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NetScientific — Advancing on multiple fronts to commercialisation

NetScientific — Advancing on multiple fronts to commercialisation

NetScientific recently announced full-year results for 2017. It was a year of progress for the company, which is carrying forward into 2018. In February 2018, ProAxsis had its first commercial sale of Neutrophil Elastase Airways Test (NEATstik) for measuring active neutrophil elastase, in this case to a research lab conducting a respiratory clinical trial with a pharmaceutical company. In March, Vortex announced a collaboration with BioView for automated clinical biomarker identification of circulating tumour cells.

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Written by

NetScientific

Advancing on multiple fronts to commercialisation

Financial results

Pharma & biotech

18 April 2018

Price

48.50p

Market cap

£38m

US$1.40/£

Net cash (£m) at 31 December 2017

6.7

Shares in issue

78.6m

Free float

20.2%

Code

NSCI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.4)

(27.6)

(11.0)

Rel (local)

(10.0)

(22.9)

(10.4)

52-week high/low

73.5p

40.8p

Business description

NetScientific is a healthcare IP commercialisation group with an investment strategy focused on sourcing, funding and commercialising technologies. Its portfolio of four core investments and one material investment is in three main sectors: digital health (Wanda), diagnostics (Vortex, ProAxsis, Glycotest) and therapeutics (PDS Biotechnology).

Next events

Glycotest Series A

H118

Vortex fundraise or partnership

H218

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

NetScientific is a research client of Edison Investment Research Limited

NetScientific recently announced full-year results for 2017. It was a year of progress for the company, which is carrying forward into 2018. In February 2018, ProAxsis had its first commercial sale of Neutrophil Elastase Airways Test (NEATstik) for measuring active neutrophil elastase, in this case to a research lab conducting a respiratory clinical trial with a pharmaceutical company. In March, Vortex announced a collaboration with BioView for automated clinical biomarker identification of circulating tumour cells.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

0.5

(12.3)

(20.6)

0.0

N/A

N/A

12/17

0.4

(9.5)

(13.6)

0.0

N/A

N/A

12/18e

1.9

(12.4)

(13.5)

0.0

N/A

N/A

12/19e

4.1

(9.7)

(10.8)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

First commercial sale of NEATstik

In February, ProAxsis announced the first commercial sale of NEATstik, a lateral flow device for rapid, easy monitoring of neutrophil elastase levels in the clinic or home from sputum samples. Neutrophil elastase is involved in chronic respiratory diseases such as cystic fibrosis and chronic obstructive pulmonary disease (COPD) and is an established biomarker of infection and inflammation.

Vortex collaboration with BioView

In March, Vortex announced a collaboration with BioView, an Israel-based company that provides automated cell imaging and analysis solutions. The purpose of this collaboration is to enable automated identification of clinical biomarkers expressed by circulating tumour cells that have been collected by Vortex’s platform.

Equity raise announced

NetScientific announced a share offering to raise £5m in gross proceeds, which was approved by shareholders at the General Meeting on 16 April 2018. Woodford funds, which already owns 45.0% of NetScientific, subscribed to approximately £3m worth of the offering. According to the company, this will provide enough cash to fund operations into 2019.

Valuation: £67.9m or 86p per share

We have adjusted our valuation of NetScientific from £70.5m or 102p per share to £67.9m or 86p per share. This is mainly due to a more conservative view of the revenue ramp for Vortex, Wanda and Glycotest (though peak sales remain the same) and a higher share count following the equity raise, which was partly mitigated by rolling forward our NPVs to 2018. We expect to update our valuation with the closing of financings for the individual companies, due in 2018, and following the closing of the recently announced financing for NetScientific itself.

ProAxsis progress

NEATstik is an immunoassay for routine, point-of-care monitoring of neutrophil elastase. Neutrophil elastase is involved in chronic respiratory diseases such as cystic fibrosis and COPD, as neutrophil elastase activity is responsible for significant airway damage and is a strong predictor of lung function decline. Detecting increased neutrophil elastase levels earlier can reduce exacerbations and hospitalisation risk in patients with cystic fibrosis and COPD and improve health outcomes. The recent sale of NEATstik for use in a clinical trial helps to validate the approach and the technology.

