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Concepta is a Reverse Takeover of Concepta Diagnostics of the former Frontier Resource cash shell. It was tipped in the Sunday mail this weekend and the shares of responded accordingly, gaining 25% today on 12x average volume. This gives the company a current market capitalisation of £17.5m. I look below at whether it still a good speculative play after this rise:
What is the concept then (pun intended)?
The company states:
We were founded in 2013, by a team of leading professionals with the sole mission to develop innovative products that can provide crucial guidance to women and couples with unexplained infertility and to help them conceive.
In this vein, we have successfully developed a proprietary platform and fertility product for home self-testing or for the doctor’s office.
There is also plenty of useful information in . To summarise though, Concepta’s product is the MyLotus Meter is effectively a tool which will allow females to check their levels of Luteinising Hormone (LH), this being the hormone associated with triggering ovulation. Low levels of LH are estimated to be the cause of around about 30% of unexplained fertility issues in women.
The MyLotus Meter will allow for a simple urine test with disposable MyLotus Test Strips, and give immediate results showing the relevant level of LH and hopefully determining whether this is a cause of any fertility problem. These results can then be recorded in an ios/Android compatible MyLotus app along with qualitative information, this can build up a wealth of information for relevance to either pinpoint the optimum time to conceive and/or to provide additional information to medical professionals.
It is expected the initial customers will be b2b, i.e. private hospitals but perhaps eventually also b2c, i.e. end consumers who are frustrated with the speed that they are able to conceive. According to Concepta it is usual in the target markets (EU and China) to not be able to pursue other medical options for the first year of attempting to conceive. In the age of ‘connected health’ and further pushes to consolidate all our health data I can see a big market here.
In terms of the potential, you might make the comparison to Withings, a small startup which recently was acquired by Nokia for £130m. Withings focuses on Connected Health, developing products for the monitoring of blood pressure, heart rate, active calories and sleep quality. You could argue that Withings operates is a more crowded space than Concepta.
What stage is Concepta at?
Concepta is pretty much at the point of commercialisation, it has received regulatory approvals in China and the MyLotus app has been translated in to Mandarin. We could therefore expect some revenues this year, although likely small.
The cash position looks good too, the company had raised £5m from two placings prior to the RTO. The RTO was made largely through shares and hence the cash balance is still fairly healthy at £3.5m, as at August 2016. It is inevitable though that further placings will be required, particularly once it develops full scale manufacturing and needs to invest in Marketing the product. However, as always this isn’t necessarily a concern as long as the funding is used to add value to the business.
What is the news flow?
The next likely news will be the finalisation of the assembly agreement with the manufacturer in China and the subsequent launch of MyLotus in the China market. We can expect this according to Concept by Q3/Q4 2016 and thus first order from distributors could be expected by the year end.
Early in 2017 regulatory approval likely in the UK/EU and higher scale commercial production in China, subject to a successful marketing strategy presumably.
Who’s are the key directors and shareholders?
Finance Yorkshire Seedcorn Fund (FYSCF) and Mercia Investments have between them almost 30% of the company. Mercia is an AIM listed investment company and the Yorkshire Seedcorn fund is a government sponsored investment fund. I had never heard of Mercia before today and to be honest their track record doesn’t look brilliant, the share price is around 16% down on it’s IPO price two years ago. However, even Neil ‘god’ Woodford has been struggling with his ‘early stage’ investment trust, Woodford Patient Capital Trust, so i’ll give Mercia the benefit of the doubt!
The other positive is the involvement of Adam Reynolds, who does have a fairly good track record in the early stage healthcare sector. Adam is chairman of Concepta and is also invested with 1% of the share capital.
How big is the market?
The company believes that the potential size of the market it has identified is £600m in revenue in China and the EU. If we take that information at face value I imagine then >£1bn wouldn’t be out of the question if Concepta expanded further into other markets. Based on Concepta’s stated market size then earnings of £300m wouldn’t seem totally unreasonable by the end of the decade if all goes to plan, although there is little information available to form a reliable estimate on. However with a £17.5m market capitalisation there does seem plenty of upside. One question though, does the £600m market size assume zero competitors? .
Do Concepta really have a Unique Selling Point?
Clearblue is an obvious competitor to Concepta. Clearblue has had its Advanced fertility kit on the market since 2013. This product tracks estrogen and the same luteinising hormone that MyLotus tracks, you can pick one of the Clearblue products up from Amazon for £75.
Concepta claims in it’s investor presentation that this product is unique, it may be technically unique but I don’t quite see how its product is sufficiently unique. Concepta’s main patent application looks at the use of the LH Surge to estimate fertilisation date, but the ClearBlue product also estimates the window of Fertility. Concepta’s MyLotus ‘connected health’ concept could command a premium but I am unclear whether the mylotus tool syncs wirelessly back to the MyLotus app or is any manual intervention is required?
According to the Daily Mail article the pricing of the MyLotus Product is expected to be between £250-£300, a significant premium to the Clearblue product, but it is not yet clear to me whether the product is sufficiently unique to command this. It is always difficult for smaller companies like MyLotus to compete with the big boys on marketing too and garner the same economies of scale in the supply chain.
It is also worth noting that the Patents are currently pending and no timescale is given as to when they are likely to be granted.
Are there other risks here?
From the information in the public realm there I can see no indications of the expected profit per unit, manufacturing costs/CAPEX/Marketing spend etc. So there is quite a lot of visibility missing on the future cashflows, which is fairly fundamental and for a company about to start commercial production this concerns me. So the key risk is whether this company can turn a profit, particularly if the market place becomes crowded.
The supply chain is always a risk for early stage companies. Concepta does have a provisional agreement with Shenzhen H&T Intelligent Control Ltd (SHBL) for the MyLotus Meter, Concepta states that it is in advanced negotiations on the final terms of this Assembly Agreement with SHBL, which is expected to be concluded in the near future. The disposable urine testing strips for use with the MyLotus Meter are likely to be manufactured inhouse in Yorkshire. I’m assuming this is a condition of its funding from the Yorkshire Seedcorn Trust.
Once we the assembly agreement is finalised we need to know how quickly can manufacturing be ramped up if orders exceed demand? Also the terms if demand is slower than expected?
Technology stability is also a risk for young companies. Withings released it’s Aura sleep monitoring product far too early and it is was catastrophic, in the end it was forced to apologise to all customers and offer free accessories to compensate. How throughly has the MyLotus Meeter product been tested, I can’t see any information on what testing has been conducted so far and whether there were any issues?
At this moment in time I can’t see the the product differentiates itself sufficiently justify the selling price quoted by the Daily Mail, i.e. at a 300% premium to the ClearBlue product. There is also far too little visibility on the profit per units, even some rough guidance would be helpful and corresponding NPVs.
I am not saying it is a SELL, I will pose some of the above questions to the Investor Relations Team and revist this. I suspect the IR team won’t be able to tell me much so i’ll likely sit on the sidelines, at least until we get an assembly agreement finalises and some clearer expectations on unit costs.