Provexis - an aid to diet AND financial health?

Provexis is an AIM listed life science business with a share price chart like a craggy mountain that would require some serious crampons. The share price is currently 6.35p (23.10.09) which capitalizes the company at £65m. A year ago the share price was 0.38p and during the intervening twelve months it has been as high as 15.75p. So, what's all the fuss about?

The Business

PXS's focus can be broadly described as the discovery, development and licensing of bioactive ingredients for integration into functional foods and beverages, medical food and diet supplement technologies. The benefits of these  ingredients are gradually being proved as preventative and curative of health issues affecting millions of people. [ref] www.provexis.org [/ref]

It is a presently a small company with ten employees (of which only one is classified as ‘administrative’),  a research and development resource in Liverpool and a shared R&D facility at the Rowett Institute in Aberdeen all under the administration of the company’s head office in Windsor.

The management of the Company are presently focused on;

• Collaborating with leading research institutes to identify and develop proprietary technologies.
• Developing credible scientific proof to support product claims.
• Gaining regulatory and safety clearances in relevant global markets
• Implementing global IP strategies underpinned by strong patent portfolios
• Commercializing technologies through collaboration and licensing

Its business can be summarized as finding good bio-technologyand developing and protecting this into a licensable product for long term income generation in the form of royalties. There is absolutely no interest in product manufacture.

Areas of operation / Products

The company currently has three products, all potentially very lucrative, in various stages of development:

1. Fruitflow(TM) – initially developed at the Rowett Institute this is a proven dietary supplement (tomato extract) to ‘thin the blood’ of platelet aggregation without side effects.  ‘Thinning the blood’ is an accepted major part of cardiovascular disease and thrombosis prevention and up until now has been addressed by the taking of aspirin which is now known, in some patients,  to stimulate gastric bleeding and other side effects. Fruitflow is a registered trade mark, the product is patented, has been approved under the European Food Safety Authority  regulatory framework and is commercially ready.
2. NSP#3G – Provexis is the 75% shareholder in a joint venture with the University of Liverpool which owns the patent for this product which is made from plantain (banana) extract and used for the treatment of inflammatory bowel disease and currently focussed on increasing the remission time for Crohn’s Disease patients. Clinical trials have been approved for this product and commencement of a two centre patient trial is imminent.  Commercialisation  is clearly some way off and the overall financial benefits to PXS unclear at this stage.
3. Helicobacter Pylori –this bacterium is the causative agent of peptic ulcers and PXS have recently taken an option on IP developed at the University of Manchester which specifically targets the source of the problem. Work is still focussed on developing a stabilised extract and therefore, in terms of return on investment, at an even earlier stage than NSP#3G.

Liquidity

As with any company at this stage of development i.e. no commercial income, the availability of cash resources is crucial. During the past five years, the company has run through £5m of cash, it raised a further £2.5m in August 2008 and is in the process of gathering in another £5m as subscription for new ordinary shares during August / October 2009.

The minimalist extent of the PXS publicly issued prospectuses for these capital raisings is, unfortunately, not uncommon for AIM listed stocks in keeping with their stated intention of reducing the regulatory burden compared to that endured by companies listed on the Main Exchange.

So, with nearly £1.7m of cash at 31 March 2008 and a cash burn averaging under £1.5m [ref] NB: this does not include the £3.1m goodwill impairment charge taken in the year to 31.03.09 which as the Chairman says is a non cash item at this time. It does however reflect very poorly on the valuation of some purchased IP some years ago, different Chairman then..…of course. [/ref] . During the previous three years, why did PXS raise so much extra money? Their stated reasons were:

1. Strengthen the balance sheet in order to improve the Company’s leverage in current and prospective negotiations for its Fruitflow technology.
2. Accelerating new claim development for its Fruitflow and NSP#3G plantain technology.
3. The acquisition of new technologies to strengthen the pipeline, thereby enhancing long term shareholder value.

