Covid made me do this!

1a. So around this time last, life changed so swiftly, the whole world came to a standstill and I witnessed it affecting people that were really close to me. I’ve been one of the fortunate few where besides my social life, haven’t lost much.

1b I’ve tried to put this to good use, and see how I could come out of this stronger and maybe also help others in the process. I’ve found myself a business that I feel makes a strong investment case and would like to share my thoughts with those who are at least curious and are searching for some long term returns. I’ve broken my paragraphs into bitesize chunks to make it more digestible.

1c Firstly, for a company to be successful, it will need a product that it can sell (duh). In any business (including diagnostics), there are three major areas that a company can compete in: quality (reagent robustness/sensitivity/specificity/ease of use), speed (to manufacture and to test), and price (through low costs).

1c Affimers (reagents) are the product that Avacta sells, and their baseline competition would be the monoclonal antibody. Affimers beat the antibody in all three main areas. Avacta has patented it's product which will stay in effect beyond 2030.

1d I can confirm I know b****ks about pharmaceuticals, but recognised and knowledgeable collaborators (Moderna, Daewoong, LG Chem) have all EXTENDED their deals with Avacta which suggests that they’ve worked with the product and have seen outcomes that are on the positive side and CHOSE to increase collaboration. This all serves to increase the reputation of the brand – the promises once made are now performant to a required standard.

1e Currently Avacta has been focused on introducing Covid diagnostic and investors have been promised a product. An anterior nasal (front of the nose) test has been been manufactured and the infrastructure to manufacture at scale has been developed too. The initial clinical validations show that they work (and that to a very high level). I’m certain a CE mark that allows the diagnostics to be sold in the EU will be granted and it’ll be transformational to the bottom line (profits).

2a Next thing to consider is that Avacta isn’t solely a Covid play. The Affimers can be used in many different applications. The various partnerships they’ve entered into show the versatility of affirmers in application.

2b These all generate revenue for the company which we can see over the last few years has been on an upward trajectory – this shows demand for the technology. End of 2019 annual statements showed a revenue of ￡5.5m (this was in reality a period of 17 months), and they haven't published the results for 2020 which is due mid April. Obviously, this figure isn't large and it isn’t currently translating into positive net cash flow just yet but up to this stage, they have been a pre-clinical stage development company, and therefore the outlays would far exceeded the income made; going into clinic would only increase the expenses further whilst taking them a step closer to commercialisation or bust. Based solely on what has been seen up to now, this would be a risky company to get into. However, this is only one way of valuing a company and that is where I believe the current discount in share price comes from.

2c The other ways of valuing a company can be done via understanding future cash flows of the business and for #AVCT, I strongly feel this will snowball with more applications, more collaborations, reaching milestones with existing partners, and success of any in-house developed therapeutics. And OH yeah – I almost forgot to mention the Covid diagnostics.

2d Another lens you could potentially see a distribution of money through is momentum (this is my least favourite way – I’m more of a commitment guy) but it’s real – we saw it with GameStop. Institution money might have prohibitive rules from investing in small cap businesses.

2e With good news the rise in share price will raise the market caps. This paves the way for the company to be included onto different indexes, unlocking more institutional money and hiking up the price further. It’s one reason why some large cap companies undeservedly keep getting larger.

2f This gives the retail investor willing to understand where the product value lies some edge over institutions. Your small size can be a strength – majority of the people reading this won’t have the power to move the needle, therefore there will be less interference from others, which means that you can buy as much as you can at today’s prices.

2g I’d also like to put in a little mention here that Avacta have cash and no debt for at least the foreseeable future. This is good as it doesn’t slow the company by restricting projects and aren’t at the mercy of a creditor tightening their purses disrupting any momentum.

3a The COMPLETE U-turn of cancer in mice by modifying the DELIVERY of an existing EFFECTIVE drug shows that your pet mice can be saved and tweaking that drug should likely obtain results in a similar trajectory for humans and at minimum, be more effective than the current standard. It would take a ‘pandemic to hospitality’ type of event (something rare) for the Affimer to stop being effective all of a sudden, in all it’s different applications. A pandemic doesn’t stop a therapeutic business, it can - in some cases - accelerate it.

3b The technology allows the chemo to be released in the tumour micro-environments, preventing the drug from friendly firing on other organs making them more safer to use on those who may otherwise have vulnerable organs prior to the cancer and reducing the adverse side-effects that are observed in chemo treatments.

3c This increases the population to whom the drug can be given to. And this delivery mechanism doesn’t apply to one chemo drug. There are various chemo drugs and immunotherapies (enhancing the bodies owns defensive system to treat cancer) which can benefit from the delivery mechanism. Having the cash to carry out these projects is why I see massive potential. Adding to this point a little further, they have collaborated with POINT Biopharma inc. to bring the delivery mechanism to radiotherapy which is out of Avacta's immediate focus but another source of income where development costs are mostly forked out by POINT.

3d Finally, as the chemo drug mentioned above has been around for over 40 years and is off patent, the effects of the drug are well documented. If all goes well for #AVCT, a phase 3 trial will not be required – the third trial is the most expensive and time consuming when it comes to making a drug marketable. With the typical outlay not being required, the drug becomes marketable sooner, time with patent exclusivity increases, profits become bigger, more projects can be taken up, momentum increases. This is a perennial multi-billion market that Avacta could dominate.

4a Now moving onto THE test. The normal timeframe to develop and manufacture any ‘lateral flow assay’ (pregnancy style test) has usually been a year to two, and the work hasn’t probably been at the manufacturing scales, accuracy and speed that is going to be required today.

4b This process is approaching a year and that’s with uncontrollable delays such as laying the infrastructure to be able to scale and Brexit border controls. In industry timelines, I still assume what has been done has been extremely rapid.

