logo-loader

Beaufort Securities Breakfast Alert: Motif Bio, Hutchison China MediTech, Advanced Onotherapy and WPP

Published: 04:05 01 Nov 2016 EDT

no_picture_pai

Today’s edition features:

Advanced Onotherapy (LON:AVO)
Hutchison China MediTech (LON:HCM)
Motif Bio (LON:MTFB)
WPP (LON:WPP)
 

"A flat to marginally positive market is seen for London this morning, with the blue-chip FTSE-100 expected to open up in excess of 15 points. With just a week before election day, politics remained the dominating talking point, with experts declaring that incriminating emails cited by the FBI in their probe into Hillary Clinton’s exchanges could be uncovered in the next few days, while she continues to insist there is no case to answer. This kept the markets in a generally nervous mood, with all principal US indices closing fractionally down to cap a disappointing month during which the S&P-500 fell by 1.9% while the NASDAQ lost 2.3%. Asia was in a slightly better mood, with both the Hang Seng and the Shanghai Composite receiving a lift from better than expected official manufacturing PMI data from China, with the index rising to 51.2 for October, up from 50.4 in September, thereby beating expectations for the third straight month. By contrast Japan was in a more sombre mood, having shifted back its target date for achieving a level of 2% inflation from 2017 to 2018 following recent data, although the central bank still left its short-term interest rate target for commercial bank deposits at 0.1%. This left Japan with a fractional loss for the day, while the ASX gave back most of yesterday’s gains through weaker commodity plays and financials as the Reserve Bank of Australia left interest rates unchanged at 1.5%. Today both the UK and the US are due to due to release manufacturing PMI figures, while the results season in full swing with a large number of corporates being scheduled to release earning or trading updates this morning, including BP (BP..L), Hastings Group (HSTG.L), MoneySupermarket (MONY.L), Royal Dutch Shell (RDSA.L), Shire (SHP.L), Standard Chartered (STAN.L), Virgin Money (VM..L) and Weir (WEIR.L)."
– Barry Gibb, Research Analyst

Markets

Europe
The FTSE-100 finished yesterday’s session 0.60% lower at 6,954.22, whilst the FTSE AIM All-Share index closed 0.10% down at 822.20. In continental Europe, the CAC 40 index ended the day 0.86% lower at 4,509.26 and the DAX closed 0.19% down at 10,665.01.

Wall Street
On Wall Street last night, the Dow Jones shed 0.1% to 18,142.42, the S&P-500 eased 0.01% to 2,126.15 and the Nasdaq lost 0.02% to end at 5,189.14.

Asia
In Asian markets this morning, the Nikkei 225 had dropped 0.03% to 17,420.02, while the Hang Seng added 1.17% to 23,202.44.

Oil
In early trade today, WTI crude was up 0.51% to $47.10/bbl and Brent was up 0.72% to $48.96/bbl.

Headlines

HMRC chasing £1.9bn tax from UK’s richest people
HMRC is chasing almost £2bn that is potentially owed in taxes by the UK’s richest people, according to the public spending watchdog. The National Audit Office said HMRC’s specialist unit recovered £416m in 2015 from 6,500 “high net worth individuals” with wealth of more than £20m. But efforts are ongoing to recover an estimated £1.9bn, the NAO said. Each one of the group of 6,500 is assigned their own HMRC official to liaise with over their tax bill. The £416m is in addition to tax the wealthy individuals voluntarily declare, which totalled more than £4.3bn in 2014-15. They often have complex tax affairs involving different countries. The £1.9bn figure of tax that is “at risk” of not being received, is an estimate and not all of it will be owed once each case has been examined in detail, the NAO said.

