Avacta's "Surprise Surprise"

Many of those who watched mainstream UK terrestrial TV in the 1980’s and 1990’s will remember the hugely popular show, “Surprise, Surprise”, hosted by the 1960’s ‘Scouse sensation’, Cilla Black.  The show was about re-uniting relatives, friends and long lost work colleagues.  Move forward to 22 December 2011 and Avacta (LON:AVCT) 's announcement that it was to raise £5.13 million by way of issuing 1.026 billion shares at 0.050p which included the purchase consideration of £1.4million for a private business – Aptuscan – a hi-tech spin out from the University of Leeds.

Strange connection?  Well, at the very beginning and end of Cilla’s show, she would sing her famous “Surprise, Surprise” song and, for those of us who have particularly poor memories / didn’t watch the show / are too young to care, I just wanted to remind you of the lyrics to the chorus:

“Surprise, surprise, the unexpected hits you between the eyes

The unpredictable, that’s the surprise you see. Surprise, surprise!”

Without wanting to bring back any more memories of this sickly track from yesteryear, I think this chorus says it all about investing in the stockmarket generally yet it had a very hollow feel when it streamed back to me back in late December 2011, just before the Christmas break.

All investors like predictability and if there is a feeling that management are going ‘off-piste’ from what had been stated in its strategy in the past, a company’s share price can get savaged and the long haul back to credibility and trust can take years – indeed, most companies don’t make it and soon depart, stage left.  To the private investor, Avacta hadn’t quite followed the script it was espousing previously.

So, following this announcement and a previously written article on Avacta, we wanted to understand why Avacta had pursued this acquisition and raised sizeable funds (for them) which in turn diluted existing shareholder’s by around 30%, especially when most existing shareholders – I’m thinking small private shareholders as opposed to the three ‘strategic’ Avacta shareholders of IP Group, ORA Capital and Henderson Global Investors – were not given the opportunity to participate.

After the dust settles

No investor wishes to be on the receiving end of substantial equity dilution, especially when the feeling in the market was that this was unlikely to happen in the short to medium term; the company was on course to prove that it was capable of reaching operating break-even point without the requirement of raising extra funds.

We returned to Avacta’s Wetherby offices in early January 2012 to meet with Alastair Smith, Chief Executive.

Alastair is, quite unusually for a CEO of an AIM listed business, very open, friendly and happy to communicate and to take ‘time out’ with all shareholders – much to his credit.

He was genuinely contrite during the initial part of our meeting.

“If I can I deal with the break-even issue first. Disregarding for a moment any increased overhead relating to the acquisition and accelerated future product development, the two operating businesses are ‘on track’ for making break-even on a monthly run rate by July of this year and we would  likely to be reporting an operating loss of around market expectations (£369,000) for the financial year as a whole.  We have obviously stated this to the market through our ‘house’ broker, Panmure Gordon.  Nothing has changed for the two operating businesses”.

Killing three birds with one stone

“To deal with your next point re the acquisition and the raising of additional equity funds; we, as a Board thought very long and hard about the message that had been relayed to the general market. We had never stated that we might not go back to the market; we believe that we have always made it known that what would interest us in terms of acquisitions was the purchase of reagents, should suitable ones come to market, especially something with a ‘toolkit element’, which is what the Aptuscan acquisition offered us.  This acquisition has given us enormous scope to create huge numbers of reagents, allowing us to also enter new markets with enormous growth potential including Protein Microarrays, which I’ll explain shortly.  In addition, the Aptuscan technology can be utilised quickly in our Optim and AX-1 cartridges, which should improve our cartridge margins by at least 10%”.

Fleet of foot

“It is true that I hadn’t anticipated that such an opportunity would reveal itself in the short-term but it did and we had to act quickly, or we would have lost the deal”.

“Based on the requirement that we had a very small window of opportunity to acquire Aptuscan and in terms of your next point, I would have loved to have offered all shareholders the option of participating in the fund raising issue and did explore this option.  However, as a Board, we took the decision that it would be far more efficient and secure to accept the proposal of our three strategic shareholders (IP Group, ORA Capital and Henderson Global Investors) who had already stated that they had a willingness to fund the £5m plus investment required to take Avacta to the next ‘strategic level’; we decided that it would be foolhardy to ignore this offer especially as there would have been no certainty that by ‘doing a long and protracted roadshow’ and producing a circular for all shareholders that we would still end up with the funds.  In many respects, it would have also been an inefficient use of the executive management team’s time when we still have lots of challenges running the existing business”.