4c AVCT’s preliminary clinical results has shown 97% sensitivity and 100% specificity with a sample of 30 and 26 people respectively. We know that it works well with low viral load samples and detects most infectious and asymptomatic cases. The test can be rapidly performed by anyone and read anywhere within 20 minutes.

4d As far as anyone can publicly see, it’s the best performing s1 spike binding antigen test in the world. The trading update (24/02/2021) confirms that healthcare service providers and the government will be the biggest purchasers of the test.

4e Alistair (CEO) confirmed on the call with Vox that they can comfortably make 10 million tests per month with more resources being put down every day to increase that figure. The price on the trading update confirms that the test will be sold in the mid-single digit figures to the DHSC and more to others.

4f From a commercial view point, if 10 million test was the supply limit, and the test was as good as stated, it wouldn’t make sense for a private company with ambitions to grow to accept a lower price point when there are others who would be willing to offer 3 times the amount. It's probably the long term view and the quantity needed that will have favoured this deal.

4g The biggest purchaser of the test will find their items in the NHS, schools, universities and more workplaces, does 10 million per month seem enough to do the job for all those heads? We’ve been informed we’ll be back to the new normal in June, does the 40 million tests in that time seem enough? There was also a tender offer that the DHSC put out for ￡8 billion on 5th March which would last a year, to supply the LFD with preference given to tests that sample using anterior nares, that are self testable, and can pick up asymptomatic cases.

4h I’m obviously trying to connect the dots above but even if Avacta go down the bare minimum route, that’s 120 million tests a year and at a price around ￡5, it should generate a bottom line big enough to carry out its own pivotal clinical trials in oncology.

4i There is also the argument, what about competitors? There only seems to be 2 potential “competitors” for the UK market: Surescreen and Mologic – I use this word in quotations because all 3 companies will sell everything that they make.

4j It’s public knowledge that Avacta have onboarded the likes of BBI, Abingdon, Mologic and GAD – some of the largest test manufacturers in Europe. The manufacturers would’ve had to be happy with the tests before sparing some already limited capacity to them. Mologic gave up its own capacity for a “competitor”. That one baffles me. #AVCT is taking up any spare capacity that manufacturers are offering. Any new competitor with an LFA will have difficulty trying to grab the infrastructure that Avacta has already tapped into in the UK.

4k Any non LFA tests will have to be point of care and inexpensive - I don’t believe a better quality test is going to make a monumental difference in spotting infectious asymptomatic cases based on sensitivity and specificity already seen after the virus prevalence has reduced.

4l Also, I feel the materials used to do anything else other than an LFA test will make a test more expensive to do (esp in single use scenarios (e.g. in pubs) - I wouldn’t want to use a breathalyser that’s been in someone else’s mouth).

4m We’ve been informed that the Affimers performs well with a few current variants, and if a new variant evades the current Affimers, then it would only take a couple of weeks to generate new ones that bind. Agility to new variants has been a major topic in the DHSC decisions when purchasing tests.

4n Finally, it’s no good having the ability to scale without having a distribution channel. AVCT have so far announced collaboration with Medusa (using BooHoo’s distribution channel), and will sell to the UK government. The test will find itself in many different hands.

4o The lateral flow assay isn’t the only Covid test play for Avacta, there are other ways that the affirmers are going to be used to help with the pandemic. Other four applications I can name that are being developed: BAMS, ELISA, #DVRG Microtox PD, #DVRG Microtox BT (Breathalysers).

4p I also think the cancer items are much bigger longer term and the size of this paragraph already skews the message in the opposite direction so I will now stop.

5a I’ve also thought about the Theranos situation and for those that are unaware, they were also a diagnostic company with technology touted to be next generation, but that’s where the similarities end.

5b They were exposed to be frauds and never peer reviewed before obtaining investor money. Affimers have been peer reviewed, and collaborators have extended deals with us. There’s enough proof it’s real.

5c Charlie Munger (Warren Buffett's business partner) has credited Sequoia Funds for being able to get on the cutting edge of change. Sequoia are also invested in Avacta, and I'm sure they would have done their due diligence.

6a Finally, all that the investor has to do is buy and hold. It would take a special case scenario for everything that has been done so far to be reversed – not just for the Covid items.

6b You have the most experienced people working on these different solutions wanting the best outcome to avoid tarnishing their reputation on the big world stage; they will want to do everything properly to avoid doubling their efforts in the long run.

6c This has taken time because it’s hard, but not impossible. Amazon have this concept of a flywheel, and Avacta are at the inflection point where the revolutions are about to speed up increasingly.

6d This is why I believe any investor will want to stay over a course of years and not worry about the day to day price; or compare it with past financial results; or what significant increase the share price has seen to date.

6e There will also be some who have spotted the price fluctuate between 100 and 200 and are probably hoping for the next time it goes to 100. FORGET THIS IDEA. As unlikely as it seems, there could be a genuine reason for this drop and one where I would also pull out. The best time to invest was yesterday, the next best day is today.

6f At these lower prices, more individuals/institutions can influence the price – you never know when that person/institution arrives. The share has plenty to see still.

6g Another reason why I like this company is because it doesn’t compromise my values. It’s keeping people alive and families together; it’s not causing any addiction; it’s not harming people; or any other work malpractices you hear and frown upon.

6h In the words of Eminem, ‘If you had one shot, one opportunity to seize everything you ever wanted, in one moment, would you capture it, or just let it slip?’ This is that moment. And one you’d probably want to capture in an ISA – this is a different conversation.

6i Finally, I like to cover my risks and part of this is for me to say, this is my opinion only! If the London Stock Exchange shut for three years and I couldn’t sell, I wouldn’t mind. I’m personally confident I’m sitting on a gold mine but you have to make your own decision.