAL MARKETS - MCP or any legal entity related to it has, within the last twelve months, acted as lead manager or joint lead manager for an offer relating to the issuer's financial instruments, and that offer has been made public; F LOUIS CAPITAL MARKETS - MCP or any legal entity related to it is a party to any other agreement with the issuer concerning the provision of investment services relating to the corporate activity; G LOUIS CAPITAL MARKETS - MCP and the issuer have agreed on the supply by the former to the latter of a service for the production and circulation of the investment recommendation concerning the said issuer.
Breakdown of recommendations At 01/05/2018, the recommendations issued by the Midcap research team at LOUIS CAPITAL MARKETS – MCP break down as follows:
Recommendation Businesses tracked of which "Corporate" businesses
Buy 67% 76%
Hold 32% 24%
Sell 1% 0%
The reference prices used in this document are the closing prices. Any opinion given in this document reflects our current judgement and may be modified at any time without prior notice. LOUIS CAPITAL MARKETS - MCP has adopted effective administrative and organisational arrangements, including information barriers to prevent and avoid conflicts of interest in relation to investment recommendations. The remuneration of the financial analysts involved in drafting the recommendation is not tied to the corporate finance business. Past performance cannot be relied on as an indicator of future performance.