NetScientific — Update 13 June 2016

NetScientific completed a strategic review in 2015, which has refined its focus onto building a transatlantic biomedical and healthcare technology group concentrated on chronic diseases through three main sectors: digital heath, diagnostics and therapeutics. The current portfolio of opportunities has been identified from a range of sources across the company’s network, including strategic partnerships, global institutions and leading technology incubators. Since mid-2015, a number of significant changes to transform the business and enable strategic execution have been implemented, including:

We provide a brief strategic overview of the company below. In the next section, we profile the core portfolio and material investments presented in Exhibit 1, outlining progress to date, the underlying technologies, market opportunity and forthcoming milestones.

NetScientific remains focused on sourcing, funding and building early- to mid-stage US and UK companies that are developing potentially breakthrough technologies in growing markets with unmet needs. Following the strategic review, the company is evolving away from a classic healthcare/tech seed-stage investment approach (the strategy at IPO in 2013) towards being an active investor involved in all phases of development, management and growth of a focused group of largely majority-owned subsidiary companies. The goal is to provide management expertise to support the core portfolio companies as they transition from development stage and approach commercialisation. This initially involves direct senior management input and technical, financial and administrative support from NetScientific; however, as the companies mature, dedicated management teams with experienced CEOs are recruited to navigate the next growth phase.

CEOs are now in place at four of the five priority companies; Glucosense is the exception being led by an experienced project manager until such time as it achieves key milestones. In addition to executing on strategy and taking their respective companies through commercial milestones, these individuals have been tasked with attracting external growth capital though Series A and potentially follow-on rounds. Proceeds from the recent NetScientific equity issue have been largely earmarked for investment into Wanda and Vortex; Series A rounds are in process or planned for Wanda, ProAxsis and Glycotest.

In addition to providing the funds necessary for growth and further development, securing external investment is critical from other perspectives. Importantly, it signifies third-party validation for the various technological approaches/market opportunities, and secondly it will allow for an explicit company valuation (carrying value) within NetScientific’s future accounts. The evolution of the carrying value of NetScientific’s portfolio as these assets gain commercial traction should drive share price appreciation as value creation becomes more apparent. Efforts by NetScientific, such as the forthcoming Capital Markets Day, to raise both its profile and that of its portfolio companies with investors in the UK and US should also increase the visibility of potential forthcoming inflection points. These may also result in an uplift to the current share price and, at the portfolio level, may also enable exits (value realisation) through IPO or trade sale.

Achievement of NetScientific’s long-term strategy of maximising shareholder value and generating capital for pipeline reinvestment into new opportunities rests on the potential for significant value realisation through exits. The timing of exits is not determined as progress of portfolio company development and availability of funding will govern how long any investment might be held. Nevertheless, under NetScientific’s refined strategy, 2016 will be a year for execution and delivery of the next steps on the path to commercialising investments ahead of potential exits, at a premium from 2017 onwards.

Vortex BioSciences is a California-based spin-out focused on cancer diagnostics. It has developed a novel ‘liquid biopsy’ system to capture rare circulating tumour cells (CTCs) from whole blood based on technology developed at the Department of Bioengineering at UCLA. The system includes a novel liquid biopsy automated instrument (VTX-1) and integrated microfluidic cartridge. CTCs are an area of intense clinical research interest and technical development (see review) as they provide information about an individual’s cancer, which can be used for prognostic, diagnostic and treatment stratification purposes. Rising CTC numbers are a known risk marker for cancer reoccurrence in diagnosed patients, therefore a combination of effective CTC isolation with sophisticated analysis could enable much better and earlier cancer diagnosis, monitoring and personalised cancer therapy. The initial focus is on the research market, The VTX-1 system was introduced at the American Association for Cancer Research (AACR) conference in April 2016. The system is currently in the late stages of development, with the official launch into the US research market planned for Q117.

NetScientific's shareholding in Vortex is 95%. Vortex was founded in 2012 and, as at 31 December 2015, NetScientific had invested £5.6m. Grant funding received to develop the underlying technology prior to Vorex’s formation was £1.6m.

A new CEO, Gene Walther was appointed in January. He has over 20 years’ experience in diagnostics, having previously held roles as deputy director of diagnostics at the Bill & Melinda Gates Foundation, executive chairman at GenturaDx (from foundation, through product development, to acquisition by Luminex), and president and global head of diagnostics at Novartis. Other notable management additions in Q116 include a chief commercial officer, VP of manufacturing and director of quality.

The Vortex technology, using microfluidics, isolates larger cells from whole blood. As CTCs tend to be much bigger than red blood cells and larger than most white immune cells, they are preferentially captured (Exhibit 3). Note that the method is not specifically selective for cancer. Key advantages include the rapid processing time (taking as little as one hour), collection efficiency (sensitivity) and purity of captured CTCs with limited white blood cell contamination (specificity). Most importantly, the captured CTCs are intact and undamaged and can be identified, analysed and enumerated using different methods. The Vortex technology is label-free, requiring no pre-treatment; hence it can be used in a variety of applications including cancer diagnosis and monitoring, personalised medicine, drug development and cancer research. The current FDA-approved system uses antibodies to capture CTCs, but misses many.

