Last August, I took a look here at Diaceutics (DXRX), a provider of technology and analytical solutions serving the pharmaceutical and biotech space.
The company caught my eye back then, as being a well-run, soundly financed business that has massive growth potential in a space that, whilst already being vast, should continue to expand and grow exponentially in the coming years.
Based in Belfast N.Ireland it already serves some twenty-one of the top thirty global pharmaceutical businesses, where its own platform provides key data to support and enhance drug development and delivery.
With growing and marked investment by pharmaceuticals across precision medicine and on a global basis, DXRX looks ideally placed to extend its reach and thus drive revenues further northwards.
The company boasts the world’s first diagnostic commercialisation platform embracing precision medicine, where it integrates multiple pipelines of real-world diagnostic testing data from a global network of labs that can then be applied and utilised to refine and personalise drug solutions and therapies.
This effectively enables the more efficient adoption of precision medicine through the data that has been amassed over multiple years and the company excels in processing this to generate benefits for pharma customers.
More recently within its offering, there is an increasing level of recurring revenue which is a focus for the business and provides for a sound base and welcome visibility to support the businesses growth map.
Since last summer though, the shares here have traded in quite a narrow range and are currently little changed from the £1.04p seen at the time of my catch up with management and someway off of the high that had been achieved in 2020.
That mundane performance is arguably more indicative of the current UK market and the general sector climate as opposed to anything else, along with the company still remaining somewhat under the wider investor radar.
Despite frustration on the share price front, much has been happening at DXRX and continues to do so, where it would appear to be only a matter of time before the shares attract a more-wider audience, particularly if it continues to deliver on what have been excellent organic growth numbers.
Having last week caught up with CEO Ryan Keeling to hear more, the story looks set to further unfold, where it is now, I am told, attracting buying from US funds that are currently sitting just below the 3% notifiable level.
To kick off my chat with the CEO, I was firstly keen to glean more on that impressive organic growth that has been achieved and which in turn saw revenue increase by 22% for the full year 2023 to £23.7m.
Commenting, Keeling said “the market we are in is growing 25%-35% per year and where the precision medical market is also growing, so the underlying growth in the market is therefore sustaining a significant proportion of our growth”.
He added that they also have the opportunity to further that trajectory with the right product mix and marketing, which sees their own internal aspirations being north of what has been achieved so far.
Being in the right place at the right time can prove pivotal for companies on a growth path and within that, the Belfast operation now has that previously mentioned welcome ingredient of recurring revenue.
At present, driven by its platform the offering equates to more than 50% of the total revenue, but Keeling sees this accelerating in the coming years where he told me that they are eyeing 70% by 2025 and ultimately see an 80%-85% level being achieved after that.
Within its total mix, there is also a more traditional professional services offering which still remains an integral part of the business along with the company also building up a significant amount of data that can be translated into meaningful benefits into and across their markets.
Expanding, Keeling added, “the evolving shape of the business is one of converting the business from that of consulting to a recurring revenue model, which is one of the reasons we came to the market.”
Clearly, the revenue growth to date has been impressive, moving from the £19.5m achieved in 2022 to an expected £30m for full year 2024 and with the number of big blue-chip names already being served, then the future would appear to look bright.
I was however keen to learn how long contracts may run and to what extent there is a level of stickiness, to further support the investment case.
“The way we look at the world is not so much the number of pharma’s we work with” said the CEO, “but the actual number of individual brands or drugs we have in our current customer base.”
Going on, he added that typically, DXRX engages two years before a therapy is going to launch into the market and then the expectation is that they stay switched on for five or six years thereafter, before it eventually drops off as competition increases for the drug along with some patent expiry.
In terms of recurring revenue subscription contracts, these are typically one to three years I was informed, although Keeling also added that they are nudging that up all of the time as customers come back and lock in for longer periods, whilst additionally, some of those contracts are also open ended.
Continuing on the aspect of subscription derived revenues, and the target, the CEO commented on the progress and meeting expectations.
“We are absolutely on track for that and if anything, we are slightly ahead of where we wanted to be, so we are very comfortable with the progress towards it”.
Whilst that was good to hear and adds further positivity to the picture, it was also worth touching on one particular and important aspect of the business from an investment perspective.
That being the focus on the reported and often closely scrutinized numbers for growth companies, particularly in relation to a heavy level of investment into the business and recognised visible profitability being delivered.
Explaining, the CEO said, “effectively we capitalise the data, where the data we buy has a lifetime value of between three and five years, so we typically amortise that over three years.”
He also added that the majority capitalised to date has been across data, although initially, they did capitalise some of the platform build, but that has now gone straight through the P&L.
Having clearly made some meaningful and notable progress since coming to the market in 2019, news flow has been positive here and most recently, the company announced a couple of interesting developments.
One of those, released just last month, was the revelation of it’s expanding the data supply network across Europe, thus increasing the number of labs through which data is being sourced.
Speaking of this news, Keeling explained the mechanics, where he said that on the data aspect the EU had largely played second fiddle to what they were doing in the US, which has been such a huge opportunity.
