sernova corp. our analysis indicates a fair value estimate of cad …€¦ · multi-billion dollar...

INITIATING COVERAGE (October 5, 2015)

Equity | Healthcare / Medical Devices

© 2011-2015 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 1 | P a g e

Sernova Corp.

(TSXV: SVA.V, OTCQB: SEOVF),

Target Price: CAD $0.76

We initiate coverage on Sernova Corp. (TSXV: SVA.V, OTCQB: SEOVF, Frankfurt: FRA.PHS, “Sernova”) with a price target of CAD $0.76 per share. With headquarters in London, Ontario, Sernova is a clinical stage medical company focused on developing disruptive platform technologies that use regenerative medicine to treat chronic diseases. Initially Sernova is developing medical technologies aimed at treating chronic metabolic diseases including Type 1 and Type 2 diabetes, blood disorders such as hemophilia, thyroid disease, and other diseases. The company’s Cell Pouch System™ is a novel, implantable medical device technology for delivering therapeutic cells (donor, stem derived, and xenogeneic cells) in a safe and biologically appropriate environment. We see several potential catalysts ahead for the company as it pursues a partner-based strategy for advancing its clinical development program – and ultimately commercialization – for the treatment of the approximately 30mn people worldwide who suffer from insulin-dependent diabetes.

INVESTMENT HIGHLIGHTS

Cell Pouch System™ offers a novel approach to diabetes treatment

Sernova’s Cell Pouch System™ is a subcutaneous implantable medical device technology that is designed for the transplantation of therapeutic cells, including donor, xenogeneic, or stem cell derived therapeutic cells to treat chronic diseases. The Cell Pouch System™ was custom designed to provide a natural environment for therapeutic cells, which then can produce missing proteins or hormones and release these therapeutics into the bloodstream. The Cell Pouch System™ can also provide local immune protection for the therapeutic cells and includes the full complement of technologies required to develop advanced cell-based treatments with applications in a number of chronic diseases involving the need for a missing protein, hormone or factor – suggesting that the technology has the potential for numerous indications beyond those enumerated by the company. Over the last six years Sernova has made considerable progress on its Cell Pouch System™ development program for insulin-dependent diabetes patients, with strong preclinical confirmation of safety and efficacy – as well as clinical success with human islets in brittle diabetics. Sernova recently secured access to a near-infinite supply of cells sourced from its licensed technology with University Health Network (UHN) of Toronto. We next expect the company to move forward to initiate a Phase 2 human trial using the Cell Pouch System™ to transplant therapeutic cells to insulin dependent diabetes patients.

Large market for diabetes therapeutics

Initially Sernova is targeting diabetes – a chronic disease that occurs when the pancreas does not produce enough insulin. Diabetes is a widespread and growing disease that affects approximately 387mn across the globe, a figure that is expected to rise to 592mn by 2035, according to the International Diabetes Federation (IDF). The cost of treating diabetes and its side effects represents a massive economic burden on healthcare, having been estimated at over $245Bn in North America alone. The initial target market for Sernova’s Cell Pouch System™ is the 30mn insulin-dependent Type 1 and Type 2 diabetics worldwide. Although smaller in number, insulin dependent diabetics represent approximately 50% of the multi-billion dollar global market for diabetes. Following diabetes, Sernova’s second clinical program for the Cell Pouch System™ is hemophilia, and the company also sees potential for the Cell Pouch System™ for treatment of thyroid disease, and other chronic diseases.

Initiate coverage with a price target of CAD $0.76

Our analysis indicates a fair value estimate of CAD $0.76 per share (detailed on page 10), for Sernova. If achieved, the target represents potential upside of 145.2% from the recent price of CAD $0.31. We see Sernova as an intriguing speculative story in the healthcare sector with a potentially disruptive platform technology that is initially addressing the $420Bn+ global market for diabetes treatment, with several additional indications planned for the future.

Stock Details (9/28/2015)

TSXV / OTCQB: SVA.V / SEOVF

Sector / Industry Healthcare / Medical Devices

Price target CAD $0.76, USD $0.57

Recent share price CAD $0.31, USD $0.23

Shares o/s (mn) 141.7

Market cap (in CAD $mn) 43.9

52-week high/low (CAD$) 0.40 / 0.13

Source: Bloomberg, SeeThruEquity Research

Key Financials ($mn unless specified)

FY13 FY14A FY15E

Revenues 0.0 0.00 0.0

EBITDA (1.4) (2.0) (2.1)

EBIT (2.1) (2.8) (2.6)

Net income (2.0) (2.7) (2.6)

EPS ($) (0.02) (0.02) (0.02)

Source: SeeThruEquity Research

Key Ratios

FY13 FY14A FY15E

Gross margin (%) NM NM NM

Operating margin (%) NM NM NM

EBITDA margin (%) NM NM NM

Net margin (%) NM NM NM

P/Revenue (x) NM NM NM

EV/EBITDA NM NM NM

EV/Revenue (x) NM NM NM


Share Price Performance (CAD$, TTM)

Source: Bloomberg

0.00

0.20

0.40

Sep-14 Nov-14 Feb-15 May-15 Aug-15


Sernova Corp.