During 2015, Vortex has made significant progress in optimising the VTX-1 instrument and the microfluidic cartridge, and strengthening its IP portfolio. IP consists of 12 patents, including three issued company-developed patents and six licensed patents. These include the devices (instrument and cartridges) and various applications; Vortex also benefits from significant know-how. It has selected contract manufacturing partners for VTX-1 (Gener8) and the microfluidic cartridge (Symbient/Z-Microsystems) ahead of commercialisation. Transition to scale manufacturing will happen in early 2017 to support commercial supply.

The current ‘gold standard’ procedure for obtaining tumour information is a solid biopsy; however, this has limitations. The primary tumour is not always easily accessible, nor are metastatic disease sites, and single-site biopsy may not provide a complete genomic landscape of the tumour due to intra-tumour heterogeneity. Liquid biopsy (CTC or ctDNA, Exhibit 4) is minimally invasive and may allow better assessment of prognosis and optimised therapy and be easily repeated.

Vortex is one of several companies with CTC detection systems in development (Exhibit 5). A number are currently marketed for clinical use in Europe or for research use. CellSearch is the sole CTC system that is FDA approved, but its use is limited to enumeration in certain cancer types. This month, the FDA approved the first ctDNA blood-based genetic test: Roche’s cobas EGFR Mutation Test v2 as a blood-based companion diagnostic for Tarceva (erlotinib).

CTC detection technologies can be used in various applications (research, drug development, diagnosis, monitoring and treatment); some of these are explored in more detail in Exhibit 6.

Vortex flags that liquid biopsy could represent a $22bn market opportunity (according to JP Morgan), excluding the research segment. This represents a significant growth opportunity for the company as its product pipeline expands from initial research use to downstream clinical applications, which will be addressed by next-generation instruments. Three different generations are in the pipeline, but the timelines to commercialisation will depend on development progress and funding. Vortex has sufficient current funds to take it through the launch of VTX-1; on existing visibility, the second-generation technology may be on the market in the next two to three years.

Vortex’s business model is akin to a razor/razor blade model whereby the instrument is sold at a small mark-up to cost, with profits made through the supply of the disposable microfluidic cartridges. Vortex’s pricing strategy is in development, but current indications are that each instrument will cost $125-150k with a per-cartridge price of $250-350.

The key milestone for the company will be direct commercial launch into the US and European clinical research market in 2017.

Wanda is a digital health company that has developed a software platform for the management of patients with chronic disease. The Wanda application is an integrated solution to improve patient monitoring and provide behavioural modification and ultimately reduce hospitalisations. The company has developed applications to monitor patients for congestive heart failure (CHF) and chronic obstructive pulmonary disease (COPD) and is currently developing an oncology monitoring application.

Wanda initially began commercialisation in 2015 with Triventis Health, a joint venture between NetScientific and the hospital operator Meridian Health, which was responsible for developing dedicated devices to use the platform. Sales expectations for the Triventis devices were not met, so a strategic decision was made to dissolve the collaboration, enabling Wanda to partner with multiple healthcare providers and device makers. The company has subsequently partnered with the home care company Health Resource Solutions to provide its CHF and COPD application and has a collaboration agreement with the hospital operator Dignity Health for the development and launch of the oncology application. Another commercial agreement has been recently signed, with additional new customers expected in 2016.

NetScientific has a 71.3% equity stake and as of 31 December 2015 it has invested £5.1m. Grant funding received to develop the underlying technology, prior to Wanda’s formation, was £7.7m.

In September 2015, Steve Curd joined as CEO. He has over 20 years of operational experience in the digital health sector, most recently as the COO of NantHealth and previously as the CEO of CareInSync (merger with Zynx Health in 2014), CIO of UnitedHealth Group, COO of WebMD and CEO of VantageMed ($13m merger with Nightingale Informatix in 2007).

The Wanda application collects data from remote monitoring systems (RMS) and patient self-assessments on mobile devices to monitor disease progression and uses the company’s proprietary analytics to predict disease risk. The project resulted from 12 years of clinical research into chronic disease management at UCLA. The information gathered is automatically leveraged by the application to provide behavioural modifications to the patient, as well as to inform the patient’s physician care team should intervention be necessary. The ultimate goal of the application is to reduce the number of hospitalizations by providing more timely feedback based on the patient’s status.

The Wanda platform is versatile and, hypothetically, can be employed to monitor a wide variety of chronic diseases. The first module developed for the platform was for the monitoring of patients with CHF. The software integrates the patients’ medical record information with regular blood pressure and weight measurements gathered wirelessly from Bluetooth-enabled devices, as well as self-reported symptom assessments. The system was previously tested utilizing a 1,500-person trial performed at UCLA. Wanda is currently developing a module for the prediction of complications associated with COPD. The company will provide the CHF and COPD modules as a combined application because of the comorbidity of these two diseases.

The vast majority of medical expenses in the US are associated with the management of chronic disease. For heart failure alone, the annual costs to the healthcare system exceed $60bn.1 Approximately 60% of these costs are associated with hospital visits, and preventing a single trip to the hospital can save the healthcare system $10,000 on average. Wanda’s primary customers will be businesses interested in reducing the cost of care, namely healthcare providers and payers.

