Faron Pharmaceuticals

Faron Pharmaceuticals Oy (FARN) is a Turku, Finland-based clinical-stage biopharmaceutical company that aims to tackle life-threatening medical conditions, such as Acute Respiratory Distress Syndrome (ARDS) and pancreatic cancer through its two drug development programs, Traumakine® and Clevegen®. Currently, there is no approved pharmaceutical treatment for ARDS and Traumakine® is the only treatment for Acute Respiratory Distress Syndrome undergoing Phase III clinical trials, and it aims to prevent vascular leakage and organ failure under ischemic condition. The company is listed on the AIM of the London Stock Exchange, and its development pipeline is based on endothelial receptors concerned with the regulation of immune responses.

Financial Highlights (FY 2018, in EUR mn)
A grant in support of the Traumakine® programme by the European Commission led to EUR 0.2 million (2017: EUR 1.5 million) of other operational income. As a result of swift cost reduction after the unsatisfactory Traumakine® trial results, the research and development costs declined by EUR 2.6 million from EUR 19.1 million in 2017 to EUR 16.5 million in 2018. The company has an option to utilise its cumulative tax losses carried forward to offset them against future profits during the years 2020 to 2028 and the total of these on 31 December 2018 was EUR 11.2 million (2017: EUR 25.9 million). Loss before income tax was EUR 20.1 million (2017: EUR 21.1 million), while net cash outflow was EUR 5.3 million for the year (2017: EUR 1.9 million outflow). Net loss for the year declined from EUR 21.1 million in FY 2017 to EUR 20.1 million in 2018, leading to a loss per share of EUR 0.65. To make progress in the clinical advancement and support preparations for the commercialisation of projects, the company raised GBP 15.0 million (net EUR 15.9 million) in February 2018.

Share Price Commentary
 
Daily Chart as at July-05-2019, before the market closed (Source: Thomson Reuters)
 
On 5 July 2019, at the time of writing (before the market closed, GMT 10:00 am), FARN shares were trading at GBX 148, up by 18 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 168.00/GBX 50.05. The company's stock beta was -0.83, reflecting negative correlation as compared to the benchmark index. Total outstanding market capitalisation was around £46.71 million.

Conclusion
As a clinical-stage drug development company, Faron has not yet reported any revenue and its programme and costs have been funded through fundraising. Its interconnected key performance indicators are cash burn and its net cash flow showed an outflow of EUR 5.3 million, against EUR 1.9 million outflows during the previous year, and it held cash balances of EUR 4.1 million, versus EUR 9.3 million in 2017. There is also the risk that the main products of the company may not be successful in the clinical trials or may come under the regulatory lens, hindering the profitable monetisation of the product. While the company has a cash preservation program implemented to reduce cash burn and preserve existing resources, it has incurred significant losses since its inception and expects to incur losses for the foreseeable future.

Based on the above factors and risks associated, we have given an "AVOID" recommendation at the current price of GBX 148 (as on 5 July 2019).
 

Intelligent Ultrasound Group

Intelligent Ultrasound Group PLC (MED) is a Cardiff, United Kingdom-based ultrasound software and services specialist that seeks to improve patient assessment and diagnoses in the clinical environment. The company develops augmented reality needle guidance systems, artificial intelligence image analysis software and ultrasound training simulators for leading medical institutions and practitioners around the world. The group was founded in 2004 and is listed on the AIM market. The company’s operations are differentiated in three operating segments: Distribution, Simulation Division Direct Sales and Clinical Division.

Recent Development
The company on 4 July 2019 announced that it had signed its first long-term licence and co-development agreement for its AI software, enabling the integration of real-time image analysis software of the company onto ultrasound systems marketed in the global healthcare market. The deal was signed with an undisclosed ultrasound equipment manufacturer, and the financial details were not disclosed, but royalty per unit revenues was expected during 2021.

Financial Highlights (FY 2018, in GBP mn)

(Source: Company Filings)

Due to the launch of new BodyWorks Eve training simulator, revenue during the year increased by 27% to GBP 5.3m (2017: GBP 4.2m). Gross profit in the year increased to GBP 2.8m from GBP 2.5m in FY2017 and gross margin was 53% as compared to 60% in 2017. The higher share of distributor sales in 2018 explains the decline in gross margin. As administrative expenses (excluding exceptional costs) increased by GBP 1.9m, the loss for the year, before tax and exceptional items, rose to GBP 4m (2017: loss of GBP 2.7m). Cash at 31 December 2018 stood at GBP 5.6m (2017: GBP 4.3m), while consolidated net assets increased to GBP 9.3m (2017: GBP 7.1m). After significantly increased investment in Artificial Intelligence, expenditure on R&D increased by 76% to GBP 1.8m (2017: GBP 1.1m).

Share Price Commentary
 
Daily Chart as at July-05-2019, before the market closed (Source: Thomson Reuters)
 
On 5 July 2019, at the time of writing (before the market closed, GMT 12:30 pm), MED shares were trading at GBX 12.93, down by 2.64 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 19.49/GBX 4.80. The company's stock beta was 0.66, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £20.75 million.

Conclusion
The signing of the recent long-term agreement is expected to be the first of many agreements for its range of AI based image analysis software, which is one of the first AI software products to provide real-time image analysis and guidance to sonographers during an ultrasound scan. The Clinical Division achieved all its AI development milestones in the year and the Simulation Division demonstrated encouraging growth in the ultrasound simulation market. However, the group meets its day-to-day working capital requirements from its cash reserves and the company is under the risk that it may not be able to raise additional funds that will be needed to support its product development programs. The company operates in global markets in the healthcare sector which is largely tariff free, but the threat of Brexit and US-China trade war has the potential to disrupt that, impacting the financials of the company.

Based on the potential headwinds, we have given an "AVOID" recommendation at the closing price of GBX 13.25 (as on 4 July 2019).

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