Paxman AB (STO:PAX) Research Update

Highlights

• Arrowhead is updating its coverage on Paxman AB with a fair value bracket of SEK 56.7 to SEK 78.2 per share (share price on June 20, 2023: SEK 31.9) based on the Discounted Cash Flow and Relative Valuation methodologies.
• Paxman reported strong results in Q1 2023 with revenue at SEK 42.3 mn, a growth of c. 51% year-on-year (YoY). The recurring revenue was at SEK 23.7 mn, an increase of 43% YoY. The company generated a positive EBITDA of SEK 2.7 mn during the period, compared with an EBITDA loss of SEK 2.9 mn YoY, driven by strong revenue growth in Q1 2023. The company incurred a net loss of SEK 2.5 mn as compared with a loss of SEK 6.2 mn YoY, primarily due to higher depreciation on capital investments in the US. The cash flow from operating activities improved to SEK -1.8 mn as compared with SEK -3.4 mn in Q1 2022 due to strong revenue growth in Q1 2023.
• PAX plans to advance its reimbursement strategy in the US, as the customers have shown interest in the ‘buy and bill’ model in FY 2022 to facilitate reimbursement with CPT lll codes. The company plans to continue investing in the research and development (R&D) pipeline in scalp cooling and cryotherapy to prevent Chemotherapy-Induced Peripheral Neuropathy (CIPN). According to the CEO, the company spent c. SEK 5.0 mn on the CIPN R&D program in the past 12 months. However, this investment is expected to be minimal in the future. Strong revenue growth and reduced CIPN investment will put the company in a better financial position.
• The company intends to accelerate its growth worldwide by expanding its sales model through direct distribution and established distribution partners in key regional markets. Paxman is already established in Asian markets such as India, Malaysia, Singapore, and Pakistan, while Japan will continue to be a strong growth market in the future. The company has signed a letter of intent with Concord Medical in China to enter a distribution and marketing agreement for Greater China, including Macau, Taiwan, and Mongolia. It has recently received market clearance for Paxman Scalp Cooling System (PSCS) use in South Korea, with the final approval for commercialization expected in May 2024.
• Paxman incorporated a new entity, Paxman Canada Inc., in the province of Ontario in January 2023. The corporation will operate on a hybrid business model, offering pay-for-use services through Paxman personnel in large academic and high-volume cancer centers and selling capital equipment to smaller regional cancer centers.
• In January 2023, the company received the European Union (EU) Medical Device Regulation (MDR) certification from the British Standards Institution (BSI). This certification reaffirms the company’s commitment to the market, its customers, and patients who will continue to benefit from the PSCS.
  Paxman is offering a Patient Assistance Program (PAP) to provide affordable medical assistance across the US. The program is in its initial stages and is delivering encouraging results. Of the 203 Benefit Investigations (BIs), 163 patients received positive coverage, representing 80% of the total BIs. Of the remaining patients without insurance coverage, 88% (35 patients) were supported by Paxman’s PAP.
• In the future, the company will continue to transition from selling equipment to clinics to the buy-and-bill model, which will be a key driver of growth in the US market. This, coupled with lower CIPN investment, will enable the company to deliver a strong return on investment, a positive EBITDA, and a push toward positive cash flow by the end of FY 2023.