The deal to provide the CHF/COPD application to Health Resource Solutions is a useful model for understanding the potential structure of future agreements. Health Resource Solutions is a home nursing and support system providing services to approximately 1,000 patients per month in the Chicago area. The agreement would provide the application to patients at an upfront cost of $225 and $60 per month, with a target of 50 patients per month from this pool. Wanda will launch its second product, OncoVerse, for the monitoring of cancer patients in 2016. The company has already entered into an agreement with Dignity Health to launch the programme in more than 40 of Dignity’s facilities.

The digital health market as a whole is poorly developed, with few to no market leaders, and highly fragmented due to low barriers to entry. There are a large number of companies in the immediate space of Wanda developing similar solutions for chronic disease management. These can be roughly subclassified into different groups based on their approach (Exhibit 7).

The company’s current focus is expanding the number of patients using the Wanda system, because data gathered on these patients can subsequently be used to validate and improve the algorithm. The roll-out of the CHF/COPD application to Health Resource Solutions is ongoing, and the launch of OncoVerse is expected to initiate later in 2016. The current number of patients using Wanda is small due to the recent launches and revenue from the agreements has not been reported yet, but is expected to increase throughout 2016. The company has stated that it expects revenue from these two licences to be c $600,000.

Wanda’s goal is to have 4,000 people using the system by end-2016. It intends to address this primarily through business-to-business deals with hospital systems and care providers by leveraging the cost-saving potential of the system. However, the company is also planning to initiate a direct-to-consumer campaign targeting early adopters, which we expect to raise the company’s profile. The company will be expanding its offering with the introduction of new disease modules and the 2016 target is to enrol at least two new business clients using existing and new systems. The company hopes to have 15,000 registered users by the end of 2017.

ProAxsis was founded in 2013 as a medical diagnostics spin-out of Queen's University Belfast in Northern Ireland. ProAxsis has developed proprietary molecules, called ProteaseTags, which selectively bind active proteases and can be used in a range of diagnostic and disease monitoring tools. The company produces a commercially available immunoassay for research use and is currently developing a PoC test called NEATstik for routine monitoring of neutrophil elastase. Neutrophil elastase is involved in chronic respiratory diseases such as cystic fibrosis (CF) and chronic obstructive pulmonary disease (COPD) and is an established biomarker of infection and inflammation. Significant progress with the development of NEATstik was made in 2015 and, contingent on raising further funds in 2016, the company expects to be ready for EU commercialisation by mid-2017.

NetScientific's shareholding in ProAxsis is 56.5% and as at 31 December 2015 it had invested £0.1m. Grant funding received to develop the underlying technology, the majority of which was received prior to the formation of ProAxsis was £1.0m. ProAxsis has initiated a Series A fund-raising round seeking £7m, with closure anticipated H216. The cash will be used to complete NEATstik development and CE marking, to build a small commercial sales team in key EU markets and to fund a COPD clinical trial.

Recent management changes have included the appointment of Dr David Ribeiro as CEO in October 2015. He has previously held senior management roles at Solvay Healthcare, Encysive Pharmaceuticals, Pfizer and Pharmaxis Pharmaceuticals. In addition, Professor Brian Walker, one of the company co-founders has been confirmed as Chief Scientific Officer.

Active proteases ('molecular scissors') play a key role in many physiological processes and are considered important therapeutic targets, as well as being biomarkers of many diseases. They may be unregulated in diseases including cancer, heart disease, stroke, Alzheimer’s disease, rheumatoid arthritis, multiple sclerosis, CF and COPD. Current assay systems for proteases utilise chromogenic or fluorogenic substrates, are often complex and may not be sufficiently specific to detect the active form of the enzyme. ProAxsis has developed novel and patented ProteaseTags to irreversibly inhibit/trap active proteases. Because they are designed to form a bridge to a solid support via covalent binding they can be combined with established diagnostic technology platforms such as ELISA, lateral flow or multi-analyte biochips.

ProAxsis's first ProteaseTag immunoassay kit was launched in August 2015 and is commercially available for research-only use, including academic labs and clinical research organisations involved in clinical trials. The kit measures active neutrophil elastase (NE), which is produced by white blood cells (neutrophils) in response to lung infections and is also a potential therapeutic target. Elastase destroys the elastic connective tissue that keeps the lungs supple, which results in permanent scarring. Clinical studies have shown that high neutrophil elastase levels are linked to deteriorating lung function (eg Sagel et al 2012). Sales in 2015 were modest, although the company expects them to grow as further pharma company customers are secured (following completion of internal validation testing). Beyond the NE kit, three further specific immunoassays are in development against different proteases targets, including those involved in pulmonary fibrosis, CF/COPD and Acute Respiratory Distress Syndrome.

ProAxsis is also developing a lateral flow device (NEATstik, Neutrophil Elastase Airways Test) for rapid, easy monitoring of NE levels in the clinic or home from sputum samples. It aims to be the first-to-market, PoC NE test. NE activity in respiratory diseases is responsible for significant airway damage and is a strong predictor of lung function decline. The goal is to detect increased NE levels earlier to reduce exacerbations and hospitalisation risk in patients with CF and COPD, and improve health outcomes.

