SQI Diagnostics
Transcription
SQI Diagnostics
SQI Diagnostics Company outlook Gaining momentum Healthcare equipment & services 6 February 2015 SQI has continued its positive momentum over the last year, signing five service agreements with drug development companies. The company also broadened its commercial focus in 2014 with a deal to automate DNAbased pathogen detection assays, a new application for its technology. We Price C$0.51 Market cap C$29m now look towards the conversion of customers from early contract work/validation to full commercialisation. Despite the encouraging deal progress, we reduce our valuation to C$55m vs C$60m previously (C$0.98 per share vs C$1.07), mainly due to the more protracted time frame for the phasing of contracts to reach significant revenue recognition. Net cash (C$m) at September 2014 C$1/US$0.81 1.7 Shares in issue 56.3m Free float 86% Code SQD Primary exchange Revenue (C$m) PBT* (C$m) EPS* (c) DPS (c) P/E (x) Yield (%) 09/13 0.0 (6.1) (14.6) 0.0 N/A N/A 09/14 0.1 (5.3) (10.5) 0.0 N/A N/A 09/15e 2.6 (3.4) (6.1) 0.0 N/A N/A 09/16e 9.1 1.8 3.1 0.0 0.16 N/A Year end TSX-V Secondary exchange OTCQX:SQIDF Share price performance Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Rich pipeline of drug developers SQI has been successful in its business development efforts over the past year and expects ongoing talks with a number of drug developers to lead to new contracts in CY15. The company has been capitalising on its expertise in immunology, which comes into increasing scrutiny by regulatory authorities in this area. The FDA issued guidelines in August, highlighting the need for a more precise understanding of immunogenic responses in drug testing. SQI’s lg_PLEX technology is able to determine the fine detail of any immune response, particularly antibodies associated with autoimmune diseases, anti-drug antibodies and cytokines. New opportunity in DNA-based pathogen detection In August 2014 SQI entered into an agreement with a UK-based company to exploit its technology to automate DNA-based pathogen detection assays. SQI is now in the second stage of the project and we expect an update on the commercial progress of its work in early 2015. It is still relatively early for this new application of SQI’s multiplexing technology, but we believe DNA testing in infectious diseases could prove a new avenue of growth for SQI’s platform. Valuation: Adjusted to C$55m or C$0.98 per share We value SQI on a DCF, applying a 12.5% discount and conservative terminal value of 0.5%. We add one new contract to forecasts in each of 2015, 2017 and 2018 given the strong pipeline of prospective customers. Near-term forecasts incorporate the lengthened time from project initiation to paying customer on existing deals, resulting in a reduction in our value for SQI to C$55m from C$60m (C$0.98 per share from C$1.07). SQI recently announced the private placement of secured debentures of up to $4m. On its current burn rate of C$350-400k per month, we estimate the company has a cash runway into early CY16. % 1m 3m 12m Abs (21.5) 56.9 (5.6) Rel (local) (25.3) 50.9 (15.3) 52-week high/low C$0.65 C$0.30 Business description SQI Diagnostics is a Canadian diagnostics company. It develops and sells multiplexed research diagnostics to pharmaceutical companies to support clinical research, and in vitro diagnostics tests to centralised diagnostics labs for diagnosing autoimmune diseases. Next events Updated progress on DNA pathogen testing contract Early 2015 Validation work starts for Isis’s 8-plex ADA test Early 2015 Analysts Katherine Genis +1 646 653 7026 Christian Glennie +44 (0)20 3077 5727 Dr Mick Cooper +44 (0)20 3077 5734 [email protected] Edison profile page SQI Diagnostics is a research client of Edison Investment Research Limited Investment summary Company description: Efficient diagnostic technology SQI Diagnostics was founded in 1999 on the premise that the number of blood tests needed to perform standard and disease diagnoses was growing and the process could be simplified. The company’s multiplexing technology is designed to save resources by obtaining multiple diagnostic results from a single test well. SQI is now commercialising its diverse offering of multiplexed microarray diagnostics, targeting three markets: pharmaceutical companies that can use SQI’s customised diagnostic tests to analyse clinical trial data, DNA testing for infectious diseases testing in humans and animals, and centralised diagnostics labs for SQI’s menu of IVD tests. The company has contracts with six companies, four of which are top 10 global pharma companies. SQI is at a critical juncture, whereby it is beginning the