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A Ben Graham value buy

An investment company that backs life sciences, healthcare and technology businesses is enhancing shareholder value, a fact that is not reflected in the 63 per cent share price discount to sum-of-the-parts valuations.
A Ben Graham value buy
  • Fair value of directly held portfolio rises 46 per cent to £31mn (147p a share)
  • Capital under advisory increases 51 per cent to £22.1mn
  • Portfolio company PDS Biotechnology set to release results of Phase 2 clinical cancer trials in early June
  • Investee company ProAxsis delivers impressive results in Covid-19 antibody test trials

NetScientific (NSCI:80p), an investment company that backs early-stage life sciences, healthcare and technology businesses, has delivered strong annual results that highlight the value the board is creating for shareholders.

The company’s proactive management team invested £4.5mn of last year’s £7.7mn placing proceeds in new investments which has increased the portfolio from 17 to 22 companies, and diversified risk, too. Moreover, EMV Capital, a wholly owned investment finance boutique that provides services to companies operating across the industrial high-tech, energy, circular economy, smart city, transportation and healthcare sectors, has increased capital under advisory by half to £22.1mn.

EMV has a carried interest arrangement with investors it has introduced into its portfolio companies and is entitled, on realisation of the investments, to a share of profits. The carried interests range between 10 per cent and 20 per cent of profits above a minimum return hurdle rate of up to 10 per cent. House broker WH Ireland values these interests at £7.4mn and believes that EMV, which made a profit of £0.2mn last year on revenue of £0.97mn, is worth a further £4.7mn. On this basis, the combined value of the carried interests, EMV as a standalone entity and £2.3mn of group net cash, back up 85 per cent of Netscientific’s market capitalisation of £16.9mn.

That leaves a further £24.4mn (116p a share) of investments in the price for £2.5mn (12p) including a $6.1mn (£5mn) stake in Nasdaq-listed PDS Biotechnology Corporation (US:PDSB: US$4.56). The $131mn market capitalisation immunotherapy company is developing cancer immunotherapies and infectious disease vaccines based on its proprietary Versamune® T‑cell activating technology platform. PDS retains $58.9mn of net cash to fund ongoing Phase II clinical trials with world leading organisations, Merck, National Cancer Institute, MD Anderson and Mayo Clinic. Expect results to be announced in the first week of June, a potential major share price catalyst.

Shareholders also received positive news a few days after Netscientific's results from 100 per cent owned investee company ProAxsis, a health and life sciences company with a focus on respiratory diagnostics. Last summer, the company entered a licensing agreement to complete the validation and global commercialisation of a SARS-CoV-2 (the virus associated with Colid-19) serology ELISA (enzyme-linked immunosorbent assay) developed by AstraZeneca’s research team. In return for providing access to the required intellectual property and technical know-how, AstraZeneca will receive a royalty fee on future global net sales of the assay.

The trials produced 100 per cent sensitivity and 99.3 per cent specificity in measuring and tracking antibodies from multiple Covid-19 variants over time in individuals. The commecial potential is certainly not priced in given that ProAxsis trades at breakeven and will require modest working capital investment this year, says chairman John Clarkson. The directors place a fair valuation of £3.5mn on the holding in ProAxsis using British Venture Capital Association valuation principles.

Netscientific also holds a 62.5 per cent interest (fair valuation of £11mn) in Glycotest, a US‑based diagnostics company that is commercialising tests for patients with life‑threatening liver diseases, targeted at early‑stage diagnosis to reduce mortality and increase survival rates for this large and growing patient population. In 2019, NetScientific negotiated a $10mn investment and licensing deal with Fosun Pharmaceutical whereby Fosun received a minority stake in Glycotest and the rights to develop and commercialise the company’s Hepatocellular carcinoma (HCC) panel in China, for which Glycotest will receive a royalty and retain rights to markets outside China. HCC is the fifth most prevalent form of cancer worldwide and the third leading cause of cancer death.

There is potential for positive news on lab test results within the next two to three months, says Clarkson. Moreover, although Glycotest reported a loss of £1.3mn last year, a contributory factor behind Netscientific’s pre-tax loss of £2.9mn, effectively Fosun's cash is funding Glycotest’s working capital requirements. Many investors have not grasped this fact.

Interestingly, Netscientific’s chief executive Dr Ilian Iliev singles out several investee companies that offer potential to deliver material returns, including: Sofant, the Edinburgh University spin-out that is developing a antenna for satellite communications and 5G applications that has signed a $7.3mn contract with the UK Space Agency and European Space Agency; and Q-Bot, a London-based robotics and AI company that has developed a patented energy saving robotic system for applying insulation in tight spaces and suspended floors (to reduce heat loss and prevent draughts, damp and mould). The point is that the diversified portfolio not only mitigates risk, but means that Netscientific now has multiple shots at reaping profitable exits from its directly held investments as well as valuable carried interests, too.

Admittedly, the share price is 9 per cent shy of since my last buy call (‘A deep discount value play’, 11 January 2022), a decline that is at odds with the shareholder value the directors are creating. The 57 per cent share price discount to sum-of-the-parts valuations is not only unwarranted, but worth exploiting ahead of likely further positive news flow in the coming months. Buy.

This article was first published on 13 May 2022 and updated on 16 May 2022 after ProAxsis released results of the AstraZenca Covid-19 antibody test trials

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