The quiet revolution that promises to transform Asterand

Charles Elliott, former Goldman Sachs analyst and the founding partner of Inflection Point Investments, has a most impressive track record for stock picking.

His strategy as head of Rowe & Pitman’s Tokyo operation in the 1980s was an interesting one. 

Realising that most companies commanded extraordinarily high stock market ratings, the young Elliott was forced to seek out emerging growth trends and companies piggy-backing on them.

It helped him identify potential “multi-baggers” (investments that might double, or triple in value over a period of time), which were an antidote to the giant blue-chips whose progress was rather pedestrian in comparison.

It was an approach that served Elliott well: among his top picks was a fledgling Nintendo, the semi-conductor firm Tokyo Electron and Shimano, a name synonymous with cycling. 

It also saw him voted Japan’s top foreign analyst while at R&P and Europe’s leading technology analyst with Goldman.

And it is why people sit up and take notice when Inflection Point takes a position in a company.

Note the market’s reaction to the news IP had taken a stake in Asterand (LON:ATD) – the share price advanced more than 16 percent. 

Elliott’s firm now owns more than 4 percent of the company. 

But what exactly has the wily old campaigner spotted that the rest of the market missed?

To answer that question Proactive Investors spoke to Martyn Coombs, the chief executive of the human tissue science group.

What we found out is there’s a quiet revolution taking place which should eventually prompt investors to re-appraise the valuation they currently ascribe to Asterand – which at less than one times sales is a fairly low one. 

Last autumn, Asterand was faced with a problem as its traditional customers, the big pharmaceuticals companies, cut their spending on contract research. 

Coombs and his team knew Asterand needed to reduce its reliance on this cyclical business.

So they decided the group would go after US government work as well as targeting the diagnostics market.

To add to the mix it acquired Bioseek, a specialist in predictive human biology, which broadened the company’s research offering.

Comined with Asterand’s existing business Bioseek could provide the launch pad for a whole new direction for the company as big pharma eschews animal research for human based models. But more of this later.

Coombs had a nervous wait before he knew the change of strategic tack was working. 

Confirmation came in September when Asterand won a prestigious contract with America’s National Cancer Institute worth as much as US$24.3 million over five years.

There are a number of points to note about the deal that were perhaps not apparent in the original announcement. 

The first is that this is a blue-chip tie-up – as good if not better than a joint venture with one of the major players in the pharma space. 

Why? Well the NCI spends around US$4billion a year on oncology research in the US, making it the biggest spender in the field by a mile.

The agreement also marks a critical phase in the rubber stamping process of Asterand as key partner of the US government. 

As Coombs points out it is always difficult to land that first contract “but once they know you it becomes a lot easier”.

Analysts believe more collaborations of this sort will follow, and the Asterand chief executive went as far as describing the NCI contract as a game changer in the immediate aftermath of the contract win.

“Working with the NCI is very prestigious,” Coombs adds. 

“They are seen as opinion formers and opinion leaders. So the fact that they want to work with Asterand is a validation of what we do.  

 “I hope also it bodes well for doing further work for the government. Certainly we intend to make a good job of this collaboration.”

What he also points out is Asterand is also making progress with the second strand of the strategy, with currently, in the tissue business, two of the company’s top five customers being diagnostic companies.

“A year ago we saw big pharma companies cutting down on their spending,” Coombs says. 

“We thought we can either sit still here and wait for this to pass or we can do something about it. 

“So we chose to do the latter and to go after two different markets. 

“One was to go after business with diagnostic companies and the other was to go after government work. 

“Going after both requires different skill sets and is not something you do lightly.

“We thought they offered us great opportunities. 

“But it has taken us nine months to get real traction in these two markets. 

“Now we have. We got the contract. And we are making some traction with diagnostic companies as well.”

Coombs isn’t satisfied with simply sitting back and admiring his and his team’s handiwork. No, he is looking at yet more areas in which to deploy the company’s ground-breaking science.