That’s it, not a financial forecast in sight. Not even an allusion as to when the company may even start to receive anything resembling trading income.  The existing shareholders are either extraordinarily understanding and supportive or, more likely, know a lot more about the commercial position than is publicly available.

Shareholder base

This is where the PXS story begins to lift off.  During 2008 the highly successful and somewhat secretive DSM Venturing took a 28.2% stake in PXS. DSM are the venture capital arm of the very large Dutch group Royal DSM NV i.e. Shell.

At present, the Directors' interests account for a further 18% of the issued ordinary share capital but this could double if all outstanding directors share options are exercised. These options are all exercisable before August 2011 at what now appear to be absurdly favourable prices. For all intents and purposes, the directors + DSM can be assumed to control over 60% of the PXS.

DSM Venturing [ref] www.dsm.com [/ref] invest in life sciences, nutrition, pharmaceuticals, performance materials, polymers in addition to base chemicals. Their world wide field of investment usually centres on USA, Europe , India and China and unlike some (most?) in this field, DSM play a long game and after some ten years of existence, they have four very profitable exits to their name.  By the usual routes , trade sales or IPO’s have divested their investments in Oxford Performance Materials, Speedel, Lipid Technologies and Morphotek. Whilst further research on these companies is clearly of limited value to prospective investors what may be of considerable interest and warrant further investigation  is DSM’s current portfolio of investments:

• Denmark - Upfront Chromatography
• China - Tianjin Green Bio-Science
• Israel - Sol-Gel Technologies
• France - IntegraGen
• Netherlands - IQ Therapeutics, Suprapolix, Terreco
• USA - Ganeden Biotech, Harland Medical Systems, Inmat, Van Technologies, Viocare, Xylos

And finally, the UK interest:  Provexis

There are two key points here. It speaks volumes that PXS are the only UK investment to pass the DSM test and it would appear that DSM may have been instrumental in the decision to raise all that cash. Finance enough to see PXS through at least another two years of no commercial income. The point being that DSM remain confident for the long term and are not now going to have their equity diluted before exit.

Prospects

Of the three ‘products’ currently being developed, it seems clear that ‘Fruitflow’ is the only one that is going to crystallize during the next two years, but that could be in a big way. The product is already through very extensive clinical trials , seemingly has full EU approval and commercial negotiations are well underway with a global ingredients manufacturer, representatives of the dairy industry and a multi national soft drinks company (rumoured to be Coca Cola). It is easy to see the attractions for all of these areas of having their product associated with improved blood circulation and the prevention of coronary heart disease.

A key risk for PXS is the continuing strength, extent and validity of the world wide patent protection  for its products and technologies. All sorts of events can upset the well being of a company dependent on royalty income from patented products. Licensing companies seeking to reduce their costs are wont to find alternatives and challenge the patent, competing technologies can be introduced, over a period of time patents can, in certain circumstances, be invalidated. There is also the reverse risk in that, for reasons they are wholly unaware of at this time, PXS can be held to have infringed a third parties rights or existing patent.

Conclusion

This has shown itself to be a very volatile stock. For the equity investor, everything hinges on there being no late regulatory difficulties with ‘Fruitflow’  and deals being struck with the various current suitors. By recently raising £5m, a considerable sum for the Company in their present circumstances, the Company have ensured that they will not be pressurized into any deal just to survive and progress to the development of their next product.  An astute negotiating tactic, the psychology of which has DSM’s influence written all over it.

All of the above  does of course weigh against the likelihood of any short term gain for the equity investor. The PXS share price will continue to fluctuate over the next 18 months/two years, probably quite wildly as it has done over the past year. These movements will be precipitated by the usual brew of company announcements, press stories, market rumours and, at times, short sellers.

There are solid grounds for longer term optimism for the development of a very profitable and valuable company which could become a target for one of the multi nationals  e.g. Unilever,  Glaxosmithkline . If you are comfortable with an 18 month/two year timeframe, then keep a close eye on the market as good buying opportunities are likely to occur for PXS shares during the coming months.