The chronic respiratory diseases CF and COPD are associated with frequent lung infections, irreversible tissue damage and lung function decline. There are 70,000 patients diagnosed with CF worldwide (30,000 patients in the US and Canada and c 40,000 elsewhere, mainly in Northern Europe) and 35.7 million patients with COPD in the US and EU. The treatment of lung diseases is estimated to cost the UK NHS £4.7bn a year and, according to NICE, "a reduction of 5% in COPD exacerbations would be expected to save the NHS £16 million per annum".

The target population for home testing is adult CF patients and moderate-severe COPD patients, 65% and 25% of whom respectively are 'natural sputum producers'. Even at a conservative price, assuming a 40% share of CF patients (testing weekly) and a 20% share of COPD patients (testing monthly), ProAxsis estimates the European CF/COPD home test market could be around £16.5m. The US market would probably be twice this, giving an estimated US/EU market of c $70m.

Newsflow in 2016 should include an announcement of customers for the NE immunoassay, although the key triggers will be CE mark approval (Q416/Q117) and launch of the NEATstik device in Europe during 2017. Full development and commercialisation of the NEATstik PoC device requires additional funding, and ProAxsis is seeking an initial £7m through a Series A fund-raising.

Technical development of NEATstik is well advanced, with clinical validation ongoing and transfer to manufacture targeted for Q316. Focusing initially on Europe, the company is aiming for CE mark approval for general diagnostic use in clinics by healthcare professionals by the end of 2016, followed by separate CE marking of the commercially more valuable self-test home device in Q217. EU launch of the in-clinic device is anticipated Q117, with self-testing launch Q217.

New funds with enable ProAxsis to run a multi-centre, blinded, two-arm, prospective pan-European trial in 100-120 COPD patients, which will start in 2017. The trial will measure exacerbations over 12 months, with patients enrolled in the trial using the NEATstik to measure their NE levels. In one arm of the study, clinicians monitoring the patients will be able to use the NEATstik readings to inform their treatment interventions, while in the other arm clinicians will not have access to the NE readings, instead basing treatment decisions on only standard symptomatology.

Readout of the trial results in 2020 will provide clinical validation and, crucially, data to support potential healthcare utility claims relating to the reduction of exacerbations. This will be key for both marketing and reimbursement discussions.

In the US the NEATstik is classed as a medical device rather than in vitro diagnostic. The US commercialisation pathway is less clear. The COPD trial will also form part of the US regulatory application for NEATstik, although formal discussions with the FDA are yet to take place. However, the immunoassays could be sold in the US via accredited CLIA labs as a service without FDA approval. ProAxsis is seeking collaborators to assist in raising awareness in the US market and contributing to the KOL publication strategy.

Glycotest is a US-based company developing a non-invasive diagnostic and monitoring test for early-stage liver disease based on proprietary blood-based biomarker panels and algorithms. Its lead product (HCC Panel) is a biomarker panel for curable early-stage hepatocellular carcinoma (HCC), the most common form of primary liver cancer. Liver disease is a large and growing market and current surveillance tests underdetect early-stage HCC. Glycotest's HCC Panel outperformed the alpha-fetoprotein (AFP) blood test, a commonly used screening test, in a 208-patient study. Using other biomarkers, Glycotest's approach could be extended to other liver diseases. Glycotest's commercialisation strategy in the US is to market HCC Panel as a laboratory service through a CLIA-accredited laboratory. Glycotest is seeking $10m Series A funding to complete clinical validation of the test, obtain CLIA lab status and launch HCC Panel by Q417.

Innovator grant funding received to develop Glycotest’s underlying technology prior to Glycotest’s formation was £5.9m ($8.9m). NetScientific has invested £1.2m and its current holding is 87.5%.

Larry Cohen was appointed CEO in December 2015. Larry has over 30 years’ experience in the medical device and diagnostics industry and most recently was CEO of Exalenz Bioscience, a medical device start-up company for the diagnosis and management of gut and liver diseases. Before this he held executive positions at large diagnostic companies such as OrthoClinical Diagnostics (J&J), International Technidyne Corporation (Thoratec) and Beckman Instruments.

Glycotest was founded on technology developed at the Baruch S Blumberg Institute and Drexel University College of Medicine in Philadelphia. Diseased livers secrete a range of glycoproteins with fucose sugar modifications at abnormally high levels, and different diseases may have characteristically abnormal fucosylation patterns. Glycotest has licensed exclusive worldwide rights, with low royalties, to over 50 patented serum glycoprotein biomarkers that exhibit increased fucosylation in liver cancers. Glycotest also owns the rights to assay technology to quantify fucosylated glycoproteins using engineered lectins (sugar-binding molecules). The lectins can be conjugated to an immunoassay detection system for a convenient readout method. Glycotest's platform uses biomarkers, either singly or in panels, to measure both quantitative and qualitative disease signals. Its current patent portfolio consists of four families covering the use of novel fucosylated biomarkers, lectin assay technology, and biomarker panels. Three patents have been issued in the US, two in Australia and others are pending in commercially important regions, including China.

Glycotest has developed its proprietary HCC Panel test for six biomarkers that are elevated in HCC. The individual biomarkers have been evaluated in >800 patients and the HCC algorithm has been developed in thousands of patients. The technology can be extended to other liver diseases, using a different array of validated biomarkers. Glycotest is also developing tests for cholangiocarcinoma and intermediate-stage liver fibrosis-cirrhosis (Exhibit 8).

