The IP Group portfolio announced a number of updates today.
IUG Trading Update
IUG - or Intelligent Ultrasound, as the name suggests, provides ultrasound software which is the fastest and cheapest form of imaging and its strapline is “Classroom to Clinic”. Part of its product offering is teaching Doctors, the other are a suite of 3 AI software tools to make processing ultrasounds faster and quicker. Make Doctors more productive in tackling those burgeoning back logs.
IUG is up 10% since the last IP Group results so that’s worth £0.7m to IPO based on its 20.76% holding (£6.1m to £6.8m). Every little helps reader!
From an IP Group point of view this is one of its “other holdings”. IUG doesn’t even get a mention in its Annual Report! (It comprises 0.46% of the NAV, so it has achieved a post period 0.05% gain for IPO! Like I said every little helps!
So why whitter on about IUG then?
Well let’s look at this from a couple of perspectives.
There’s a bucket load of listed holdings like IUG which gives IPO an extra £206m worth (£450m total including cash) based on the 2023 Interims of “firepower”. Firepower in a bombed-out market is no bad thing.
IPO trades on a huge 57.25% discount to NAV (as at 9/1/24). How real are the value of its holdings?
What are the 2024 and 2025 future prospects of IPO holdings like IUG?
IUG Strategy
After 5 years of product development and regulatory approval, IUG has moved to commercialisation.
The strategy of growth is geographical and commercialising its three AI products. The AI products have tripled revenue y.o.y. (and triple is what they forecast they’d achieve so well done IUG), and excluding one-offs, group revenue grew 38%.
IUG “should” become cash positive in 2024. What is encouraging too is the significant market growth remaining.
They have an exclusive contract with GE Healthcare, who are the world’s largest medical imagining and obstetrics company. IUG’s software is used by 2 of their 4 machines within GE’s Sonolyst software which is embedded into those machines. As a sonographer scans it will automatically tell them once you’ve achieved a “normal” scan and met the protocol of some 13 measurements. It makes scanning much quicker and easier - driving productivity. IUG are seeking to get on to their other machines going forwards - and earn royalties.
A second pillar of sales is ScanNav Anatomy is about peripheral nerve blocks. IUG’s software helps an anaesthetist give you a local anaesthetic - rather than a general one - by showing a 3d image of say your hand and improving their confidence in using and interpreting the ultrasound.
Pillar three is Needletrainer which is another product which teaches you how to use ultrasound using a simulation and see the nerves see the arteries but where no injection actually occurs on the “volunteer” (aka Pin Cushion).
These products will provide meaningful growth - and significant profit too.
Cash burn has reduced to £0.3m in H2 2023 and sales are forecast at £14m-£17m in 2024 taking IUG to breakeven, or even to a slight profit.
If growth can be maintained at 35% as the GE relationship continues and sales growth in the US, China and Europe continue the effect over the next 36 months is dramatic. (IUG consider their 2025 sales will be £4m higher than this) so I’m being conservative.
Using a 15X on 2026 Price Earnings puts this at £83.25m so 2.5x it’s current price of 10p.
Such a valuation would be a £10m gain for IP Group holders (a 0.7% gain to NAV)…. from a company that IP Group DOES NOT EVEN MENTION ONCE IN ITS ANNUAL REPORT!
Talk about hidden value!
ONT - Oxford Nanopore
Not so fast!
A sharp drop today for ONT - about 13% down to £1.75/share. On the face of it, a disappointing result with a key customer who’ve renewed for 3 years on a lower margin. Interesting then, to learn the Emirati Genome Program used to be a major part of revenue but has been falling (as other revenue is growing) so proportionately is now less than 7% of ONT’s revenue.
Does a 3% lower margin for a customer which comprises 7% of your sales warrant such a drop?
What’s the knock on effect for IP Group? £1.75 share means a negative drop in NAV of £8.7m (or 0.66%) compared to the last valuation 30/06/23.
0.66%? So a 2.17% drop in IPO’s share price is a market (over)reaction? Yep.