Source: BBC News

Company news

Advanced Onotherapy (LON:AVO, 109.50p) – Speculative Buy
Advanced Oncotherapy, the developer of next-generation proton therapy systems for cancer treatment, yesterday announced that it has finalised the details of the contract for manufacturing the first LIGHT machine with Thales. This forms part of the partnership with Thales that was announced in February 2016. Thales has selected one of its factories located in France, to house the first manufacturing line. This line is located in a 2,800sqm building and consists of two configuration and test production lines for the linear accelerator, along with one test and development area for the treatment room. In addition, Thales has already started to carry out high power RF testing and conditioning of accelerating modules and sub-systems in its Velizy site near Paris. Thales is completing the engineering studies needed to optimise the integration processes, with the view of setting up a cost-efficient manufacturing platform for the production of the machines. The cost of these activities is funded by Advanced Oncotherapy and will be recovered through the retention of 100% of the gross margin on the first LIGHT machines produced. Thales intends to organise the series production so as to drive down costs, whilst operating under an appropriate quality framework.

Our view: This step is an important milestone in the Company’s long-term commercialisation plan and a natural progression in the partnership between Advanced Oncotherapy and Thales. It represents a clear validation of all the work done by both companies since the collaboration began in February and will permit production of eight machines per year to service an existing large and promising pipeline which already comprises firm orders and prospective commitments. Such facilitation is, of course, absolutely necessary to provide prospective buyers with confidence that a delivery schedule for these highly-sophisticated units will be deliverable. Without it, AVO would not be in a position to undertake manufacture followed by commissioning once the prototype has demonstrated its ability to perform in line with specification. LIGHT will then be seen to fulfil its promise to become a smarter, second generation, proton therapy solution that offers a cheaper, safer, smaller and more effective system to the medical world. With this in mind, its Board has committed to ensure it is positioned to move seamlessly to production, immediately following ‘first switch on’ and heading for FDA approval. Having completed its latest funding round, AVO now appears to carry only limited financing, commercial or scientific risk, while its prospective opportunity is stands to considerably outstrip even the most optimistic market suggestion (with much higher volume unit production likely to be out-licenced from Thales) as the output of existing ‘first generation’ units effectively becomes obsolete and lower costs significantly broaden the overall market opportunity. Quite clearly the share price is having problems grasping with this vision, encouraging investors to instead question whether AVO’s technology genuinely can ‘do what it says of the tin’. Management, by comparison, has already gone beyond this point, determining instead exactly how it can ensure its giant opportunity does not stumble once the capability has been demonstrated. Sceptics stand to be defeated on this over the next few months, possibly by AVO hosting a site visit to its development laboratories at CERN, where it might be hoped that all remaining questions and uncertainties will be answered. Beaufort sees quite considerable upside for this impressive and highly protected technology and continues to recommend the shares as a Speculative Buy.

Beaufort Securities acts as corporate broker to Advanced Oncotherapy plc

 

Hutchison China MediTech (LON:HCM, 1,902.50p) – Buy
Hutchison China MediTech (‘Chi-Med’), the China-based healthcare group, yesterday announced that its commercial platform joint venture has received US$59.5m land compensation payment from the Shanghai government. The compensation was paid to Shanghai Hutchison Pharmaceuticals Limited (‘SHPL’), Chi-Med’s 50:50 prescription drug joint venture with a subsidiary of Shanghai Pharmaceuticals Holding Co., Limited (‘Shanghai Pharma’). On 9 December 2015, SHPL has entered into the Compensation Agreement with the Shanghai government for the surrender of SHPL’s remaining 35 year land-use rights on its old factory site for a total compensation, including cash and subsidies, of US$113.1m. SHPL has received an aggregate of US$97.2m to date and the final US$15.9m is expected to be received by the end of 2016 or early 2017. After repayment of bank debt and taxes, approximately US$80m of the compensation is expected to be distributed equally to Chi-Med and Shanghai Pharma next year. Chi-Med Group will book an estimated one-time gain on the transaction of US$38.2m in the Q4 2016, representing Chi-Med’s share of the compensation less the US$10.3m net book value of the old site and its buildings, as well as taxes and other costs. Chi-Med’s CEO, Christian Hogg commented “…SHPL Prescription Drug business has grown sales over ten-fold during the past 10 years to US$126.8 million in the first half of 2016. The establishment of a new production facility in Shanghai, with expanded production capacity, is important to support this profitable and cash generative business.”

