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Anteo Diagnostics (ASX: ADO) – A blue-sky of Opportunities

Article written by Pitt Street Research. For the full report click here

POC and battery segments represent significant opportunities

Anteo Diagnostics, a Brisbane-based technology company, is developing a nano-chemistry technology to modify surfaces. The company has streamlined its focus from an initial target segment of the entire life sciences diagnostics and IVD space to specific areas such as the Point of Care (POC, representing a major chunk of IVD industry) and battery segments. The POC segment is a near-term opportunity for Anteo on the back of its more-than-a-decade-old experience in the IVD space.

The opportunity in this >US$15bn market is huge due to the demand for nanoscale platforms in POC devices that can bring them head-to-head with lab-scale devices without compromising on advantages related to their ease of use. We thus believe that Anteo has a tremendous potential to make POC devices more effective. In fact, a few initial collaborations have already proven its potential as large players, such as GSK and QIAGEN, have shown interest in POC devices modified using Anteo’s technology.

Anteo is also evaluating the potential of its technology in the battery segment, which represents a long-term opportunity for the company. It is currently conducting validation studies in this segment and has secured initial collaborations with battery component suppliers. These agreements represent an opportunity to bring the technology to a broader audience and drive adoption.

Investment Case

Anteo has decided to streamline its focus on high-value opportunities, including POC and batteries. The unmet need in both sectors is tremendously high and Anteo’s technologyaims to fulfill it. We believe Anteo’s strategy to focus on important opportunities first is a great way to utilize its cash. The ongoing collaborations are expected to continue to drive the commercialization potential of this technology. Meanwhile, a licensing opportunity in other areas, such as medical devices, would be an added advantage.

Valuation

We value Anteo at 2.9 cents per share base case and 4.0 cents per share optimistic case using a probability-weighted DCF valuation approach. We see Anteo being re-rated by the market as its Battery project yields highly efficient silicon composite anodes, and as the POC project moves towards commercialization.

Introducing Anteo Diagnostics (ASX: ADO)

Anteo Diagnostics (ASX: ADO) is a Brisbane-based nanochemistry technology and diagnostics company that develops products for the healthcare and energy sectors. Anteo’s patented nanochemistry surface engineering technology, called Anteo Surface Technology, combines the strength and stability of covalent binding with the gentleness of passive binding through multipoint chelation. The company has been conventionally involved in providing materials and services for commercial applications using its reagents, binders, coatings, or primers.

However, over the past couple of years, it decided to focus efforts on its surface coating technology through three products – AnteoCoat, AnteoBind, and AnteoRelease. Target markets for these products include protein binding and antibody coupling (e.g., point- of-care [POC] devices), primers for in vivo medical devices and clinical drug delivery, and coatings for industries such as life sciences, in vitro diagnostics (IVD), and energy.

Anteo’s nanochemistry technology can be used to modify any surface to improve the binding of molecules. Thus, the application base of this technology is extremely diverse and is useful in industries such as medical devices, diagnostics, energy, electronics, industrial, environmental, and food and agriculture. In the early years of Anteo, diagnostics was its major area of focus. The company was making concentrated efforts to enhance particles, to improve their performance in IVD assays (particularly immuno assays with c.US$20bn market).

Back then, Anteo saw enormous potential in this segment, considering the high volume of tests conducted every year. It had planned to target diagnostics giants – such as Roche, Abbott, and J&J – as well as particle manufacturers including Bangs Laboratories and Merck. Considering the large industry base and the potential of its technology (then called Mix&Go) to make the assays quicker and more reliable, the company invested close to a decade in exploring its potential in the diagnostics industry.

However, customer feedback and market analysis revealed the plenty of challenges associated with the market penetration of this technology. This is mainly because the diagnostics sector is tightly regulated and large players are reluctant to modify their fixed test menus with improved assays. Subsequent market analysis suggested that Anteo had developed overly broad solutions, which complicated the task of finding the best target customers in each area.

Based on consequent learnings, Anteo decided to focus on specific segments, including POC, within the IVD space and lithium-ion (Li-ion) batteries, within the energy space. We believe Anteo’s strategy to concentrate on the most lucrative growth segments to generate revenues has the potential to create value and sustain the business in the long term.

