NetScientific — Progress continues

NetScientific is a healthcare investment company with a portfolio of five major holdings, all in early stages of clinical validation. It is the majority shareholder for four of the companies. Vortex is developing a fluidics-based mechanism of isolating circulating tumour cells. Wanda is a digital health company launching a patient monitoring programme for heart failure and chronic obstructive pulmonary disease (COPD). ProAxsis is developing an at-home test for cystic fibrosis (CF), COPD exacerbations, and bronchiectasis. Glycotest is developing a test for hepatocellular carcinoma and PDS Biotechnology (the sole minority stake) is developing vaccines for HPV-driven cancers.

Based on a risk-adjusted NPV analysis of each of the major holdings, we value NetScientific at £57.3m or 83p per share. We currently value Vortex as the highest value holding (£15.9m for NetScientific’s share, £16.7m total valuation) because of the near-term commercial prospects in the research market (we estimate peak sales of £141m). We value the remaining investee shares in a range of £5m to £11m with 17% to 88% ownership. Valuations reflect the early stage of development across the board, with probabilities of success ranging from 5% to 15%.

NetScientific ended H117 with £11.1m in net cash and has announced expected Series A financing rounds for Glycotest and PDS in H217, Vortex and ProAxsis in H118, and Wanda in H218. Our model forecasts £77m is needed to bring the five companies to profitability, corresponding to £12m in additional financing for NetScientific’s proportion of costs. We forecast slight decreases in combined R&D spending to £6.4m in 2017 (from £7.4m in 2016), partially associated with the movement of Wanda, Vortex and ProAxsis toward commercial activities and compounded by the delays in financing of these companies. We expect the parent company to become cash flow positive in 2020.

NetScientific carries the risks associated with investing in early stage healthcare companies, and the individual portfolio companies can all be considered high risk. However, we expect the risk to the parent company to be mitigated by the portfolio approach and by potential exit strategies to realise value for investors and limit downstream risk. Wanda is the most commercially advanced company, with a product in the early stages of commercialisation. Wanda is also operating in a highly fractured space with low barriers to entry and significant competition. The other portfolio companies are all in the development stage and carry the associated clinical and regulatory risks. Vortex and Glycotest will likely need to seek pre-market approval (PMA), and will require both clinical validity and utility trials. Vortex is one of at least 37 companies developing technology to isolate circulating tumour cells. ProAxsis has a simpler pathway and may be able to seek a 510(k) approval, but we project low peak sales (£47m). Glycotest is entering a market that we expect to decline in incidence with increasing treatment of hepatitis C, but partially offset by increases in other liver disease such as non-alcoholic steatohepatitis. PDS Biotechnology has the high development costs and risk associated with therapeutic development, and cancer vaccines have historically underperformed in the clinic. All of the above risks are compounded by financing concerns, and these companies may not be able to raise sufficient capital. There have been delays to the financings for all the companies, although guidance now points to Series A financing rounds for Glycotest and PDS in H217, Vortex and ProAxsis in H118, and Wanda in H218.

NetScientific is an investment company focused on early stage investing in healthcare companies across a range of different technologies. The company’s main holdings include three diagnostics companies (Vortex, ProAxsis, Glycotest), a digital health company (Wanda), and a cancer therapeutic company (PDS Biotechnology) (Exhibit 1). NetScientific invests up to £20m and holds a majority in four companies.

The current model of the company follows a strategic change in direction away from seed-stage investing in 2015. François Martelet MD, a highly experienced biopharma professional, was appointed CEO in June 2015, along with additional appointments in the board and upper management. The company divested approximately half of the companies in the portfolio to focus on the four main companies, and in particular to accelerate the development programmes in Vortex and Wanda. To finance this, NetScientific issued 15.2m new shares at 120p in November 2015 raising £18.2m (gross) from new and existing shareholders. The company successfully completed an £8.1m offering (at 45p per share) in June 2017, resulting in approximately 18m new shares to offset the financing needs for the portfolio. The company retained a small number of seed investments (Exhibit 2), but these are beyond the scope of this report.