HCC is the third leading cause of cancer-related death worldwide and the ninth leading cause in the US, with an increasing incidence. Globally, there are c 500k deaths due to HCC per year. Cirrhosis is a scarring of the liver resulting from liver disease and 5-30% of patients with cirrhosis go on to develop HCC. The predominant risk factors for cirrhosis (and therefore HCC) are chronic hepatitis C infection (26% of cirrhosis), hepatitis B infection (15%), as well as non-viral factors such as alcohol consumption (21%) and non-alcoholic fatty liver disease – NAFLD (18%), see Exhibit 10. NAFLD is linked to obesity (BMI >30) and is a growing problem affecting 30% of the US population. It can progress to nonalcoholic steatohepatitis (NASH), which has a 15-25% risk of cirrhosis. The prevalence of alcoholic steatohepatitis (ASH) is unknown, although it may be estimated from the prevalence of alcoholism (8% of the US population, one-third with ASH), which is still a major cause of liver disease in western countries.

There is a clear medical need for an effective surveillance test to detect HCC at an early stage when it is potentially curable by surgery. The American Association for the Study of Liver Diseases (AASLD) recommends that high-risk patients undergo surveillance for HCC with ultrasound every 6 months. Current blood tests for HCC are cheap but insufficiently sensitive/specific. The commonly used AFP test is inadequate when used alone as AFP is secreted by less than 50% of tumours; so many high-risk patients are referred for abdominal ultrasound (AUS). However, AUS sensitivity (detection of true positives) is highly dependent on operator experience and is reportedly less accurate in obese patients. CT/MRI scans are potentially more sensitive, but are associated with increased cost and issues of radiation exposure, so are less widely used. Importantly, AUS has only a 60% sensitivity at identifying curable early-stage HCC.

Based on AASLD guidelines of HCC risk (for hepatitis B/C, ASH and NASH), we estimate that nearly three million patients in the US would be eligible for liver cancer surveillance. Assuming a 20% uptake, this gives a market projection of over $750m in the US assuming two tests per year and a cost per test of $660 (Glycotest data). We note that the average cost of abdominal ultrasonography plus AFP test is around $500. Whether this higher cost/test pricing is achievable remains to be seen and will presumably hinge on the ability of HCC Panel to demonstrate cost-benefit in detecting early-stage HCC. However, growth drivers are likely to come from an increasingly obese population (increasing fatty liver disease and NASH). We estimate the ex-US market potential to be >$3bn, assuming lower uptake (3% of eligible) by a much larger population and a lower cost per test ($300).

Glycotest's commercialisation strategy in the US is to market HCC Panel as a laboratory-developed test (LDT) service; blood samples will be sent by liver specialists to a centralised CLIA-accredited laboratory run by Glycotest. Laboratories testing human samples apply to the Centers for Medicare & Medicaid Services (CMS) for accreditation, which avoids the need for FDA approval for the test itself. Outside the US, Glycotest will seek strategic partnerships, especially for the large Asian liver disease markets.

Glycotest aims to complete the commercial-grade manufacturing methods for its biomarker assays by Q316. In Q416 the company will seek $10m in Series A financing to support its commercialisation strategy, namely team expansion and opening the laboratory, collection of clinical samples (by Q317), complete analytical validation and algorithm training (H117) with the aim of completing clinical validation and obtaining CLIA status for the lab in Q317. Obtaining CLIA status for the lab is reliant on the Series A funding. Glycotest is planning a 500-patient clinical validation study to support its marketing strategy for HCC Panel and has identified investigators and sites. The HCC Panel launch is planned for Q417.

Reimbursement also depends on demonstrating clinical utility and Glycotest plans to seek Medicare coverage through Palmetto GBA's MolDx programme. Private payers are more likely to come on board once the test has Medicare coverage. Reimbursement submissions are expected in late 2018, for potential reimbursement approval in 2019.

Glucosense is a Leeds University spin-out that is developing a non-invasive continuous glucose sensor for self-monitoring of blood glucose as an alternative to finger-prick testing, which is an $8bn market. The company employs nano-engineered silica glass with a low-powered laser to provide real-time measurements of blood glucose within 30 seconds. It is developing two device modules: a small, portable device for intermittent measurements and a continuous monitoring wearable device with a hypoglycemia-alert. This could supplement or replace the current invasive/implantable devices. A small-scale validation in 12 patients was positive and Glucosense plans further optimisation in 2016. Assuming success in ongoing testing of the benchtop prototype device, and subsequent clinical trials, European commercial launch is possible in 2019.

As at 31 December 2015, NetScientific had invested £700k and its shareholding was 60.7%; Leeds University owns most of the remainder.

Following the retirement of David Gough at the end of 2015, Glucosense plans to appoint a new CEO following the next clinical evaluation. The timing of a new appointment is likely to depend on hitting forthcoming technical milestones. Mark Rosser, formerly of GE Healthcare, was appointed programme director in May 2015 and continues to lead the product development work for Glucosense.

Glucosense's device uses proprietary photonics technology which, according to the company, is backed by strong IP. Various patent applications are in place. In July 2015, a key European patent covering the core technology of nano-engineered silica glass (photonic glass) containing ions that fluoresce when stimulated by a low-power laser was awarded. When the glass is in contact with the user's skin, the fluorescent signal varies according to the concentration of blood glucose, enabling a direct measurement of glucose levels in less than 30 seconds.

