Investing in the junior pharma/biotech sectors can be a risky business, with the occasional high rewards tempered more often than not with investments ending up on the critical list.
However, the space continues to see ongoing and massive spending, particularly with the advent of precision medicines which has stirred me into delving further for some alternative, less risky propositions that may prosper from this arena going forward.
One such subject where I caught up with management some weeks back in order to hear more on the story and which looks highly interesting, is Diaceutics, (DXRX) a company whose products and services assist major pharmaceutical companies spanning the precision medicines space.
Whilst in the current investment climate it may draw a sharp intake of breath, anyone in any doubt as to the potential for the company need only look at the market it is targeting and already penetrating, which has seen revenue for this N. Ireland based business demonstrating significant traction.
From a 2022 revenue figure of £19.5m, DXRX is on track to deliver £24m this full year, increasing to £30m in 2024 as it continues to scale up its offerings across an expanding and accelerating market that is projected to surpass $254bn by 2032.
Major Pharma players across the world are already investing significantly in the precision medicine market spot with tailored and more individual specific drugs and treatments being developed to meet specific patient needs, which ultimately prove more successful in meeting their objectives.
So, where does DXRX exactly fit into this complex jigsaw, given there are numerous facets operating across the sector, with both existing and emerging players looking to make in-roads and expand within healthcare.
In short, the Belfast based operation which came into being back in 2005 has developed its own unique and highly regarded platform built on many years of amassed complex data that appears to have seen it steal a march in the space.
The data has been collated from over 52,000 labs from around the world, covering types of diseases and the numbers of people impacted, which takes in 481 million de-identified patient records from no less than 53 countries.
The complex information is invaluable across what is a fragmented sector and having been collated over time by the company is now being embraced and adopted by major pharmaceuticals, providing for positive recognition and acceptance of the DXRX platform for a partner of choice.
Typically, laboratories hold whole swathes of data and information that has been obtained and collected, often around oncology and rare diseases, but much of this is disjointed in the context of actually being able to utilise it for subsequent tailored drug or medicine development.
Such data requires harmonisation and structure which can then be applied in order to develop safer and more efficient therapies which is where DXRX fits into the picture.
To expand, a number of labs for example will hold masses of particular or specific data, others perhaps something different, but in isolation the data in itself is largely unrefined, rather akin to wandering into a library with masses of books but without the indication as to where to find what you are looking for with ease.
DXRX has, by its extensive network developed its platform that has been built on the ability to bring all of the data together under one umbrella, which can then be of specific use to the end user such as the pharmaceutical company undertaking specific research in its development programme.
Whilst there are always doubts from an investment perspective with such relatively young growth stocks, particularly in the health/pharma sector, few can surely deny there appears to be significant potential here, particularly when looking at news the company released just two months ago concerning a really substantial contract win.
This was related to a global top 10 US based pharmaceutical business which signed up to a $10m deal with DXRX over a three- year period, with the revenue being recognized on a monthly basis.
Speaking with the CEO Peter Keeling who himself boasts over thirty years of industry experience, I am told that the deal in question could ultimately prove more lucrative than what has yet been announced as there are additional options in place that would benefit the company further.
He also sounds positive and upbeat on the potential for further deals, as momentum across the space continues to build, which now sees the company clearly in the spotlight.
The highly significant contract as already mentioned, followed other positive announcements made earlier this year, which saw two additional top 10 Pharma’s signing up for licenses with a combined value of $7m.
The size of these deals suggests that the quality and breadth of what is being provided by DXRX has intrinsic value to the end user, which could put it in a sweet spot as the precision healthcare market expands.
The information and data supplied certainly appears to be a unique offering, particularly in that it provides the pharmaceutical’s with the key tools to assist in developing and refining medicines of the future.
Speaking of the recent deals Keeling says that the adoption of their products and services by the big pharma’s is a real testament to the value placed on the business. He also speaks confidently on what is a strong and increasing pipeline of opportunities with both existing and new end customers.
As a key and increasing aspect of the business, DXRX operates a growing subscription service through its platform which should ensure an increasing flow of recurring revenue alongside an extended runway, which is welcomed by investors and can prove to be a great underpinning of a story.
As part of its growth trajectory and earnings visibility, the company is aiming to see at least 70% of its revenues derived from subscriptions by full year 2025, with an aim of a peak at 80% thereafter.
As reported in its 2023 half year numbers, it had registered 47% of income via the subscription service which appears to bode well going forward given the positive trend, whilst recurring revenues now represent 83% of the total revenue figure, also a positive to warm to.
Much of the progress being achieved has been built on foundations laid over the years, and Keeling explained that the goal of driving higher and becoming more embedded within its increasing customer base is being achieved through a high level of trust, which understandably isn't easy to gain.
And it can certainly be tough for emerging companies to secure business with the big blue chip hitters that DXRX has achieved, whereby many fall by the wayside at the first hurdle, which arguably suggests the company is in something of a unique or niche spot within such a vast market.
As of June of this year, the company sat on £17.9m of cash and no debt which provides it with ample ammunition to further invest across the business in order to build and maximise on the opportunities ahead.
The broker expectation (Stifel) is for around £7m of cash to be used throughout the current period until the end of 2024 in order to deliver on its business plans, which should see a very comfortable £12m at the lowest point.
Despite ploughing much into further developing the business and its road map, the company delivered positive EBITDA last year of £3.6m, resulting in a small pre-tax profit of £0.6m.
Although broker Stifel is forecasting an EBIT loss of £2.3m for this year and a £2.6m loss in 2024 it has issued a £2.00p target price where it views the doubling down on investment at this time in a positive light.
The shares currently stand at £1.04p where the market cap sits at £84m, which may prove attractive, given the accelerating revenue stream and long-term growth drivers.