Fusion IP targets maiden profit in new financial year

Bottom-line profitability is a key aim for Fusion IP (LON:FIP) in 2011, chief financial officer Tony Gardiner told Proactive Investors.

Gardiner believes the company can achieve a maiden profit in the current financial year with future funding rounds providing the triggers for Fusion to re-value its equity in each portfolio company.

Fusion invests in new companies and technology that are formed from university research. At present it has investments in 23 portfolio companies, originating from Cardiff University and the University of Sheffield.

The value ascribed to each of Fusion’s investments is based on prices from the most recent funding round. As portfolio companies grow, achieving higher valuations through successive funding rounds, Fusion in-turn re-values the fair value of its own equity stake.

This fair value uplift is reported as revenue, and it is providing a major driving force behind Fusion’s improving financials.

Gardiner expects forthcoming funding rounds to have a big impact on the fair value of Fusion’s assets in next year’s results.

Indeed yesterday’s strong full-year results were boosted by the increasing value of Fusion’s equity stakes across its portfolio companies, with fair value uplifts providing a £2.59 million net gain.

In the current year the CFO sees a supportive funding environment for the portfolio companies.

“We have a good track record of funding our portfolio ... if the technology works and the companies hit their milestones we don’t foresee problems in continuing to fund them,” Gardiner said.

“Our plan for 2010/11 is to invest approx £2m into our portfolio and again leverage that with third party investors, so we would expect at least £5m plus into the portfolio in addition to our £2m investments.”

In addition to the fair value uplifts Gardiner identified the licensing division as a potential source of further revenue growth.

Gardiner emphasised that the licensing agreement with Sheffield University has big growth potential.

Through the agreement, Fusion helps license-out IP from the university’s research with the net income shared between Fusion and the IP holder.

In Monday’s financial results Fusion reported £0.8 million in revenue from a single licensing deal, licensing out the IP from Sheffield's Medical Physics team to an international orthopaedics company.

Whilst revenues have mainly been from single transactions, Gardiner said the company is aiming for the deals to start generating recurring revenues.

Furthermore the CFO had an upbeat outlook for its investment portfolio.

“We have achieved a good balance in our portfolio from engineering through software to medical devices and drug discovery,” Gardiner said.

“The route to market and revenues for some of the portfolio companies can be long but we now have some companies coming through which could deliver revenues within two years from start up significantly enhancing their value.”

Of Fusion’s twenty-three portfolio companies six are in the trading phase, and three of them are trading profitably.

Under its business model, Fusion will ultimately divest its stake once the portfolio company reaches an appropriate exit point - i.e. through a takeover or a stock market flotation.

For the 12 months ended 31st July, Fusion reported a significantly improved financial performance with a massive increase in revenue to £4.4 million (FY09: £0.6 million). The strong revenue growth enabled a substantial improvement to the bottom line, as pre-tax losses were cut to just £1.6 million compared to a £5 million loss last year.

Yesterday chief executive David Baynes said the company has had an encouraging year.

It helped start three new companies in the period - Asalus Medical Instruments, Seren Photonics and Progenteq - and the group plans to create further new spin-out companies in the coming year. During the year the company raised £3 million through share subscriptions and placings, and as of the 31st July Fusion had a cash balance of £4.6 million (FY09: £5 million).

Additionally Fusion also sealed a significant co-funding deal with fellow commercialisation firm, the IP Group (LON:IPO). Through the partnership, the two companies are jointly investing in new start-ups. As part of the deal the IP Group took a 19.8% stake in the company.

In terms of commercialisation Symcyp is Fusion’s most advanced portfolio company.

Symcyp recorded a sixth year of growth and reported a 21% increase in turnover to £4.7m (FY09: £3.9m), boosting profits substantially with a 42% increase to £1.7 million (FY09: £1.2 million).

Simcyp is a predictive drug assessment company, its technology allows pharmaceutical companies to analyse how a drug is absorbed, distributed, metabolised and excreted in virtual patients, before the human clinical trial phase.

The other portfolio company to achieve significant growth was Magnomatics, with a 266% increase in turnover to £0.8 million (FY09: £0.3m).

Magnomatics is a specialist engineering company, it manufactures magnetic transmissions and ultra-compact and highly efficient magnetically-geared, motors and generators. Magnomatics technology is focussed on increase the efficiency in ‘green technology’.