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I'd previously posted that oncology may be a little down the line as far as Novacyt is concerned, but articles like the one below show how PCR type tests for cancer patient monitoring may be about to explode onto the diagnostics scene and the technology required appears to be right up our street. Something for DA's 'COBRA team' to consider.

Hope for cancer patients https://mol.im/a/10773277 via https://dailym.ai/android

Here are a few salient extracts/quotatiins to whet your appetite:

"A simple blood test has the potential to revolutionise how doctors detect early on if cancer may be returning, British scientists have found."

"Researchers used the liquid biopsy, which has similar methods to PCR testing for Covid, to assess how 104 patients with throat cancer responded to combined chemotherapy and radiotherapy."

"By picking up on DNA from tumours before symptoms appear, liquid biopsy has huge potential to revolutionise how we detect cancer at an early stage. We have shown it can work for throat cancer patients but the beauty of the technology is we can adapt it to detect any DNA sequence that is linked to cancer from a simple blood test."

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@ Brentwood nice post. Well now the market has closed for the long weekend, I feel I can post this missive in response. I’ve changed the title from “Do I stay or do I go” (very reminiscent of one of my old Clash records) for reasons that will become clear if you make it to the end.

I think the penny has finally dropped; this is a longer-term investment opportunity for those that can see the quality of R&D, the agility and determination of the company and the potential for growth in near-to-care diagnostics. As I said previously, something to put in your SIPP or your children’s ISAs for a long-term reward.

But having had time to look at the presentation video again, it is becoming even more clear how undervalued this company currently is. As DBR says, we have pretty much bottomed, so there is little room for downside but plenty of head room, even in the short term. I don’t think this SP opportunity is going to remain for long. Let me briefly summarise why:

Revenue 2022
Covid sales are drying up faster than expected, down 75% compared to 50% predicted. [This could reverse any point, but let’s not hope for that.] But what about non-covid sales. 13.85 in 2020, 13.44 in 2021 and now just 3m in first quarter (equates to 12m for the FY). But what this last figure does not include is the sales from Microgen or Lab21. Usually, we don’t gain much substantive information from a presentation that is not already included in the RNS. However, here JM explained how the winding up of these two companies is going to be cost neutral. Basically, they will cover any costs associated with redundancies etc. with the revenues from the sales in the first HY (I assume they will retain anyone worth keeping within the new structure – so this is healthy pruning). [He basically said for accounting purposes we are assuming they have already closed from beginning if Jan, and no revenue from them is being recorded.] That way it will not affect overall margins. I was assuming that this year would be a flat year with no profit to report but they are confident that some profit will be made. I would assume at least 3.5m [10% (is the lowest double-digit figure) of 35m]. They will be sharp on all their costs – especially the 18.4m direct labour that will be cut right back (plus any costs associated with running Lab21 & Microgen will be already removed) to ensure that the 102m in the bank is not touched or built on further (remember, also, there will be little tax to pay as they have a 9m carry over plus patent box relief to apply retrospectively. So that 102m will likely be 105 by year end – the important thing is that is does not reduce.

So, basically no chance of depleting our cash in bank this year.

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Revenue 2023 to 2027
From next year onward they will start to release their new portfolio of non-covid test. They say these will take from 12 -24 months, so some will be released at the end of this year/beginning of next immediately affecting next years revenue but really 2024 will be the year to start seeing more substantive growth. After that, they will continue to expand their portfolio as they branch into ever more areas (sepsis, meningitis etc.) and expand their sales envelope (US will come after EU) until they hit their 100m revenue target in five years.

DHSC
They could not add much more on this topic, but it was made very clear from their presentation that they had already ring-fenced quite enough to cover any outcome, and again, the 102m cash in bank will not be touched. Originally, I was hoping for a speedy resolution, but now it has gone this far, the longer this drags on, the harsher we can be with our main customer, as every month that passes by, we become less dependent on UK Gov. Since the dispute began, we have pivoted strongly toward overseas and private sector. By the time this gets to court, if it ever does, we will probably have less than 25% of revenue from UK Gov. Some have said here today, “let’s just get this cleared up”. But I think we should now remain polite and amicable but resolute and determined to claim what is rightfully ours, with interests and costs.