shift from early contract work involving initial validation towards building an extensive and retained portfolio of cash profit-generating companies. Valuation: C$55 or C$0.98 per share We value SQI using a five-year, sum-of-the-parts DCF model. We apply our standard 12.5% discount and include a conservative terminal value of 0.5% on 2019 cash flow. The per-share value reduces to $C0.98 from C$1.07. Our sales forecast assumes risk-adjusted revenue from those contracts already signed or expected to be signed in the coming quarters. Given the steady pace of business development and high level of interest from existing customers, we have added sales to our model with one new signed contract in 2015 and one additional in each of 2017 and 2018. Counteracting this, given the lengthened time from project initiation to paying customer, we now risk-adjust sales in our model to 50-80% (vs ~90% previously). Near-term forecasts now compensate for the more protracted timeframe of revenue recognition from pharmaceutical company contracts. Financials: First revenues coming through SQI reported FY14 results in December, with revenues of C$119,000, up from C$3,000 in the prior year. Contracts from four customers were revenue generating and we anticipate continued monetisation of existing and new agreements in the coming quarters. Assuming timely execution of contracts, we forecast risk-adjusted sales of C$2.6m and C$9.1m in FY15 and FY16 respectively, primarily driven by the pharma customer business. SQI ended FY14 with cash on hand of C$1.7m and recently announced the private placement of secured debentures of C$4m (first tranche closed 30 January). This should ensure sufficient cash for operations through to early CY16 based on the company’s current cash burn rate of C$350-400k per month. SQI’s last fund-raising arm was in April 2014, when it realised C$4.2m from the sale of 8.4m shares at C$0.50 and 8.4m warrants (exercisable at $0.65, expiring 10 April 2016). Sensitivities: Commercial risk as company eyes profitability SQI’s biggest challenge is the conversion of agreements with pharmaceutical and biotech companies into significant revenues that can drive the business forward. SQI reported revenue from four customers in 2014 and we expect sales to begin to ramp up in the current year. SQI now needs to convince customers of the approved accuracy and efficiency of its technology. We regard execution risk as minimal. To date, the company has completed project work for all customers in a timely fashion; its work has been well received and the majority of customers are moving forward, and in some cases expanding on existing agreements. The steady stream of signed contracts with top pharma and biotech companies, together with the publication of validation data on its lg_PLEX by Algorithme and BMS, reduces risks related to the company’s technology and utility. SQI’s SQI Diagnostics | 6 February 2015 2 pipeline of new customers looks promising and the realisation of these and ongoing contracts into full fee-paying customers would significantly improve valuations and sentiment. Diagnostics Tools & Services (DTS) – pharma & biotech The commercialisation strategy for Diagnostics Tools and Services (DTS) mainly involves the placing of its diagnostics systems and routine test kits (consumables) for use in preclinical and clinical drug trials by the company or its CRO. Contracts with pharmaceutical companies entail the development of a prototype or custom test and an initial validation phase. Once this hurdle is cleared, the potential for SQI to establish an extensive and retained portfolio of businesses with a company is significant (a contract for testing one drug in development could fetch up to C$2m in annual fees). However, it takes time to monetise existing contracts. Typically, it has been necessary to increase customers' comfort levels with the new technology internally in a systematic fashion, and in some circumstances this has required the development of more than one prototype by SQI for subsequent testing and validation. SQI has three machines to run its assays: SQiD-X, a semi-automated, multiplexed, bench-top machine, typically used by earlier-stage, lower-volume customers; SQiDlite, a fully automated bench-top machine, to which customers transition from SQiD-X as volumes and complexity increase; and SQiDworks, a high-throughput, fully automated machine able to cope with the highest complexity of tests at a throughput of 1,000+ results per hour, delivering the greatest cost savings to high-throughput customers. Exhibit 1: SQiDlite and SQiD-X platforms Source: Edison Investment Research, SQI presentation SQI’s technological