We initiate on Advanced Oncotherapy. The company has significant growth potential in the nascent but fast growing Proton therapy ("PT") industry. AVO's high quality industry partners like Thales facilitate industrialisation and quick ramp up. We expect 20% top line growth for the PT sector in 2016 and double digit in the mid term driven by a PT conversion rate of 15% by 2030. This could result in a c.$8.0bn market by 2030 including both machines and recurring services charges. AVO has a significant chance to secure a low double digit market share in the next two decades.
The PT incumbents, IBA and Varian are far ahead of its competition dominating the market with a combined market share of more than 90%. However, besides pricing all PT players share one significant hurdle for fast adoption rate. The cyclotron technology involves lengthy and complicated building preparation. Heavy cyclotrons and large concrete bunkers make the installation a major building project, which is regardless of pricing often a big hurdle. AVO could carve out a significant advantage with their modular system, which could in theory allow a much faster and easier installation almost comparable with conventional linac. AVO could tap into a new market for mid sized hospitals, which could be a significant volume play.
The advantage of AVO’s technology being faster and less complicated combined with a cheaper production process driven by Thales as a industrialisation partner could give the company a fast head start with a future margin expansion opportunity.
While the current debate in the clinical community is about pricing and clinical evidence, we believe that the above mentioned installation hurdles are more significant in holding back a faster adoption rate. In this report we have compared cost of cancer treatments, which makes PT look less expensive over a longer time period compared to drug based approaches. We feel that the pricing element will become even less of an issue once the PT vs. RT head to head trials read out in 2020 brings clinical evidence to light. Should PT machines stay at the $15m price band by 2030 margins could look significantly more attractive for the whole PT industry.
While AVO has an interesting technological approach and established good industrial partnership to bring the product to fruition execution remain the main risk factor. Milestones could be missed, regulators could slow down the process significantly and credibility could suffer as a result. We highlight to investors, that while AVO could be a fast growing new comer in the PT industry, the commercial, manufacturing and regulatory hurdles and low liquidity of the stock are downsides.
We assume a PT conversion rate of 15% by 2030, which would make it a c.$8.0bn market ($4,5bn for 380 machines in that year sold and $3.5bn for the service of all machines installed up to 2030 (c.2,900 PT vs. c.16,500 conventional PT machines). PT is amongst the most attractive subsectors in Medtech, which grows significantly above the sluggish Medtech sector with low single digit top line growth. Medtech as a whole has lost its steam due to lack of innovation, which was followed by price pressure from payers, who no longer pay top dollar for commoditised devices and instruments.