M&A
The 102m cash will be used for M&A and only to meet strategic objectives and accelerate the above 100m revenue target, so that we reach it more quickly and complete surpass it by 2027. Again, they we were quite clear, and forthright on this in a way which, as many have picked up on, one could infer something is already being worked on. Clearly, an announcement on this could happen at any time and would see immediate gains to the SP as investors don’t like cash to be held and eroded by inflation.

Tata
They were clear and open that we white label other company’s test through Pathflow and that many companies sell our goods badged as their own. Clearly, negotiants were ongoing with third parties and this could see substantial additional revenues if they were to succeed.

2021 was our annus horribilis
I started the year with a post titled “Decision on the Mountain” - in hindsight I should have sold and comeback in now. But no, I continued my journey along my metaphorical mountain path, like many of you, only to be bashed and battered by tempests and rock falls all year long. Well, my intrepid fellow travellers, I do finally see the sun coming out and the path ahead looking more prosperous.

That £1bn enterprise (SP £15) is, to me, still a reality and I firmly believe we are heading there.

But right now, I’m heading over to The Swan Inn to do some more research for my pub project – have a good weekend all!

Part 1 of 2

I’m a slow reader so it’s taken me well over three hours to properly read, digest unassimilated the full report. I have summarised as succinctly as possible my analysis to clarify my thinking and to share with the board. I have not read the BB yet, so this will be fresh but will inevitably, also cover points probably already raised or discussed, so apologies if there is an element of repetition.

Cleary, the vision of becoming a leading global clinical diagnostics company in the fight against infectious diseases has not changed and the key headline is that they expect to achieve 100m annual revenue within five years.

At first, I thought ‘what have they been doing with their time?’ But you need to be sure about closing two parts of your business (Lab21 and Microgen); this is a hard decision that needed some due diligence. Also, I was expecting to see an improvement in non-covid sales. But here too, the picture is becoming clearer. Pre-covid they were boffins making tests for research labs – small quantities of high-quality tests. Those labs switched a lot of their activity to Covid – so to suddenly try to increase these sales is not actually a possibility – even with 100m in the bank and an increased sales force.

What they actually need to do is refresh their whole portfolio and change it from RUO (research only) to regulated, clinical use tests so that they can be used to test in real world situations and be sold at scale into hospitals and other POC, for example, rather than just specialist labs. This does not just apply to tests on humans but their whole portfolio (food, animal health, water testing).

In terms of human testing, the focus remains on respiratory disease, transplant and infectious disease (including growing prevalence due to global warming of insect born disease) plus they are adding GI (gastrointestinal) and, at a later date, will also look at sepsis, STI/UTI and other hospital acquired infections, plus possibly meningitis.

They think that the IVDR regulations in Europe, coming into effect in May of this year, will kill off many of the smaller diagnostics companies (just like Lab21 and Microgen) and leave them in a commercially stronger position to sell these new tests.

They also want to add extraction capability as an option, which means that they can test for much smaller quantities of DNA/RNA or determine the amount of DNA present and be more flexible rather then simply providing binary yes/no tests.

I’m not sure whether I have missed something, but they also mention ‘exciting point-of-care biosensor technology’ ??? – this is a first for me.

Anyway, this is all going to take time and new revenue will take between one and two years to pull through. In the meantime, they are looking at “other short-term opportunities”.

Part 2 of 2

Commercially, they will be further strengthening distribution and working on OEM deals (no mention of Tata specifically!) and enhancing their global distributor network plus establishing some direct sales. It was interesting to note that they sold 500 instruments in 2021 and this netted revenue of 9.3m, which equates to nearly 20k each (seems high to me). If they can continue to push these, it will serve as the foundation for future tests sales.

A final interesting point to note is that “Novacyt also intends to ensure that stronger contracting and partnership oversight are applied”. Is this an admission that their contract was not as tight as it should have been? This may be why the DHSC has been able to spin it out. IMO they will eventually have to cough up though.

24m (owed form 2020), 49m (owed form 2021) and a further 35m minimum of exceptional costs minus a possible 20m product warranty for replacing products (a maximum liability as judged by the company and not changed since the DHSC claim this week). This equates to a reasonable estimate of a probable, total sum due to us of 88m.

So, the bottom line will be whether you believe they will be successful. With revenues of 35-40m this year and possibly less next year, we can assume the next two years to be broadly earnings neutral (i.e. no profit/loss). But the following three years will then see huge year on year growth in both revenue to 100m and annual EBITDA running at 30-40m. With that sort of growth, one would expect a PE of 15-20.