Our view: The old Shanghai Hutchison site was re-zoned in 2014 from industrial use into one for new science and technology, commercial and residential development area. As a result, SHPL built a new factory at a cost of c.US$95m, financed through operating cash flow and limited amount of bank debt. Located outside Shanghai city, the new factory has been completed and operational since September 2016, resulting in approximately a three-fold increase in productive capacity. With its August interim result announcement, Chi-Med said its two 50:50 joint venture Commercial Platforms (SHPL and Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (‘HBYS’)) continue to increase profits and paid Chi-Med a dividend of US$15.9m (H1 2015: US$6.4m) during H1 2016. Net income in SHPL and HBYS have totaled US$335m since 2005, from which a total of US$175m has been paid in dividends to Chi-Med and its partners. Combined with the cash provided by its partners AstraZeneca, Eli Lilly & Company and Nestlé Health Science S.A., the cash flow from two joint ventures will enable sustained investment in the ongoing clinical development of Chi-Med’s 7 drug candidates. Chi-Med is currently enrolling patients in 25 clinical trials around the world, including 4 pivotal Phase III studies the first of which, Fruquintinib in third-line colorectal cancer, will report top-line results in early 2017. Beaufort reiterates its Buy recommendation on the shares.

Motif Bio (LON:MTFB, 40.25p) – Speculative Buy
Motif, the clinical stage biopharmaceutical company specialising in developing novel antibiotics, released no less than three separate RNS announcements yesterday. Two of the these confirmed the quite exceptional progress being made with its lead antibiotic, iclaprim, while the third detailed ongoing process regarding its proposed public offering of American Depositary Shares while noting current balance sheet pressures. With respect to the latter, the offering of ADSs together with Warrants to purchase ADSs and listing of ADSs and ADS Warrants on the NASDAQ Global Market, along with a European Placement of Ordinary Shares together with warrants has already been thoroughly detailed in Beaufort research. The Board noted that an update to the market will be provided in due course when the registration already filed with the SEC becomes effective. Motif’s other releases went on to confirm iclaprim’s quite exceptional progress. It outlined new data presented on the antimicrobial activity of iclaprim, against recent clinical samples of Gram-positive bacteria, including multidrug resistant isolates, gathered from around the world. The results showed that iclaprim was highly potent against strains of Staphylococcus aureus, beta-hemolytic streptococci, and Streptococcus pneumoniae associated with clinical SSSI and HABP isolates taken globally during 2012 to 2014. As part of this it also noted that data presented at IDWeek 2016 in New Orleans supports fixed dosing of iclaprim designed to optimise efficacy and safety outcomes in the Company’s ongoing Phase 3 REVIVE clinical trials.

Our view: The market appeared to take fright from yesterday’s announcement regarding the timing of Motif’s public offering of ADSs, even though the announcement in fact told shareholders nothing they did not already know. The sentence that appeared to send the shares tumbling was the Board’s declaration that with respect to the ongoing trials “While not increasing overall costs, this has accelerated the Group’s cash utilisation and increased its trade and other payables such that the Group’s liabilities are expected to exceed cash resources by approximately US$4 million by 31 October 2016.” The reality is that cash is being burn at such a pace precisely because the trial results are so exceptional, exceeding expectations to the extent that REVIVE-1 data readout is now expected as early as Q2’2017. In reality, this underlines Beaufort’s view that the iclaprim platform accrues very significant value to the extent that it will ensure a valuation well in excess of US$1bn for Motif within 24 months, assuming the current trails remain on schedule. Having stumbled once, however, the market continues to wonder if the Company will in fact achieve its proposed NASDAQ quotation which, given the US’s ability to price such drug development opportunities correctly, is key to near term share price sentiment. While such concerns are understandable, yesterday’s release appears simply to have been provided for European investors who otherwise, due to the legal constraints imposed the US filing, were lacking any formal statement from Motif’s Board. Beaufort’s own confidence in this being achieved, centres on (i) the undoubted value of iclaprim and (ii), its belief that a revised F-1 is unlikely to have been submitted unless sufficient demand for the US-listed shares had actually been received to ensure its success. Moreover, should the shares not be seen to recover from yesterday’s hit, European allocations will need to be priced even more attractively than expected! With this in mind, investors wishing to gauge potential upside in the shares would do well to look at NASDAQ-listed Paratek Pharmaceuticals, Inc (NASDAQ:PRTK), whose own similar-stage antibiotic development although lacking iclaprim’s exceptional safety data, still enjoys a valuation more that 4-times that of Motif Bio. Beaufort recommends subscribing Motif’s European offer, with the expectation of being allocated pari-passu at a reasonable discount to market while also being allocated fee warrants. Subscribe.

