Radiopharmaceutical Expansion And AI Data Platforms Will Drive Long Term Oncology Research Demand

Catalysts

About Champions Oncology

Champions Oncology provides preclinical oncology research services powered by a proprietary, deeply characterized patient-derived xenograft tumor bank and related data platforms for biopharma customers.

What are the underlying business or industry changes driving this perspective?

• Expansion of in-house radiopharmaceutical capabilities, including an expanded radioactive materials license and dedicated radiochemistry infrastructure, should shift work away from higher cost outsourcing and support a recovery in gross margin and operating income.
• Growing demand across pharma and biotech for translationally relevant oncology models positions the company’s large, multiomic PDX bank to capture larger and more durable TOS contracts, which should drive sustained revenue growth and better visibility on earnings.
• Rising use of AI and machine learning in drug discovery increases the value of Champions’ clinically annotated tumor data sets, which can scale through multi-quarter licensing arrangements and materially improve overall company margins and earnings mix.
• Early traction in the data platform, evidenced by three consecutive quarters of data sales and targeted investments in R&D and business development, provides leverage as fixed costs are absorbed and should translate into higher incremental EBITDA as the pipeline converts.
• External funding and partnership opportunities for Corellia, the wholly owned drug discovery subsidiary, offer potential upside from milestones or equity value creation without burdening the balance sheet, which could enhance long term earnings power and shareholder value.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Champions Oncology's revenue will grow by 9.4% annually over the next 3 years.
• Analysts are not forecasting that Champions Oncology will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Champions Oncology's profit margin will increase from 5.2% to the average US Life Sciences industry of 15.5% in 3 years.
• If Champions Oncology's profit margin were to converge on the industry average, you could expect earnings to reach $11.6 million (and earnings per share of $0.82) by about December 2028, up from $3.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 29.4x today. This future PE is lower than the current PE for the US Life Sciences industry at 36.0x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The broader biotech funding slowdown and ongoing pressure on pharma R and D budgets may persist longer than management expects. This could limit demand for preclinical studies and slow growth in the TOS business, which would constrain revenue and delay operating leverage benefits to margins and earnings.
• The transition of radiopharmaceutical work from outsourced providers to in-house infrastructure could take longer or cost more than planned. In that case, elevated cost of sales and underutilized facilities would keep gross margins below the prior year level of 50% and weigh on operating income.
• The data platform remains at an early stage with only three consecutive quarters of sales. If large licensing deals slip or customer adoption of AI and machine learning enabled oncology data is slower than anticipated, high R and D and sales and marketing investments may not be covered by incremental revenue, which would compress net margins and earnings.
• Corellia, the wholly owned drug discovery subsidiary, depends on attracting external capital in a weak biotech funding environment. If investment appetite remains muted, Champions may face pressure to divert internal cash or slow development, which could dilute future upside while adding risk to cash flow and earnings stability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.0 for Champions Oncology based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $74.5 million, earnings will come to $11.6 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $6.3, the analyst price target of $12.0 is 47.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.