“Nevertheless, in an ideal world, I would have wanted all shareholders to have participated in the fund raising and I am sorry that the whole affair has left a sour taste in the mouths of some small private investors, many of whom have contacted me directly to whom I have explained our decision process and in some cases have sold their Avacta equity – we still do value all shareholders and we are acutely aware that there would not be a daily market in our shares if it were not for small shareholders’ buying and selling”.

Aptuscan – the transformative acquisition

Alastair wanted to put the Aptuscan acquisition into context continuing:

“I have had a long relationship with Aptuscan which has gone back at least 3 years, having acted as an ‘Industrial Mentor’ for the company in its early days, so I was very aware of what Aptuscan had and what it could potentially be.

“If we hadn’t have attempted to buy the business now, we would have stood no chance in being able to acquire it in even one years’ time, such is its potential value”.

“Naturally, I’ve known (Dr) Paul Ko Ferrigno for some years and am delighted that he was happy to move over to our operation here in Wetherby and continue his excellent work under the Avacta banner”.

“What concerned me in the days following the acquisition was that some investors thought that this acquisition was random and that it was foisted on us (IP group had a significant equity investment in Aptuscan). Firstly, this acquisition actually represents part of a structured thought process that we as a Board have considered for some time; as stated earlier, we have never hidden the fact that we would have always looked to purchase suitable reagents should they become available on the market (such as Reactivlab in 2010).  Secondly, it was my decision – which I recommended to the Board – that we attempt to acquire Aptuscan.  We were not forced by IP Group (a 24% shareholder in Avacta at the time and now a 31% shareholder).  Indeed, we approached them once we became aware that Aptuscan was available”.

So, what is an affinity reagent?

The technical definition of an “affinity reagent” is:

“An antibody,peptide, nucleic acid, or other small moleculethat specificallybinds to a larger target molecule in order toidentify, track,capture, orinfluence its activity”.

Basic Biology

Before discussing the whole field of “Affinity Reagents”, let’s take a step backwards and define some core terminology.

“Proteins (a protein is a fundamental core to all human and animal living cells) is the key component in what goes wrong in human / animal health; each human / animal cell is made up of tens of thousands of complex proteins.  Unfortunately, a protein cannot be ‘seen’ by a research scientist wishing to understand and create new cures for serious ailments such as cancer without the aid of tools such as affinity reagents.  The most common affinity reagent employed today is the antibody.

An antibody is one tool that helps scientists to ‘see’ proteins and it does this by ‘binding’ to the protein; even under a powerful microscope, proteins cannot be viewed with the human eye but by capturing with an antibody, the protein is now available for examination using a range of measurement techniques.  If you like, the protein has been illuminated by the antibody.

Antibodies are core to Avacta’s eagerly awaited AX.1 which uses them to capture proteins from blood and then uses a luminescence measurement to determine if proteins have been captured, which indicates the presence of a disease.

For the record, an antibody is itself a protein that is used by the immune system in humans and animals to identify and neutralise foreign objects such as bacteria and viruses.

The next problem comes when certain antibodies will only bind to certain proteins; the researcher needs to know which antibody will ‘illuminate’ which protein.

A whole industry has grown up around providing and selling the correct antibody to match the correct protein target.  Excellent company examples of this include $ABC (Antibody Cambridge -www.abcamplc.com), the AIM listed company, and Santa Cruz Biotechnology (http://www.scbt.com/) which produces and sells an enormous amount of antibodies which can be purchased online by research scientists.  This has proved to be a very profitable and successful business model.

Antibodies currently dominate the biotechnology, molecular diagnostics and therapeutic markets.  As already stated, antibodies are the largest class of “affinity reagents”.