Healthcare | Medical Devices

October 5, 2015

SUMMARY TABLE

Figure 1. Summary Table (As of September 28, 2015)

Share data *

B/S data (As of fiscal 3Q15) Key personnel:

Recent price: 0.31 Total assets: 3.8mn President & CEO Dr. Philip M. Toleikis, PhD

Price target: 0.76 Total debt: 0.0mn Chairman of the Board of Directors:

Frank Holler

52-week range: 0.40 / 0.13 Equity: 3.6mn Chairman, Scientific Advisory Board

Dr. David White

Average volume:** 269,843 W/C: 3.6mn Chief Financial Officer

Ralph Deiterding

Market cap: $43.9mn ROE: -73%.2 Senior Director, Research & Development

Delfina Siroen

Book value/share: $0.03 ROA: -43.8%

Cash/share $0.02 Current ratio: 23.3

Dividend yield: 0.00% Asset turnover: N/A

Risk profile: High / Speculative Debt/Cap: 0.0

* All fundamental data and estimates in CAD unless noted

** Three month average volume (number of shares)

Estimates

Valuation

FY October Rev (CAD$mn) EBITDA (CAD $mn) EPS (CAD$) P/Rev (x) EV/ EBITDA (x) P/E (x)

2013A 0.0 (1.4) (0.02) NM NM NM

2014A 0.0 (2.0) (0.02) NM NM NM

1Q15A 0.0 (0.4) (0.00) NM NM NM

2Q15A 0.0 (0.4) (0.01) NM NM NM

3Q15A 0.0 (0.7) (0.00) NM NM NM

4Q15E 0.0 (0.6) (0.00) NM NM NM

2015E 0.0 (2.1) (0.02) NM NM NM

2016E 0.0 (2.7) (0.02) NM NM NM

2017E 8.5 2.5 0.02 5.1x 4.6x 17.2x

Source: SeeThruEquity Research, All historical figures and estimates in CAD unless noted

INVESTMENT THESIS

We initiate coverage on Sernova Corp. (TSXV: SVA.V, OTCQB: SEOVF, Frankfurt Exchange: FRA.PHS, “Sernova”) with a price target of CAD $0.76 per share. With headquarters in London, Ontario, Sernova is a clinical stage medical company focused on developing disruptive platform technologies that use regenerative medicine to treat chronic metabolic diseases. Initially Sernova is developing medical technologies aimed at treating chronic metabolic diseases including Type 1 and Type 2 diabetes, blood disorders such as hemophilia, thyroid disease, and other diseases. Sernova has invested six years and considerable resources developing its patented Cell Pouch System™, which is in Phase 1 / 2 clinical development for potential treatment of insulin-dependent diabetes patients. The company’s Cell Pouch System™ is a medical device technology that offers a novel method of delivering therapeutic cells (donor, stem derived, and xenogeneic cells) in a safe and biologically appropriate environment. Sernova recently gained worldwide exclusive rights to a stem cell derived insulin producing technology though a license agreement with University Health Network (UHN) in Toronto, Canada. We see several potential catalysts ahead for the company as it pursues a partner-based strategy for advancing its clinical development program – and ultimately commercialization – for the treatment of the approximately 30mn people worldwide who suffer from insulin-dependent diabetes.


Sernova Corp.


October 5, 2015

Cell Pouch System™ offers a novel approach to diabetes treatment

The Cell Pouch System™ is a subcutaneous implantable medical device designed for the transplantation of therapeutic cells, including donor, xenogeneic, or stem cell derived therapeutic cells to treat chronic diseases. Custom designed to provide a natural environment for therapeutic cells, the Cell Pouch System™ can produce missing proteins or hormones and release these therapeutics into the bloodstream. The Cell Pouch System™ also provides local immune protection for the therapeutic cells and includes the full complement of technologies required to develop advanced cell-based treatments with applications in a number of chronic diseases involving the need for a missing protein, hormone or factor – suggesting that the technology has the potential for numerous indications beyond those enumerated by the company. Sernova has made considerable progress on its Cell Pouch System™ development program for insulin-dependent diabetes patients, with strong preclinical confirmation of safety and efficacy from – as well as clinical success with human islets in brittle diabetics. The mechanics of the Cell Pouch System™ are straightforward, with the Cell Pouch™ implanted so that natural vascularized tissue chambers form for the placement of therapeutic cells, enabling the therapeutic cells to produce and release insulin and other regulatory hormones. The therapeutic cells are protected by Sernova’s local immune protection technology, which eliminates the need for anti-rejection drugs. Importantly, the Cell Pouch™ is contract manufactured, packaged and sterilized in a manner compliant in the United States under GMP and ISO 13485 standard. The process is also scalable – with the Cell Pouch™ having completed a packaging and product stability study and coming in multiple sizes for preclinical and clinical evaluation. Sernova has also made nice progress demonstrating the safety and efficacy of the Cell Pouch™. The safety of the Cell Pouch System™ has been tested successfully in four animal models, with preclinical efficacy confirmed in isograft (rat, mouse), autograft (pig) and allograft diabetes models (pigs), with glucose control demonstrated. The device alone and with islets has been proven safe in humans in a proof of concept study. The islets were proven to be vascularized and able to produce all of the regulatory hormone types required to control glucose levels. We see several potential catalysts ahead for the company as it pursues a partner-based strategy for advancing its clinical development and ultimately commercial initiatives. Large market opportunity for potentially disruptive Cell Pouch System™