How to value the company based on all that?

Well taking the lower estimates of PE 15 and 30m EBITDA, we would be 450m which is 633 per share and 40m at a PE of 20 would give 1126. You then need to add cash in bank (currently over 100m) and DHSC payment 88m. That’s a further 264 per share. So, in 2027 the PS would be from anywhere between 897 and 1390. These figures do not take into account unused tax losses and patent box refunds etc., which would all add further value and as would current assets and any M&A. A total value of around £15 is, therefore, still quite conceivable. Clearly, this is based on future earnings, we would not expect SP at that level at this point, but that would be the direction of travel for a longer-term investment.

The alternative view, in a nutshell, is that we make huge losses trying to cover our costs with falling revenue; we don’t develop any of these products on time and when we do, we won’t sell them, so that we deplete all the cash – that way we are worth nothing.

People will make their judgements based on what they see this p.m. and probably settle at something in between these extremes of zero and £15.

I dropped a tin of paint the other day - the lid came off and I lost half the contents outside the front door. I swore a bit and then a bit more.

My wife was in a fluster and getting out the hose to spray the spilt paint down the path! But I regained my composure and managed to contain the situation. I carefully got most of the paint back in the can with a dustpan and (paint)brush and then mopped up the rest, first with absorbent paper then several changes of hot water, and then scrubbed the step and patio clean. Looking at the same spot now and you'd be none the wiser that anything had occurred.

So, after reading the RNS this morning, I swore a bit and then a bit more.

Then I went out for a six-mile run in the sunshine. As well as giving me calm thinking time, this was to prevent me doing anything rash (like spraying the paint down the path). By the time the markets opened I was far down a leafy, country lane well away from any potential sell button.

And it was the correct thing to do.

Yes, we would all have liked to have woken to the news of dispute resolution, but it was not the calamity I had first thought. Just like the paint, this will all have all disappeared and will be eclipsed by the information we glean on Thursday of this week. In fact, we are a step further along the process of claim and counter claim and DHSC is just trying to kick the can further down the road and start the haggling from the most extreme position possible. It’s all bluster and we’ll get what’s due in the end if we stand firm and exert our contractual rights. I’d agree with DRB’s figures that even if a court were to come down completely against us, this extreme scenario would actually equate to 30-40m off our cash in bank. We have not shown the other extreme yet, but Karen has outlined a few figures with which I would concur.

When and whether they make their counter claim public I don’t know – but when we received the 2020 FY results, there were some figures in terms of stock write down for example that, to me, only served on purpose. If we were to win that case the windfall in our favour is likely to be colossal in comparison (unpaid invoices, stock wastage, scale up costs for suppliers etc). The likely hood is it will end up be somewhere in between, however.

So, from anywhere between minus £40m to plus well over £200m – I see more upside to this than downside.

Plus, thanks to HarChris’s bet, we have lost another troll, but beware the Lernaean Hydra.

I hope that cleared up all the wet paint!

GLA LTH for Thursday

It's great that they have put the date out; this will avoid the speculation of delays that would have inevitably appeared with no RNS on Monday. Also, the presentation implies that there will be significant new information in the RNS accompanying the results on top of the new tests to be released Q4 and a chance for DA to redeem himself.

It is interesting who they have left out - just the CFO and CEO involved. Hopefully, this will be numbers driven but still include some details on product innovation.

@ saintsmith - I noticed the same myself when reading the RNS first thing. Ref the major corporate players - I don't think we can expect to see the Tata name mentioned. As I have written before, the Indian's seem quite patriotic in their perspectives at the moment, and this is clearly in their marketing. Tata (MD) are clearly ‘owning’ the Q32 as theirs - they don't want to mention the a small matter of a little British company.

@Baby Huey - I’m not sure I entirely agree with your list of those who are/are not invested. But one thing is for sure, there are a two or three on here who clearly want to keep the price down. It is one thing to raise legitimate Qs about your investment and quite another to constantly denigrate your own position. It's like trying to sell your car whilst kicking your own tyres and shaking your head saying - 'I don't know'.

You have to think why they would do that? - The only answer can be that someone wants these shares but not at the current price and are willing to pay people to keep it down if possible. There is very little trading at the moment with everyone sitting on their hands waiting for next week, which makes it difficult for any major player to buy in without seeing the price increase.