NetScientific’s strategy is to develop a balanced portfolio of digital health, diagnostics and therapeutics companies focused on chronic disease. The company intends to seek majority ownership in future portfolio investees, and to leverage its ability to recruit high-quality management to operate these companies independently. NetScientific has stated that the development of therapeutics companies is of high strategic importance. The goal is to structure a new therapeutics company surrounding a therapeutic asset, as opposed to the acquisition of an existing entity. We predict that expansion of the portfolio will follow exits from the current investments. NetScientific aims to drive asset appreciation using external financings concurrent with investee inflection points such as clinical results. We do not expect NetScientific to invest during these subsequent rounds. We expect the company to exit pre-profits through a trade or public listing to limit its exposure to commercialisation risk.

Vortex BioSciences is a California-based spinout 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 in Nature Reviews Cancer) 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 and the placing of instruments with strategic players. The VTX-1 system was introduced at the American Association for Cancer Research (AACR) conference in April 2016. The system received CE mark and FDA Class I registration and was soft-launched into the research market in the US and Europe in February 2017. Revenue from the research market is essential for the near-term cash flows for the company.

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. 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. Two recent papers have highlighted the utility of the platform for western blotting and genotypic profiling. Moreover, because the cells remain viable during the process they can be further propagated via tissue culture.

In collaboration with UCLA, Vortex is investigating its VTX-1 liquid biopsy system in two proof-of-concept trials for PD-L1 and EGFR biomarkers. The aim of the first 100-patient trial is to determine whether CTCs isolated with VTX-1 can be evaluated for the PD-L1 biomarker for the purpose of identifying suitable patients for immunotherapy treatment, while the second study aims to target treatable patients by determining if EGFR mutations can be identified among 60 lung cancer patients using Vortex technology. The company aims to complete both trials by the end of the year.

Vortex is one of a number of companies with CTC detection systems in development (34 by management’s estimates; Exhibit 3 shows a selection of those based on microfluidic isolation). 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. In June 2016, 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).

Vortex flags that liquid biopsy could represent a $22bn market opportunity (according to JP Morgan), excluding the research segment. Our estimates are more conservative: based on the rates for prostate specific antigen (PSA) testing, the most common current cancer blood test, and Vortex’s pricing strategy (see below), we predict a market of approximately $13bn by 2031. Due to higher cost, the need for dedicated equipment and significantly lower throughput (each test requires an hour to perform on this platform) compared to the PSA test, as well as a high degree of competition, we expect initially low penetration (1%) of this market, but we expect this to expand (2% by 2030) as the company introduces more high throughput devices for clinical purposes. Regardless, 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. We expect the company to have to perform clinical validity and utility trials in the US in order to support marketing claims regarding the efficacy of the test. We currently model this as approximately £5m in R&D spending before profitability in 2019 to support the clinical studies necessary to enter the diagnostic market. The company aims to complete this financing in either Series A or commercial partnership during H118 (it is in the process of placing VTX-1 systems with strategic players in order to assist them in considering a potential commercial partnership). The second-generation technology may be on the market in the next two to three years, and we expect the development of future platforms based on the technology to require additional research spending, and expect to update our valuation and estimates with the release of more details on these systems.

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 may evolve in the future, especially as more advanced systems enter the market, but indications are that each instrument will cost in the $125-150k range with a per-cartridge price of $250-350. We expect this pricing to ultimately be tempered by discounts, which we predict in the range of 30%.

Wanda is a digital health company that has developed a software platform for the management of patients with chronic disease. The Wanda application is a recently patented, 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 COPD.

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 hospitalisations by providing more timely feedback based on the patient’s status.