The use of some of the company’s technologies could help save the cost-conscious big pharmaceuticals companies money by indentifying drugs that are likely to fail clinical trials early in the process – well before hundreds of millions of dollars have been ploughed into R&D.

The strategic direction of the group will be the focus of Dalia Cohen, the company’s newly appointed chief scientific officer, who was recruited from Rosetta Genomics, but is perhaps even better known from her fifteen years at a senior level at Novartis.

It was a bold move for such a small company, but one that sums up its ambition.

Asterand’s team isn’t happy being just a small cap company. You sense Coombs sees it as mid-cap niche specialist, and he says as much during our conversation.  

“We have brought in a senior, big hitting player who has worked at a senior level in Big Pharma... into a job where the fruits of her labour won’t come in just a couple of weeks,” the Asterand boss says of the Dalia Cohen appointment. 

“The message we want to send is we plan to be the scientific leader in this space. We won’t react to what other people do. We are going to set the leadership position. 

“At the moment, over 90 per cent of compounds in clinical trials fail, even after many years of testing in animals. This shows that animal-based models are at best a partial guide to responses in humans.  There is an urgent need for early stage, human-based methods that can predict, from an efficacy and safety perspective, likely success in humans.”   

“We are looking at how human based methods will dramatically improve the discovery process.

“Dalia will be taking a long term agenda on how we want to take the company forward. 

“We want the name of our company, Asterand, to become synonymous with science, with innovation, with disruptive change, with growth.  As an example, we have been very pleased with the enthusiasm that our customers have shown to our new BioSeek platform.” 

“We are not intending to be a US$20 million revenue company in a few years time.”

“We are going to grow organically. But we are also going to grow by acquisitions.“

So, acquisitions will form part of the strategy, Coombs says. That said the group has just recently finalised the financing of the Bioseek takeover, agreeing a US$4 million term loan with the Silicon Valley Bank to do this.

So any deal would require the financial backing of shareholders, though price of the shares, currently languishing at 12 pence each even after the recent spike, would have to much higher before I sense Coombs would be comfortable diluting down shareholders via an equity fundraiser 

“Human-based solutions in drug discovery is a very fragmented niche,” Coombs says.

“There are some interesting companies doing some exciting things. 

“The companies we may look at will have a strong technology that creates an immediate barrier to entry, that we can sell through our collaborative distribution channel.  Oh, and they will be human based.” 

At the moment the focus is on getting the fundamentals right, and driving performance.   Coombs says: “I should stress that we won’t be gung ho on acquisitions.  Organic growth is most important.  “Acquisitions are important also, given the stage of the company and the fragmented nature of our niche, but this is secondary.  Acquisitions are challenging to integrate successfully, we feel we have done well with BioSeek, but we are realistic in that we kissed a lot of frogs before focusing on BioSeek, and would evaluate any other potential targets equally prudently.”

If Asterand delivers there is nothing to prevent the firm acquiring the sort of rating ascribed to successful, growing platform companies,  for example, Manchester-based stem cell research group Epistem (LON:EHP), analysts say. Its market value is currently more than double that of Asterand, yet its annual sales are much smaller.

Broker Religare in a recent research note valued Asterand’s shares at 23 pence each (incidentally this was before the announcement of the NCI contract).

“Asterand should be a core life sciences portfolio holding for investors,” it said.

“The company is well placed to take advantage of two important long-term trends in the pharmaceutical and biotech industries. 

“(They are) the increasing importance of human tissues and tissue-related services in drug discovery and development, and the growing trend for companies to outsource research services, to support internal development programmes.”    

Coombs is happy Asterand’s story is being recognised by the market – as the investment by Elliott’s Inflection Point shows. 

“I think a few things are happening. We have done a lot to build our business on the supply side and generally internally,” he says. 

“We are working out how to sell BioSeek to our customers and have re-directed our business towards government business and diagnostics as well as towards our traditional pharma business. All of those things are now in place. 

“Most importantly, we are fortunate to be in a growth niche that is ripe for change.

“As a company, I believe that we are in the right place at the right time.”