How DIA source’s divestment shaped the company’s strategy

When Anteo acquired DIAsource ImmunoAssays back in 2016, it had a lot of debt on its balance sheet – owing large sums to the vendors of DIAsource, investors, and directors. This, combined with the management’s lack of success in securing long-term financing for the acquisition, influenced theboard’s decision to sell the DIAsource business for US$18.5m in September 2017. The sale provided the company some cash to support value creation opportunities in the POC and battery segments after repaying all outstanding loans that it had secured.

Thereafter, Anteo decided to focus on its core surface coating technology through three products – AnteoBind, AnteoCoat, and AnteoRelease. The company leveraged past investments in the technology to streamline most potential markets where it had the maximum opportunity to make a difference. Thus, DIAsource’s divestment was crucial to help Anteo realize its technology’s value.

Why Anteo’s focus on POC and Li-ion batteries has the potential to bring long-term shareholder value

Anteo’s strategy to focus on two initial areas – Li-ion batteries and POC – that entail a high-unmet need and near-term growth opportunities will make it possible to generate substantial revenues to sustain the company for at least a few years.

Within the battery segment, there is tremendous focus on improving energy density and battery capacity. One of the best strategies to achieve this is by using silicon in battery anodes. However, currently, the silicon content in Li- ion battery anodes is estimated to be limited to only about 6wt.% due to problems related to its expansion and contraction at a higher density. AnteoCoat helps overcome this issue, and Anteo believes it can increase the silicon content in anodes ultimately to up to 40wt.%. Considering the rising focus on electrification, especially with growing interest in improving the capacity of electric vehicles (EVs), Anteo has a potential to target an enormous market dominated by large players such as Samsung and Panasonic.

Within the POC sector, there is an increasing interest in developing nanoscale surfaces with the same potential as lab-scale devices – compared with the IVD sector (wherein Anteo’s technology is a value-add and not a must-have). The company has already entered into partnerships with POC device manufacturers and has demonstrated commercial potential. One of its partner companies, Ellume, recently secured an agreement with large players– GSK and QIAGEN – for its POC device. The deal has the potential to drive up the volume of testing conducted by Ellume and hence boost the demand ofAnteo’s technology. With an enormous near-term opportunity in POC and long-term opportunity in the battery segment, we believe Anteo is headed in the right direction.

Moreover, while Anteo has decided to deprioritize other sectors such as medical devices, drug delivery, and food and agriculture, it is still open to out- licensing opportunities where a collaborator shows interest. We strongly believe in the viability of Anteo’s strategy to focus on two segments with the current cash-in-hand and utilize the revenues to decide the further course of action. Our assessment suggests that once the company has explored the opportunities in these segments, it can evaluate investing in other longer- term opportunities, such as medical devices/implants, to continue to grow the business.

Ten reasons to consider Anteo (ASX: ADO)

1) Anteo’s strategy to focus its efforts on only a couple of segments seems prudent. The company previously targeted a plethora of immuno assays with its AnteoBind technology; however, it now has a deeper understanding of ‘what the market wants’, and it is building upon this knowledge by focusing its cash inflow only on two areas where the chances of success are the highest – the POC and battery segments.

2) Anteo’s technology has a ‘blue sky’ of applications. Even though the company has decided to focus on two key applications of the technology– in the POC and energy sectors – we believe that the technology can be applied to a number of other areas (medical devices being one). The potential of the company to garner licensing deals in these presently ‘non-core’ areas is evident.

3)  Anteo has a high potential for rapid uptake in the POC testing segment. It has already collaborated with POC manufacturers and demonstrated that its technology offers improved assay performance within the cardiac, fertility, and infectious diseases space. With promising results from all the collaborations, we believe Anteo has a significant near-term opportunity with respect to generating revenues from the POC segment.

4)  The need for nanoscale devices in the POC testing segment is very significant. Currently, there is high focus on making POC devices comparable with lab-scale devices without compromising on their ease of use. Anteo’s nanotechnology aims to plug this gap and therefore has a huge market potential.