The current prototype is a desktop device for intermittent testing. A small trial in 12 Type 1 diabetics was run over eight hours comparing Glucosense to standard continuous monitoring and finger-prick testing. The data showed a clinical accuracy rate of 77% and a clinically acceptable accuracy rate of 96.5%, indicating that the device has the potential to be at least as accurate as current methods. Further device development and miniaturisation is underway (see Future steps).

Diabetes is a growing global problem. Over 380 million people are estimated to have diabetes at a cost of $500bn to healthcare providers. By 2035, this number is expected to rise to nearly 600 million adults worldwide. Regular monitoring of glucose levels five to eight times daily is essential for Type I diabetics. Some 27% of Type 2 diabetics require insulin, so should test their glucose levels. This is most commonly done by finger pricking with a lancet – an uncomfortable and messy process. As a result, many people do not test themselves as often as they should.

With the rise in diabetes, the global blood sugar monitoring market could be worth more than $12bn by 2017, comprising predominantly of hand-held glucose meters and testing strips (GlobalData). The US self-monitoring blood glucose market is estimated to be over $4.2bn in 2016 (Frost & Sullivan), although generic competition and cuts in reimbursement by Medicare from $0.64/strip to $0.21/strip have put the testing strips market under pressure. The market leader is LifeScan (J&J, c 40% share); the rest of the market is dominated by Roche, Abbott and Bayer.

However, research has shown that trend data are more useful than snapshot (intermittent) monitoring in determining the long-term treatment regimen for diabetes. Several companies are therefore investing in continuous monitoring technologies, as well as non-invasive methods of testing. In this competitive and evolving market, Glucosense's technology has the potential for both.

Continuous monitoring devices are available in the US and are used to complement finger-stick glucose strips tests. They are not reimbursed by Medicare, but are currently private or insurer-funded purchases. They use implanted sensors linked to external monitors, often with digital health functionality and server connectivity. New sensors last a few days and need regular calibration with glucose strips. For example, the Abbott FreeStyle Navigator II (not FDA approved, some EU sales) uses a sensor, inserted just under the skin, which lasts five days. Dexcom (a US continuous sensing company) has developed its G4 Platinum system with seven-day sensor life and gained FDA approval as a supplement to glucose strips in 2012. In 2014 Dexcom had direct sales of $257m (+ 63%). In April 2015 Dexcom announced a partnership with Google to develop cloud-connected, bandage-sized wearable, albeit not non-invasive, glucose sensors.

Invasive finger-stick testing currently complements the use of continuous monitoring devices; however, in the longer term, these may ultimately lose market share to continuous devices and could also be replaced by non-invasive devices. In view of the competitive oligopolistic nature of the market, a viable commercial route, in our view, is for Glucosense to partner (or be sold to) one of the three major glucose diagnostic players. Glucosense’s partnering strategy may evolve as discussions progress, although current thinking is to find the optimal partner with the appropriate strengths for each device type in development.

Timeline/future steps

2015 saw the successful validation of the prototype benchtop device. Glucosense is currently optimising the optical components and working on miniaturising the sensor head technology so it can be used in two distinct forms of the device: a portable device for intermittent testing and a wearable continuous monitoring device. Candidate suppliers have been shortlisted for contract manufacturing of the glass, with supplier evaluations ongoing to select a preferred partner.

It is anticipated that testing of the benchtop device could produce a readout in end-June and end-December 2016, leading to the next clinical phase in H117. Further clinical studies are planned, but timelines will be driven by clinical results and are dependent on a fund-raising in Series A and B rounds. We expect that a CE mark could be gained by end-2018, with a possible commercial launch in Europe in 2019. We assume that FDA approval will need a full clinical validation under the stringent pre-market approval (PMA) route, and hence US launch will follow approximately 12 months later, contingent on the timing of clinical trials. Trial design and size will depend on the results obtained from prototype testing. The company plans to discuss the study design with the FDA to ensure all regulatory requirements for the US market are addressed.

The portable device will be an all-in-one device that collects, processes, stores and displays data, with a wireless connection for data transfer to PC/smartphone. The wearable device will consist of a sensor head to measure and collect the data, combined with a separate hand-held display and data processing/storage unit. This could give continuous glucose readings and, as a non-invasive system, would have a major market advantage with potential clinical gains from better glucose control. The current strategy is to launch the portable device, with the wearable device following at a later stage. The precise timelines for the wearable version will depend on partnering progress and further funding requirements.

PDS Biotechnology is a biopharmaceutical company focused on the development of novel cancer immunotherapies and vaccines for infectious diseases. PDS intends to initiate up to five or six Phase II clinical programmes in oncology in 2017. PDS’s products are based on the company’s proprietary and novel T-cell activating platform, Versamune. Three of the forthcoming Phase II trials will be run in collaboration with the US National Cancer Institute (NCI). One preclinical programme, which will feed into two or three additional Phase II clinical trials, is also in progress in collaboration with the NCI. Successful clinical trials and regulatory decisions will be followed by sales and marketing of the products, which the company may choose to undertake on its own or with a suitable marketing partner. A licensing deal has already been concluded with Merck KGaA; PDS is in discussions with other large pharma companies regarding clinical development partnerships.