edge in immunogenicity is highly competitive and the company is reported to have consistently beat competition in the bidding of higher-profile contracts with the wins attributed to its advanced level of expertise in this area. In many cases SQI’s capabilities in immunogenicity provide the basis for first discussions with potential customers, also opening the door for further potential business for other products and services including cytokine testing and pharmacokinetic (PK) analysis. SQI Diagnostics | 6 February 2015 3 Steady progress on deals SQI has continued to make solid progress over the past year, signing deals with new companies and expanding on its existing agreements. It has initiated a number of new projects with ongoing customers, a good indication of the high level of interest in SQI’s technology and capabilities. More recent project originations include deals generated in earlier stages of prototype development, which we understand can run up to hundreds of thousands of dollars in upfront fees early on in a contract. SQI currently has six master service agreements with large global pharmaceutical companies, into which it has entered over the course of the last two years. Tests are being co-developed in partnerships with five drug developers and one DNA diagnostics company. In most cases CRO services and the penetration of routine screening and testing segments provide potential for additive business on existing contracts. Exhibit 2 provides a snapshot of the status of the company’s current deals in the DTS business. Exhibit 2: Status of pharma contracts Product Cytokines 8 PLEX (various global pharma) Heparin Immunogenicity (HIT) Assay DNA company (UK) Global pharma 1 Isis Pharmaceuticals Global pharma 4 Global pharma 2 Global pharma 3 Candidate panel Proof-ofconcept Stage of development Assay development Automation Validation Ready to commercialise Source: Edison Investment Research and company notes Management reports that prototypes have been completed on time for all projects thus far, each within a number of weeks. A summary of development activities is as follows: Global pharma 4 – successful completion of the (paid) development of two ADA tests has led to a third paid project. Negotiation phase of commercial contract including delivery of SQiDlite platform and validation test kits. Revenue projected for Q215. UK company – SQI developed a DNA-based pathogen detection test for this DNA diagnostic company using 31 DNA probes to identify 19 pathogens in a single well (more detail below). Global pharma 1 – evaluation of 11-plex ADA assay is complete. Validation planned for 21-plex Epitope Mapping assay (data delivered Q3) ahead of potential purchase of SQiDlite system and test kits. Global pharma 2 – SQI developed and delivered a 21-biomarker ADA test measuring immune response to in-development biologic drug. Performance expectations were met and SQI is working with the customer on follow-on opportunities for SQI’s ADA assays. Isis Pharmaceuticals – SQI is finalising a commercial contract with Isis’s CRO for its 8-plex multiplexed ADA test. Validation work to start in early CY15. Global pharma 3 – revenue-generating project whereby a 6-plex ADA test was developed for pipeline drug. A new contract is under negotiation for a custom ADA test on a new drug molecule with validation likely at SQI facilities. Cytokines 8-plex – initially developed on SQiD-X, project moving forward with global pharma company that should lead to the sale of test kits and machines. Potential side business with other customers. Heparin Immunogenicity (HIT) Assay – collaboration with Algorithme Pharma (January 2013); proof-of-concept complete, Algorithme commenced marketing as a ‘shelf-ready’ multiplexed assay. SQI Diagnostics | 6 February 2015 4 Newly published FDA guidelines In August 2014 the FDA published guidelines for the use of testing by drug developers for a variety of biological responses to in-development drugs including immunogenicity; anti-drug antibody (ADA); inflammatory; biomarker and epitope mapping or more complete characterisation of immunogenic responses. The guidelines, titled Immunogenicity Assessment for Therapeutic Protein Products, highlight the need for a more precise understanding of immunogenic responses when drug testing. We expect that this call by the FDA for more detailed immunogenicity testing will positively affect companies in this field, including SQI. SQI has been actively designing products for 18 months that comply with the draft guidance and the corresponding expected needs of the industry. As a result, SQI’s technology fully meets US FDA and European Medicines Agency (EMA) immunogenicity and biosimilar test guidelines. The guidelines specifically address concerns that the drugs being tested in clinical trials can hinder or interfere with the immunogenicity signal, an area of strength for SQI’s technology compared with the current standard immunogenicity testing – 1 primarily ELISA (enzyme-linked immunosorbent assay). DNA pathogen testing – a new avenue for growth Molecular diagnostic testing is a new application using SQI’s multiplex technology, which we believe could hold considerable potential for future revenues for the company. The market for DNAbased testing for infectious diseases alone is large and growing and SQI can offer clear advantages over traditional testing methods. Currently the majority of DNA testing is completed using agarbased cultures, which take days to complete. SQI’s automated multiplex technology has the capability to work much faster and more accurately and is capable of identifying multiple pathogens simultaneously. DNA-based testing on SQI platforms takes several hours, delivering a more precise diagnostic result for infection-based diseases at competitive pricing. In August 2014 SQI entered into an agreement with a UK-based company to exploit its technology to automate DNA-based pathogen detection assays. SQI was paid in the initial phases to deliver an automated working prototype of one of the customer’s assays operational on the company’s SQiDlite system. The company delivered a prototype test specifically targeting detection and identification of pathogens in raw milk from dairy cows that cause mastitis. This test uses 31 DNA probes capable of identifying 19 pathogens in a single well – a considerable improvement on speed and efficiency to current tests. The idea is that the quicker testing time could allow for swifter segregation and treatment of infected cows, in turn reducing the overall costs associated with herd infections. SQI is now in the second stage of the project. This entails the scale-up of the manufacturing processes and quality procedures, completion of the automation of the SQiDlite system for the detection of the pathogen-derived DNA and the automation for the extraction and amplification of DNA from samples. SQI will first develop a panel to detect pathogens in human blood, while simultaneously continuing to develop product applications in the animal health dairy market. We expect an update on the commercial progress of this work in early 2015. It is still relatively early for the new application of SQI’s multiplexing technology, but we are cautiously optimistic that the DNA testing in infectious diseases will prove a new avenue for the use of SQI’s platform, which could not only lead to the commissioning of additional tests from its existing customers, but also provide automated diagnostics solutions for more companies with similar testing needs. The UK-based customer is also developing assays for agriculture and food safety for screening high volumes of samples, all of which we believe could potentially lead to 1 ELISA, a test that uses antibodies and colour change to identify a substance, is a popular format of ‘wet lab’ analytic biochemistry assay that uses a solid-phase enzyme immunoassay (EIA) to detect the presence of a substance, usually an antigen, in a liquid sample or wet sample. SQI Diagnostics | 6 February 2015 5 additional contracts with SQI. We see significant potential for SQI’s high-volume tests in further human and animal health DNA projects. Exhibit 3: SQI advantage in DNA pathogen testing Source: Company reports Commercialisation – pharma and biotech drug developers SQI guides towards signing an additional five to 10 new agreements in FY15, either as add-on work with companies where it has existing agreements or with new companies. Management reports that it is in very advanced stages of discussion in at least four cases. The company anticipates having one or more systems placed with at least 10 drug development companies by the end of CY15 (with the potential for revenue of up to $2m pa for each customer operating at capacity). The company has a small but growing dedicated sales team and the selling effort focuses primarily on leads generated through its existing network, direct selling and medical conferences. SQI has been active at medical meetings, having attended the AAPS National Conference in San Diego in early November 2014 and presented results of recent development projects at the Annual Immunogenicity for Biotherapeutics Conference in late October 2014. At the end of 2014 a salesperson was hired specifically for the eastern part of the US and a counterpart will be added for the West Coast in