However, currently produced antibodies have a number of major disadvantages:

1)     They are difficult to develop i.e. to find antibodies for specific protein targets

2)     Very expensive to produce

3)     They are sourced naturally via animals, such as rabbits, and more exotic creatures such as lama’s, camels etc

4)     There are a limited number of natural antibodies

5)     They can be unstable when binding to some proteins

6)     They are relatively frail and are often damaged by processing for specific applications

The advantages of Aptucscan’s non-antibody engineered proteins is available in more detail on Avacta’s website (http://www.avacta.com/affinity-reagents) but in short they overcome all of the disadvantages listed above.

In order for Optim and the AX-1’s consumables to work, they require antibodies within the reagents for a reaction to take place between the sample of blood and the chemicals within the cartridge.  However, what the Aptuscan acquisition will allow Avacta to do is to replace the antibodies in their current consumables, with new engineered “affinity reagents” which have been created to bind with high specificity to a wide range of proteins creating a potentially very large menu of “affinity reagents” which have been coined “Affimers” by Avacta. But remember, this is not the ‘big win’, the ‘big win’ is in protein microarrays which we will explain shortly.

A generic term that is often used to describe non-antibody based affinity reagents is “Aptamer” -http://en.wikipedia.org/wiki/Aptamer.  Briefly, Aptamers are small sequences of nucleic acids, RNA or DNA and more rarely, peptide chains.

Avacta’s “Affimers” are actually technically known as “Aptamers”.

Aptuscan - Multi-purpose acquisition replacing the Antibody in reagents

Alastair estimates that there are currently four key markets where antibodies play a key commercial role:

1)     Reagents for biotech R&D which he estimates at $33bn in value.

2)     The human and veterinary point of care (POC) immunodiagnostics which he estimates at $19bn.

3)      Protein microarray market – worth $2bn and expected to grow exponentially in years to come.

4)     Biopharmaceutical market i.e. replacing antibodies as therapeutics – this is estimated to be worth around $200bn.

“Clearly, there are some very significant opportunities for reagents that function like antibodies but do not suffer from the same technical and commercial disadvantages; Affimers are faster to develop taking months rather than years to identify new reagents; they have similar properties with regards to capturing the target but with a much wider range of targets possible and finally, they are much cheaper to manufacture using far simpler processes”.

In theory, the Aptuscan “engineered” protein molecule can replace the current antibody in all of the processes stated above, which would be an enormous task to achieve, so a more focused approach is required for a company the size of Avacta.

Aptuscan – why so cheap at £1.4m?

Engineered Affinity reagents are not unique.  Alastair believes that there are around 30 companies that offer engineered affinity reagent solutions to date.  The bulk of these companies have been purchased by large global biopharmaceutical organisations such as GSK (Domantis -http://www.mrc.ac.uk/Newspublications/News/MRC003436 - £230m) in many cases for a substantial premium.  Many of these affinity reagent companies are targeting their affinity reagents in the therapeutic market (that is, the treatment or curing of disease).  In Avacta’s case, they are targeting the R&D reagents and tools market not the therapeutic market. Alastair stated that an interesting comparable competitor to Aptuscan could be Dutch based BAC (http://www.bac.nl/) which has a reagents focus.

A side issue, but nonetheless one to watch

As explained above, therapeutics is not a key application area, or indeed an area of strategic focus. Alastair continues:

“It is important to state to existing and prospective shareholders that Avacta will not itself be seeking to develop therapeutic applications from the affinity proteins.  Instead, it will be open to licence to third parties seeking to develop therapeutic applications.  It will be a bi-product, if you like, of our main focus”.

So, it would appear that a licensing deal for a therapeutic application is indeed a very real prospect, and in our opinion this has the potential to more than justify the initial acquisition price for Aptuscan, especially if it included a sizeable upfront payment.

Digging around for such examples, a deal was struck in 2007 with Ablynx by Boehringer Ingelheim   for the development of antibody fragments in the application of nanobody therapeutics. The reader will note the large payments involved – a potentially staggering EUR 1.35 billion if all milestones are achieved.

http://www.outsourcing-pharma.com/Preclinical-Research/Antibody-alternatives-continue-to-pull-in-the-cash

Whilst this is not what we would expect from Avacta, as they are not seeking to develop therapeutic applications, it gives a flavour for the amount of interest and money involved.  Therefore, it is not inconceivable that a therapeutic license agreement (third party development) could, on its own, singularly justify the Aptuscan acquisition price.