PDS is one of the portfolio investments in which NetScientific has a minority position, and where the investment was made with an existing management team in place. As at 31st December 2015, NetScientific had invested £1.8m and held a 14.85% equity stake. In addition, it recently invested a further $500,000 via a convertible loan note instrument. The current CEO, Frank K Bedu-Addo PhD, was one of the founders of the company in 2006. PDS has a small core group of drug development scientists based at its New Jersey facility and multiple third-party collaborators (academic, government and industrial) who perform the testing and manufacturing of the products under development. Although the core strategy is to continue to operate as a semi-virtual company, PDS has recently strengthened its senior management team with the recruitment of a chief medical officer and VP of drug development and manufacturing.

Versamune is a nanoparticle antigen technology based on the use of synthetic positively charged (cationic) lipids. The Versamune platform overcomes a major hurdle in immunotherapy by enabling the unique cancer proteins (antigens) to enter the cytoplasm of the immune dendritic cells directly. This leads to effective priming of tumour-specific killer (CD8+) T-cells to recognise and attack the tumours, leading to tumour cell death. The unique lipid used in the Versamune platform acts as a potent immune activator, which induced proliferation and activation of the primed T-cells.

In contrast to other cancer vaccines, the Versamune-based products are able to reduce the population of certain immune-suppressor cells that could inactivate T-cells. The ability to induce high levels of potent killer T-cells (tumour attack) while simultaneously reducing the number of immune-suppressor cells (tumour defence) allows the product to overcome immune suppression leading to high anti-tumour efficiency.

The Versamune technology platform has demonstrated a clean safety profile in humans and is the first synthetic immunotherapy demonstrated to activate all three critical mechanisms required for effective immunotherapy (Exhibit 12):

The nature and potential advantages of the technology mean that PDS management sees Versamune-based products as having the ability to overcome significant shortcomings of existing immunotherapy approaches. Cancer vaccines have been sub-optimal in their ability to treat cancers largely due to their inability to facilitate antigen-cross presentation via the MHC Class I pathway to killer T-cells, which is compounded by inability to overcome tumour immuno-suppression. CAR T-cells and checkpoint inhibitors, due to their safety profiles, target the very late stage/terminal cancer patients; hence there is a clear therapeutic gap with earlier-stage cancer patients who may be the most treatable by immunotherapy. However, for such subjects a safer immunotherapeutic approach is needed. PDS0101’s Phase I indicated strong T-cell potency and safety, which lends it to targeting early-stage cancer.

Limitations of the current approaches to immunotherapy have shifted the focus to combination immunotherapy. However, this brings additional challenges such as compounding of toxicity by combining two products with sub-optimal safety (potentially further restricting the target patient population) and the high cost associated with combining two (or more) expensive drugs (with additional implications for reimbursement), Due to their simplicity (low cost of goods) and indicative clinical profile (safety and potency shown in Phase I) the Versamune-based products have the potential to overcome such issues with the development of combinations with checkpoint inhibitors. In addition, the induction of antigen-specific T-cells shown in humans, coupled with the potential ability to reduce immune suppressor cell levels (eg regulatory T-cells – Tregs - and myeloid-derived suppressor cells [only shown preclinically to-date]) may allow for dose sparing of the checkpoint inhibitor, reducing toxicity and therefore potentially addressing a wider patient population.

Value could develop quickly though deals and licensing now that the PDS0101 Phase I has successfully completed; the clinical data show excellent safety and immunogenicity. Collectively, HPV16 is the cause of about 60% of cervical cancer cases in western markets. Adding an HPV18 candidate increases the coverage to about 75%. PDS has been given FDA approval to start Phase II studies. The studies are planned to start in early-2017and run until late 2019.

Phase II clinical trials for PDS0101 will be in (1) CIN and AIN 2/3 precancerous patients; (2) stage III cervical cancer patients; and (3) late-stage HPV-positive head and neck cancer in combination with a checkpoint inhibitor. Note that AIN/CIN 2/3 are now termed high-grade squamous intraepithelial lesion (HSIL). This type of lesion (CIN 3) is cured surgically, so patients in the proposed study may be at risk of cervical cancer. Most studies establish a therapeutic effect in low-grade squamous intraepithelial lesion (LSIL) patients. PDS management (based on commissioned independent market research) estimates a market for treatment of high-grade precancerous cervical, anal, vulvar and vaginal lesions of $1.1bn in the fifth year after launch, at a 40% market penetration in the US, EU and Japan. In addition, sales into metastatic anal, cervical and oropharyngeal cancer markets in the same geographies were estimated by PDS management at $180m, $430m and $330m respectively. The overall market is therefore potentially $2bn. Management is positioning PDS0101 as the first immunotherapy to provide the safety, cost and potency to potentially replace surgery as the first-line treatment for HSIL. It could also be applied to LSIL, where patients currently do not get treated due to the risk-benefit of surgery. Other projects, currently in Phase I in collaboration with the US National Cancer Institute, are in prostate, breast cancer and ovarian cancer.

Potential direct competitors would include cancer immunotherapy/infectious disease vaccine company, Bavarian Nordic, whose lead cancer programme, Prostvac, is currently in Phase III and is subject to an option with Bristol-Myers Squibb in return for a $60m upfront fee.