As a reminder, ProAxsis also announced in January that it had received a CE mark for a test to detect active plasmin using its ProteaseTag technology. Plasmin is a protease present in the blood that, among other functions, breaks down the fibrin protein found in blood clots. It is implicated in inflammatory disorders of the lung, such as idiopathic pulmonary fibrosis (IPF) and acute respiratory distress syndrome (ARDS), because these conditions are characterised by the impairment of fibrin breakdown, which may contribute to the pathology of these disorders. The plasmin assay may therefore be useful in the lab for the development of treatments for these disorders.

All of this will help ProAxsis continue its commercial momentum. ProAxsis previously announced it had tripled the number of orders for its Active Neutrophil Elastase Immunoassay kit in H217 over H117, partially as a result of a high level (75%) of repeat orders. Due to this momentum, NetScientific continues to expect ProAxsis to generate around £1m in revenues in 2018.

Valuation

We have adjusted our valuation of NetScientific from £70.5m or 102p per share to £67.9m or 86p per share. This is mainly due to a more conservative view of the revenue ramp for Vortex, Wanda and Glycotest (although peak sales remain the same) and a higher share count following the equity raise, which was partly mitigated by rolling forward our NPVs to 2018. We expect to update our valuation with the closing of financings for the individual companies, expected in 2018 (Glycotest for example is aiming to close a Series A in H118), and following the closing of the recently announced financing for NetScientific itself.

Exhibit 1: Valuation of NetScientific

Portfolio company

Prob. of success

Profitability

Peak sales (£m)

Margin
(%)

rNPV
(£m)

Ownership
(%)

Share value (£m)

Vortex

15.0%

2020

138

43%

16.3

95.0%

15.5

Wanda

7.5%

2020

326

52%

16.6

70.9%

11.8

Proaxsis

15.0%

2020

47

51%

15.3

56.5%

8.6

Glycotest

20.0%

2021

113

51%

17.7

87.5%

15.5

PDS

10.0%

2022

270

56%

29.8

17.4%

5.2

Total

 

 

 

 

 

 

56.6

Net cash and equivalents (H217 + offering) (£m)

11.3

Total firm value (£m)

67.9

Total shares (m)

78.6

Value per share (p)

86

Source: NetScientific reports, Edison Investment Research

Financials

NetScientific reported revenue for 2017 of £0.39m and an operating loss of £10.6m. We are lowering our 2018 revenue forecasts from £3.5m to £1.9m as we take a more conservative view of the revenue ramp for some of the portfolio companies, although the growth rate remains high at 385%. We are also introducing our 2019 forecasts, which feature revenues of £4.1m.

Cash as of the end of the year was £6.9m, which the company has said is enough to fund the business until the end of June 2018. Hence, NetScientific announced a share offering to raise £5m in gross proceeds, which was approved by shareholders at the General Meeting on 16 April 2018. Woodford funds, which already owns 45.0% of NetScientific, subscribed to approximately £3m worth of the offering. According to the company, this will provide enough cash to fund operations into 2019. We record a financing shortfall as £11m in illustrative debt in 2018, which could be reduced by successful Series A financings.

Exhibit 2: Financial summary

£'000s

2015

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

122

518

386

1,873

4,132

Cost of Sales

(6)

(255)

(245)

(428)

(1,207)

Gross Profit

116

263

141

1,445

2,925

Research and development

(7,256)

(7,443)

(5,177)

(7,197)

(5,114)

Selling, general & administrative

(4,260)

(5,001)

(5,281)

(5,560)

(5,911)

EBITDA

 

 

(11,530)

(12,570)

(10,814)

(11,533)

(8,321)

Operating Profit (before amort. and except.)