5)  Anteo’s initial results in the battery segment are promising. The company has shown that AnteoCoat has the potential to address the problem of limited energy density of Li-ion batteries, along with the capability to reduce the cost of manufacturing. These benefits offered by Anteo are extremely encouraging for the battery sector.

6)  Anteo has already been able to strike deals with two battery makers in one month. The deals demonstrate that battery component suppliers are already showing extremely positive interest in the technology’s capabilityto improve the capacity of their batteries.

7)  Multiple large battery manufacturers are investing in improving the energy density of batteries. In line with increasing focus on electrification, many large players are making investments in developing new technologies that can aid the future of EVs (expected to be a huge opportunity over the next few years). Some companies are also keen to strike collaborations with firms, such as Anteo, that have developed interesting technologies to boost battery capacity.

8)  Lithium-ion batteries are a massive market opportunity. As the cost per GWh of a lithium-ion battery drops markedly over the next decade we see the global market opportunity rising from perhaps US$20bn today to more like US$130bn in 2030. This provides significant upside if Anteo’stechnology is adopted by any of the leading battery manufacturers.

9)  There is significant opportunity for the use of the technology in active implants. There is a growing adoption of miniaturized implants as they are less harmful to the body during implantation. We are certain that as soon as Anteo finds a new collaborator (after conclusion of the Cook Medical partnership), it would demonstrate significant benefits for this sector as well.

10) Anteo is current trading underneath out valuation range. We value Anteo at 2.9 cents per share base case and 4.0 cents per share optimistic case using a probability-weighted DCF valuation approach. We see Anteo being re-rated by the market as its Battery project yields highly efficient silicon composite anodes, and as the POC project moves towards commercialization.

Valuing Anteo

We value Anteo at 2.9 cents per share base case and 4.0 cents per share optimistic case using a probability-weighted DCF valuation approach.

Valuing the PoC project

We assume:

  • Anteo develops a PoC device that costs the company another US$4m (optimistic case) up to US$6m (base case)
  • The company formally licenses the diagnostic to a pharma or diagnostics industry partner in FY21 (optimistic case) or FY22 (base case);
  • Global product launch beginning in FY22 (optimistic case) or FY23 (base case);
  • Upfront payments post the licensing agreement of US$2-5m;
  • Milestone payments of US$10m-$15m;
  • Peak sales globally of ~US$80m (base case) to US$120m (optimistic case).
  • A royalty to Anteo of 3% (base case) to 5% (optimistic case).

Valuing the Battery project

We estimate that the world’s current output of lithium-ion batteries is ~125 Gwh55 and that the typical battery sells for ~US$180/KWh. We developed two models for the global lithium-ion battery market out to 2030.

In Market Model 1, annual global battery output rises to ~1,800 Gwh and selling prices decline to ~US$75/KWh by 2030. Between 2030 and 2037, the annual growth rate on battery output rises at half the rate of the growth to 2030 on flat selling prices.

In Market Model 2, electric vehicles do not mainstream as quickly as the first model suggests, but the market still grows vigorously, with annual output increasing to ~360 Gwh and selling prices declines to ~US$130/KWh by 2030. As per Market Model 1, after 2030 the annual growth rate on battery output rises at half the rate of the growth to 2030 on flat selling prices.

We used these models to develop base and optimistic case valuations. In each case we assume that Anteo’s silicon composite anodes go into commercial production in 2022 with Anteo collecting royalties. Forconservatism’s sake we assume that the royalty stream ceases in 2030 due to alternative silicon-based approaches coming forward from competing research groups.

Base case. For our base case valuation, we assume that Anteo’s market share grows from 1% in 2022 to 2.5%56 in 2030 and beyond using Market Model 1, with Anteo earning a 3% royalty.

Optimistic case. For our optimistic case valuation, we assume that Anteo’smarket share grows from 1% in 2022 to 7.5%57 in 2030 and beyond using Market Model 2, with Anteo earning a 5% royalty. In effect, a slower decline in manufacturing costs for lithium-ion batteries means greater market share for a technology that can make for more efficient batteries.