Originally, Wanda was 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 and has since shifted its commercial plan earlier this year to target three additional players in the healthcare system with significant vested interests in patient outcomes including hospitals, payers, and accountable care organisations. Moreover, due to the nature of their businesses, there is the potential to attract significantly higher volumes 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. NetScientific anticipates a lower revenue projection for 2017 than previously suggested. Additionally, as part of the transition, Wanda has sold its equity in OncoVerse, its cancer patient monitor platform in development with Dignity Health. Its 35.9% stake was sold to BTG for £1.5m.

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 patient’s 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 utilising a 1,500-person trial performed at UCLA. Wanda has developed a module for the prediction of complications associated with COPD, which comes bundled with the CHF module because of the comorbidity of these two diseases.

We model the combined CHF/COPD disease management market in the range of $4bn. Based on our understanding of the FDA guidance on mobile healthcare applications, we do not believe that Wanda will be classified as a device. However, we expect the company to engage in further clinical trials to support marketing claims to drive adoption in this area. We expect these clinical trials to be inexpensive compared, for instance, to therapeutics, and we have trimmed R&D spending in our model to around £4m before profitability in 2019, but a portion of this will be offset by near-term revenues. We expect the cost of the trials to be associated with device placements, support of physicians performing remote monitoring and the acquisition of medical records to support claims that Wanda reduces hospitalisations, but we expect a high degree of participation from healthcare providers given the low impact on their operations. Moreover, these trials will set up a footprint in participating institutions where Wanda is available, and could support market development. We expect Wanda to require an additional investment of approximately £4m to commercialise the existing programmes.

The digital health market as a whole is poorly developed, with few to no market leaders, and is 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. This space (and the mobile med-tech space in general) is developing exceptionally quickly. These companies can be roughly sub-classified into different groups based on their approach, which include remote patient monitoring, data warehousing, analytics, remote care and behaviour modification. The Wanda combination of patient monitoring, analytics and behaviour modification is unique to our knowledge, but replicated in part in multiple instances.

ProAxsis was founded in 2013 as a medical diagnostic spinout of Queen’s University Belfast in Northern Ireland. ProAxsis has developed proprietary molecules, called Protease-Tags, which selectively bind to 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 has also developed a PoC test called NEATstik (Neutrophil Elastase Airways Test) for routine monitoring of neutrophil elastase (NE). Neutrophil elastase is involved in chronic respiratory diseases such as CF and COPD and is an established biomarker of infection and inflammation. NEATstik received a CE mark in September 2017 and is the first-to-market point-of-care NE test in the EU.

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 Protease-Tags 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.

NEATstik is a lateral flow device for rapid, easy monitoring of NE levels in the clinic or home from sputum samples. One single-use test is sold for £18 and a box of 10 tests is sold for £150. NE activity in respiratory diseases is responsible for significant airway damage and is a strong predictor of lung function decline. Detecting increased NE levels earlier can reduce exacerbations and hospitalisation risk in patients with CF and COPD, and improve health outcomes.

ProAxsis’s first Protease-Tag immunoassay kit was launched in August 2015 and was 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 have been modest, although the company expects them to grow as further pharma company customers are secured. In order to increase sales potential, ProAxsis recently named Diagenics Ltd as sales distributor of its Protease-Tag immunoassay kit for the UK and Ireland. 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. In July 2017, ProAxsis was awarded a grant from Innovate UK to support continued development of its Protease-Tag technology. In addition, ProAxis announced a partnership with an unnamed US biotech company to develop activity-based immunoassays for two essential respiratory proteases using its Protease-ag technology in September 2017.

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 ($25 in the US, £15 in Europe), 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, and these estimates are largely in line with our own. We expect the company to pursue a 510(k) submission in the US, which would additionally limit R&D spending. The company expects to complete a Series A financing in H217.

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 under detect 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 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).

Glycotest has developed its proprietary HCC Panel test using 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.