(11,400)

(12,429)

(10,593)

(11,312)

(8,100)

Intangible Amortisation

0

0

0

0

0

Exceptionals/Other

(1,518)

(666)

0

0

0

Operating Profit

(12,918)

(13,095)

(10,593)

(11,312)

(8,100)

Net Interest

78

86

1,058

(1,126)

(1,626)

Other (change in fair value of warrants)

0

(49)

(45)

0

0

Profit Before Tax (norm)

 

 

(11,322)

(12,343)

(9,535)

(12,438)

(9,726)

Profit Before Tax (IFRS)

 

 

(12,840)

(13,058)

(9,580)

(12,438)

(9,726)

Tax

94

(18)

202

62

204

Deferred tax

0

0

0

0

0

Profit After Tax (norm)

(11,229)

(12,361)

(9,333)

(12,376)

(9,522)

Profit After Tax (IFRS)

(12,746)

(13,076)

(9,378)

(12,376)

(9,522)

Minority interest

1,905

1,881

1,060

2,111

1,019

Profit After Tax after minority interest (FRS 3)

(10,842)

(11,195)

(8,318)

(10,266)

(8,502)

Average Number of Shares Outstanding (m)

38.2

51.1

61.0

75.8

78.6

EPS - normalised (p)

 

 

(24.4)

(20.6)

(13.6)

(13.5)

(10.8)

EPS - IFRS (p)

 

 

(28.4)

(21.9)

(13.6)

(13.5)

(10.8)

Dividend per share (p)

0

0

0

0

0

BALANCE SHEET

Fixed Assets

 

 

2,946

4,054

3,805

5,063

7,221

Intangible Assets

1

0

0

0

0

Tangible Assets

285

779

891

1,069

1,247

Other

2,660

3,275

2,914

3,994

5,974

Current Assets

 

 

23,799

11,034

7,968

12,017

5,309

Stocks

0

0

86

375

516

Debtors

560

1,578

1,014

187

413

Cash

23,239

9,456

6,868

11,455

4,379

Other

0

0

0

0

0

Current Liabilities

 

 

(2,206)

(2,172)

(905)

(2,517)

(2,192)

Creditors

(2,156)

(2,044)

(777)

(2,389)

(2,064)

Short term borrowings

(50)

(128)

(128)

(128)

(128)

Long Term Liabilities

 

 

0

(80)

(70)

(11,264)

(16,264)

Long term borrowings

0

(80)

(70)

(11,264)

(16,264)

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

24,538

12,836

10,798

3,300

(5,926)

Minority Interest

(1,805)

(3,875)

(4,573)

(6,684)

(7,703)

Shareholder Equity

 

 

22,733

8,961

6,225

(3,384)

(13,629)

CASH FLOW

Operating Cash Flow

 

 

(10,752)

(12,939)

(10,479)

(8,663)

(8,275)

Net Interest

38

43

(11)

(1,126)

(1,626)

Tax

83

112

(131)

62

204

Capex

(299)

(457)

(399)

(399)

(399)

Acquisitions/disposals

(144)

(1,261)

1,310

(1,080)

(1,980)

Financing

18,208

0

8,083

4,600

0

Dividends

0

0

0

0

0

Other

39

66

(574)

0

0

Net Cash Flow

7,172

(14,436)

(2,201)

(6,607)

(12,076)

Opening net debt/(cash)

 

 

(16,136)

(23,189)

(9,248)

(6,670)

(63)

HP finance leases initiated

0

0

0

0

0

Exchange rate movements

(212)

(603)

387

0

0

Other

92

1,098

(764)

0

0

Closing net debt/(cash)

 

 

(23,189)

(9,248)

(6,670)

(63)

12,013

Source: NetScientific reports, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by NetScientific and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by NetScientific and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Findel — Strong finish – Forecast upgrade

Findel indicates that it will finish FY18 at the top end of current market expectations. This suggests that both the online strategy and the turnaround strategy at Findel Education are on course. We upgrade FY18 profit forecasts to the new guidance level and retain our 312p valuation which, at an FY18e P/E of 10.5x, is modest for a company with an online presence of 72% and 13% PBT CAGR 2017-19e.

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