A Positive Angle for Success

Despite very challenging equity markets in 2011, there have been a number of interesting corporate announcements in the UK small cap sector recently.  One that really strikes the private investor in terms of opportunity – hence the 158% increase in its share price since late September 2011 – is Angle PLC.

Relatively unknown outside of hardened UK small cap investor circles, it appears to be on the cusp of an extremely exciting development in the space of a medical diagnostic test for cancer.

Andrew Newland, Chief Executive and founder of Angle PLC, agreed to meet with me recently in Central London to discuss the progress to date of Angle’s investment portfolio, and especially the recently announced Parsortix ‘breakthrough’. 

This article will almost exclusively concentrate on the Parsortix business but there will be a short discussion on the ‘other’ business units which make up the rest of the portfolio as well as some thoughts on their valuation towards the end. 

Angle – the business

Angle is listed on AIM and has a portfolio of unlisted equity investments in “high tech” industries.  All businesses are at a ‘mature funding level’ except Parsortix, which will require a small equity infusion in mid 2012 in order to reach clinical product launch and sales.

Parsortix Inc

90% of the equity of Parsortix is owned by Angle.  This company has developed a potentially world beating cancer diagnostic and foetal health test.  Based in the US, its patented cell separation device can isolate and capture very small numbers of cancer cells from whole blood in an efficient and reliable manner.  It does not require an antibody as a mechanism to capture CTCs (Circulating Tumour Cells), which is the case with a competing product – ‘CellSearch‘- which is sold by Veridex, a subsidiary of Johnson & Johnson.  To date, Angle has invested $3m in Parsortix.

The target is to launch the product into the cancer research market in the near term – end 2012 - with the aim of regulatory approval in late 2013 and clinical product launch shortly thereafter.  There are expected to be substantial ‘near-term’ revenues achievable within the research market.

Novocellus

82% of the equity of this company is owned by Angle. Novocellus has developed a patent protected system, EmbryoSure, for selecting IVF (in vitro fertilisation) embryos likely to lead to a successful pregnancy. This is expected to lead to a 25% increase in the clinical pregnancy rate for IVF as well as a reduction in health risks for the mother and baby.

Novocellus has a corporate partnership with Origio A/S (http://www.origio.com/investors.aspx) who will fund and manage the final trials process. Origio supplies around one in five of the global market for IVF culture medium.

Geomerics (Enhanced computer games middleware)

33% of the equity of this company is owned by Angle.  Geomerics has successfully developed and launched its 'Enlighten' product, dramatically improving the lighting of computer games.

Geomerics has secured sales from key reference customers including Electronic Arts (Battlefield 3, Need for Speed: The Run), CCP and Zombie. The company is also developing a strong base in South East Asia, including South Korea and Japan.

Management services

Angle also provides management services to governments and other public-sector organisations in the development and implementation of regional and national strategies for the creation and development of technology sectors.

In addition, they also support corporates, governments and academic research institutions in commercialisation of their intellectual property.

This is not a ‘core’ part of the business but supports the company as its portfolio of investments ‘mature’ and eventually become realised.

Strong track record and ‘a once in a lifetime’ opportunity

Andrew Newland is a veteran of “high tech” business start ups.  He worked in the US as a corporate finance advisor for KPMG along the renowned “Route 128” technical corridor of Boston, Massachusetts, in the mid to late 1980’s; Background wise, he is steeped in assessing and advising companies with pioneering technologies.

“In my early career, I worked for TI (a UK engineering conglomerate which was acquired by Smiths Group in 2000) as well as a lengthy 12 year stint at KPMG, most importantly establishing their UK and European High Technology Practices and High Tech Consulting Group.  This is what really inspired me to found Angle”.

Andrew continues:

“I’ve been involved, as founder or adviser, in the establishment of numerous “high tech” businesses over the years and I have to say that, without wishing to be disparaging about the other successful businesses, Parsortix is a ‘once in a lifetime’ opportunity to make a real difference - and I don’t mean just financially.  If we can execute our strategy for Parsortix successfully, this will crown my business career”.

Parsortix and the ‘breakthrough moment’

George Hvichia, the Chief Technical Officer of Parsortix, is originally from the former Soviet Union and arrived in the US in the late 1980’s, co-founding Parsortix in the Philadelphia region in 2006 with Angle. 

“The Parsortix separation ‘Cassette’ was George’s invention and we supported him in his quest to develop a micro-fluidic platform for the separation of rare cells from blood as it offers so many high value applications”.

“Originally, we had intended to apply the intellectual property to develop and commercialise a test for foetal health.  Then, the team had a kind of breakthrough moment and realised that the Parsortix ‘cassette’ could actually provide a greatly improved test for cancer.  So, we modified our plan and are now executing a strategy to develop our cassette to support this enormous market”.