Initially Sernova is targeting diabetes – a chronic disease that occurs when the pancreas does not produce enough insulin – the hormone that regulates glucose– or when the body cannot effectively use the insulin it produces. Diabetes is a widespread and growing disease that affects approximately 387mn across the globe, a figure that is expected to rise to 592mn by 2035, according to the International Diabetes Federation (IDF). Although there is no cure for diabetes, blood glucose levels can be managed with frequent blood glucose testing combined with regular injections; however, blood glucose control using this treatment approach is fraught with problems, and can lead to dangerous side effects including heart, kidney and eye disease, as well as ischemia-induced amputations. The cost of treating diabetes and its side effects has been estimated at over $245Bn in North America alone, according to data from the Juvenile Diabetes Research Foundation, with global estimates surpassing $420Bn. The initial target market for the Cell Pouch™ is the 30mn insulin-dependent Type 1 and Type 2 diabetics worldwide. Although smaller in number, insulin dependent diabetics represent


Sernova Corp.


October 5, 2015

approximately 50% of the multi-billion dollar global market for diabetes market. Following diabetes, Sernova’s second clinical program for the Cell Pouch System™ is hemophilia, and the company also sees potential for the Cell Pouch System™ for treatment of Thyroid Disease, among other chronic diseases, as indicated in the following table.

Figure 2. Target markets for Cell Pouch System™

Strong IP position

Sernova’s platform technology is supported by what appears to be a strong intellectual property position, which is continuously expanding through patent applications and licensing activities. The company’s patent portfolio consists of 53 issued and pending patents in nine families covering the company’s enabling platforms (28 issued and 25 pending). Sernova attempts to obtain broad claims in its patents, including exclusivity of the Cell Pouch™ device and related technologies in combination with a wide range of therapeutic cell types and to treat a number of chronic diseases. Earlier this year, for example, Sernova announced that patent offices in China, Israel, Singapore and New Zealand issued patents to Sernova for its patent application entitled "Methods and Devices for Cellular Transplantation,” which help protect Sernova’s entire Cell Pouch System™, including the Cell Pouch™ itself, as well as the Cell Pouch™ combined with therapeutic cells and surgical tools for cell transplantation. The company has already been issued this patent in the United States. Sernova management believes that these issued patents, in addition to patent rights already granted or actively being pursued in other countries, should provide Sernova with patent protection through 2030. Transformative agreement with University Health Network (UHN) gains access to unlimited stem cells

On September 10, 2015, Sernova announced that it has entered into what management believes will be a transformative license agreement with the University Health Network (UHN) of Toronto. As part of the agreement, the company will gain access to patent-pending stem cell technologies developed by distinguished UHN researchers, Dr. Cristina Nostro and Dr. Gordon Keller. Significantly, the license agreement is exclusive and provides Sernova with worldwide rights to the technologies, which relate to the development of a potentially unlimited supply of stem cells into glucose-responsive therapeutic cells for the treatment of patients with insulin-dependent diabetes. Clearly the agreement has positive implications for the advancement of Sernova’s flagship implantable medical device, the Cell Pouch™, as the company now has access to a proprietary, unlimited and non-donor dependent source of stem cell derived glucose responsive therapeutic cells that can be placed in the Cell Pouch™ for therapeutic treatment of diabetes – the company’s largest disease.


Sernova Corp.


October 5, 2015

Sernova shares listed on OTCQB as company expands outreach and partnership discussions

On September 21, 2015, Sernova announced that its stock has been listed for trading on the OTCQB market exchange under the symbol SEOVF. Shares will also continue to be traded on the TSX Venture exchange under its existing ticker SVA.V. The admission into the OTCQB expands Sernova’s presence and visibility in the United States, which represents a key potential market for the company. The move should add to the liquidity of the stock and provide access to a larger base of potential institutional and retail investors. As part of the announcement, Sernova management indicated that the OTCQB listing was a key step in an expanding investor relations effort, which will include conferences and investor meetings in Toronto, New York, and Boston, to introduce the company to a broader set of potential investors as the company increases its international presence, product development programs, and partnering discussions. Reflecting initial success in these efforts, we note that Sernova recently raised $1.6mn in an oversubscribed private placement during fiscal 3Q15 and ended the quarter with $3.5mn in cash and short-term investments.


Sernova Corp.


