NetScientific — Update 9 December 2016

Since our last report, NetScientific has provided its half-year report and multiple other incremental updates on the operations of its subsidiaries as they advance their commercialisation and development programmes. Series A financings are still planned for all the majority-owned subsidiaries (Wanda, ProAxsis, Glycotest and Vortex).

Vortex announced a series of regulatory advances that are important for the commercialisation of the circulating tumour cell (CTC) technology. The company received a CE mark from the EU for the VTX-1 cell isolation platform, preparing it for launch in Europe. The company also received a so-called Class 1 designation from the FDA. Medical devices (including diagnostic tests) marked as Class 1 pose the lowest threat to human health. Class 1 devices are exempt from 510(k) premarket notification requirements and GMP controls. Devices in this class cannot be used to diagnose a disease or provide medical guidance, although they can be used as part of a larger diagnostic procedure. This will allow the VTX-1 to be sold to researchers and interested clinical investigators in the US, and the company has announced that the first sales are expected in 2017.

The product was also recently featured in an article in the journal Oncotarget.1 The authors, some of whom are from Vortex, used the VTX-1 chip to isolate CTCs from 15 colorectal cancer patients and screened these cells for mutations common to the disease (KRAS, BRAF, PIK3CA). On average 2.6 cells/mL of blood were isolated using the chip, and these levels were not affected by the use of neoadjuvant therapy (Exhibit 1). These cells were used to track individual patients through courses of treatment, monitoring the progress of their disease. The study also compared the rate of mutations detected in CTCs isolated from the chip with those found in circulating tumour DNA (ctDNA), an alternative liquid biopsy technology. The two types of test agreed between 74% and 91% of the time, depending on the mutation, although neither test identified all mutations, and therefore the authors concluded that the two technologies were complementary. The cells isolated with the VTX-1 showed mutations similar to biopsy 77.8% of the time. This study adds to the body of evidence for the utility of the technology both as a diagnostic and as a research tool.

In other news, Vortex has licensed electroporation technology from Harvard University. Electroporation is the process of using a pulse of electricity to temporarily form holes in the membranes of living cells. Many different molecules such as DNA, proteins or diagnostic chemicals can be introduced to the interior of a cell in this manner. In traditional electroporation procedures, cells are exposed to a range of electric field strengths and the damage to many cells is irreversible, leading to cell death. The new technology leverages the microfluidics in the VTX-1 chip to provide a more uniform electric field thereby decreasing cell death. Although the company has not provided specifics, this technology could potentially be used in future iterations of the device for a wide array of diagnostic procedures via probing of the intracellular function of CTCs.

PDS Biotechnology recently presented the results from the open-label Phase I/IIa dose escalation study of PDS0101, its treatment in development for Human papillomavirus (HPV) related cancers. The results were presented at the Annual Meeting of the Society for Immunotherapy of Cancer. The trial enrolled 12 women with high-risk HPV infection and the primary outcome measure was safety and tolerability, although the patients were also examined to see if the vaccine induced an anti-HPV immune response. The enrolees each received 2.4mg of HPV vaccine (HPV-16 E6 and E7 peptides) and successive cohorts received successively larger doses of the Versamune adjuvant (1mg, 3mg and 10mg). This data release is the first time that the response of the patients with 10mg Versamune has been examined.

The company did not provide a complete safety profile but it did note that no dose limiting toxicities, serious adverse events, or discontinuations due to adverse events were observed. The main adverse event that was observed was injection site reactions that were more severe at higher Versamune doses. No other treatment emergent adverse events were correlated with increases in dose.

The HPV specific immune response was measured in the patients by measuring the increase in interferon ɣ (IFN-ɣ) and granzyme B following inoculation with HPV antigen. An increase in IFN-ɣ is indicative of antigen specific immune response, and granzyme B increases in response to cytotoxic T-cell activation. Nine of the 12 participants in the study had positive IFN-ɣ responses and six of the twelve had positive granzyme B responses (Exhibit 2). The study was complicated by the presence of two outliers (one in the 1mg cohort and one in the 3mg cohort) with unusually high baseline IFN-ɣ. Neither of these outliers responded to either assay. Additionally, the granzyme B assay could not be performed due to low sample volume in the 1mg cohort. The addition of the 10mg cohort in this data release increases our confidence in the reproducibility of the induction effect, given the limitations of the 1mg and 3mg cohorts. However, the increased dose does not appear to improve T-cell activation any further. The company is progressing to Phase II clinical trials.

Similar to Vortex, ProAxsis received a CE mark for its NEATstik neutrophil elastase test. This will enable the test to be sold on the European market, where the company is targeting a mid-2017 commercial launch. Neutrophil elastase is a marker of inflammation and respiratory disease and the company intends to market its test for the management of cystic fibrosis and chronic obstructive pulmonary disease.

Wanda has announced two more sales agreements with A to Z Home Health Care and 24Hr HomeCare, bringing the total number of provider contracts to four. Both companies are domestic healthcare service providers based in California. This rate of signing new contracts is consistent with our estimates, and we expect acceleration in the future with increasing proof of positive outcomes for patients and reduced costs for caregivers.

Glucosense is a prototype-stage company founded to develop a non-invasive method of monitoring blood glucose. NetScientific has announced that the company had difficulty with the reproducibility of its technology and therefore the device will not proceed to clinical testing. Glucosense remains on NetScientific’s balance sheet, but the future of this programme is in question and we have removed it from our valuation. NetScientific invested £0.7m in the company.

We have reduced our valuation to £67.8m or 133p per share from £71.7m or 140p. This change reflects the removal of Glucosense from our valuation and a lower cash balance, partially offset by rolling over our NPVs to the most recent reporting period and an updated exchange rate (from $1.32/£ to $1.24/£). We have also increased the valuation of PDS to reflect an increased probability of success (10% from 7.5%) following the recently presented detailed clinical trial results. We expect to update our valuation following the closure of the Series A financings, which are expected in the near term, as well as with initial sales reports from Vortex and ProAxsis, which are expected when these companies launch their commercial products in 2017.

NetScientific released financial results for H116 showing an operating loss of £6.3m, with £3.7m in R&D spending. We expect spending to increase (£15.5m for 2016 and £16.1m for 2017), reflecting the clinical advancement of the subsidiary development programmes, offset by increased revenue (£1.1m for 2016 and £4.3m for 2017). Our spending estimates have been reduced (by approximately £5m for 2016 and 2017) to reflect the removal of the Glucosense programme from our estimates. The company ended the period with £15.9m in cash. It should be noted that all these estimates reflect current ownership stakes of the various subsidiaries and we expect these values to change to reflect the potential dilution from upcoming financing rounds. We expect these financings to offset future funding requirements for these companies. Based on the current ownership structure, the company will require £21m in additional financing (recorded as illustrative debt in 2017) before profitability in 2019, offset by £6m in cash spending attributable to minority interests, for a net obligation of £15m, a reduction from the previous estimate of £18m.