Tomorrow’s Jam Today
Featured in this month’s Master Investor Magazine.
Often, a company can have an exciting product in the pipeline for years and remain relatively unnoticed until some kind of catalyst grabs the attention of the market and sends the share price rocketing. No-one has a crystal ball, but more often than not in these cases, such catalysts are entirely predictable for anyone willing to do the research. In the following piece, I outline the case for three companies that could be nearing catalysts of their own.
Insert Omega logo
Omega Diagnostics* (ODX) is a share I called back in 2013 – to some initial success as market anticipation built up on the back of positive newsflow surrounding its CD4 tests for AIDS, which are a vital part of patient management (measurement of CD4 T-cells is required when determining when to commence antiretroviral treatment). Currently available CD4 tests require flow cytometry techniques which are lab-based, expensive and require cold-chain storage for reagents. However, Omega’s Visitect CD4 point-of-care test does not require such infrastructure and therefore opens up the opportunity for widespread testing, particularly in rural areas of the developing world.
However, the firm encountered some variability in the testing efficacy of Visitect, which held up the commercialisation process and sent the shares back to prior levels. Since then, Omega has brought the process of lamination and re-agent dispensing in-house, thereby gaining fuller control of the manufacturing process for Visitect CD4.
The renewed excitement comes on the back of a recent trading update, which revealed that results for the year ended 31st March will be slightly ahead of expectations, with revenues at £12.1 million and adjusted pre-tax profit at £1.4 million. More importantly, however, Omega said it believes it has identified and corrected the root cause of the test variability for Visitect CD4. Final confirmatory testing is underway, and the firm anticipates providing a further update by the end of May.
Omega states that the “prospects for the Group as a whole will be significantly enhanced by the success of this product”. Indeed, the market opportunity for Visitect is huge. The global CD4 need is expected to grow substantially over the next 8 years as countries scale up their HIV/AIDS treatment programmes; this should see the number of tests rise from current levels of just over 30 million to nearly 60 million tests by 2020. The estimated cost per test for Visitect is £1.12 versus an estimated unit selling price of £3.21. With annual capacity at the Omega facility estimated at 2.5-7.5 million units, this implies sales potential of £8-24 million with gross margins of £5.2-15.7 million, thus underlining the scale of the opportunity for Omega.
The really interesting point to note from an investment perspective is that broker finnCap’s forecasts currently exclude any contribution from Visitect CD4. However, the broker commented that the trading update “gives us confidence that the moment when the time-to-market will become clearer is not far away.” Based on its current forecasts, the broker’s 28p price target would place Omega shares on an EV/Sales multiple of 2.2x, EV/EBITDA of 15x and a P/E of 20.8x – metrics which finnCap notes are “not out of line with our peer group of profitable diagnostics companies”.
Insert Cambridge Cognition logo
A world leader in cognition testing, Cambridge Cognition (COG) has spent 25 years testing and validating its technology, CANTAB, in a clinical setting. Supported by over 1,000 peer reviewed publications, this technology is now ready for commercialisation. The firm has also developed an iPad-based diagnostic which enables early detection of memory loss and differential diagnosis of Alzheimer’s disease. It is currently in use in the UK, and forms a central component of a government-sponsored pilot Brain Health service in the UK. In addition to this, the firm also has an existing profitable business which supports cognition research and drug development.
Consider this astonishing fact: Alzheimer’s Disease International estimates that if the disease were a country, it would be the 18th largest economy in the world. Moreover, Alzheimer’s is but one of several different forms of dementia, of which Alzheimer’s is the most common. In the UK alone, it was estimated in 2012 that over 800,000 people suffered from dementia, with a direct cost to the NHS of £3.3 billion a year, and an overall economic burden of £23 billion – greater than the costs of cancer, heart disease and stroke combined.
With the ageing population, the number of patients is forecast to increase to over 1 million by 2021, with a commensurate increase in costs (source: Alzheimer’s Society). Globally the problem is even more pronounced. An estimated 35.6 million people suffered from dementia in 2010, and this is forecast to double every 20 years as the world’s population gets older. The annual economic cost of the disease has been estimated at $604 billion – i.e. more than 1% of global GDP (source: World Alzheimer Report 2010, Alzheimer’s Disease International).
In order to bring down the cost of dementia to society, early detection and treatment is crucial. A recent publication found that in the UK every patient receiving early assessment and treatment saved society £7,741 per annum, of which £3,600 was direct healthcare costs. In terms of an average cost of £25,472 per dementia sufferer per annum, this represents a considerable saving. It is therefore unsurprising that both the US and the UK have made Alzheimer’s disease a priority.