October 5, 2015

COMPETITIVE LANDSCAPE

Sernova operates in the large and competitive global medical technology industry, which is a highly regulated industry that requires significant time and capital investment to bring new therapeutic products, medical devices, and therapeutic cells into commercialization. Because of the time and cost of developing new therapeutic products, the industry includes many large multi-national pharmaceutical companies, which are better able to finance and navigate the varied regulatory approval processes to market therapeutic products in different parts of the world. These large corporations have a structural advantage versus smaller companies due to their established sales distribution, well-known brands, and access to deep financial resources and large research facilities. Sernova seeks to compete effectively in this market by pursuing a collaborative partner-based approach to advance clinical development and commercialization of its innovative Cell Pouch™ technology, which has potentially disruptive applications for the treatment of a number of chronic diseases, including insulin-dependent Type 1 and Type 2 diabetes, as well as other potential indications. With annual global treatment costs estimated at over $420Bn for diabetes and its side effects, the market for diabetes is massive, and we expect Sernova to seek to partner with one or many of the larger participants in the global medical industry as a means of addressing the financial and regulatory barriers endemic to the global medical technology market. In the following graphic we examined key size and profitability metrics for a group of publicly traded companies we see as peer companies of Sernova. We considered companies developing therapeutic products employing stem cell and regenerative therapies, including Caladrius Biosciences, Asterias Biosciences, and Mesoblast Ltd., among others. We also considered peer companies focused on the treatment of diabetes, including Mankind, Biodel, DexCom MedX, and PharmaCyte Biotech, among others. As the graphic illustrates, Sernova’s profitability metrics seems in line with clinical development stage peers. Indeed, it is not uncommon for early and mid-stage peers in the industry to have negative profitability as they invest in research and development and costs associated with conducting clinical trials or other endeavors to achieve regulatory approval to market their products.

Figure 3. ROA vs. EBIT– Sernova Peers

Source: Thompson Financial, Company filings, SeeThruEquity Research

Mesoblast Ltd.

MannKind Corp

Asterias Biotherapeutics

Athersys

Osiris Therapeutics

Biodel Lexicon Pharmaceuticals

DexCom

Caladrius Biosciences

Sernova Corp.

-120%

-80%

-40%

0%

40%

-80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20%

RO

E %

ROA %

Size of bubble indicates market cap


Sernova Corp.


October 5, 2015

FINANCIALS AND FUTURE OUTLOOK

Sernova is a clinical stage medical technology company. As such, the company does not generate revenues at this time but rather is focused on the clinical development of its products and identifying strategic partners for licensing or collaboration as it pursues regulatory clearance and ultimately commercialization of its proprietary medical technology. As detailed below, the analysis in this report assumes that the company’s Cell Pouch System™ employs innovative regenerative medicine technology with disruptive implications for the diabetes and hemophilia markets, as stated by management. Based on that assumption, management’s statement that it is seeking a partner-based approach to advance the Cell Pouch System™ towards commercialization, and the large market potential for diabetes, the analysis below assumes that Sernova is able to strike lucrative licensing deals with large strategic partners. To date the company has not yet announced a licensing deal, and we have assumed that future deals will include upfront license fees, milestone payments, and a royalty rate.

Recent results

In FY3Q15, Sernova’s operating expenses came in at $0.67mn, comprised of $0.31mn in R&D expenses and $0.36mn in G&A expenses. The company reported a net loss of $0.67mn for the quarter, with average shares outstanding during the period of 139.7mn and EPS coming in at a loss of ($0.00). For the first nine months of FY15 the company invested $1.9mn in operating expenses, including $1.2mn of R&D and $0.71mn in G&A. Net loss for the first nine months of the fiscal year was ($0.01).

Key Assumptions / Business Drivers

Given the large market potential for Sernova’s medical technologies and the high cost associated with bringing new medical technologies through to regulatory clearance and commercialization, we expect the company to embark on a collaborative go-to-market strategy by pursuing research and licensing partners. Our model makes the assumption that Sernova is generally successful in structuring partnerships that advance its portfolio of products into the market, culminating in international regulatory clearance and commercialization. Specifically, we have assumed the company strikes license deals for the Cell Pouch System™ in North America, Asia, and Europe, which incorporate an upfront license fee, as well as milestone and royalty payments. Our model is focused on the initial market of diabetes, which is large enough to support Sernova’s growth for the foreseeable future, if the company is successful, and also includes assumptions for the company’s second target market of hemophilia.

It is important to note that this analysis assumes the company is generally successful in its pursuit of commercializing the Cell Pouch System™ for the multi-billion dollar global diabetes, and that the valuation derived from the assumptions in this forecast are adjusted by a probability factor of 40%, recognizing the inherent regulatory and business risks of bringing a Phase I/Phase II medical technology to future commercialization. We have assumed three large licensing deals, with initial license fees ranging from $5mn to $10mn, plus milestone fees and future royalty payments, with initial license fee revenues beginning in 2017E.

Balance Sheet & Financial Liquidity

Given that Sernova has a history of losses is not expected to generate free cash flow from operations in the near future, we see the company’s balance sheet as a key item to watch for the company. Sernova ended FY3Q15 with $3.6mn in cash and short-term investments on hand and no debt. During 3Q15, Sernova raised an additional $1.6m in an oversubscribed, non-brokered private placement, which management has indicated will be deployed to fund the company’s regenerative medicine clinical program and collaborations utilizing its platform technology to treat diabetes and other serious disease conditions, as well as for general corporate purposes. The company has 141.7mn shares outstanding following the raise. Sernova’s management has indicated that it believes the company’s cash and working capital position is sufficient to meet cash needs for at least the next twelve months.


Sernova Corp.