the first part of 2015. An additional one or two people will be added to the sales force by year end and the hire of two service engineers is slated to round out the support function. Sales efforts are also being supported by senior managers in R&D and on the executive team. We continue to maintain that future revenue potential for SQI is substantial. Current customers alone have an estimated 130 drugs in drug development collectively and the aim is to increase the number of projects per customer that can run on the same technology (SQiDlite) platform. The challenge lies in realising relatively timely cash generation on these agreements. Management maintains that its technology and solutions have been well received, although the conversion rate of paid development projects to full commercial adoption has been protracted. Much of this is related to the necessary timeframe for the thorough evaluation of what is a brand new application for a new technology for most pharma and biotech companies. To counteract this dilemma, SQI is increasingly charging some nominal upfront fees for earlier development work, a move that serves to provide working cash for company operations, as well as ensure a real and vested interest on the part of the customers. In vitro diagnostics SQI is focused on developing its in vitro diagnostics business for commercialisation through central diagnostics laboratories in the US and Canada. The company’s multiplexed IVD products target SQI Diagnostics | 6 February 2015 6 protein and antibody biomarkers in autoimmune and other immunological diseases. SQI’s strategy for this business group is based on the notion that reducing the number of blood tests performed to diagnose a patient would create significant benefit by increasing a laboratory’s throughput with significantly less labour, consumables and other costs. As such, SQI’s multiplexed format offers more high-value tests for less effort and at lower costs than multiple single-plex ELISA tests. The company aims to sell its systems (processing equipment and consumable tests), which process large numbers of patient samples to detect and quantify multiple and varied types of human antibodies. The market for IVD testing is large, with more than 1,600 diagnostics laboratories in North America performing autoimmune testing. Sales of autoimmune testing are estimated by SQI at >US$1bn, of which most are standard single-screening assays. SQI plans to build relationships with major Canadian and US diagnostic laboratories, targeting the top 500 referenced laboratories in North America. SQI obtained regulatory approval (510k clearance) in November 2014 for it lead IVD test, the lg_PLEX celiac DGP panel, for marketing in the US. This followed regulatory clearance in Canada last February for the test, which quantifies the levels of multiple key biomarkers associated with celiac disease. SQI’s IVD diagnostics work is part of a menu of tests on its proprietary automated SQiD-X system, and is slated to eventually include a quantitative 12-plex panel for lupus, a quantitative 3-plex panel for vasculitis, and an 8-plex panel for Crohn’s disease (held for the time being at the development stage). The status of SQI’s IVD portfolio is summarised in Exhibit 4. Exhibit 4: IVD portfolio Product IgX PLEX RA (Qualitative) (1) IgX PLEX RA (Quantitative) (2) IgX PLEX Celiac (Qualitative) (1) IgX PLEX Celiac (Quantitative) (3) Ig_PLEX Celiac DGP (Quantitative) (3) Ig_PLEX Vasculitis Ig_PLEX Lupus Ig_PLEX RA (Quantitative) (3) on hold Ig_PLEX IBD/Crohn’s on hold Candidate panel Proof-ofconcept Stage of development Assay development Automation Validation Approval/clearance Source: Company documents. Note: (1) Approved/cleared in the US and Canada and EU; (2) Approved/cleared in Canada and EU; (3) Approved/cleared in Canada. 'On hold' means no material expenditure at present, but test is viable for future development. Commercialisation – IVD In the short term the company plans to continue to develop and obtain regulatory approvals for its IVD tests. SQI’s sales force is targeting the top 500 reference laboratories in North America and we understand that active discussions are ongoing with a number of large market leading laboratories. SQI will initiate hiring a dedicated sales force in the current year. With limited resources, SQI is currently channelling much of its time and energies into near-term opportunities in its diagnostics and tools business in those projects that are expected to produce a quicker return on investment. Given the large upfront costs for customers associated with its hardware platform, management believes the commercial opportunity in its IVD