 

WPP (LON:WPP, 1,778.00p) – Buy
WPP, a leading marketing communications group, yesterday provided trading update for 3 months ended 30 September 2016 (‘Q3 FY2016’). During the period, reported revenue in Sterling advanced +23.4% to £3.6bn, whereas in other currencies, it increased +4.6% to US$4.7bn, +4.2% to €4.2bn or fell -12.3% to ¥485.4bn. Revenue at constant currency rose +7.6% with like-for-like (‘LFL’) revenue grew +3.2%. For the 9 months period (‘year-to-date’), reported revenue advanced +15.8% to £10.1bn and at constant currency revenue grew +8.5% with LFL revenue up +3.9%. Operating margin improved by +0.3 margin points in constant currency, and by +0.4 margin points in reported basis. The Group’s net new business was £3.5bn year-to-date compared to £3.2bn in the same period last year. In the 12 months to 30 September 2016, the Group’s free cash flow was £1.6bn and the Group’s capital expenditure, acquisitions, share repurchases and dividends were £1.7bn. Average constant currency net debt increased by +£434m for the first nine months of 2016 due to acquisitions and share buy-backs. Net debt at period end stood at £4.7bn, marginally increased compared to £4.6bn in 2015. On the operational front, the Group made 46 acquisitions year-to-date, with 16 in new markets, 31 in quantitative and digital and 10 were driven by individual client or agency needs. The Group have spent £342m in share buybacks (2015: £588m) year-to-date, representing 1.6% of the issued share capital, against a full year target of 2.0%-3.0%. The Group also issued £400m of 30 year bonds with a coupon of 2.875% in September.

Our view: WPP delivered a stronger than expected performance for the first 9 months, recorded higher LFL revenue growth in all regions and all divisions, except data investment management which saw LFL revenue fell -0.7% year-to-date. In the Q3, on a constant currency basis, activities in the UK slowed compared to the Q2 which the management stated were “Perhaps, the first signs of Brexit anxiety” taking Western Continental Europe with it also slowed while other regions registered stronger growth. The exceptional +23.4% growth in revenue during the Q3 was helped by +4.4% growth from acquisitions and +15.8% from currency due to continuing weakness of the Sterling. The Group completed 46 acquisitions during the 9 months and has made 3 further acquisitions post period. This phase strengthens WPP’s global positioning as it seeks to actively expand into new markets. The management increased the dividend pay-out ratio earlier in the year to 50%, ahead of its original schedule of 2017, with interim dividend hiked up by +22.9%. Looking ahead, WPP said it is targeting LFL revenue and net sales growth of “over” +3%, which is lightly weaker wording compared to the previously guided “well over” +3% growth. The Group also said it is on track to deliver an operating margin to net sales improvement of +0.3 margin points on a constant currency basis. WPP trades on FY2016E and FY2017E P/E multiples of 16.2x and 14.4x, along with dividend yield of 3.1% and 3.4%, respectively. The recent setback in the share price was dragged down by sentiment affecting its competitors and being aware of this, noted that it is achieving stronger revenue growth than peers by fully utilising its market leading position. The momentum is there and the Group reiterated its full year target. We believe recent share price weakness represents good opportunity to re-enter. Beaufort therefore upgrades the shares from Hold to Buy

BenevolentAI advances novel ulcerative colitis treatment through Phase 1a trial

BenevolentAI (OTC:BAIVF) chief scientific officer Dr Anne Phelan joins Proactive's Stephen Gunnion with positive safety data from the Phase 1a, first-in-human, clinical study of BEN-8744 in healthy volunteers. Phelan explained that BEN-8744 is a potent, selective PD10 inhibitor, uniquely...

1 hour, 21 minutes ago