October 5, 2015

In our view, Sernova is likely to seek to raise additional capital during the next six to 12 months in the form of new equity issuances and/or through the engagement of a strategic partnership. We note that Sernova’s fiscal 3Q15 financial statements were prepared assuming the company will continue on a going concern basis, which reflects the company’s pre-revenue status and history of losses as it pursues clinical and collaborative activities to move its flagship Cell Pouch System™ towards regulatory clearance and ultimate commercialization. We have forecast EPS of (0.02) in fiscal 2015E and (0.02) in fiscal 2016E.

Figure 5. Key Performance Indicators of Sernova, FY15E-18E

Source: Company filings, SeeThruEquity Research

-50%

0%

50%

100%

150%

2015E 2016E 2017E 2018E

Gross Margin Operating Margin Net Margin

-10,000

-5,000

0

5,000

10,000

15,000

2015E 2016E 2017E 2018E 2019E

In C

AD

00

0

Revenue Gross Profit Operating Inc. Net Income FCF


Sernova Corp.


October 5, 2015

VALUATION

We utilize discounted cash flow (DCF) and peer company analysis to value Sernova. Given the pre-commercialization status of Sernova, as well as the long time horizon for bringing new therapeutic products to market, we used a probability factor to our DCF forecast of 40%. Sernova is pursuing the bold goal of introducing a disruptive medical technology platform incorporating regenerative medicine to treat insulin-dependent diabetes, and there is vast potential for the company if management can execute to plan. Sernova has spent six years developing its flagship Cell Pouch™ technology platform. As illustrated in our peer valuation table, the market has been wiling to pay high valuations for clinical stage and early commercial stage companies showing promise as burgeoning leaders in the regenerative medicine and diabetes therapeutic markets. If Sernova can execute in a similar fashion, or attract a marquee strategic partner, there is potential for a higher valuation than we have assumed in the peer analysis. Given the company’s current stage as an intriguing Phase 1 / Phase 2 clinical stage company, however, there remain considerable risks to growth and execution. Considering all of these factors our valuation yields a fair value of $0.76 per share, representing potential upside of 123.5% to the recent price of $0.34.

DCF

We expect Sernova will use cash in the early portion of our forecast as the company is a Phase 1 / Phase 2 clinical stage medical technology company, and does not have products with regulatory approval for commercialization. During this time we expect the company to invest in clinical studies, research and development, and the pursuit of partnerships to expand the potential applications for the Cell Pouch™ and to advance the Cell Pouch™ towards commercialization. We have assumed Sernova management will engage form strategic partnerships with larger companies in the biotechnology / medical technology space, which we have assumed will be structured as a license and royalty agreement with milestone payments for development and regulatory accomplishments. The following DCF assumes three large deals, with initial license payments ranging from $5mn - $10mn, with initial license revenues occurring in 2017E, plus royalties and milestone payments, as indicated earlier in this report. We discounted cash flows at a weighted average cost of capital of 13.4%, adjusted for a probability factor of 40%, and assumed a terminal growth rate of 5% at end of FY2026E to arrive at a probability-weighted enterprise value of $89.6mn. We adjusted for estimated cash on hand of $4.2mn, arriving at a fair value of $0.67 per share.

Figure 5. Discounted Cash Flow Analysis

$CAD FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Diabetes – North America IND Phase 1/II Phase 1/II Phase 2 Phase 2 Phase 3 Phase 3 FDA Comm. Comm.

Diabetes – International Pre-clinical Pre-clinical IND Phase 1/II Phase 2 Phase 2 Phase 3 Phase 3 FDA Comm.

Hemophilia Pre-clinical Pre-clinical Phase 1/II Phase 1/II Phase 2 Phase 2 Phase 3 Phase 3 FDA Comm. Comm.

EBIT (2,735,000) 2,500,000 (1,500,000) 5,675,000 (5,652,250) 2,118,183 2,867,872 6,243,702 29,313,462 40,480,596 64,830,418

Less: Tax - - - - - - - - - 4,863,369 20,760,926

NOPLAT (2,735,000) 2,500,000 (1,500,000) 5,675,000 (5,652,250) 2,118,183 2,867,872 6,243,702 29,313,462 35,617,227 44,069,492

Changes in working capital 8,616 8,997 9,394 (150,623) 245,000 255,000 (420,000) 63,200 (418,261) 290,472 950,000

Depreciation & Amortization 35,000 33,500 34,170 34,853 35,550 36,261 36,987 37,726 38,481 39,251 40,036

Capex (36,000) (36,720) (37,454) (38,203) (38,968) (39,747) (40,542) (41,353) (42,180) (43,023) (43,884)

FCFF (2,727,384) 2,505,777 (1,493,890) 5,521,027 (5,410,667) 2,369,697 2,444,317 6,303,276 28,891,502 35,903,926 45,015,644

Discount factor 1.0 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2

Probability Factor 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

Probability-weighted PV of FCFE (2,727,384) 1,922,012 (1,010,817) 3,295,444 (2,848,951) 1,100,696 1,001,549 2,278,353 9,212,234 10,098,967 11,169,626

Sum of PV of FCFE

33,491,728

Terminal cash flow

226,155,148

PV: Terminal cash flow

56,115,347

Enterprise value

89,607,076

Less: Debt

0

Add: Cash

4,200,000

Equity value

93,807,076

Outstanding shares (mn)

140.9

Fair Value per share

0.67


Sernova Corp.