business can be best exploited once a menu of qualitative tests achieves regulatory approvals. SQI Diagnostics | 6 February 2015 7 Valuation Basis for the valuation Our near-term forecasts have been adjusted to compensate for the more protracted timeframe that is anticipated from existing pharmaceutical company contracts. We have also included updated expectations based on the additional work initiated with the UK-based DNA company in human samples. We have pushed forward revenue from IVD products by two quarters as we understand that company resources will primarily focus on Diagnostics Tools and Services in the earlier part of the year. Additionally, the strategy to bundle new IVD products together in one platform necessitates approval across multiple products before a significant sales campaign can begin. We have also rolled our valuation ahead by one year to 2019, following full year 2014 results announced by the company in December. The key changes to our valuation and financial model are summarised in Exhibit 5. Exhibit 5: Summary of forecast changes Added two additional contracts in 2017 and 2018, phasing of current contracts moving to full commercial terms pushed back two quarters, one new contract pushed forward two quarters, risk-adjusted from 90% to sliding scale of 50-90%. SQiD equipment SQiD machine sales in 2015 risk-adjusted from 100% to 70% (UK DNA company 90%). Custom pharma contracts (cytokine assays) Phasing of cytokine assay orders shifted back two quarters. IVD: Celiac test Phased Canadian lab contracts to Q415, removed one lab in 2016. IVD: Vasculitis Pushed back vasculitis test launch by two quarters to Q415, removed one lab in 2016. IVD: Lupus Pushed back lupus test launch by one quarter to Q415, removed one lab in 2016. Custom pharma contracts (ADA assays) Source: Edison Investment Research Valuation method Our valuation for SQI is based on our risk-adjusted forecast for revenue generation from those master agreements already signed or expected to be signed in the coming quarters. Given the steady pace of business development and high level of interest from existing customers – which has culminated in some cases in additional project work – we have added forecasts for one additional signed contract in each of 2015, 2017 and 2018. Counteracting this, given the lengthened time from project initiation to paying customer, we now assume a risk adjustment in our models of 50-80% (vs an average of 90% previously) for pharmaceutical company contracts. We value the company using a five-year (to 2019) risk-adjusted, sum-of-the-parts DCF model. We apply our standard 12.5% discount rate and include a relatively conservative terminal value component of 0.5%. The per-share value reduces to C$0.98 from C$1.07. Should the momentum with current customers continue, we could envision an alternative scenario with significantly higher top-line growth. Successful completion of current work could lead to added revenue for existing customers, many of which have a large number of development projects. We also expect the continued validation of the company’s technology platform seen by outsiders to lead to new customers being signed. The price and value of each pharma contract may vary significantly, depending on assay complexity and the clinical stage of the subject product. Hence we adopt a base-case approach generating a sliding scale of business, and retaining SQI’s services for a number of years. Should the rate of new business revenues not materialise as predicted, this would have further negative impacts. Our per-share valuation does not include any potential dilution from 30.2m warrants and 2.1m outstanding share options. SQI Diagnostics | 6 February 2015 8 Exhibit 6: SQI valuation model and key drivers Value driver Custom pharma contracts (ADA assays) rNPV (C$m) 24.4 SQiD equipment 1.0 Custom pharma contracts (cytokine assays) 5.4 IVD 3.5 R&D Admin Net cash Terminal value (0.5%) Valuation (11.2) (6.7) 0.7 38.0 55.0 Current shares outstanding 56.3 rNPV per Key assumptions share (C$) 0.47 Six current customers; five new customers by end-2015; 15 customers by end-2019; C$25k initial fee; gradual increase revenue per customer ($200,000 in on to six months, to C$1.6m/year as retained basis); 60-80% probability of success. 0.02 15Xx SQiDlite (C$80,000) sold through 2019. 60-80% sliding scale of probability of success. 0.10 8-plex, 10-plex and 10-plex (Quant) available in Q415, Q116 and Q216, respectively; sliding scale of adoption, after two years, 50% will purchase 8-plex, 25% for 10-plex and 20% for 10-plexQ; 70-90% sliding scale of probability of success. 