I'm far more relaxed about this knowing that the two that are making the presentation are now invested with their own cash – so, I’m off on a brewing course next week as I'm intending to open a microbrewery brewery when my new pub venture takes off hopefully at the end of May! Off to see another brewer now, so no posting from me for a bit.

GLA

Remmber it's only the covid portion of sales that are reducing by 50%.

Last year non-covid sales were disappointingly flat at 13m - we may see a slight uptick to this aspect over the next three quarters before the new strategy kicks in in Q4 - especially if instrument sales are included in this figure.

This leaves 83m of covid sales to be reduced by half to approx 41m. So year end would be 41m + 13m = 54m (not quite your 60m, DRB?).

I agree, the covid portion of this may taper down whilst the far smaller non-covid sales will, hopefully, start to ramp up.

It will be difficult, therefore, to predict with any accuracy and, on top of this, another factor to consider is that, unless I am mistaken, the 50% reduction was in reference to the market in general. Novacyt suggested it may pick up an increasing share of this remaining revenue. Considering that general tests are rapidly reducing but tests for travel remain for many countries, and travel is only going to increase, this hypothesis is not so unlikely. We will continue to supply the likes of Katalyst and Wren who may actually see a continuing demand for their test especially across the busy summer months.

The other unknown in this respect is Tata, who is also positioning itself in the travel sector with labs at airports. So far as we know though, they may only be interested in our machines but, depending on the scale of their ambitions, this could still be significant.

Too me this is a transition year that will be the springboard to future growth - what happens regarding communications on strategy, what moves Biosynex or other parties make and what governments or international bodies do in terms of global surveillance will be far more significant with respect to longer term shareholder value.

I agree though, that we don't want to see our cash reserves depleted, so to see these continue to build, even if by only a small margin, will be important to maintaining or increasing confidence in this share. The cash in bank figure will, therefore, remain critical. The long overdue return of our cash from the DHSC will also be a more than welcome boost and further strengthen our position in terms of net worth and opening up acquisition oportunities - this could easily see a significant step up in the SP but likely not to be as great as the step down, as it will not imply an immediate return to the previous lucrative relationship that we lost when the contractwas torn up. We do know though that we are still doing business with the NHS whatever the outcome.

The next few weeks could well be white knuckle time whether you're on a roller coaster or climbing that mountain with me - time to hold on tightly!

GLA LTH

Great to see DA share purchase. IMO this is the final signal indicating the beginning of the new uptrend. It most likely guarantees a 30-day news free period from the company, however, until full year results along with the forward strategy are announced . Of course, we may receive further notifications in terms of Biosynex, or any other player, activity and we should see investors that left on the “no news ‘til April ticket” slowly returning. I would expect the SP to build firmly in anticipation.

There is some talk regarding the timing of the purchase. Why would DA not buy at 140p?

I have done some analysis on DA share worth. The shares bought could be seen as an insurance policy in the event that he does not achieve the minimum required SP of £4.71 (£3.54 x 110% x 110 x 110%) to get the minimum 25% of 358,262 share bonus.

If the share price in Dec 2024 were only to achieve 450 for example, then the LTIP would pay out nothing, but his personal investment would have nearly doubled to just over 195k.

Far more likely though, is that this purchase is part of the plan to get the SP well over that required to achieve the minimum. Once the LTIP kicks in, it dwarfs the shares purchased by a long shot. At an SP of 800p , for example, his shares purchased will be worth a not inconsiderable 348k but his LTIP will be worth 3.21m! And at my target price of £15, which I believe is still realistically achievable by that date, his total worth would be just over 6m (652k from the share bought on Friday but a whopping 5.37m from the LTIP). Click the link to see the full graph:

https://twitter.com/Hill__Seeker/status/1507642125726453761?t=ADkQIPNcpRNGDZqZC0yKOw&s=03

So, you can see that signalling to the market that this company is worth far more the 230p is of far greater importance than buying at the very bottom, which would in all fairness look terrible in any case. My view would be that he held on as long a possible before making the purchase.

Some investors may feel aggrieved that the SP was not supported throughout last year’s drop, and they may have a fair point, but bringing emotions into your investment does not help you make money. One thing remains clear, there is now one huge incentive for the SP to rise significantly over the next 30 months from where it languishes now and this cannot be achieved in the last minute – so we’re back to that long upwards climb – pack your sack and get your walking boots on were going up that mountain.

All IMO only, this is not investment advice, please DYOR

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