October 5, 2015

Summary conclusions

Key assumptions

DCF FV ($ per share) 0.67 Beta 1.2

Recent price ($ per share) 0.34 Cost of equity 13.4%

Upside (downside) 95.9% Cost of debt (post tax) 9.0%

WACC 13.4% Terminal Growth Rate 5.0%


Figure 7. Sensitivity of Valuation – WACC vs. Terminal Growth Rate

WACC (%)

Term

ina

l g

row

th r

ate

(%)

0.67 12.4% 12.9% 13.4% 13.9% 14.4%

4.00% 0.73 0.67 0.62 0.58 0.54

4.50% 0.76 0.69 0.64 0.59 0.55

5.00% 0.79 0.72 0.67 0.62 0.57

5.50% 0.83 0.76 0.69 0.64 0.59

6.00% 0.87 0.79 0.72 0.66 0.61

6.50% 0.93 0.84 0.76 0.69 0.64



Sernova Corp.


October 5, 2015

Peer Group Valuation

We also examined Sernova based on using a peer group valuation. Our peer group valuation examines the company relative to a group of peers on the basis of estimated future revenue. As illustrated in the following peer valuation table, leading early stage companies in the markets for regenerative medicine and for treating diabetes have been able to command high valuations relative to current fundamentals. Generally, we believe there is a potential strategic value to these company’s products to larger medical companies that is being priced into the peer valuations on a company-specific basis. Considering this, we believe there is the potential for considerable variability in Sernova’s multiples as it pursues commercialization of the Cell Pouch System™, and we would expect market sentiment to be strong for the company if it can find a marquee strategic partner for commercialization of the Cell Pouch System™. Currently Sernova is a Phase 1 / Phase 2 clinical stage company, and we do not forecast the company to generate revenue from license agreements until 2017E. We considered EV/Revenue and P / Sales target multiples of 13.0x our 2017E revenue estimate of $8.5mn. We note that our 2017E estimate assumes that the company has completed a license deal with a large partner to advance the Cell Pouch System™ towards commercialization in North America.

Figure 8. Comparable Valuation (Data as of 9/22/15)

Company Mkt cap (**$ mn)

EV/Revenue(x) Price / Revenue (x)

FY15E FY16E FY15E FY16E

MannKind Corp 1,341 3152.2x 52.7x 2916.0x 48.8x

Mesoblast Ltd.** 1,176 40.2x 32.5x 48.0x 38.7x

Asterias Biotherapeutics 212 103.3x 465.0x 118.0x 531.1x

Athersys 112 17.0x 9.5x 23.9x 13.4x

PharmaCyte Biotech Inc. 63 N/A N/A N/A N/A

Osiris Therapeutics 652 6.2x 4.8x 6.7x 5.2x

Biodel, Inc. 41 N/A N/A N/A N/A

StemCells Inc. 57 307.7x 285.7x 440.3x 408.9x

Lexicon Pharmaceuticals 1,300 362.2x 68.8x 416.7x 79.1x

Caladrius Biosciences 103 4.1x 2.3x 5.2x 2.9x

DexCom, Inc. 7,804 20.5x 14.9x 20.7x 15.0x

Average * 107.6x 58.9x 134.9x 76.5x

Sernova Corp.** 48 N/A N/A N/A N/A

Premium (discount) N/A N/A N/A N/A

* Averages exclude highest multiple in each column for comparability

** Serrnova market cap in CAD, Mesoblast market cap in AUD

Source: Bloomberg, SeeThruEquity Research


Sernova Corp.


October 5, 2015

RISK CONSIDERATIONS

Financial Solvency

We see access to new capital as a risk for Sernova. Sernova is a commercial stage medical technology company, which has not generated revenues from its product pipeline. We do not expect Sernova to generate recurring cash flow from its operations for several years, as the company’s lead medical device has not been approved for commercial use in any country. Consequently we believe the company will seek to raise new capital through the issuance of equity and/or as part of a strategic industry partnership. At the end of its fiscal 3Q15, the company had cash on hand of $3.5mn and a current ratio of 23.3x. We note that Sernova recently raised $1.6mn in gross proceeds from an oversubscribed non-brokered private placement, which management indicated will be deployed to fund Sernova's regenerative medicine clinical program and collaborations utilizing its platform technology to treat diabetes and other serious disease conditions, as well as for general corporate purposes.

Partnership Assumptions

The analysis in this report assumes that Sernova is able to large strategic partnerships with large pharmaceutical companies which include license fees, milestone fees, and royalty rates. Although we believe the company is seeking to find a licensing partner for the Cell Pouch™, to date Sernova has not announced any licensing partnerships, and there is no guarantee that the company will ever do so Without the support of a large pharmaceutical partner, we believe the company will need to raise considerable capital to bring its products to market.