0.03 One new labs/year in Canada; two new labs/year in US; all labs adopt all IVD assays when available: Celiac (Q116; 85% probability), vasculitis (Q415; 65%) and lupus (Q415; 50%). (0.20) 75-100% sliding scale risk-adjustment. (0.12) 75-100% sliding scale risk-adjustment. 0.01 Estimate for January 2015. 0.65 0.5% annual growth on FY19 free cash flow, discounted at 12.5%, net of 30% tax. 0.98 56.3m shares outstanding (excludes dilution from 30.2m warrants and 2.1m share options). Source: Edison Investment Research 2 In September 2014 SQI joined an investor-focused US exchange, the OTCQX. We consider this listing a positive step forward, which should serve to increase awareness of the company in the US investment community and with potential collaborative partners. Sensitivities SQI’s technology has gained independent validation through multiple pharma customer contracts and the publication of certain studies (eg Algorithme and BMS). We therefore view technical risk as relatively moderate as the majority of assay targets are clinically accepted, so there should be little challenge in gaining regulatory approvals, physician acceptance and reimbursement. Additionally, a comprehensive diagnostic data set is of increasing importance to the FDA in its review of new drug applications, which is driving demand for more efficient (time/cost saving) and accurate diagnostic tools. This is borne out by the recently published FDA industry guidance for the assessment of immunogenicity in therapeutic protein products. We also view execution risk on early contract work as relatively minimal. The company has garnered significant traction with its existing customers by the successful completion of initial prototypes which, in all cases, has met or exceeded expectation in terms of timely delivery and customer satisfaction. The challenge for SQI is to convert its technical and competitive advantages into revenues. Conversely, at this stage, with modest revenues to date, there is reasonable commercial risk in SQI achieving the adjusted near-term sales targets we have modelled. The diagnostics field is highly competitive, with a number of large companies able to apply significant resources to promotion and commercialisation activities. The challenge for SQI will be in communicating and convincing customers (pharma and biotech companies, CROs and diagnostic laboratories) of the improved accuracy and efficiency of its Ig_PLEX technology. We have assumed a consistent stream of new customers, but any significant delays in uptake could have a negative impact on our valuation. SQI’s pipeline of new customers and new assays looks promising, so delivery on these fronts, particularly over 2015, could significantly improve valuations and sentiment. 2 Companies need to meet pre-specified financial statement requirements and be compliant with US securities laws to qualify for the OTCQX. SQI Diagnostics | 6 February 2015 9 Financials SQI reported FY14 sales of C$119,000 (C$67,000 in Q414), an increase from C$3,000 the year before. Sales were derived from four revenue-generating customers. We anticipate a stepped increase in sales in the coming quarters with the completion of current and new project work, which should convert to consistent cash payments. SQI management estimates revenue generation of between C$1-2m pa per customer platform once in full gear (ADA assays). We conservatively forecast C$1.1 annual cash revenue per customer platform, including a sliding 60-80% risk adjustment. This is primarily driven by the pharma customer business, assuming timely execution of existing and prospective contracts. We model sales of C$2.6m and C$9.1m in FY15 and FY16 respectively (previously $5.7m and C$18.6m). We expect a steady run rate of annual costs with ~C$3.5m allocated to R&D and ~$2m to corporate and marketing initiatives. Based on our assumptions we project SQI could reach profitability in the early part of FY16. We estimate that SQI ended Q115 (31 December 2014) with C$0.7m in cash (vs C$1.7m at 30 September 2014). The current burn rate for the company is at C$350-400k per month, which should gradually decrease as the year progresses on the back of revenue growth. The company has recently announced the private placement of secured debentures of up to $4m. The loan will be repayable 60 months from the date issued, bearing an interest rate of 10% on the principle issued. Additionally, up to four million warrants will be issued to the lender (each warrant entitling the holder to purchase one common share at $0.60 exercisable up to 60 days after the issue date). With this new financing we estimate that the company has cash on hand to supply operations into early CY16. Before this