Tepnel buys Orchid Biosciences

I did attend the R&D day and summarized my observations below:

1/ Firstly, it was very upbeat and informative, but focused more on the science and product pipelines rather than on the commercial values of these products.

2/ Ben stated several times that he could not due to financial regulations (that Seymour Pearce had obviously reminded him of) provide any commercial forecasts going forward. Obviously, they believe that this is their jobs which they do so well of course – not!

3/ As another poster mentioned (Soldi) there we approx 30 people in total from shareholders (private/institutions) and press coverage. I know this because they used a register where you had to state your reason for attending.

4/ It was presented by Ben Matzilevich that the following new growth opportunities were seen as:
4.1/ Organ Transplant Monitoring (LSA, DQA and Biomarkers)
4.2/ TDy – evaluating opportunities in infectious disease assays
4.3/ Foetal Distress – such as QST*R 4hours compared to FISH (8 hours) or other existing techniques (2 weeks)

5/ Livingstone Site, Scotland. An update was given by Allan Brown on this where the new 18,000 sq ft lab which will open the doors to new customers whom previously have not used Tepnel because of lack of scalability/capability (these include one or two big pharmas) as well as significantly expanding the business Tepnel can do for existing pharma customers (already including some of the big pharmas). The new site will give this scalability, even being able to easily expand the site if necessary without having to move. Also will be providing an expanded menu of services such as genotyping, immunoassay and cell based assays as well as more focus on bioanalysis. Note, Tepnel is at the stage now where it is moving away from small-scale bioanalysis and moving up into the next scale, which is very positive for the future in terms of growth. The big year with new site for Tepnel will be of course 2008, with one full years very significant growth anticipated. Note, already even without new facility seen at least a 20% year on year growth. This year (2006) will have best year ever. Just imagine once new facilities are in place where there are no limits to expanding. The project is on schedule and on budget. 15th Jan 2007 facility will be wind proof / water tight. The practical completion scheduled for 14th May 2007. Note, the equip relocation will take place during April 2007; commence validation/quality checking of equipment May 2007 and finish in June 2007. Plan is 1st July 2007 the Livingstone site will be fully operational offering all services.

6/ Some new technologies (currently no products but areas being currently evaluated for potential) were reviewed by John Ooltram.
6.1/ Point of Care – vet nary and human. Such as rapid tests (< 2 hours) which are reliable, simple, sensitive and offer optional antibiotics profiling (which basically allows armed liposoles / targeted armed liposoles to target only specific bacteria – i.e. organism under test). Note, Tepnel already have the proven rapid test technology and there is already user awareness of this technology down to home pregnancy test kits, etc. Other techniques which can be offered are agar plate (maindraw back is it is slow) OR 96 well high throughput plate (not useful for the clinic market due to the cost of the additional equipment).
6.2/ Post Extraction DNA Analysis Service. This is a very interesting area because the patent lapsed last year so one can move into this area. PCR, QPCR and WGA. PCR used for monitoring instrument / work area contamination, residue testing, and upstream DNA sequencing. QPCR has same uses the main difference is that it has a ‘reporter’ molecule to inform you that the test has worked.

7/ Steve Dodsworth presented trends in genotyping and epigenetics.
7.1/ Associative SNPs will be used more and more to spot differences between things being healthy and diseased. Basically, from discovery, validation, associative studies, clinical trials to actual medical use the No of SNPs will greatly be reduced. The highest number are of cause at the discovery stage and the lowest at the medical usage stage as lots of SNPs are disgarded. Therefore the value of the SNP increases from the discovery stage to the medical usage stage with the SNPs having the highest value at medical usage stage. This is basically the stages during pharmaceutical development. The trends in this area are that associative studies will use more SNP markers, assays will become more robust and accurate, the quality of genotyping will increase, the cost will fall, and epigenetic screening will be as common as genetics.
7.2/ Epigentics – which is the study of reversible heritable changes in gene functions or other cell phenotype that occur without a change in the DNA sequence. DNA Methylation is a very different approach which can lead to new possibilities which were never possible before (i.e. succeeding where current diagnostics fail). Potential for uses in areas such as psychiatric patients diagnosis, post stress diagnosis, etc. Tepnel is involved with a leading UK academic researcher looking at this area. Tepnel will have exclusive rights to commercialise (Intellectual Property rights). Tepnel is sponsoring this research. This is a very exciting area and could radically transform the company going forward if a breakthrough is made. There is lots of excitement over this and it was stated that at this time they cannot disclose anymore information on this for obvious reasons other than to say that Tepnel has been extremely fortunate to have been involved in this research; and that they were at an early stage which looks very intriguing and very promising .

8/ Ivan Balazas then presented Lifecodes (HLA Typing). HLA=Huma Leukocite Antigens).
8.1/ DNA Typing (LifeMatch DNA) – used for finding suitable organ donors
8.2/ HLA Antibody Monitoring (LifeMatch Antibodies) – pre & post tranplant monitoring. Note, w/single antigens for HLA antibody detection should improve margins to manufacture.
Tepnel have also developed s/w for Tepnel LifeMatch Instrument.
Remember that HLA Typing is worth approx $150m growing at approx 10-20%. Luminex is a form of HLA Typing which is growing at approx 40-50% within the HLA Typing marketplace and there is only 2 companies in the world who have the license to use it – Tepnel (through it Orchid Diagnostics acquisition in 2004) and One Lambda. Since 2004 Tepnel were positioned no 6 in the HLA Typing area. Today they are currently No 2. You can guess who No 1 is – One Lambda. This is the reason why many companies (especially all the ones that Tepnel have overtaken) have been sniffing around and wanting to buy Tepnel’s Lifecodes business from Tepnel. Just think Tepnel purchased Lifecodes from Orchid Diagnostics in 2004 for $2.49m. Now revenues are 8 million and the profit margins in this area are extremely good. This was really deal of the century in IMHO and is currently the jewel in the crown!

9/ Finally, the attendees had a chance to ask questions. From this it was clear that Ben and the board were extremely frustrated by the shareprice reaction (i.e. that it is not reflecting it’s true market value which IMHO is currently 20p+). Ben was also questioned about the recent options he and other managers received. Ben answered that they have not received any significant pay rises (his words) for some time and this was a way of providing an incentive going forward and is clearly tied not only into the company’s performance but also the shareprice reflecting this. I personally asked what was going to be done to raise the profile of the company in the investment community and hence attract new investors and re-rate the shareprice which is well overdue, especially considering that he can not inform us of any forecasts. He said himself and the board had not been successful so far in this area in 2006, and this will be one of his top priorities for 2007. One of the areas he was going to focus on was getting more brokerage coverage (whether this means changing brokers / getting more than one broker to cover this stock is anyones guess).

Finally, Ben seemed to be extremely bullish about this years results and intimated (without directly saying so) that they would easily beat the brokers estimates in terms of profitability. I can’t remember the way he put it – maybe Soldi can. Remember the Seymour’s 2006 operating profit (EBIT) is for 67,000 GBP, with 856,000 GBP forecasted for 2007. My guess is that Tepnel will deliver a profit of over 250,000 GBP for 2006 and over 1,000,000 in 2007.

Apologies for the delay in posting the update and hope you find it useful.

Best Wishes to all and may it be a prosperous as well as healthy New Year for us all!
TTNY