Protein microarrays

Alastair was adamant that the Aptuscan acquisition was not just about taking cost out of the reagents used in the consumable cartridges for Optim and AX-1 but about a far more important aspect of building a new substantial business opportunity outside of Avacta’s two main markets.

“Our main driver regarding the Aptuscan acquisition was to leverage into the huge space of protein microarrays for the high throughput drug and biomarker discovery market, and the related application of diagnostics.  This is a market that is much, much larger, potentially than even the AX-1 and Optim markets.

Protein microarray, come again?

Protein microarray technology allows the simultaneous analysis of thousands of molecular parameters with a single experiment. In other words, a very large number of protein ‘spots’ are printed or ‘spotted’ onto a single glass slide and then the slide is used to identify protein-protein and drug-protein interactions;  so, instead of spending 10 hours analysing one protein, up to 10,000 proteins can be analysed on a single chip in the same 10 hours. These “tools” are used to identify new potential drugs, protein that indicate diseases are present (biomarkers) and as diagnostic tests.

Excessive salary increases?

The increase in salaries was something that flagged on our radars, which, taken as a whole, looked to add 40% to both Alastair’s and Tim’s pay packets (£140,000 plus £35,000 discretionary bonus and £125,000 plus discretionary bonus of £31,250 respectively) relative to the previous financial year.  As all investors know, this is a very topical issue at the moment and whilst we continue to ‘soldier on’ in ‘Austerity Britain’ with real pay reductions, it is interesting to see real salary increases and how that can be justified in the current environment.

Having checked across industry comparables, these proved to be far from excessive. For example, two locally AIM listed “Medtech” businesses – Surgical Innovations and Tissue Regenix - pay their CEO’s £125,000 and £136,000 respectively.

Alastair continued:

“I completely understand the sensitivities regarding increasing remuneration in the current economic environment.  As you have already stated, Tim’s and my remuneration packages have increased;  IP Group (our largest shareholder) has over 50 hi-tech businesses in their portfolio and they benchmarked our packages as being somewhere in the lower quartile of comparable organisations at our stage of development”.

I must also add that Avacta has always taken a sensible approach to salaries and you will be able to find many examples of much larger salaries for AIM directors. In addition, I would like to add that in the past and on more than one occasion, I have cut my own salary when cash has been tight in order to retain staff in Avacta. The median salary for a listed biotech business in the UK is currently £260,000 but there is no justification for such payments until the company is returning significant value for shareholders and I will stand behind that statement. “

Full time Finance Director

What is very noticeable in terms of the executive Board’s remuneration is that Tim Sykes, up to very recently, was employed on a contract basis as the company did not feel that there was necessarily a requirement to employ a full-time finance director. 

“As is typical of my approach, we have taken a very cost effective approach and had a part-time finance director since inception; we are very lucky to have had someone of Tim Sykes’ calibre on a part-time basis.  However, this situation changed as part of the fund raising exercise before Christmas; one of our institutional investors did not feel comfortable investing without employing a finance director full-time – they felt it unusual for a quoted business of our size not to have one.  A number of our other shareholders’ (and even Tim himself) were quite comfortable with the status quo but we were happy to support a full-time finance director, should this become a stumbling block for their investment participation” commented Alastair.

Future equity dilution?

The message from the management on future dilution is, despite having continued to put in place in January the same authority as in previous AGMs, “that we will certainly not be seeking further dilutive transactions for the foreseeable future. We have to remain adaptive in our approach but we have a great deal of ammunition and the Board’s focus is on delivery with what we have created and acquired”.

This is probably one of the strongest and apparently most sincere messages we have received directly from a management team. Obviously, we cannot discount another acquisition completely, but the more this subject was pressed upon, the more the message was made even clearer!

Conclusion

After years of fund raising and shareholder dilution, we believe Avacta is at an important inflection point, and therefore the management should now be critically judged against the creation of tangible shareholder value (i.e. an appreciating share price).

There is no doubt that Avacta offers opportunities to the brave investor willing to invest time in understanding the business opportunities that the company has created for itself.

