Q3 2023 review

The sales for Q3 came in at SEK13.3m (SEK18.5m), 27% under our sales estimate of SEK18.3m. This corresponds to a y/y decrease of 28%, where we learned from the report that the main reason is a low activity by Enzymatica’s international partner STADA. However, during the quarter, Enzymatica’s own markets performed well, with a sales growth of 27% compared to last year's quarter. Moreover, the gross margin for the quarter was 62% (56%), which was a bit higher than our estimate of 59%. Operating expenses amounted to SEK-17.0m (SEK-22.9m) compared to our OPEX estimate of SEK24.2m, and EBIT came in at SEK-8.7m (SEK-12.6m), better than our EBIT estimate of SEK-13.4m. The difference between our estimates and the report is a higher gross margin because of low sales outside of Sweden. We also anticipated higher selling and marketing expenses (SEK-10.1 vs actual SEK-5.2m). This line item often correlates with sales, and as the quarterly sales were lower than expected, we are not surprised that the selling and marketing expenses were also lower.

The cash flow from operating activities was SEK-16.0m (SEK-6.0m) due to changes in working capital of SEK-8.4m, which we assume is because of a larger inventory than the previous quarter. Lastly, by the end of the quarter, the cash and cash equivalents amounted to SEK13.0m. In our view, the current cash position of SEK13.0m (plus SEK1.6m in unutilized credit facilities) will not be sufficient to cover future business activities, and we, therefore, expect a capital raising during Q4 2023/Q1 2024. We add a rights issue of SEK30m into our model (assuming a 30% discount and current share price levels). Note that there is a possibility of financing the business with a loan; however, as Enzymatica already has a loan agreement with the three largest shareholders, along with the CEO and Chairman of SEK20m, which matures by the end of summer 2024, we believe the likelihood of a loan is relatively low.

Overall, the report did not meet our expectations. Even if the operating result was better than anticipated, we are concerned by the low sales and the issues with STADA. As STADA is a global player with an extensive network, we believe the risk in the case of Enzymatica increases if the two players part ways. However, we learn from the report that Enzymatica has initiated discussions with other partners during the quarter concerning several markets currently served by STADA. We hope to receive information about the progress in the near future.

In August, Enzymatica released in-vitro study results from the Medical University of Innsbruck. The results show that ColdZyme reduces viral load by more than 99% when applied onto human cells infected with influenza A (H3N2) compared to cells treated with salt solution.

Earlier studies have shown ColdZyme blocking viruses from sticking to human cells. In our view, the study results of reduced viral load and the reduction of viruses' ability to spread in cell cultures add value from a marketing perspective.

Moreover, Enzymatica released the first results from its ongoing independent clinical study at the University of Kent, UK. The results show that ColdZyme significantly reduces the viral load of rhinovirus, which is the predominant cause of a common cold. Moreover, participants who used ColdZyme instead of placebo experienced significantly less severe sore throat symptoms.

So far, 51 athletes have been divided into two groups: one using ColdZyme and one using a placebo. The participants kept training logs and completed a daily upper respiratory tract infection symptoms questionnaire. When the participants experienced symptoms, they were told to take self-swabs from their throats and start using the mouth spray according to instructions.

The final study is expected to be published in 2024, and the interim report results have been submitted for review and could be presented at a scientific conference early next year.

We endorse the first results from the study and argue it is essential for two reasons:

As mentioned, the report did not live up to our expectations. We have chosen to make some changes in our estimates between 2023e-2024e. Firstly, we decrease our sales estimate for Q4 2023 (from SEK25.3m to SEK18.2m) due to the uncertainty with STADA. Moreover, the issues with STADA create concerns for our sales estimates for 2024e as well, as we believe our current estimate does not take height for uncertainties with one of Enzymatica’s most important partners. As a result, we decrease our 2024e sales estimate to SEK95m (from SEK119m). Furthermore, we adjust our OPEX estimates for Q4 2023 as we believe OPEX in Q4 will be more similar to Q3 2023 and make minor changes in 2024e.

