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Epistem: a stem cell research firm already generating cash

After Epistem released its final results a few weeks ago, we decided to catch up with its chief executive Matthew Walls. Here we reveal what he had to say, while we take a closer look at the firm

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One of the risks investors in early-stage life science firms often need to be wary of is that a company, at some point, will come back to them for more cash in order to fund the next stage of their development. Epistem (LON:EHP) is a biotechnology company that goes some way to obviating this by combining a cash-generative contract research business in order to fund its own research activities.

Epistem specialises in the commercialisation of adult stem cells in the areas of oncology and gastrointestinal diseases, as well as in cosmeceutical applications (cosmetics that use a biologically-active component). The firm is developing therapeutic drugs based on its stem cell technologies as well as diagnostic biomarkers – biological indicators that are used to quantitatively measure or evaluate pharmacological responses to drugs.

Meanwhile, Epistem also supplies contract research services to drug development companies.

The Contract Research Services division currently accounts for the bulk of Epistem’s revenues, and is both profitable and cash generative. It specialises in preclinical efficacy testing on a fee-for-service basis and has provided these services to over 90 clients around the world, although primarily these are companies based in Europe or the United States.

Although Epistem’s other businesses promise more in terms of long-term success for the firm, the Contract Research Services division generates the cash that allows it to develop its more potentially lucrative prospects. “Whilst we said a couple of years back that it was perhaps the most traditional area of our portfolio, based on its strength of expertise and scientific reputation it continues to generate good profit margins and is doing very well,” says Matthew Walls, the firm’s chief executive officer. 

Epistem’s Personalised Medicine division is responsible for the firm’s biomarker and Genedrive technologies.

The biomarker technology uses Epistem’s knowledge of the behaviour of epithelial cells and drug-induced gene expression change to measure the effect of a drug during treatment. Changes in gene expression can be detected within hours and at low levels of chemotherapy or radiation. The biomarker technology uses mRNA extracted from cells at the base of a single hair follicle as a minimally-invasive process.

The Genedrive molecular diagnostic testing tool, according to Epistem, represents a “major advance” in molecular diagnostic testing by providing a rapid (around 30 minutes), low cost, simple-to-use device that is applicable to a wide range of viral, bacterial, fungal and somatic mutation-based diseases. It is currently being targeted at identifying tuberculosis infection at an early stage, but the firm plans for it to be used across a broad spectrum of infectious diseases (including Dengue Fever, HIV and other STDs). Genedrive also has applications in other areas where rapid identification of DNA is required, such as in law enforcement.

The firm’s Novel Therapies division is focused on developing its own therapeutics to late, preclinical stage development. Through its discovery platform, says Epistem, Novel Therapies has identified 250 potential drug candidates, of which a subset are to undergo further evaluation.

Almost halfway through October, the firm announced results for its 2011 financial year. These showed that revenue improved to £5.75 million from £5.74 million during the year to June 30, while its pre-tax profit was £357,000 (2010: £350,000). After tax, profit came to £385,000 compared with £290,000 in 2010.

Epistem said that it made good progress during the year across each of its three divisions. Its Contract Research Services division saw revenue grow by 19 per cent to £3 million with the extension of its service offerings and the renewal of a US government bio-defence contract enabling the division to deliver a solid performance.

Epistem’s Novel Therapies business saw its drug development programme continue to advance. The funded research phase of its Novartis collaboration was completed at the end of February and generated £1.6 million over the year (2010: £2.4 million). According to Walls, a total of £8 million has been invested by Novartis in the business and now that the funding phase has finished Epistem is in discussions with a number of potential partners in the areas of regenerative medicine and oncology about how it moves forward with commercialising its therapeutics.

The firm’s Personalised Medicine division experienced revenue growth of 39 per cent to £1.1 million, largely driven by a three-year Sanofi-Aventis oncology biomarker collaboration that was announced in March this year.

Meanwhile, the development of Epistem’s Genedrive molecular diagnostic device continues to make “excellent progress” with clinical trials now underway across a number of diagnostic areas. For example, in September the company announced that it had successfully completed its first TB clinical studies as part of its diagnostic collaboration with India’s Xcelris Laboratories (India, where two million new patients develop TB every year, has the largest number of TB sufferers in the world).

Early in October, the firm also announced that it is working with the UK’s National Policing Improvement Agency to help develop a human DNA identification system that uses Genedrive.

“The potential is significant,” says Walls. “It’s not just for healthcare and infectious diseases, it’s for anything that involves DNA in a rapid form.”

In a recent research note on the regenerative medicine sector broker Daniel Stewart said that Epistem “presents far less risk than most of its peer group as the company is financially self-sufficient” and that should the group strike another major collaborative research agreement (as it did with Novartis in the past) it would expect a re-rating.

Certainly, while the cash-generative contract research business means that Epistem is able to look after itself in the short term, the biomarker technology, Genedrive and the Novel Therapies business all have the capability to be company changers, according to Walls. “All these three have the capacity to catapult the company forward significantly,” he says.

For the moment, Daniel Stewart has set a target price of 429 pence for Epistem’s shares, which were trading at 380 pence each this morning.

 

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