Potential for valuation uplifts

We believe we have been conservative in developing our valuation range, so there is significant opportunity to increase this in the event of commercial success by Anteo:

  • For the battery project, a successful licensing deal would reasonably lead to an increase in the probability weighting assigned to our valuations. As we note above, this is currently only 12.5%. Consequently we could reasonable increase this eightfold in the event of a deal being announced.
  • For the Point-of-Care project, we valued only a single project, resulting in only a nominal value for this potentially very valuable platform. Progress in signing up multiple partners beyond the Ellume collaboration can reasonably justify more of a platform valuation than a single-product valuation.

For the other applications of the Anteo technology, commercial progress here can justify separate valuations.

Re-rating Anteo

We see a number of factors helping to re-rate Anteo towards our valuation range:

    • The ability of Anteo to show significant benefits of using AnteoCoat in the battery sector with the 2 battery makers that the company has recently engaged with.
    • The ability of Anteo to drive adoption of AnteoBind in the POC segment as it receives interest from new partners.
    • Demand for AnteoBind rising as existing partners continue to strike collaboration deals with large players for products using the technology.
    • Partnering or collaboration agreements related to AnteoRelease.

Anteo has an experienced management team

Christopher Parker, the current acting CEO, joined Anteo in April 2018 and is expected to serve the company on a short-term contract basis (now extended until June 30, 2019). He was appointed to give time to the company Board to conduct a considered search for a permanent CEO after Dr. Stefan Enderling resigned due to personal reasons. Mr. Parker brings >20 years of experience in the medical device and diagnostics industry, predominantly with Roche.Before retiring in H2 2017, he was the MD of Roche’s UK and Ireland diagnostics affiliate and held the responsibility for all Roche’s diagnosticproducts. Thereafter, he moved back to Australia and formed Stratigent Consulting – a business research and consulting firm. We believe that Mr.Parker’s experience with one of the largest pharmaceutical and diagnostics companies globally is a great opportunity for Anteo and is extremely important to Anteo’s development strategy in battery and diagnostics sectors.

Dr. N. Joe Maeji, CSO, has been associated with Anteo for more than a decade. He was a co-founder and founding CEO of Bio-Layer Pty Ltd that became Anteo Technologies. Prior to joining Anteo, Maeji had managed successful R&D projects in the biotechnology and life science industry over a span of 20 years. His experience in securing funds for new technology development as well as in creating and securing extensive IP portfolios would continue to support Anteo through its venture into new market segments.

Dr. Charlie Huang, Head of R&D, has >20 years of experience in leading R&D projects across technology and medical device companies. Prior to joining Anteo in 2013, Huang held senior R&D roles in several public listed healthcare and IVD companies including Panbio Ltd, Alere, Cellestis Ltd, and QIAGEN.

Manuel Wieser, Head of Battery Development, has extensive experience in lithium ion battery R&D, technology commercialisation and a strong background in international collaborations. Previously, Wieser was Product Development Manager at Nano-Nouvelle, a materials company developing nano-structured current collector technology for lithium ion batteries and next generation lithium metal anodes, where he was instrumental in taking the technology from lab scale to pilot production ready.

Although the company’s Board underwent a few changes in FY2018 due to its redirection and sale of DIAsource business, it now has a stable Board with expertise in the segments that Anteo plans to target.

  • Dr. Jack Hamilton, Independent Non-executive Chairman, has >30 years of experience in the energy sector, holding senior positions for over 15 years. His experience ranges across functions including, strategy development, commercial marketing, and M&As. Further, Hamilton has a board level involvement for >10 years as a Non-Executive Director in listed/non-listed companies in Australia and other countries.
  • Dr. Geoff Cumming, Non-executive Director, has >20 years of experience in healthcare and biotechnology sectors. Previously, he was serving as MD of Roche Diagnostic Systems. Currently, he is the Chairman of Sienna Diagnostics, an ASX listed company, and a Non-executive Director of Multiple Sclerosis Research Australia, a not-for-profit organization.
  • Matt Sanderson, Non-executive Director, was appointed to the board in October 2017 and supports Anteo’s focus on strategy, profitable execution, and commercial growth. For over 10 years, Sanderson has served as a director of private investment companies investing in public and private companies.

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