HCC is the third leading cause of cancer-related death worldwide and the fifth 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%). NAFLD is linked to obesity (BMI >30) and is a growing problem affecting 30% of the US population. It can progress to non-alcoholic steatohepatitis (NASH), which has a 4-14% 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.

Based on AASLD guidelines of HCC risk (for hepatitis B/C, ASH and NASH), we estimate that two million diagnosed patients in the US would be eligible for liver cancer surveillance. However, we expect declining rates of hepatitis C virus (HCV) to reduce this number to 1.3 million by 2030. Assuming a 10% uptake, this gives a peak sales projection of over $150m in the US assuming two tests per year at a cost per test of $660 (Glycotest data) and a median 30% payer rebate. 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), albeit offset by declining rates of hepatitis B virus (HBV) and HCV.

Glycotest will be able to offer the test as a laboratory service and will therefore not need FDA approval before marketing. However, the company will need to perform clinical utility trials demonstrating a change in treatment patterns to support the marketing claims and payer support for wider adoption. We predict an R&D cost of £6m before profitability in 2019. Glycotest is currently participating in a $10m Series A in China and it intends to use the financing to open a CLIA lab in H217. A CLIA waiver (expected in early to mid-2018) should enable the company to launch its HCC test in H218. The company also plans to expand its reach via overseas partnerships, particularly in regions that historically have a high rate of HBV and HCV such as Asia.

PDS Biotechnology is a biopharmaceutical company focused on the development of novel cancer immunotherapies and vaccines for infectious diseases. PDS has seven planned oncology clinical programmes in collaboration with the US National Cancer Institute (NCI) and Merck throughout 2017-20. PDS’s products are based on the company’s proprietary and novel T-cell activating platform, Versamune. 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 with Merck KGaA was signed in 2016; PDS is in discussions with other large pharma companies regarding clinical development partnerships.

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 induces 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 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. Chimeric antigen receptor (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. The company’s first therapeutic using this platform, PDS0101, indicated strong T-cell potency and safety in Phase I, which lends it to targeting early-stage cancer.

Phase II clinical trials for PDS0101 will be in (1) grade 2 and 3 cervical and anal neoplasia patients (AIN/CIN); (2) stage III cervical cancer patients; and (3) late-stage human papillomavirus (HPV)-positive head and neck cancer in combination with Merck’s checkpoint inhibitor Keytruda (pembrolizumab). 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. In addition, PDS plans to initiate clinical programmes in prostate and ovarian cancers in 2018.

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. 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. We expect R&D costs of approximately £42m total before profitability in 2022.

A significant number of cancer vaccine programmes have failed to progress in the clinic over the past decade. Most recently, Bavarian Nordic, a cancer immunotherapy/infectious disease vaccine company, announced the failure of its lead Phase III monotherapy cancer programme, Prostvac, for patients with metastatic castration-resistant prostate cancer. Therefore, we consider the risks associated with cancer vaccine programme development to be higher than for other therapeutics.

Given the high impact of checkpoint inhibitors and their capacity for significant synergies with other treatments, there have been an unprecedented number of combination studies initiated with these drugs. EvaluatePharma reported in May 2017 that there were 783 ongoing combination studies employing PD-1 or PD-L1 inhibitors, 268 of which employed Keytruda. However, by our estimation from data available on clinicaltrials.gov, there are fewer than 60 industry-sponsored studies in head and neck cancer (HNC), and fewer than 25 are for recurrent forms of the disease. There are a relatively small number of clinical studies investigating the combination of Keytruda with cancer vaccines for this disease (Exhibit 4). We believe that the PDS technology is well positioned among this group given the straightforward mechanism of action and strong potentiation of cytotoxic T-cell responses.

The NetScientific investment strategy in early-stage companies carries the inherent risk associated with the ability of the investees to both develop products and source additional financing. At this point, however, the amount of capital paid in by NetScientific is £32.8m, and is outsized by the expected value of the investments even at our high-risk estimates. This positions NetScientific to be able to make early exits, significantly improving the risk profile of the parent. It is unlikely given this model that NetScientific will have a position in any of the investees following commercialisation, but a thorough examination of the risks of the investees over the lifetime of the company gives insight into both current and exit value.

