Small Caps | Dec 05 2016
This story features RESONANCE HEALTH LIMITED. For more info SHARE ANALYSIS: RHT
Resonance Health has captured the imagination of NDF Research with its world-leading MRI diagnostics, resulting in an initiation of coverage.
-Key MRI-based test, FerriScan, yet to gain widespread reimbursement from health care systems
-Advantage in FerriScan as a companion diagnostic for Novartis drug, Exjade
-Potential with new products for stock to re-rate over time
By Eva Brocklehurst
Resonance Health ((RHT)) has captured the imagination of NDF Research with its world-leading MRI diagnostics. The Perth-based company has developed the world's first non-invasive diagnostic for iron overload, an MRI-based test called FerriScan. The test gained both Europe's CE Mark and US Food & Drug Administration approval in January 2005, and has been the basis of a small but growing business.
The natural question, NDF Research poses, is if the scan is so good why is annual revenue only $2.0-2.5m per annum? Diagnosing iron overload is important, with an estimate of around 4-5m people globally suffering from such disorders, which include sickle-cell disease, haemochromatosis and aplastic anaemia. In these conditions the patient's body absorbs excessive amounts of iron, resulting in a build up in the liver, heart, pancreas and other organs.
Resonance Health is yet to obtain widespread reimbursement for its diagnostic from the health care systems where it is used, so it is most often paid for by patients' out-of-pocket expenses or from internal hospital funds.
Use of the product has grown from a low base and the company expects that in the long run, usage will become routine as management of iron overload becomes more important in catering to a range of diseases. A notable example is cancer, for which frequent blood transfusions after chemotherapy can result in iron overload.
Even without reimbursement FerriScan is increasing its user base. In FY16, 25 new radiology centres started using the product and there are now over 250 in 30 countries that can offer the diagnostic to patients. The other issue is the cost of MRI (medical resonance imaging), as traditionally this is one of the more expensive imaging techniques, causing health professionals to limit its use as much as possible.
The analysts note MRI costs are decreasing as more units are becoming available worldwide and they envisage potential for FerriScan to move beyond being a niche product and become more mainstream.
Another plus for FerriScan is that it is now a companion diagnostic for the Novartis drug, Exjade, an oral iron tablet which gained FDA approval in November 2005, and its successor tablet, Jadenu. There is a problem in over-treating with Exjade/Jadenu and the FerriScan diagnostic is able to best manage this problem, given the accuracy and ease with which it can be performed. The analysts believe Exjade/Jadenu provides a guide to the upside to FerriScan as the product has grown into a best seller for Novartis.
The company's second diagnostic, Cardiac T2 Star, gained FDA approval in August 2011 as a MRI test of cardiac iron overload derived from the algorithms which went into FerriScan. The use of the two tests is considered highly valuable in this setting.
The company's third key product, HepaFat-Scan, is an MRI-based method of measuring the volume of fat in the liver tissue. Fatty liver disease has the potential to become a significant problem worldwide. It is estimated that around 30% of US adults have non-alcoholic fatty liver disease, with the potential to develop fibrosis and cirrhosis of the liver. By providing the first accurate alternative to a liver biopsy, the company's scan has potentially made a strong contribution towards managing the disease, NDF Research believes.
Resonance has developed technologies for use in additional organs including bone marrow, pancreas and spleen and the analysts envisage multiple growth horizons beyond its main diagnostics and potential with the introduction of new products for the market to re-rate the company over time.
Resonance has conducted a single capital raising in the past decade, in 2014. Cash has remained more or less steady over the past few years as the company carefully invests in new development. Resonance has made a deliberate decision to invest more in marketing and R&D to develop and grow its business and the investment is expected to pay off over time.
NDF Research initiates coverage of Resonance Health with a Speculative Buy rating at 7.5c per share as the base case and 14.3c per share as an optimistic case. The target price of 11c sits at the mid-point of these two numbers. The researcher also assumes true gross margins for the company's tests are around 65% at present and will expand to between 70% and 80% by FY26. Cost growth is expected to converge on revenue growth by FY26. The company is forecast to become profitable in FY18.
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