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Published to the market and investors on 16^th May 2019 @ 7.02am (BST).

Epigenomics (ECX-DE): Key catalysts to fuel growth throughout 2019
Recommendation: OUTPERFORM
Target Price: EUR4.01
Current Price: EUR1.90 (CoB on 15^th May 2019)

KEY TAKEAWAY

Epigenomics reported Q1/2019 sales of EUR331k (7% YoY), driven largely by a 198% YoY increase in product revenue, which was in part offset by lower licensing revenue due to the recently announced termination of the collaboration with Chinese licensing partner BioChain. We expect solid underlying growth momentum to continue throughout 2019, with back-end loaded revenue generation in Q3 and Q4 fuelled by a number of commercial as well as regulatory catalysts that can unlock significant sales potential for Epi proColon as well as support the commercialisation of HCCBloodTest, the latest addition to Epigenomic's growing portfolio of liquid biopsy tests, which allows for blood-based detection of liver cancer. We continue to see the positive commercial outlook of Epigenomic's liquid biopsy tests due to a differentiated profile, fast readouts, large target markets and a significant health-economic impact. We maintain and reiterate both our OUTPERFORM recommendation and EUR4.01 target price ("TP").

Q1/2019 financial results

Epigenomics reported total Q1/2019 revenue of EUR331k, an increase of 7% compared to Q1/2018. Total revenue was primarily driven by strong product sales growth (198% YoY), which was in part offset by a decrease in licensing revenue due to termination of the distribution agreement with Chinese partner BioChain. Other income attributable to exchange rate gains amounted to EUR499k (vs. EUR10k in Q1/2018). R&D expenses of EUR1.6m were broadly in line with last year (2% YoY), while SG&A expenses increased significantly to EUR2.4m from EUR1.8m (32% YoY) as a result of higher marketing expenses to fuel commercial development. Epigenomics closed Q1 with an improved net loss position of EUR-3.0m (-6% YoY) and as of March 31, 2019, cash stood at EUR12.9m, which should allow the company to fund operations well into 2020E.

Continued progress on CMR coverage for Epi proColon

Epigenomics recently announced that the Centers for Medicare & Medicaid Services ("CMS") has accepted the company's application for a National Coverage Determination ("NCD") review of Epi proColon, which constitutes one of two pathways to obtaining CMS coverage. While CMS have not yet initiated the review process due to a lack of resources available at present, CMS will issue a proposed decision within six months of starting the process, which management expect to begin in due course. A positive decision would represent a major breakthrough for Epigenomics, and we anticipate on-going updates on timelines and assume share price momentum along with positive news flow.

Rich news flow expected to catalyse growth throughout 2019

Having reached a number of critical milestones in 2018, we expect the positive momentum to continue throughout 2019 and anticipate rich news flow driven by (1) publication of the results from the microsimulation study in Q2/2018, paving the way for inclusion into the colorectal cancer screening guidelines, (2) a potential green light from the CMS for Epi proColon, which would translate into immediate coverage in the US, (3) progress on the prospective clinical study for liver cancer detection, and (4) an update on a new distribution agreement in China. As such, 2019 represents a decisive year for Epigenomics that, in our view, could lay a solid foundation for sustainable long-term growth.

Valuation suggests ample upside

With the recent CE marking for HCCBloodTest, in our view, the key uncertainty remains medicare coverage and inclusion into medical guidelines for Epi proColon. With the new liver product de-risking the commercial outlook, Epigenomics offers a highly attractive investment opportunity with significant potential for growth. We maintain and reiterate both our OUTPERFORM recommendation and TP of EUR4.01.

Kind regards,

Martin Piehlmeier | Analyst

goetzpartners Healthcare Research Team | Research Team

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