Going Concern

We note that Sernova’s interim financial statements were prepared assuming the company will continue on a going concern basis. Sernova has experienced operating losses and cash outflows from operations since its inception, and will require ongoing financing in order to continue its research and development activities in pursuit of reaching successful commercialization of its products. We expect the company to seek new funding during the next six to twelve months in the form of equity offerings and/or licensing agreements and collaboration arrangements with development partners.

Competition

Sernova operates in large and highly competitive markets. The market for treating insulin-dependent diabetes in particular, has numerous competitors due to the large opportunity, and Sernova’s medical technology plans to displace the current standard of care. Moreover, there are many companies competing in the evolving field of using stem cell technology in medicine. This is a rapidly emerging market and Sernova is potentially exposed to risks associated with competitive innovations or changing technology that would render its products noncompetitive or require the company to make further investments in research and development in order to remain competitive.

Regulation

As a clinical stage medical technology company Sernova is operating in an industry that is subject to significant government regulation. It is likely to be difficult and costly for Sernova to obtain regulatory clearance to market its products, and the company will need to demonstrate compliance with a number of regulatory requirements, including conducting clinical trials / studies that demonstrate their safety and efficacy, manufacturing its products in a GMP compliant facility that meets strict regulatory guidelines for the production of medical materials, and the proper handing of hazardous materials. Additionally, it is worth noting that regulatory clearance in one geographic market does not guarantee that the company will achieve regulatory clearance to market its products in another market.

Share Liquidity

Although Sernova’s shares have recently been listed on the OTCQB, the company’s shares have demonstrated limited liquidity in the past on the TSXV. Over the three months ended September 17, 2015, Sernova traded an average of 276,564 shares per day. At the recent price of 0.28, this suggests an average daily value of $77,438. Share liquidity affects an investors’ ability to acquire or dispose of large share positions at the price quoted.


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Dilution potential

We expect Sernova to raise fresh capital by the issuance of equity instruments, which may include common equity, preferred equity, options and warrants, among others. Holders of common equity may have their positions diluted over time as the company raises new capital. Additionally, as of the end of 3Q15 the company has 19mn warrants outstanding, which expire between February 2016 and May 2017 with an average exercise price of $0.35 per share.

Management Team

Dr. Philip M. Toleikis, President and CEO BA, MSc, PhD

Dr. Toleikis is a seasoned biotechnology executive, with over 20 years of experience in the therapeutic, medical device and combination product sectors. He has been President and CEO of Sernova Corp. a clinical stage company since 2009, successfully gaining financing for the company through grants and equity funding of over $12mn, and has been leading the development of a natural and immune-protected environment for delivering therapeutic cells to patients with chronic diseases such as insulin-dependent diabetes and haemophilia.

Dr. Toleikis headed a successful consulting company for the medical device and combination product field and was previously Vice President, R&D Pharmacology and Drug Screening, at Angiotech Pharmaceuticals, Inc., where he built and oversaw product development teams working on novel combination products to improve technologies for restenosis, surgical adhesions, device related infections, and orthopedic indications as well as led the team in the development of a novel treatment for immune inflammatory disease with completed Phase II clinical studies in multiple sclerosis, psoriasis, and rheumatoid arthritis.

He also headed multiple corporate collaborations and in seeking in-licensing technologies. Dr. Toleikis is an author of multiple issued patents and over 110 patent applications. His research training and experience includes biochemical pharmacology, diabetes, oncology, inflammatory diseases (psoriasis, multiple sclerosis, surgical adhesions, Alzheimer's disease and rheumatoid arthritis), osteoarthritis, neurological diseases and cardiovascular conditions including ischemic heart disease, cardiomyopathy, hypertension and aneurysms.

His career philosophy is in developing and empowering closely integrated product development teams and linking those to the physicians and patients who are in need of novel products to build a strong passion for success. He has been a volunteer for many years for regional science fairs, as well as Diabetes, and Heart and Stroke Foundations and on the grant writing committee for a local school council. Dr. Toleikis has earned advanced degrees from the University of Michigan and the University of British Columbia, where he completed his Ph.D.

Frank Holler, Director and Chairman - Board of Directors

Mr. Holler is chairman and CEO of BC Advantage Funds (VCC) Ltd. Mr. Holler previously served as President & CEO of Xenon Pharmaceuticals, Inc., a genetics-based drug development company focused on the treatment of rare inherited medical conditions, President & CEO of ID Biomedical Corporation, a vaccine development company sold to GlaxoSmithKline in 2005, and was a founding director of Angiotech Pharmaceuticals, a TSX/NASDAQ-listed biotechnology company. He was also an investment banker with Merrill Lynch Canada and Wood Gundy, Inc. (now CIBC World Markets) and former director of the British Columbia Biotechnology Association (now LifeSciences BC), and in 2003 received the BC Biotech Award for Vision and Leadership.

Ralph Deiterding, CPA, CA, CMA – Chief Financial Officer

Ralph Deiterding joined Sernova as Chief Financial Officer in May 2015. Mr. Deiterding is a finance veteran with over 20 years of experience, primarily in senior finance roles at Toronto Stock Exchange listed software vendors. Prior to joining Sernova, Mr. Deiterding was Director of Finance & Accounting at Lexington Park Real Estate Capital Inc., a real estate asset management firm. Previously, he held the positions of Corporate Controller for MKS Inc. and Controller at Workbrain Corporation, both software vendors listed on the Toronto Stock Exchange. While at Workbrain, he was an instrumental member of the team that completed the company’s C$40 million Initial Public Offering. While at MKS, he was highly involved in the transition when


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the company was acquired by Parametric Technology Corporation, a NASDAQ listed software vendor, for C$292 million.