“The last few years we focused on getting the data supply that we needed absolutely working at scale and we think we have got that to the point where we have now, this year, turned a lot more of our attention back to the European market.”
There is however less of an opportunity for DXRX as that which exists in the US, whilst it equally also presents less of an sizeable opportunity for their customers too, given the contrasting levels of investment between the US and Europe.
Additionally, Keeling said that a lot of the drugs that DXRX works on are high cost and novel that are more readily available in the US than in the likes of the UK or Germany.
Continuing he said, “I believe we were absolutely right to put the US first and be US centric and we will remain that, although there is a significant opportunity in Europe for us.”
Expanding further, the CEO added that over the last year they have been bringing up their data capability to where it is on a par with that achieved in the US. Although they haven’t put any kind of upgrade or increase to guidance on the back of that, Keeling said he thinks there are opportunities for them to do that.
In terms of some insight into the opportunity ahead in monetary terms, Keeling told me that today, they work on some sixty-nine different therapy brands, where the average revenue per brand is £350k.
However, there are actually some 250 brands available to them now as being the current addressable market and that number is growing.
“Our strategy is to capture more of those 250 brands, but at the same time through our product mix and product evolution and revised pricing strategies to move up that £350k per brand to £450k, which is well within the capabilities of our roadmap.
The big, big, thing for us, is that we think we have built scale in the data, supply and platform, all of those things where we have invested in since the IPO.”
What they haven’t done to date though is build anything of scale relating to marketing as everything has been achieved organically through existing contacts via their consultancy business.
There are seven sales people across the business where just one of those I was told, would typically manage four major global pharma.
“The focus for this year and beyond” said Keeling, “is less on the build infrastructure of the business and just focus on that sales and marketing, getting our name out there and being understood”.
This, to a certain degree can be achieved and further driven through partnerships such as a recently announced positive tie up with KPMG.
“What this brings to the table is that they are already present in all of our customers and they have a specific precision medicine practice”.
This provides for a potentially significant opportunity for DXRX to further expand, as KPMG can bring the business in alongside themselves and there are already KPMG account teams offering DXRX data and capabilities to their extensive global customer base.
Synergies are also emerging from that deal, whilst Keeling said that they are also adding ten new sales people in the US, although he says that given the opportunity, this should probably be around fifty and that in time perhaps they will get there.
With a very comfortable balance sheet sporting net cash of around £16m, I enquired as to whether the concentration is purely on organic growth or as to whether an acquisition could feature.
The CEO said that they are always interested and have looked at some things, but it would have to be right and at the right price that would bring revenue into the top line.
To date nothing has emerged and Keeling is extremely mindful of shareholder interests, so the focus has really been on the partnership route.
At present DXRX is in the pre-profitable phase due to ploughing money back into the business, although it just about broke through to profit in 2022. As a result, I was keen to hear as to whether a clear profitable path was now on the horizon.
Commenting on this key area Keeling said that 2023 and 2024 have been very much about focusing on investing in and across the business. For 2025 and onwards he said that they expect to build back out from that and profitability is very much squarely in their near-term plan.
“If you can have profitability along with the security of the balance sheet which we have and growing that, it is very clear it is a recipe that would be rewarded.”
Although Keeling shares the frustrations on the share price performance and adds that they believe the overall value is not currently recognised, he said that they have been actively looking to build a US investor base.
That appears to be making notable progress and he added that they have grown that over the last six months.
The US appears to be more understanding and embracing of the sector and technology, which means that although DXRX is relatively small and they aren’t looking at a Nasdaq listing, the company is nevertheless attracting interest.
To date, those investors aren’t visible as they sit below the 3% threshold for notification, but if buying continues which looks likely, then names will no doubt soon emerge.
In its note from January broker Canaccord highlighted the strength of the order book which had closed at a record £26.6m up 57% year-on-year and which had increased to £30.8m during the first four weeks of full year 2024.
The same broker is forecasting revenue of £30.1m for 20024 moving to £39.1m next year, with cash hitting a low point of £13m before reversing to £15m.
Stifel also covers the stock and is equally positive on prospects, where it comments that it is on track for another year of ambitious growth in 2024.
"Diaceutics continues to grow the number of precision medicines it is working on and is seeing continued strong demand for its insight and engagement solution products, which is in turn driving order book growth and increased recurring revenues. The market opportunity available to Diaceutics is larger than ever and continues to grow at pace as global pharma accelerates the shift to precision medicine to improve patient access, capture lost revenue and increase profitability."
Aside from the aforementioned brokers, RBC has also recently initiated coverage along with Panmure, where the latter has provided an extremely in-depth note and is equally bullish with a target price of £1.76p.
From an investment perspective, companies that are pre-profitability will not appeal to everyone and quite often it is a waiting game for that all important inflection point of game changing cash generation and profitability.
That said, DXRX looks to be a quality player that is extremely well placed, where having already delivered impressive growth can now accelerate on that to become a much larger and sustainably profitable business in the coming years.