Wanda, Vortex and ProAxsis are the three portfolio companies with fully developed products while the remaining two companies are both in very early development stages with significant investment needed before any products can compete commercially. The company with the highest level of development-related risk is PDS, as it carries the associated risks of drug development.

The diagnostics companies (Vortex, ProAxis and Glycotest) may be able to market tests in the near term on a provisional basis via various mechanisms (CE mark, CLIA waiver, investigational use), but will require significant clinical testing before broader marketing approval. We expect the Vortex and Glycotest programmes to require PMA enabling clinical utility trials before they can fully realise their market potential.

Although the Vortex platform has strengths, there are a large number of other companies developing similar technology to isolate CTCs (37 companies by management’s measure). In this highly fragmented market, the marginal differences between these technologies may be less important for ultimate success than commercial factors. Another limiting factor of the current system is the long processing time per sample (one hour) and lack of parallelism, which significantly limits throughput for the test, and will hinder adoption for more broad-based screening.

A significant limiting factor for the success of Glycotest is that the company’s product is a test for HCC, and the incidence of this disease is closely linked with the prevalence of HCV. HCV is being cured at a dramatically increased rate due to new technology, which we predict will translate into a decline in HCC incidence, as well as a decline in the at-risk population targeted for surveillance.

There are a unique set of risks associated with the commercialisation of the Wanda platform, both in the currently available programmes and for other programmes that may become available for other diseases. This area of digital health (chronic disease management) is largely untested and the size of the addressable market is uncertain. We model the market for recurring services in CHF/COPD in the range of $4bn, but there is significant risk associated with the degree to which healthcare providers and payers will embrace this technology. Additionally, the low barrier to entry for the digital health market has resulted in a large number of competitors in the chronic disease management space. The company will need to establish a sizeable footprint quickly to forestall any future entrants into the CHF/COPD chronic disease management space.

PDS Biotechnology is the only therapeutic company in the portfolio, and carries the associated risks of drug development: high R&D costs, regulatory risk, etc. Historically, cancer vaccine companies have not been successful at development, and we view the company’s lead programmes as very high risk. Moreover, incidence rates for HPV-related cancers have been steadily declining and may decline more quickly as the number of immunised individuals increases and the vaccines prevent infection from an increasing number of strains. Finally, cervical dysplasia, which is a large fraction of the company’s potential market (approximately 900k patients per year), has effective surgical treatments.

Every portfolio company needs additional capital, with our projected R&D costs ranging from £2m (ProAxsis) to £42m (PDS). There is substantial risk that these companies will not be able to raise sufficient capital given the current fund-raising environment. There have already been significant delays in the expected financing schedule for these companies. Guidance now points to financing rounds for Glycotest and PDS in H217, Vortex and ProAxsis in H118, and Wanda in H218.

We have reduced our valuation to £57.3m or 83p per share, from £68.4m or 99p per share. This change was driven by delays in development and our sales ramps to reflect the prolonged financing timelines for the portfolio companies. Moreover, our revenue expectations for Vortex and Wanda have been adjusted to reflect the lack of any sales in H117. We have delayed the expected date of profitability for Glycotest to 2020 due to lack of financing and PDS to 2022 due to the lack of clinical progress in 2017 to date. The reduction also reflects lower net cash (£11.1m down from £17.3m) and an increase in share count. This was partially offset by an increase in the probability of success for ProAxsis from 10% to 15% due to recent commercial progress including a CE mark, and by rolling forward our NPVs.

Although the potential market opportunity is large, we are only able to assess probability of success in the range of 5-15% due to the early stages of development of the portfolios. Each company is modelled on the basis of self-commercialisation at this point, as opposed to out-licensing of assets, as we believe this is more illustrative of the intrinsic value of the internal programmes at this early stage.

