Record Revenue for 3QFY20!
On September 3, 2020, Avivagen, Inc. (OTC:VIVXF) announced financial results for the third quarter of fiscal year 2020 that ended July 31, 2020. Revenue for the three months ending July 31, 2020 was CAD$612,530 compared to CAD$12,484 for the three months ending July 31, 2019. The increase was primarily driven by increased sales of OxC-beta Technology product in Mexico and the Philippines. Operating expenses were approximately CAD$1.0 million for the third quarter of fiscal year 2020 compared to CAD$1.3 million for the third quarter of fiscal year 2019. The decrease was primarily due to the recognition of COVID-related government grants during the most recent quarter.
As of July 31, 2020, Avivagen had approximately CAD$1.2 million in cash and cash equivalents. We estimate the company has sufficient capital to fund operations into the first quarter of fiscal year 2021. As of July 31, 2020, Avivagen had approximately 41.7 million shares outstanding and, when considering the approximately 8.7 million warrants and 2.8 million stock options, a fully diluted share count of approximately 53.2 million.
New Publication on Effectiveness of OxC-beta Technology on Sow Health
On August 18, 2020, Avivagen announced the publication of a manuscript in the British Journal of Nutrition on the health effects of oxidized β-carotene on the reproductive performance and immune response of sows and nursing piglets (Chen et al., 2020). The article, titled “The effects of maternal supplementation with fully oxidised β-carotene on the reproductive performance and immune response of sows, as well as the growth performance of nursing piglets”, showed a statistically significant increase in antibody levels in colostrum in sows fed oxidized β-carotene, which led to healthier and heavier litters compared to controls. The overall health of the sows fed oxidized β-carotene was apparent from reduced weight loss during lactation, a higher percentage of sows returning to estrus earlier, and fewer undersized piglets at birth.
The company continues to publish positive results in peer-reviewed journals that helps to validate the OxC-beta technology, with many feed industry leaders looking for that type of validation before deciding to utilize a new product such as OxC-beta.
Approval and First Sale in Brazil
On June 24, 2020, Avivagen announced that is has received approval from The Ministry of Agriculture-Feed Additives Division for the immediate use of OxC-beta Livestock in poultry, swine, and cattle in Brazil. On August 12, 2020, the company announced the first sale of OxC-beta Livestock in Brazil to Look Chemicals, Avivagen’s distribution partner in Brazil. The 125 kg purchase represents an “introductory order” as Look Chemicals begins to distribute the product in the market.
Brazil is the third largest feed market in the world, consuming more than 69 million metric tons of livestock feed each year. Importantly, Brazil is a large exporter to regions such as Europe that have banned the use of antibiotics in livestock feed. OxC-Beta is now approved in nine markets worldwide, including the U.S., Mexico, New Zealand, Australia, Taiwan, Thailand, Malaysia, and the Philippines.
Preparing for OxC-beta™ Approval in China
In Dec. 2019, Avivagen announced it has entered into an agreement with COFCO Biotechnology Co. Ltd. in which COFCO will assist Avivagen in securing regulatory approval for OxC-beta™ Livestock in China. COFCO is a leading supplier of agriculture products in China, and with 12,000 employees and sales of more than $17.5 billion in 2018 we believe they are a great partner to assist Avivagen in determining what trials of OxC-beta™ Livestock will be necessary to secure approval for use in chicken feed along with advising on other aspects of the Chinese regulatory pathway.
China represents a tremendous opportunity for Avivagen as the Chinese government has announced a plan to ban all antibiotics in livestock feed by July 2020. In addition, African Swine Fever (ASF) decimated China’s swine herd in 2019, with an increase in poultry production set to fill the protein supply gap. This increased demand for poultry is being filled by both increased imports to China as well as increased domestic poultry production, which is up 20% since 2018. Some estimates call for Chinese poultry feed production to nearly double over the next five years (Feed Strategy).
Accelerating Plans for Commercial Launch of OxC-beta Technology for Human Use
In March 2020, Avivagen announced plans to accelerate its plans for commercial launch of OxC-beta as a supplement for human use as a response to the COVID-19 pandemic. Multiple studies show that the OxC-beta product supports and primes the innate immune system while decreasing exaggerated inflammatory responses. We anticipate additional updates from the company on the timeline of the launch of the product in the U.S. and other markets.
We value Avivagen using an EV/EBITDA multiple based on projected revenues of OxC-beta Livestock. We believe Avivagen is laying the groundwork for a very steep growth rate in revenues in the coming years through a combination of new market opportunities and market expansion. For example, the company is making steady progress on sales in the Philippines and we believe it is only a matter of time before sales begin to ramp up considerably in Asia and other parts of the world, particularly as additional data showing the benefits of the OxBC technology is published.
Due to the fact that Avivagen has a limited commercial history, the financial forecasts we have prepared are educated guesses and are heavily reliant on the company continuing to execute on its business plan to get OxC-beta Livestock approved in as many jurisdictions as possible, signing distribution agreements in each of those jurisdictions, and continuing market expansion through adoption of OxC-beta Livestock by major animal producers.
Our model estimates sales of OxC-beta Livestock of CAD$60 million in 2025, as we believe the company will hit an inflection point following the adoption of OxC-beta Livestock by multiple major animal producers over the next couple of years. Using an EV/EBITDA ratio of 16 (which is derived from the average for pharmaceutical companies found here) and an EBITDA of CAD$23 million leads to an EV of CAD$368 million. Using a discount rate of 20% (derived from CAPM) we arrive at a present day EV of approximately CAD$148 million. The company has approximately CAD$3.5 million in debt, approximately CAD$1.2 million in cash, and CAD$7.8 million in potential financing from warrant exercises. Accounting for that leads to an NPV of CAD$153 million. Dividing this by the fully diluted share count of 53.2 million leads to a valuation of approximately CAD$2.89 per share. Using the current exchange ratio of $1 CAD = $0.76 USD leads to a valuation for VIVXF of approximately $2.20.
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