For the first time in its history, Avacta will be ‘fully funded’ and along with its disruptive technologies, developing product pipeline, strong existing and new IP, this represents a powerful mix and a strong foundation upon which significant shareholder value could be built.

Nevertheless, the company must prove that this fund raising exercise will really deliver tangible benefits for all shareholders.  A good first step in convincing investors must be to hit short term targets on the operating businesses breaking even on a monthly run rate, by 31 July 2012, successfully selling the APP tests to a third party and driving up placements of Optim and AX-1 instruments.

The last thing we, as shareholders, want is for Cilla Black to have the last word – “Surprise, surprise” unless, of course it is a ‘nice’ surprise leading to a steeply rising share price.

---

 

Written by Rob Spurr and Simon Murphy.

Rob Spurr has a direct shareholding in Avacta Group PLC shares

Simon Murphy does not currently have a direct / indirect shareholding in Avacta Group PLC shares

For further reading, the authors would also like to suggest four excellent articles published around the subject of affinity reagents (especially aptamers) and their increasingly significant role in the Life Sciences field.

1)     Artificial, non-antibody binding proteins for pharmaceutical and industrial applications

Thomas Hey 1, Erik Fiedler 1, Rainer Rudolph 2 and Markus Fiedler 1

1 Scil Proteins GmbH, Heinrich-Damerow-Str.1, 06120 Halle/ Saale, Germany

2 Institute of Biotechnology, Martin-Luther-University Halle-Wittenberg, Kurt-Mothes-Straße 3, 06120 Halle/ Saale, Germany

http://cmbi.bjmu.edu.cn/news/report/2004/biotech/7.pdf

2)     Biochem. J. (2011) 436 (1–13) (Printed in Great Britain) Review

Alternative affinity tools: more attractive than antibodies?

Vincent J. B. Ruigrok* ¹² , Mark Levisson*† ¹ , Michel H. M. Eppink‡, Hauke Smidt* and John van der Oost*

http://www.biochemj.org/bj/436/0001/bj4360001.htm#refB129

3)     Aptamer-Based Blood Protein Detection Technology May Soon Be Used By Medical Laboratories in Tests for Cancer, Diabetes, and Other Diseases

Published on January 20 2012, Researchers believe that clinical laboratory assays that use aptamers would have multiple advantages when compared to diagnostic tests utilizing anti-bodies

http://www.darkdaily.com/aptamer-based-blood-protein-detection-technology-may-soon-be-used-by-medical-laboratories-in-tests-for-cancer-diabetes-and-other-diseases-012012#axzz1m4BP4b00

 

The Use of Phages and Aptamers as

Alternatives to Antibodies in Medical and

Food Diagnostics

4)    General Comments 

 

Phages and aptamers have great potential as specific recognition elements in various

biomedical and food applications. Their function as sensing receptors offers advantages

over methods that are based on antibodies: their efficient immobilisation, the possibility of

using different detection methods due to easy labelling and the easy regeneration of their

functionality after immobilisation. Additionally, they can be modified, thus enhancing their

stability, affinity and specificity and facilitating the functionalisation of nanoparticles and

surfaces. These advantages enable the phage and aptamer biosensors to meet the

requirements of sensitivity and stability that are necessary for the detection of disease

biomarkers and food contaminants in their natural matrices.

The full potential of these novel biomolecules has not yet been realised completely and there are certain challenges that need to be overcome. However, proof-of-concept experiments demonstrating that aptamers and phages can specifically bind and regulate the function of various biomedically relevant targets, hold promise for the development of innovative diagnostics. The ability to develop affinity-based detection systems consisting of tailor-made characteristics, which can be applied to the analyses of disease biomarkers or carriers which are unlimited by size, complexity, toxicity and matrix effects, offers the field of biosensing the opportunity to explore new and dynamic routes of diagnostic sensor development. Overall, the potential of aptasensors and phage sensors is vast, and this exciting area of investigation is on the verge of exponential growth.

http://www.intechopen.com/source/pdfs/12836/InTech-The_use_of_phages_and_aptamers_as_alternatives_to_antibodies_in_medical_and_food_diagnostics.pdf