NetScientific — Portfolio starting to mature

One of the most significant changes that has occurred in the portfolio is a shift in the commercial plan at Wanda. The company was originally focused on marketing its patient monitoring platform to the home healthcare market. The key value proposition to these companies is that algorithmic patient monitoring can improve outcomes and reduce hospitalisations, thereby extending the value of these services. Wanda complements this market well because the platform is more easily integrated into the patients’ routines due to persistent contact with healthcare professionals. Moreover, the monitoring solutions provided by Wanda closely mirror some of the responsibilities of the home healthcare provider. To this end, the company has signed contracts with three such networks (A to Z Home Health Care, 24Hr HomeCare, and Health Resource Solutions) and this market remains important to the company. However, the company has stated it failed to gain significant traction in 2016 by targeting these providers. We suspect that this may be due to the low margin nature of the business and the unclear correlation between patient outcomes and the bottom line.

However, three other players in the healthcare system with significant vested interests in patient outcomes are hospitals, payers, and accountable care organisations. Moreover, due to the nature of their businesses, there is the potential to attract significantly higher volume through these channels and greater recurring revenue. Wanda has shifted its focus to sourcing contracts with these businesses. Although we see a higher barrier to entry into these markets, we believe that the metrics on outcomes gathered in the home healthcare market can be leveraged into larger contracts. A key strategic goal for 2017 is to build out a sales pipeline to target these markets, and Wanda’s CTO Foad Dabiri was promoted to CEO to lead the transition, because of his experience in the digital health space. The company has stated a target of $800k in sales for 2017. Additionally, NetScientific has impaired its £8.8m (to £3.8m) debt payable by Wanda.

Additionally, as part of this transition Wanda has sold its equity in OncoVerse, its cancer patient monitor platform in development with Dignity Health. The project was sold to BTG for an undisclosed amount, but NetScientific management stated that it represented a “strong return on NetScientific’s initial investment.”

Vortex’s circulating tumour cell (CTC) isolation system, the VTX-1, is commercially available in the US and EU. The company received a CE mark and a class 1 designation from the FDA and launched the product for research purposes in February 2017. Management has informed us that manufacturing hurdles have been surmounted and that it is currently targeting its key researchers and centres for a soft rollout. The inclusion of the technology in prominent scientific publications continues to bolster its utility among scientists. The latest such publication is the use of the system to perform a single-cell western blot of a CTC.1 A small number of sales have already occurred and we expect the first revenue for this company to be reported in the next earnings release. The company may be able to enter the broader cancer screening market via adding its technology to existing 510(k) market approvals. This would involve validating VTX-1 as an alternative to biopsy in established biochemical assays. To this end, the company is doing a study in collaboration with UCLA comparing the ability to assess epidermal growth factor receptor (EGFR) status in patients with non-small cell lung cancer (NSCLC) using CTCs and comparing data with traditional biopsy.

ProAxsis is also expanding its commercial footprint. The company’s neutrophil elastase tests have been commercially available since August 2015 for research use, but it has been in the development of its NEATstik point-of-care test for the broader diagnostic market. NEATstik is a one-use crossflow device for monitoring cystic fibrosis (CF) and chronic obstructive pulmonary disease (COPD) patients for exacerbations. The company is targeting a CE mark in H117 and a commercial launch of the product in H217. The company is also launching two new immunoassays for the research market (plasmin and tryptase) in late 2017, although we see the potential of these products as very incremental.

Finally, Glycotest has also announced its near-term commercialisation timeline. The company is currently in a Series A financing in China, which it intends to use to open a CLIA lab in H217. A CLIA waiver (expected in early to mid-2018) should enable the company to launch its hepatocellular carcinoma (HCC) test in H218.

We have decreased our valuation to £60.3m or 118p per share from £67.8m or 133p per share. This was largely due to an adjustment in our valuation of Wanda. We have reduced the value of the share of the company from £18.7m to £8.0m. We have adjusted the sales ramp for the company to reflect the new target market, and removed OncoVerse from the model, which amounted to approximately £2m of our NPV. Additionally, we have decreased the probability of success for the company to 5% from 7.5% because of the commercialisation difficulties seen in 2016. We have also adjusted our research and development spending timelines to reflect updated financing timelines for all companies, as no Series A financings concluded in 2016. These adjustments are partially offset by advancing our NPVs. We expect to update our valuations following early reports from the launches of the Vortex, ProAxsis and Glycotest products. We also expect to update our valuations following the completion of Series A financings.

The company reported a small amount of revenue (£518k) for 2016, although we expect this value to be eclipsed by increasing sales of the Vortex and Wanda products in 2017 (£2.7m total revenue) and the launch of the Glycotest HCC test in 2018 (£11.6m total revenue). Operational cash burn for 2016 was £12.9m compared to £10.7m for 2015, with the increase due to a combination of increased SG&A costs (£5.0 vs £2.8m from continued programmes in 2015) attached to building out Wanda and Vortex as well as increases in working capital. R&D spending for 2016 was £7.4m, significantly lower than our estimate of £9.7m. Our R&D spending estimates are coupled to the financing of the portfolio companies and we have adjusted both of these timelines. We expect Glycotest to complete its Series A in 2017, which should result in a concurrent increase in spending for that programme. We forecast £9.7m in R&D spending in 2017 as the portfolio programmes expand their research operations seeking broader marketing approval. NetScientific ended 2016 with £9.2m in net cash. For illustrative purposes, we have included £24m in debt in 2017 to finance the operations of the portfolio companies to profitability in 2019, although we expect these financing requirements to be met through outside investments. After accounting for approximately £6m in obligations from minority interests, this corresponds to a total obligation of £18m (up from £15m).