We are withholding a valuation of certain programmes from the various constituent companies, awaiting a clear pathway to market. We have not modelled ex-US launches of the Vortex and Glycotest diagnostics because we view the current planned pricing for both programmes to be prohibitive overseas. We will add these programmes in the event that the management for these companies expresses a viable overseas commercialisation strategy or partner. Although we believe that the ProAxsis Protease-Tags may have utility outside of CF and COPD, we are withholding valuation of these programmes until a clear clinical pathway is announced. Lastly, although we see potential for the Wanda platform for the management of other chronic diseases (besides CHF/COPD and cancer), we do not want to speculate as to the nature of these future programmes.

We assign our highest probability of success to Vortex at 15%. We view the technology behind the platform as robust, and the fact that it isolates cells without the need for affinity labels provides an added degree of versatility for downstream applications. This should prove to be a competitive advantage. That said, the main risks to the company are commercial, considering the highly fragmented landscape and the low adoption of CTC testing to date. If the company is able to establish a significant footprint (eg 10% penetration in the research market) or secures a favourable distribution agreement, this would correspond to a substantial reduction in downstream risks. Additionally, we may update our valuation to reflect the development and future commercialisation of next generation platforms, when the details of these systems are announced.

NetScientific’s H117 post-tax loss of £5.2m (H116: loss of £6.4m) reflects ongoing investment into a portfolio of pre-commercialisation and therefore currently loss-making companies. An investment of £3.0m was made into the development of fundamental technologies and products of the core portfolio companies. Wanda’s move from development to commercialisation is reflected in the reduction in research and development expenditure in comparison to H116 (£3.7m). We forecast that NetScientific will invest additional capital in R&D during H217 as we expect Glycotest to complete its Series A this year, which should result in a concurrent increase in spending for that programme. Selling, general and admin costs for H117 were £3.0m, which includes a significant proportion of subsidiary management by NetScientific executives; the increase on H116 (£2.4) was driven by increased sales and marketing development at the portfolio level, in particular Vortex and Wanda.

NetScientific had cash on the balance sheet of £11.3m at 30 June 2017 (H116: £15.9m; FY16: £9.5m), which includes the £8.1m raised in the June 2017 private placement. The company reported a small amount of revenue (£164k) for H117, mainly attributed to sales made by Wanda to its associate OncoVerse. Additionally, NetScientific’s operating income of £222k is from ProAxsis’s research development tax credit (£154k) and Innovate UK grant income (£67k). We have reduced our projected revenue ramp for Vortex, Wanda and Glycotest to reflect slow existing sales and delayed financing timelines. This has reduced our expected 2017 revenue to £1.4m from £2.7m, and these reductions are carried forward. We have similarly reduced our expected operating loss in 2017 to £9.9m from £13.7m to reflect these operational delays.

We fully incorporate the financials of Vortex, Wanda, ProAxsis and Glycotest into our projections, and accounted for the difference in earnings due to minority interests. PDS, as the sole minority stake, is accounted for as an equity investment. The future financing needs of PDS attributable to NetScientific are recorded as the acquisition of additional equity.

All of the NetScientific portfolio companies will need additional financing before reaching profitability, and the company has announced expected Series A financing rounds for Glycotest and PDS in H217, Vortex and ProAxsis in H118, and Wanda in H218. Our model forecasts £77m needed before profitability for all five programmes. The degree of dilution of these assets and the proportional ownership by NetScientific will depend on the nature of these offerings, and we expect to update our forecasts at that time. In the interim, we have included £16m in illustrative debt (in 2018) on our balance sheet to reflect the additional financing requirement required by NetScientific (including minority interests). This is a reduction from our previous estimate of £24m due to the recent financing. After accounting for £4m in cash burn attributable to minority interests over the period, this corresponds to a net obligation of £12m.