The Parsortix ‘Magic Plastic’ – Simple, Effective and Affordable

Andrew carefully took out a small silver foil vacuum packed wrapper from his suit pocket, tore the edge of the packaging and out popped a clear plastic moulded ‘cassette’, no more than 4cm square by 5mm deep.  This was the ‘magic plastic item’ we had heard so much about over the past few months.  Holding it on its edge between his forefinger and thumb, Andrew then explained how blood would enter the upper section and filter through the cassette, capturing the larger abnormal cells, whilst filtering the smaller healthy red and white blood cells away.

“This is the basics of the cassette”, declared Andrew “once the cassette has completed its ‘filtering’ process, the physician is left with a ‘liquid biopsy’, which can be forwarded onto a central laboratory for further examination”.

“What is also very important to stress is that this patented technology is cancer agnostic.  By this, I mean that we believe this medical diagnostic tool can be employed against almost any cancer type (e.g. Bowel, Ovarian, Lung, Breast, Prostate etc) except leukaemia cancers (i.e. cancers of the blood).  This gives it enormous potential in the market as it is not limited by the need for specific antibodies for each cancer”.

Andrew is unequivocal in his belief that there are three core reasons why the Parsortix ‘cassette’ stands a very good chance of commercial success.

“It is an incredibly simple idea, it is very effective relative to competing offerings and the manufacturing cost is low, allowing widespread adoption at a fraction the cost of alternative technologies”.

“To summarise - Simple, effective and affordable”.

Uses for the device

“Our belief is that this medical diagnostic tool could be used in a number of ways:

A)     Monitoring a patient’s response to chemotherapy to ensure effective treatment and avoiding the use of ineffective cancer drugs with bad side effects.

B)     As part of the routine management of a patient currently in remission, where the detection of CTC may provide early diagnosis of relapse or potential relapse allowing early treatment thus improving survival rates.

C)     As part of an annual ‘Health check-up’ whereby a medical practitioner could use our ‘cassette’ to do a routine test for common cancers”.

Limited competition

As any investor would expect, the rewards for providing an accurate, simple and efficient ‘cancer test’ are huge, so it comes as no surprise that the usual ‘suspects’ in pharmaceuticals are investing heavily in this market.

Johnson and Johnson’s subsidiary Veridex has an established product - CellSearch - based on antibody affinity capture technology. 

“When it was released, the pricing was quoted as requiring a system which cost approximately $125,000 to purchase and then a consumable of $900 per test” commented Andrew “Market intelligence indicates that this product suffers from false negatives”.

“A second generation CellSearch product is in the process of being developed with Massachusetts General Hospital and this was announced back in January of this year”.

“The key point to note about this second generation product is that it employs a chip which has 78,000 micro ‘posts’ coated with antibodies and these attract the ‘abnormal’ cancer cells.  This product is then expected to count and capture the cells.””.

Substantial Rewards

Unsurprisingly, the rewards that could accrue to Parsortix could be potentially huge. There are at least 1.2 million new cancer patients per annum in the US market alone (Source – US National Cancer Institute, 2010).  It is quite possible that each patient may be required to be monitored at least 30 times over the course of their illness.

Andrew believes that there are major clinical markets for a simple CTC counting product estimated to exceed $4 billion per annum in the United States market alone.

Assuming that all hurdles have been overcome, it is realistic to believe that the Parsortix technology is very likely to be licensed by one (or a number of) global medical diagnostic businesses who have the sales and distribution network to truly push the product.

As Andrew readily admits, he is still unsure who his partner(s) is /are likely to be but he believes it is likely to be someone of the calibre of Roche, Astra Zeneca, GSK or such like.  Naturally, he was tight lipped but “exploratory talks have taken place” with a number of entities “with an interest” but indications are that any offer for the license will be “too low ball for us” at the moment.

Risks and Research Collaboration

Clearly, the numbers are mind boggling for an entity the size of Angle.  However, it is worth tempering exuberance a little and the prospective investor should consider that there are still a number of hurdles to be overcome:-

1)     The company must finesse and optimise the design of the separation device

2)     Establish a collaboration with a cancer research centre(s)

3)     Capture CTCs in actual cancer patient blood (with the assistance of a cancer research institution)

4)     Establish a leading Scientific Advisory Board

5)     Consider joint development programmes with Corporate Partners

6)     Complete comparative studies to support FDA and CE Mark submission

7)     Gain FDA / CE Mark Approval

Most importantly, gaining FDA approval should be easier for a medical device such as the Parsortix cassette as Veridex CellSearch has already been approved by the FDA so the Parsortix cassette should qualify for the FDA 510(k) programme which should allow a 90 day Premarket Notification.

However, it is clear that there is still a great deal to complete and each stage is a potential risk to Angle / Parsortix.

Returning to the cancer research collaboration for a moment.

Andrew is quite candid with his views on the risk(s) that might lie ahead

“I am acutely aware that there could be something out there of which we are not aware.  We don’t know what we don’t know.  As far as we know, there isn’t anything to match the Parsortix offering on all the levels that I have mentioned before in terms of simplicity, effectiveness and price”.

