New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Pacific Edge<br>FY21 Result&nbsp;— Still On The Edge</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Pacific Edge (PEB)&nbsp;reported&nbsp;strong FY21 revenue growth and an improved NPAT loss, however, COVID-19 was a much larger handbrake to revenue growth momentum than we had forecast. The March exit-run rate was encouraging, which bodes well for a step-change in revenue from FY22.&nbsp;There was nothing in the result to change our view of the opportunity or PEB’s ability to capitalise on this.&nbsp;COVID-19 has clouded the short-term upside, however, the prize is substantial and headwinds are showing some signs of easing.​​​​​​​&nbsp;With the range of justifiable long-term outcomes wide, we expect the share price to continue to be driven by&nbsp;newsflow&nbsp;— which is likely to be positively skewed. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;More conservative ramp path. FY22E revenue lowered to ~NZ$23m (-NZ$3m), medium-term changes more modest.</li>
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<h3>COVID-19 a significant handbrake through FY21</h3>
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<div id="m_413871933766022069iadn5">
<p>PEB reported FY21 product sales of NZ$7.7m, up +76% on the prior year albeit materially below our expectations (-NZ$2.1m) — with larger than anticipated COVID-19 headwinds weighing on overall test volumes. Recent data points to a meaningful recovery, with indications March 2021 volumes were ~2,100 (+69% on&nbsp;the 11-month average through FY21). Extrapolating this, we estimate a base-level exit run-rate for revenue of ~NZ$18m.&nbsp;Consistent with recent results, costs were well controlled, and cash receipts have materially improved since coverage was secured from key US public health insurer, CMS (Centre for Medicare &amp; Medicaid Services).</p>
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<h3>Cash position remains healthy</h3>
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<div id="m_413871933766022069igo4v">
<p>PEB reported net cash of NZ$23m at FY21, enough for c. 23 months operations using 2H21 cash burn rates and significantly longer using our forecast burn rates. There is also upside risk given it excludes tests for CMS patients prior to commercial coverage (22,634 tests; or ~US$17m at US$760/test) where partial reimbursement is feasible, albeit the quantum and&nbsp;timing unknown. This is not included in our forecasts.</p>
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<h3>Where to from here?&nbsp;We forecast a strong near-term revenue growth profile &amp; operating leverage; quantum the key unknown</h3>
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<div id="m_413871933766022069i2pm9">
<p>The FY21 result includes c. 8 months of contribution from CMS, albeit very little contribution from large US healthcare provider, Kaiser Permanente with COVID-19 delaying progress. Both of these should be more material contributors from FY22E.&nbsp; Commentary suggests FY22 has started well, albeit we expect COVID-19 disruption will linger at least into 1H22E. The range of reasonable and justifiable outcomes remain very wide, particularly for revenue. We expect strong operating leverage as revenue grows even with a step-up in SG&amp;A costs, aided by highly attractive gross margins (&gt;~85%). Potential near-term newsflow includes: new commercial agreement(s), stronger mention/inclusion in clinical guidelines, back payment from CMS, additional clinical evidence.</p>
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<div><strong>Chelsea Leadbetter, CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
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Pacific Edge FY21 Result&nbsp;— Still On The Edge

OUTPERFORM
Pacific Edge (PEB)&nbsp;reported&nbsp;strong FY21 revenue growth and an improved NPAT loss, however, COVID-19 was a much larger handbrake to revenue growth momentum than we had forecast. The March exit-run rate was encouraging, which bodes well for a step-change in revenue from FY22.&nbsp;There was nothing in the result to change our view of the opportunity or PEB’s ability to capitalise on this.&nbsp;COVID-19 has clouded the short-term upside, however, the prize is substantial and headwinds are showing some signs of easing.​​​​​​​&nbsp;With the range of justifiable long-term outcomes wide, we expect the share price to continue to be driven by&nbsp;newsflow&nbsp;— which is likely to be positively skewed. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;More conservative ramp path. FY22E revenue lowered to ~NZ$23m (-NZ$3m), medium-term changes more modest.



COVID-19 a significant handbrake through FY21


PEB reported FY21 product sales of NZ$7.7m, up +76% on the prior year albeit materially below our expectations (-NZ$2.1m) — with larger than anticipated COVID-19 headwinds weighing on overall test volumes. Recent data points to a meaningful recovery, with indications March 2021 volumes were ~2,100 (+69% on&nbsp;the 11-month average through FY21). Extrapolating this, we estimate a base-level exit run-rate for revenue of ~NZ$18m.&nbsp;Consistent with recent results, costs were well controlled, and cash receipts have materially improved since coverage was secured from key US public health insurer, CMS (Centre for Medicare &amp; Medicaid Services).


Cash position remains healthy


PEB reported net cash of NZ$23m at FY21, enough for c. 23 months operations using 2H21 cash burn rates and significantly longer using our forecast burn rates. There is also upside risk given it excludes tests for CMS patients prior to commercial coverage (22,634 tests; or ~US$17m at US$760/test) where partial reimbursement is feasible, albeit the quantum and&nbsp;timing unknown. This is not included in our forecasts.


Where to from here?&nbsp;We forecast a strong near-term revenue growth profile &amp; operating leverage; quantum the key unknown


The FY21 result includes c. 8 months of contribution from CMS, albeit very little contribution from large US healthcare provider, Kaiser Permanente with COVID-19 delaying progress. Both of these should be more material contributors from FY22E.&nbsp; Commentary suggests FY22 has started well, albeit we expect COVID-19 disruption will linger at least into 1H22E. The range of reasonable and justifiable outcomes remain very wide, particularly for revenue. We expect strong operating leverage as revenue grows even with a step-up in SG&amp;A costs, aided by highly attractive gross margins (&gt;~85%). Potential near-term newsflow includes: new commercial agreement(s), stronger mention/inclusion in clinical guidelines, back payment from CMS, additional clinical evidence.



Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Pacific Edge: FY21 Result — Still On The Edge