Amphion’s Unique Approach to Innovation

The global financial crisis that began in 2007 has had a severe effect on many parts of the world of finance, but one area that has perhaps suffered more than most has been the IPO industry. In turn, this has affected the ability of several industrial and commercial sectors to raise much-needed capital to fund future growth.

The technology industry – a major beneficiary of the IPO boom of the late 1990s – is one such sector, and those firms directly concerned with bringing technology companies to stock markets have seen their share prices drop as a result.

In London there are a handful of listed businesses that specialise in investing in early-stage technology companies and developing them to a stage when they can be brought to public markets. Some of these have undergone significant falls in their share prices during the past two years. For example, IP Group (LON:IPO) – one of the best-known developers of intellectual property-based companies – has seen its shares lose more than two-thirds of their value since the summer of 2008.

Alternative Investment Market-quoted Amphion Innovations (LON:AMP), which Proactive Investors has followed since August last year, has fared better. Its shares traded for more than 20 pence each in August 2008 before hitting a low of nine pence in the spring of 2009. At the time of writing, they trade for 13.5 pence each.

Perhaps a key reason why Amphion’s shares have managed to retain most of their value amid the IPO drought is the firm’s highly-focused business model. Rather than take lots of stakes in numerous early-stage companies and technologies. Amphion’s directors see the firm as being like a “shipbuilder”. It works closely with inventors to put a management team in place and carefully build a company around their intellectual property.

Consequently, Amphion has been involved in creating just a few companies that it can concentrate its resources on. Today, its portfolio includes:

•    Axcess International – a developer of RFID systems for a range of applications, such as “advanced workforce management”. Axcess, valued at almost $8m, is quoted on the US’s OTC Bulletin Board under the ticker, AXSI.
•    FireStar Software – owns an enterprise-quality software platform, called EdgeNode, that enables service providers to create and run multi-enterprise messaging applications, e.g. a healthcare payments system.
•    Kromek – owns a digital X-ray system for applications in security, industrial production, medicine and defence.
•    m2m Imaging – MRI (magnetic resonance imaging) coils and tools for clinical and research applications.
•    Motif BioSciences – applies proprietary technology and expertise in medicinal chemistry, biology and genomics to discover and develop best-in-class small molecule drugs.
•    Myconostica – molecular diagnostics for fungal diseases.
•    PrivateMarkets – online energy trading marketplace.
•    WellGen – a firm developing medical foods and nutritional supplements for the health market.

Among the companies listed above, Kromek is judged by Amphion’s management as being the most likely to go public next.  “We continue to explore the possibility of listing Kromek via an IPO,” Amphion’s chief executive officer, Richard Morgan, told Proactive Investors. “If an IPO is possible in the current market climate Kromek should be the first of our partner companies to be able to go public.  We have very active discussions ongoing with several bankers and in general they all seem to be quite positive about the opportunity to do a good IPO for Kromek as and when we hit some key corporate milestones, which we believe should be possible in the next six to eight months.”

The problem for Amphion is that while there have been some quite high-profile technology IPOs in recent months, such as Silicon Valley-based electric car manufacturer Tesla Motors’ launch onto Nasdaq, activity in the IPO market remains tentative. “We are in almost continuous discussion with bankers in New York and in London and the mood is uniformly cautious, at best, and of course changes up and down with the general mood about the equity capital markets in general,” added Morgan. “Right now, the general mood is getting worse again.”

Getting IPOs away is key to Amphion’s business model over the long term, the idea being that it generates cash through the annual “graduation” of at least one partner company. This cash can then be used to fund investment in other portfolio companies as well as to reward shareholders with dividends.

“That basic model remains unchanged,” said Morgan. “What has changed for the worse is the general climate for exits via IPO or in any other way, so we are reconciled to carrying our partner companies further and for longer in a tougher climate for fund-raising generally.”

On the positive side, Amphion has been able to generate cash flow through its intellectual property licensing programme. The DataTern subsidiary, which is wholly owned by Amphion, helped the firm boost its income from IP licensing by 40% to US$7.6m last year. Although IP licensing has lagged behind during the first half of this year, Morgan said that it is “expected to pick up steam again in the next three-to-six months”.

Meanwhile, Kromek itself managed to raise £12.3m in an oversubscribed financing in March this year. More recently, the company – which is pioneering a cadmium telluride-based technology for X-rays and advanced 3D imaging for the medical, security, industrial inspection and defence markets – bought California-based NOVA R&D. The acquisition brought a number of imaging and detection technologies in the chemical, biological, radiological and nuclear space to the enlarged business, as well as what Amphion calls significant commercial relationships.

Clearly, investors in Amphion should keep an eye out for further developments at Kromek. According to Morgan the earliest the business can be floated would be during the first quarter of 2011, at which point Amphion’s 16% stake should be worth far more than the last valuation of £9m.

But although the 203 IPOs completed across all sectors during the first half of this year eclipses the 103 achieved in 2009 (source: Renaissance Capital) are clearly a sign that IPO activity is improving, Morgan’s caution regarding Kromek is understandable given that the past two years have proved tough for IPOs in general.