1. technology and computing

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.
Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research
Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not
regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com
DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SQI Diagnostics and prepared and issued by Edison for publication globally. All information used in the
publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report
represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This
research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States
by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition
of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about
companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be
construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or
attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and
habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell,
subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any
securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence
of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any
investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any
or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as
well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not
necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable,
and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.
For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or
disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class
service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To
the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any
of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the
London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors
accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
Frankfurt +49 (0)69 78 8076 960
Schumannstrasse
34b
SQI Diagnostics
|6
60325 Frankfurt
Germany
London +44 (0)20 3077 5700
280 High
Holborn
February
2015
London, WC1V 7EE
United Kingdom
New York +1 646 653 7026
245 Park Avenue, 39th Floor
10167, New York
US
Sydney +61 (0)2 9258 1161
Level 25, Aurora Place
88 Phillip St, Sydney
NSW 2000, Australia
Wellington +64 (0)48 948 555
Level 15, 171 Featherston St
Wellington 6011
New Zealand
12