We still expect Enzymatica’s sales to rise in the following years and expect sales of SEK95m in 2024e and SEK217m in 2025e. We note in the report that the company reiterated its financial target for 2026e (sales of SEK600m and an EBIT margin of at least 28%). We continue arguing that the target is too challenging to achieve and believe our 2026e sales estimate of SEK345m is more reasonable.

Moreover, due to a new internal policy, we have increased our model's risk-free rate (from 2.5% to 3.0%), increasing the WACC from 12.5% to 13.0%. Enzymatica disclosed a cash position of SEK13.0m. We argue the company needs to raise capital during Q4 2023/Q1 2024, and we, therefore, anticipate a right issue of SEK30m into our model (at the end of 2023), assuming a 30% discount to current share price levels. Concludingly, our short-term estimate changes do not significantly impact our valuation as most of the value lies in the long-term forecast; however, the increased WACC and the estimated equity issue lower our fair value range. Our updated fair value range includes a base case of SEK6 (6.5), a bull case of SEK13 (14), and a bear case of SEK1.5 (1.5).

We estimate the Swedish market share increases during our forecast period, and we expect a 7% market share by 2030e. Moreover, we estimate ColdZyme will have a European market share of 1.8% by 2030e and only include ColdZyme's current and definitively planned markets (80% of planned markets) in our base case.

We believe it will take longer for Enzymatica to establish ColdZyme in Asia, and we estimate a 1% market share there by 2030e. The American market only includes Mexico for now, with a plan to launch ColdZyme in Canada. In Africa, we only include South Africa and Algeria's planned launch. As these regions currently include few markets, we believe it will be easier to earn a larger market share there; we estimate market penetration of 2% in both regions by 2030e.

Finally, we expect sales to increase by 86% CAGR in 2023-2026e and by 48% in 2023-2030e, taking sales to SEK345m and SEK841m, respectively (sales CAGR of 25% for 2026-2030e). We expect the gross margin to decline during the forecast period to 54% by 2030e and operating expenses to increase slightly with sales owing to costs related to the Swedish market. We assume a terminal EBIT margin of 25%, which is in line with Enzymatica's financial target of 28%, and we apply terminal growth of 2%.

In our bull case scenario of SEK13, we assume a faster ramp-up in sales, reaching SEK574m by 2026e, which is fairly in line with the company's financial target of SEK600m. In this scenario, we expect more rapid regulatory processes and that Enzymatica's distributors have a higher focus on launching ColdZyme in markets, compared to our base case. We thus include 100% of all planned launches. Moreover, we expect market penetration of 9% in Sweden by 2030e, with European market penetration of 2.5%. In our bull case, we have higher expectations for the Asian market, estimating peak penetration of 1.5%, and we believe China, Japan and Vietnam will be important markets in the region. In both Africa and America, we estimate 3% market penetration by 2030e. We set our terminal EBIT margin at 30% and terminal growth at 2% (2036e).

In our bear case scenario of SEK1.5, we assume a slower ramp-up in sales, reaching SEK181m by 2026e. In this scenario, we expect slower regulatory processes and that Enzymatica's distributors have a lower focus on launching ColdZyme in markets compared to our base case. We thus include 50% of all planned launches in this scenario. Moreover, we expect market penetration of 5% in Sweden by 2030e, with European market penetration of 1%. In our bear case, we have low expectations for the Asian market, estimating peak penetration of 0.5%, and we believe regulatory processes will be time-consuming. In both Africa and America, we estimate 1.5% market penetration by 2030e. We set our terminal EBIT margin at 20% and terminal growth at 2% (2036e).

In addition to our DCF valuation, we offer a peer group analysis that compares Enzymatica with other medtech companies in the Nordic region. We consider EV/Sales to be the best measurement, as Enzymatica is not currently profitable.

When comparing Enzymatica to other medtech companies, we can observe that the Enzymatica share is currently trading at 11.1x times its 2022 sales and 10.2x its 2023e sales. Enzymatica is currently valued higher than the selected peers; however, we want to highlight the differences between the selected companies.