Future Parsortix Funding Requirements

Andrew was quite open in that he estimated that a further £5m equity injection into Parsortix would be required to take the product through regulatory approval.  This could come from a partnership deal for some of the commercialisation or from a trade sale of Geomerics. 

Remembering that Andrew is a significant shareholder in Angle PLC with just over 19.4% of the equity, it is obvious that he would prefer to use funds generated from a Geomerics sale and believes he could be left with a substantial surplus after committing to the £5m Parsortix investment.

“There will be no deeply discounted placing / rights issue.  That would be completely unnecessary and I have no interest in diluting my equity interest unnecessarily” commented Andrew.

Financial Net Asset Valuation

A recent broker note was issued following on from the Parsortix announcement giving a value for Angle in its current stage of development of 200p per share.  The current share price is 77.5p and the share price is clearly trading at less than half its estimated value. 

It is notoriously difficult to make definitive valuations on the individual parts of Angle’s investee companies.  They are illiquid and being “high tech”, offer radical but as yet, unprofitable businesses.

Listing the individual business units, the recent broker note offers up the following valuations:

Novocellus’ final trial for EmbryoSure has been recently delayed.  Angle is meeting with Origio very shortly to review options with a view to accelerating progress as soon as possible. Andrew is hopeful that there will be a positive outcome to discussions.

A recent broker note has allotted a value of 28p to this investment.   

Andrew gave indications that Geomerics was a company that has great strategic value to the gaming companies that have adopted its technology (including Electronic Arts, CCP and Epic Games).  It is possible that if the ‘lighting effects’ that are available through the Geomerics ‘Enlighten engine’ add considerable value – which appears to be the case in Battlefield 3, Need for Speed: The Run and  Eve Online – this will become a core ‘must-have’ component for the industry.  To use the colloquialism ‘an almighty bun fight’ could ensue in order to have strategic ownership of the technology thus denying this to other competitors in terms of their gaming solutions. 

There are also other account developments in the market with ‘Enlighten’ being able to be used for mobile devices and tablets, such as the iPad.  It is also conceivable that the technology could also be used for Architectural design (Autodesk) where realism in simulations is an excellent marketing tool.

Therefore, it is possible that the valuation could be higher than the current broker valuation of 62p.

Parsortix is clearly the real ’kicker’ in terms of a large appreciation in Angle’s company valuation.  One broker is indicating a value of around 110p based on a discounted valuation for a) a successful collaborative agreement with a suitable cancer research institution, b) licensing to a large global medical diagnostics company for the purposes of monitoring CTCs in the clinical setting, c) short term ‘research’ revenues.

Financial results and share options

Angle PLC generated revenues of £2.4m in 2011 (£2.4m in 2010) based largely on its management services business.

In addition, the company has recently made two small fund raisings; £0.76m was raised during the last financial year ending 30 April 2011 and £1.25m in July of the current financial year, of which the majority has been earmarked to support the continued development of Parsortix.  There were no cash realisations re investments during the previous financial year.

After expenditure on ‘controlled investments’ (defined as greater than 50% Angle ownership), the value of which is expensed under IFRS rather placed on the balance sheet, the company made a full year loss of £0.43m.

Share options

Clearly, through the recently announced share options scheme, the remuneration committee believe that there is substantial upward movement in the share price to come, having issued the Board with 1.90 million shares at a strike price of 75.5p but these cannot vest until two conditions have been met; that the share price hits 200p and that the Parsortix separation device has been demonstrated to successfully capture circulating tumour cells (CTCs) from actual cancer patient blood.

Andrew will take up 1m of these options, with Ian Griffiths (Finance Director) and Shane Booth (Parsortix Chief Executive) collecting 0.5m and 0.35m respectively.

Indeed, if all share options are executed, including all historic options already issued, this will dilute current shareholder’s equity by 10.4% - not an immaterial amount.

Final thoughts

It is not the author’s place to predict accurate net asset valuations on the individual components of Angle’s investments but it is quite obvious that the key to significant capital appreciation of Angle’s stock will come through Parsortix.

It may well be that Parsortix is either bought out as a whole or that it becomes a ‘holding entity’ for the license(s) and effectively collect sizeable future revenue streams from the third party (ies).  Optimistically, that situation is still some two years away, at the earliest.  There are obvious hurdles, as already outlined, to overcome still.

What is clear is that Parsortix possesses a very disruptive technology which appears to be unmatched at the time of writing.  However, as with all pioneering discoveries, time is of the essence and the product needs to be widely accepted and adopted by the cancer research community - and quickly.

While fortune may favour the brave, as with all ‘cutting edge’ investments, caution must be the watchword.  This is not an equity investment for ‘widows and orphans’ but it is certainly an equity investment that could be a component of a more ‘adventurous’ investors’ portfolio.

Simon Murphy has a direct and indirect interest in Angle PLC