Underlying revenue growth at ONT was 32% and the positive news for the Emirati Genome Program was a contract extension of a further 3 years.
The thing “the market” seems not to understand is the remarkable progress being made by ONT. Speeds are 5-6x faster, accuracy is higher. Sequencing DNA, RNA and Proteins is a wildly memory intensive process so if you can do this faster then the cost per scan drops.
“The Market” perhaps needs to talk to some Scientists because there appears to be two very different stories here. This is a Scientist speaking to their progress - across machines, speed, capabilities and efficiencies.
It's also notable that 75% of ONT’s revenue are consumables.
In my prior article introducing the IP Group I spoke of the “ONTing presence” of ONT on IPO but despite today’s share price set back I remain convinced Multinomics is on the cusp of changing the world. More on that later.
If we take today’s trading update along with the H1 2023 results and extrapolate the P&L and cash flow working with the assumption of 46% CAGR (as has been achieved the past 4 years), along with improvement in margin ONT tells us it can achieve, then it is clear to see that improvement begins in 2024 and substantially continues in 2025, leading to the promised EBTIDA breakeven in 2026.
This is my model of how that looks.
One could (legitimately) argue that selling costs would also grow. 5% growth year to year leads to an EBITDA of £85m. Cash flow is comfortably held above £100m in this scenario.
Of course ONT is not alone in being in the wars. ARKG (Ark Invest Genomic Revolution) or Illumina in the USA are its closest peers.
ARKG’s fact sheet forecasts a much more rapid multi-omics growth to $300bn as opposed to ONT’s own £150bn market size estimate. Its “Why Invest” shows, for example, the rapid growth of RNA-based medicine….
What does this kind of growth mean for ONT? It means that 46% CAGR could be a conservative level of growth.
Reader, I also offer this story of Jessica and how the NHS can be transformed through the work of Oxford Nanopore - and firms like Genomics Plc who I discuss next.
STOP PRESS: Genomics
Genomics plc has contracts with several pharmaceutical and insurance companies, including MassMutual. Genomics plc is also the exclusive provider of PRS to the UK’s Our Future Health programme, which is recruiting up to 5 million participants to test and develop new ways to prevent, detect and treat common diseases. In 2022, Genomics plc partnered with the NHS to run the HEART Trial - the world’s first real-world pilot using genomics to help improve cardiovascular disease prevention in GP practices in England - GPs said they would change the management of 13% of their patients based on the new assessment.
Today (10th Jan) it raises £35m Series C equity. IP Group owned 10.6% prior to this so we will see whether they participate or dilute. Looking at Genomics last accounts their cash burn is around £8m a year and revenue growing 50% year on year in 2022 (100% outside the UK).
Genomics provide 2 products.
First are Individual Risk Scoring - which are tools which give a scientific measurement of your genetic information called a Polygenic Risk Score (PRS). Basically they’ve figured out the 10,000s of genes to check using an Oxford Nanopore machine to rate your risk to things like cancer or other nasties.
Second are “Population Health System” sales for example to NHS England. In 2023 Genomics won a major project studying factors for Heart Disease (where 13% of patients had an altered treatment as a result - which if this goes on to provide better health outcomes will be a major victory forthcoming for Genomics), the growth appears to be at least 50% in 2023 and postive for 2024. One imagines the £35m has been agreed in today’s difficult environment with a focus to take Genomics Plc through to cash generation and profitability.
Conclusion:
IPO contains these and 64 other interesting holdings. When you dig in to the specifics, behind today’s apparently negative headline there appears to be a tailwind for ONT which could change medicine - change the world - enable science to change the world for the better. ONT’s problem is effectively telling the story behind the sheer complexity behind what they sell. Looking at the institutional investors several have bought in during the past 12 months. What does the Smart Money know?
Meanwhile IUG and Genomics Plc are smaller IPO’s holdings “off the radar”, but on an exciting - and profitable - growth journey too.
This is not advice
Oak