Dr. David White (Chair), Chairman - Scientific Advisory Board

Dr. White graduated from the Universities of Surrey and Cambridge and in 1975 was awarded a PhD in Immunology from Cambridge. He was Board Certified in Pathology in 1984 (MRCPath) and elected as a fellow of the college in 1995 (FRCPath). Dr. White holds appointments on the Editorial Board of several major international transplantation journals, has served as a member of government advisory committees, and has been awarded a number of academic prizes for his work. He has published over 300 scientific papers on subjects related to transplant immunology.

Dr. White first became interested in transplantation while undertaking research at the Department of Surgery at Cambridge University in the 1970s. In conjunction with Professor Sir Roy Calne, he undertook much of the original experimental and clinical work that led to the development of the immunosuppressive drug Cyclosporin A. The drug became pivotal in preventing organ rejection following transplantation and has allowed new transplantation procedures to be developed.

His research into the immunological process underlying rejection of organ transplants led him to investigate how the immune system could be modified to enable successful transplantation of non-human organs - potentially solving the 'organ donor crisis'. These studies led Dr White in 1992 to create the world's first genetically engineered pigs whose organs and tissues were modified for transplantation into humans. In 1984 he and transplant surgeon John Wallwork founded Imutran Limited, which became a wholly owned subsidiary of Novartis Pharma AG in 1996, and Dr White was appointed to the Novartis Global Research Management Board. In 2000 Dr. White was appointed the Novartis/Stiller Professor of Xenotransplantation at the University of Western Ontario.


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FINANCIAL SUMMARY

Figure 9. Income Statement

Figures in CAD $mn unless specified FY13A FY14A FY15E FY16E FY17E FY18E

Revenue 0.0 0.0 0.0 0.0 8.5 6.0

YoY growth NM NM NM NM NM (29.4%)

Cost of Sales 0.0 0.0 0.0 0.0 0.0 0.0

Gross Profit 0.0 0.0 0.0 0.0 8.5 6.0

Margin NM NM NM NM 100.0% 100.0%

Operating expenses 2.1 2.8 2.6 2.7 6.0 7.5

EBIT (2.1) (2.8) (2.6) (2.7) 2.5 (1.5)

Margin NM NM NM NM 29.4% (25.0%)

EBITDA (1.4) (2.0) (2.1) (2.7) 2.5 (1.5)


Other income/ (expense) 0.1 0.0 0.0 0.0 0.0 0.0

Profit before tax (2.0) (2.7) (2.6) (2.7) 2.5 (1.5)

Tax 0.0 0.0 0.0 0.0 0.0 0.0

Net income (2.0) (2.7) (2.6) (2.7) 2.5 (1.5)


EPS (per share) (0.02) (0.02) (0.02) (0.02) 0.02 (0.01)


Figure 10. Balance Sheet

Figures in CAD $mn, unless specified FY13A FY14A FY15E FY16E FY17E FY18E

Current assets 5.2 3.6 3.1 2.6 5.2 3.9

Other assets 1.1 0.4 0.0 0.0 0.0 0.0

Total assets 6.2 4.0 3.1 2.6 5.3 3.9

Current liabilities 0.2 0.2 0.2 0.3 0.3 0.3

Other liabilities 0.0 0.0 0.0 0.0 0.0 0.0

Shareholders’ equity 6.0 3.8 2.8 2.3 5.0 3.7

Total liab and shareholder equity 6.2 4.0 3.1 2.6 5.3 3.9


Figure 11. Cash Flow Statement

Figures in CAD $mn, unless specified FY13A FY14A FY15E FY16E FY17E FY18E

Cash from operating activities (1.2) (1.7) (2.0) (2.5) 2.7 (1.3)

Cash from investing activities (0.6) 1.7 2.9 (0.0) (0.0) (0.0)

Cash from financing activities 1.8 0.2 1.6 2.1 0.0 0.0

Net inc/(dec) in cash 0.0 0.2 2.5 (0.5) 2.7 (1.3)

Cash at beginning of the year 0.3 0.3 0.5 2.9 2.4 5.1

Cash at the end of the year 0.3 0.5 2.9 2.4 5.1 3.8



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About Sernova Corp.

Sernova Corp. is a clinical stage regenerative medicine company developing medical technologies for the

treatment of chronic debilitating metabolic diseases such as diabetes, blood disorders including hemophilia

and other diseases treated through replacement of proteins or hormones missing or in short supply within

the body. Sernova is developing the Cell Pouch™, an implantable medical device for therapeutic cells

(donor, xenogeneic or stem cell derived therapeutic cells) which then release proteins and/or hormones as

required.


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CONTACT:

Amit Tandon

Director of Research

Jay Albany, CFA

Senior Research Analyst

SeeThruEquity, LLC

www.seethruequity.com

(646) 495-0939

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