Annual growth in the global oncology drug and supportive care market is expected to be 7.5-10.5%, with the overall market reaching $150 billion by 2020. One unrelated estimate suggests that the global market for prostate cancer (the second most common type of cancer affecting American men) therapeutics alone may reach $8.2b by 2023. Breast cancer is the commonest form of malignancy diagnosed among women in the US and globally.

Timeline/future steps

PDS is on track to initiate multiple Phase II studies in HPV-related cervical cancer, head and neck cancer, and pre-cancerous lesions (the latter in collaboration with the National Cancer Institute) in the next 12 months. These trials are scheduled to run until late 2019, with an interim data readout in 2018. Phase III trials will normally take three years, so data in 2023 and approval in 2024-25 may be possible. Three projects in breast, prostate and ovarian cancer are planned to enter Phase II in mid- to late-2017 (once again in collaboration with the National Cancer Institute). The company will have to raise additional funds to progress the studies over this period.

NetScientific’s FY15 post-tax loss was £12.7m (FY14: loss of £7.1m), which was primarily attributable to continuing operations (FY15: loss of £11.2m, FY14: loss of £6.2m) and reflected the ongoing investment into a portfolio of pre-commercialisation and therefore currently loss-making companies. Post-tax loss from discontinued operations was £1.5m (FY14: loss of £0.9m), which included the operating loss incurred by the 10 discontinued subsidiaries2 subject to disposal during 2015, the share of loss from associates and JVs and a £0.3m net loss recorded on disposal.

Significant investment was made into the development of underlying technologies and products of the core portfolio companies, in particular Vortex and Wanda, as indicated by R&D spend of £7.3m in FY15 (FY14: £3.1m). General and admin costs for the year were £3.2m, which includes a significant proportion of subsidiary management by NetScientific executives; the increase on FY14 (£2.5m) was driven by increased sales and marketing costs and admin spend at the portfolio level. Headcount across the group also increased from 28 to 47, excluding non-executive directors. Exceptional costs of £0.9m (FY14: £0.7m) include redundancy and restructuring costs related to the strategic review and a non-recurring impairment charge related to Triventis. We forecast a significant rise in expenditure in FY16 to £15m (vs £10.4m), with R&D investment rising to £11m as portfolio assets progress towards commercialisation and potential value realisation events. Funds from the 2015 equity raise have been specifically earmarked to accelerate the development of Vortex and Wanda.

FY15 revenues of £78.6k were predominantly generated through the sale of ELISA kits to the research market by ProAxsis, an evaluation fee from a corporate booked by Glucosense and Vortex cartridge sales for research use of VTX-1 at universities. Our FY16 forecast includes further modest revenues generated from the sale of VTX-1 cartridges associated with KOL placements and ProAxsis research kits, as well as c £0.5m connected to Wanda functionality delivery. Exhibit 13 outlines historic financials and summary forecasts. Note that these forecasts do not reflect future fund-raising plans of the individual portfolio companies; as such, a c £6m funding shortfall in 2017e is included in the summary as £10m illustrative short-term debt.

Funding and structure

NetScientific had cash on the balance sheet of £23.2m at 31 December 2015 (FY14: £16.9m), which included the £17.1m net proceeds from the capital raise. Operating cash outflow for the year as reported by the company was £11.0m (FY14: £8.8m). At end-March 2016, cash stood at £19.5m.

At IPO, NetScientific issued 18.75m new shares at 160p to raise £30m gross, £28.6m net. Post the November 2015 placing (15.2m new shares at 120p to raise £18.2m gross), the three Azima Family Trusts representing the former CEO (Zahra, White Mustard and Cyrus) held 20.4% of the company’s issued share capital; this has been reduced from 47.9% of the post-IPO equity. NetScientific’s free float now stands at 16.2%.

Valuation

NetScientific presents a valuation dilemma. Portfolio value is the most important financial metric for investors; however, unlike other classic investment companies, NetScientific does not provide a portfolio NAV that could be compared with the company market cap. This reflects the relatively modest level of investment that the company has made into its portfolio companies, which has been leveraged by grant funding. However, NetScientific offers the potential for significant value creation from the maturation of its portfolio of equity holdings in digital health, diagnostics and therapeutics companies.

Typically, investment companies with quoted investments can be valued by the underlying asset value and compared to the market value to determine any discount or premium, with unquoted portfolio companies being valued per International Private Equity and Venture Capital Valuation guidelines. These guidelines allow a portfolio company to be valued at the last funding round, at cost for early-stage investments or at the director’s discretion.

The NetScientific Capital Markets Day on 14 June should provide more information on the underlying portfolio companies and their forthcoming newsflow, allowing us to make an assessment of the intrinsic value of each. Additionally, with Series A rounds on the horizon for Wanda, ProAxsis and Glycotest, successful fund-raisings will not only provide growth capital, but also allow for an explicit fair value for these companies in NetScientific’s future accounts. The evolution of the carrying value of NetScientific’s portfolio as these assets approach commercialisation should drive an uplift in share price. Ultimately, however, NetScientific’s investment case rests on the potential for significant value creation through realisation, ie exit through IPO or trade sale of its maturing portfolio companies. An exit would enable the return of capital to shareholders and/or reinvestment into new pipeline opportunities.