placement, the company last raised funds in April 2014, realising C$4.2m from the sale of 8.4m shares at C$0.50 and 8.4m warrants (exercisable at $0.65, expiring 10 April 2016). SQI Diagnostics | 6 February 2015 10 Exhibit 7: Financial summary 2012 IFRS 2013 IFRS 2014 IFRS 2015e IFRS 2016e IFRS 12 0 12 (3,890) (2,131) (288) (6,734) (6,198) (99) 0 (6,297) 11 (25) (6,187) (6,311) 0 0 (6,187) (6,311) 3 0 3 (3,858) (1,928) (449) (6,695) (6,129) (103) 0 (6,232) 25 0 (6,104) (6,207) 0 0 (6,104) (6,207) 119 0 119 (3,416) (1,537) (540) (5,786) (5,255) (119) 0 (5,374) (86) 0 (5,341) (5,460) 0 0 (5,341) (5,460) 2,627 (394) 2,233 (3,512) (1,460) (594) (3,601) (3,224) (109) 0 (3,333) (218) 0 (3,441) (3,551) 0 0 (3,441) (3,551) 9,084 (1,363) 7,722 (3,582) (1,489) (624) 1,814 2,142 (116) 0 2,027 (374) 0 1,768 1,652 0 0 1,768 1,652 Average Number of Shares Outstanding (m) EPS - normalised (c) EPS - FRS 3 ($) Dividend per share ($) 37.4 (16.54) (0.17) 0.0 42.0 (14.55) (0.15) 0.0 51.0 (10.48) (0.11) 0.0 56.9 (6.05) (0.06) 0.0 57.4 3.08 0.03 0.0 BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Other Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets 3,322 685 2,637 0 4,208 54 135 3,818 201 (1,018) (1,018) 0 0 0 0 6,512 3,082 775 2,307 0 1,724 56 253 1,415 0 (454) (454) 0 0 0 0 4,352 2,533 734 1,799 0 2,058 33 290 1,735 0 (433) (433) 0 0 0 0 4,158 2,264 816 1,449 0 2,981 108 290 2,583 0 (433) (433) 0 (4,000) (4,000) 0 812 2,043 895 1,148 0 4,064 106 290 3,668 0 (433) (433) 0 (3,000) (3,000) 0 2,674 CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Other Net Cash Flow Opening net debt/(cash) HP finance leases initiated Exchange rate movements Other Closing net debt/(cash) (6,692) 0 0 (432) 0 10,091 0 0 2,967 (851) 0 0 0 (3,818) (5,522) 0 0 (429) 0 3,548 0 0 (2,403) (3,818) 0 0 0 (1,415) (4,535) 0 0 (212) 2 5,065 0 0 320 (1,415) 0 0 0 (1,735) (2,934) 0 0 (217) 0 0 0 0 (3,152) (1,735) 0 0 0 1,417 2,307 0 0 (223) 0 0 0 0 2,084 1,417 0 0 0 (668) Year end 30 September PROFIT & LOSS Revenue Cost of Sales Gross Profit Research and development Corporate and general Sales and marketing EBITDA Operating Profit (before GW and except.) Intangible Amortisation Exceptionals/Other Operating Profit Net Interest Other Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Deferred tax Profit After Tax (norm) Profit After Tax (FRS 3) C$000s Source: SQI accounts, Edison Investment Research. Note: Revenues are risk-adjusted. Model does not include any potential dilution from 30.2m warrants and 2.1m share options. SQI Diagnostics | 6 February 2015 11 Contact details Revenue by geography 36 Meteor Drive Toronto, Ontario M9W 1A4 Canada +1(416) 674-9500 www.sqidiagnostics.com N/A CAGR metrics Profitability metrics EPS10-15e EPS 12-15e EBITDA 10-15e EBITDA 12-15e Sales 10-15e Sales 12-15e N/A N/A N/A N/A N/A N/A Balance sheet metrics ROCE 15e Avg ROCE 10-15e ROE 15e Gross margin 15e Operating margin 15e Gr mgn / Op mgn N/A N/A N/A N/A N/A N/A Gearing 15e Interest cover 15e CA/CL 15e Stock days 15e Debtor days 15e Creditor days 15e Sensitivities evaluation N/A N/A N/A N/A N/A N/A Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices Management team Chief executive Office: Andrew Morris Vice President Technology: Kate Smith Andrew joined SQI in 2004 as CFO, becoming CEO in June 2013. Before SQI, he led the Corporate Finance Life Sciences group at Ernst and Young. He has a background in medical research, capital markets and corporate finance (Scotia Capital). Kate joined SQI in January 2005. She was previously at Visible Genetics, NeXT Computer and Lucasfilm. She holds a bachelor’s degree in computer science from Brown University. Chairman: Peter Winkley Vice President R&D: Jaymie Sawyer Jaymie joined SQI in October 2010. Previously, she was director, reagent and assay development at Becton Dickinson. Also a founding member of Motorola Biochip systems. She holds a PhD in genetics from the University of Wisconsin. Appointed chairman in 2014, Peter is VP, finance and CFO of Algoma Central Corporation. Before Algoma, he was VP of finance and CFO of Therapure Biopharma Inc. He began his career in corporate audit at Ernst and Young before leading corporate finance at MDS, Inc. Peter is a chartered accountant. Principal shareholders (%) Cumberland Private Wealth Management Focus Asset Management Claude Ricks (board member) Saied Nadjafi (non-exec director) Dr Peter Lea (founder) David Williams (non-exec director) 13.8 10.5 4.43 4.29 3.92 1.06 Public companies named in this report Bristol-Myers Squibb (BMY); Isis Pharmaceuticals (ISIS); Algorithme Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. 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