Launched in the UK in May 2012 and available as an app on the iPad, CANTABmobile is CE-marked as a Class II medical device. It can be deployed in any GP surgery, requires no special training, and can assess the memory function of the patient in 10 minutes. It is paid for on a per site basis, and the current price is £1,000 per annum for a maximum of four users. During 2014 over 260 GP surgeries and over 40 Clinical Commissioning Groups (CCGs) in the UK (out of a total of 211) used Cantab Mobile.
However, the real opportunity lies in rolling out the product internationally. With this in mind, the company opened its first office in the US in March, which seems to already be bearing fruit. The North American operation already has a healthy pipeline of contracts in the safety and tolerability trial space that are expected to convert over the year.
Full-year results released in March showed that the company was profitable in H2, with sales and gross margins ahead of expectations and resulting in a loss before tax considerably lower than forecast. In particular, Cantab Mobile sales continue to grow, with over 15,000 patients having now been assessed in the UK. Management expects to deliver a pre-tax profit in the current year, and finnCap’s 100p target price would place Cambridge Cognition on a 1.8x EV/Sales multiple based on 2015 estimates – still a discount to the peer group. The broker also added that it sees progress to “an even higher share price as confidence in these forecasts increases”.
Insert Angle logo
Previously an IP management and investment company, Angle (AGL) has recently transformed itself into a medtech company in order to focus solely on its cancer cell capture technology, Parsortix. Parsortix was originally developed as the first ever non-invasive testing platform for the unborn baby. Pregnant women have a very small number of their baby’s cells circulating in their blood – at most one foetal cell for 500 million maternal cells. Parsortix developed a separation device, which can isolate intact foetal cells in maternal blood (as opposed to merely DNA fragments) when only 1.5ml of maternal blood is flowed through the device.
However, it soon became apparent that a much more lucrative opportunity for the device existed in the cancer diagnostics market. In September 2011 the firm achieved a major milestone by validating that its cell separation device can capture cancer cells added to blood. Angle reported that it had “already established discussions with several of the world’s leading cancer research institutes and there is strong interest in such a product, which would not require regulatory approval for use for research purposes.” The company also noted “encouraging interest” from many of the larger medical diagnostics companies regarding a potential commercial collaboration.
The potential market for such a product is huge. In addition to the substantial commercial opportunities available prior to regulatory approval in respect of sales of product for research purposes and corporate partnerships, it is estimated that major clinical markets for a simple CTC counting product exceed $4 billion per annum in the United States alone. As house broker Cenkos opines, “There are very few cancer patients today who would not derive a potential benefit from being evaluated with the Parsortix device in order to not only detect circulating tumour cells (either before or post diagnosis of cancer) but also in terms of the evaluation of treatment regimens (using genomics and proteomics) and monitoring patients who are in remission and at risk of recurrence.”
PricewaterhouseCoopers projects that the market for a more personalized approach to health and wellness will grow to as much as $452 billion by 2015. Although the largest share of this market is projected to be accounted for by the nutrition and wellness market, it is the core diagnostic and therapeutic segment of the market – comprised primarily of pharmaceutical, medical device and diagnostics companies and expected to grow by 10% annually, reaching $42 billion by 2015 – where the real excitement lies. Parsortix could therefore play a key role in identifying the particular therapeutic needs of a patient.
Angle could be one to watch in 2015, as the firm is currently in the process of securing US regulatory approval for Parsortix from the FDA. At present the only CTC system that has been approved by the FDA is CellSearch (Veridex, Johnson & Johnson) which, unlike Parsortix, is unable to harvest CTCs for molecular analysis, and can only be used to isolate CTCs from a limited number of cancer types. “It is this feature that makes Parsortix unique”, argues house broker Cenkos, “and due to the urgent need for a system with the capabilities of Parsortix we believe that the FDA will be keen to drive this forward.”
With the US regulatory filing underway, there have been hints that Angle is preparing the ground for greater things to come. In particular, the appointment of Peggy Robinson to the senior management team looks prescient, as Robinson was involved in the commercialisation of none other than CellSearch, which should provide Angle with invaluable contacts and expertise in the field. In addition to this, Angle secured a US quote in October 2014 through ADRs (American Depository Receipts), which should help improve liquidity and raise the firm’s profile in the medtech-hungry US market. Given the scale and scope of the opportunity here, this is a share that could easily soar on positive newsflow.
* James owns shares in Omega Diagnostics.
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