WatsHot in the Small-Cap Market: Omega Diagnostics, Motif Bio, RedX Pharma and Minds+Machines

This morning we were treated to good news from Omega Diagnostics* (ODX), who confirmed that they have resolved the manufacturing variability issues with Visitect CD4, their point-of-care test for assessing the levels of CD4 in the blood (which indicates when to start treatment for HIV). The firm said it has now made three pilot batches of devices, all of which have yielded comparable results and which demonstrate that Visitect CD4 is capable of meeting the company’s performance design goals in comparison to flow cytometry when tested on HIV positive patients. The next step will be to produce three larger validation batches, before moving to field tests in Kenya and India (estimated for H2 2015 by broker finnCap).

In addition to the good news for Visitect, Omega also reported good progress with its allergy development programme, where it now has 32 allergens that have been optimised and a further 22 of these have completed claim support. These allergens will be used in beta evaluations at sites in Spain and Italy, planned in June and July respectively. Moreover, a preliminary field study comparing the Allersys system to ThermoFisher ImmunoCAP using eight allergens concluded that the two systems were comparable. The results of the study have recently been accepted for an oral presentation at the European Academy of Allergy and Clinical Immunology (EAACI) Annual meeting in Barcelona, 6-10 June 2015.

Clearly, these two ‘blue-sky’ programmes are being progressively de-risked, and the market has started to react accordingly. However, I note that in spite of recent progress, house broker finnCap has elected to retain its prior forecasts, which assume no contribution from either Visitect or Allersys. In the meantime, the existing diagnostics business continues to progress in a solid albeit modest manner, underpinning finnCap’s forecasts for an adjusted pre-tax profit of £1.2 million in FY15 (ended 31st March), rising to £1.5 million for FY16. With net cash of £1.5 million on the balance sheet, I can only conclude that the shares remain cheap despite the recent rise.

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Readers will no doubt be familiar with the challenges facing modern medicine in terms of the imminent decline in efficacy of the current stable of antibiotics. The front line of this problem is the battle against multi drug resistent strains of bacteria, most notably in hospitals; and it is this battle in which Motif Bio (MTFB) has thrown itself into the fray. Since my colleague Leo Wilson highlighted the stock in last Wednesday’s market report (CLICK HERE to subscribe to our newsletter so you don’t miss out), the shares have soared by almost 50% on the back of a string of positive news regarding its programmes. Most importantly, its late clinical-stage antibiotic, iclaprim, is set to fill a major market void, and having already been tested on over a thousand patients, its safety and efficacy is well supported. If approved, the drug could achieve over $1 billion a year in sales, according to house broker Northland, with potential double-digit royalties for Motif. Northland’s price target is 89p, versus the current price of 48p.

One stock that has yet gone relatively unnoticed but which operates in the same spheres as Motif is RedX Pharma (REDX). RedX Pharma uses advances in gene science to create personalised pharmaceuticals to address unmet medical need and has a portfolio of 13 candidates. Four of these have achieved pre-clinical proof of concept and are aimed at treating methicillin-resistant staphylococcus aureus (more widely known as MRSA), bone tumours, skin, brain and blood cancers, and have been shown to outperform competitor drugs. RedX Pharma aims to meet the growing need of major pharmaceutical companies to replenish their product pipelines as patents start to expire, as well as helping emerging players to broaden their existing portfolios. Given that the crowd has yet to latch onto this one, it may be worth investigating, especially given the high-profile backing including Jon Moulton.

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The next phase of evolution of the internet is something in which all investors should show an interest, as our very own Jim Mellon outlined in Fast Forward. I first highlighted Minds+Machines (MMX) (then known as Top Level Domains Holdings) back in 2012, but the market was slow to show interest, and the shares bobbed around for a few years – before taking off at the end of 2014. However, they have since settled back down, for some unfathomable reason, and are currently back roughly where they were before the excitement. This looks like an opportunity for the more adventurous investor, as MMX has already proven itself a canny acquirer of Top Level Domains (if you don’t know what these are, just do a quick Google search – they are key for the next phase of development of the infrastructure of the internet), having received gross receipts of $37.5 million from private auctions towards the end of 2014. It is also sitting on cash of almost $46 million (current market cap £70 million), so it is well placed to continue to add to its portfolio.

With profit margins potentially as high as 50%, and renewal rates stretching to almost 80% for existing TLDs, there is potentially a very profitable and valuable business here. MMX is planning to further bulk up its portfolio of TLDs in 2015, before settling down to become an operating company in 2016. In its most recent annual report, the company also speaks of assessing the potential for introducing a progressive dividend or making a special return of cash to shareholders in the near future. I would also like to remind investors that TLDH CEO Van Couvering was the founder of NetNames, which he sold in 1999 to Group NBT (which was itself taken out by private equity in 2011), and also founded NameEngine, which was sold to industry giant VeriSign – encouraging precedents to say the least.

* James owns shares in Omega Diagnostics.