Volition
may become a 100 bagger!
By Manuel Maurício
October 15, 2021
Symbol: VNRX (NYSEAMERICAN)
Share Price: $3.47
Market Cap: $184 Million
Introduction
In recent times, I’ve been gravitating towards healthcare related stocks. This is not intentional.
I welcome investment opportunities coming from anywhere in the industry spectrum, but it’s becoming apparent that I like this niche.
The company I’m bringing to you today is – just like MILC – a pre-revenue company (sort of).
Some years ago, when I sketched my first investment checklist, I explicitly wrote “Don’t invest in companies with zero revenue“.
Truth be told, by that time I had no intention of investing in companies with zero revenue, but I had seen an investor whom I admired set this rule for himself and I figured it was a good rule to keep me out of trouble.
And now here I am looking at the second company with zero revenue in a short period of time. I’m evolving. If I’m evolving in the right direction, only time will tell.
Business
Volition has been developing blood based cancer tests for the past 10 years. As with most life science companies, everything took longer than expected.
But the surge of a global pandemic brought serendipity with it.
The way that Volition’s tests work is that they identify early stage cells before the cancer spreads.
Cancer leads to elevated levels of Nucleosomes in the blood. It’s like if cancer leaves a trail in the blood. By measuring those Nucleosomes, the tests can identify the patients who may have cancer.
It turns out that the tests that Volition had been developing for humans work very well in dogs too.
Every year, approximately 1.6 million human cancers are diagnosed in the USA. 1.6 million too many, if you ask me.
But the number of dogs diagnosed with cancer is 3 times that of humans.
And whilst there are probably hundreds or thousands of companies trying to come up with cancer diagnosis tools for humans, there’s none for dogs (at least not at affordable prices per test).
Also, the regulation for a dog blood test is much less stringent than for a human leading to a much quicker road to commercialization.
The company has several shots on goal in the human blood tests, but today I’ll only focus on the veterinarian segment as that’s the most likely to be commercialized soon.
The launch of the Vet Cancer Screening Test
As they shifted their focus to the veterinarian market, the management’s plan was to launch a BETA version to make sure that everything worked with the product, and that they were able to supply large amounts of it. Trivial stuff such as labeling, packaging or shipping were all unknown areas to the company just a few months ago.
In 2019, the company partnered with Texas A&M College of Veterinary Medicine to conduct clinical studies that were going to assess if Volition tests could detect canine cancer. Texas A&M got a 12.5% ownership stake in Volition veterinarian subsidiary.
Two studies were performed with very good results. A single Nu.Q Vet assay detected 77% of the lymphomas and 82% of the hemangiosarcomas. These two cancers account for one third of canine cancers and the company is working on creating tests for 7 other types of cancer.
The veterinarian test is now being recommended for the early detection of cancer in older dogs (seven years and older) during their annual checkup, especially for at-risk breeds such as Golden Retrievers, Scottish Terriers or Boxers.
For now, the tests are being processed at the Texas A&M University. You send the blood tests back to them and get the results in a few days (3-5).
But that might be changing.
The worldwide distribution agreement
After years of over promising and under delivering, Volition is now in negotiations with the largest veterinarian companies in the world to sign a licensing agreement that could make the company be worth multiple times what it’s worth today.
There are just a few major veterinarian companies in the world: Mars Veterinary Health (owned by the Mars family – the same that owns the chocolate brand) and Idexx are two of the largest.
Mars is like an octopus. Its tentacles spread so wide as to own, not only veterinarian clinics and hospitals around the world, but also the leading pet-food brands Pedigree, Whiskas, and Royal Canin.
Idexx is the world leader in manufacturing laboratory equipment for all things veterinary.
I believe that the company is in negotiations with both Idexx and Mars.
My current opinion is that several licensing deals would be better than one single exclusive deal because, although there’s a first mover advantage in this business, that advantage can only last for so long.
If Volition signs a deal with just one company, all the other vet companies will want to offer their own tests. This will lead to competition entering the space eroding volition’s moat.
By signing multiple deals with the largest players, it would be much harder for a new competitor to enter the space and Volition would benefit from some bargaining power.
In order to lower the price and control the manufacturing, the company has bought a manufacturing facility near its existing facility in Belgium. It’s called Silver One (because it’s outside walls are silver colored).
Financials
Given that this has been a research company with virtually zero revenue until very recently, the past financials are of little use to us.
With the launch of the Nu.Q Vet, the company has earned $25 thousand in each of the past two quarters, but that is negligible.
And, as the company ramps up its R&D efforts, the Operating Income has increasingly become more negative.
Balance Sheet
One of the biggest risks for microcap investors is dilution.
Because the company has been losing money for so long, it has been selling new shares in order to keep afloat.
The problem with this strategy is that the exiting shareholders get “diluted”, meaning that your previous ownership in the company is lowered (or diluted) by the issuance of new shares.
At the end of June, the company had $28 million in cash and a monthly burn rate of $2 million. That means that the company had enough cash to operate for 14 months without the need for additional capital.
A licensing deal could come with an upfront payment and commercial milestones, minimizing the risk of further dilution at depressed prices.
If the licensing agreement doesn’t materialize, and especially if the company needs to go to market by itself, shareholders will be seeing new shares being issued.
The company recently filed for a Shelf Offering of $100 million, meaning that it’s getting ready to issue new shares.
I believe that the managers are counting on a deal to be signed and once the stock goes up they’ll be seizing the opportunity to issue shares at much higher prices, thus minimizing the dilution (from an existing shareholder’s point of view, it’s better that the company issues one share at $50 than 10 shares at $5).
Management and ownership
Cameron Reynolds, the CEO, owns close to 5% of the company.
He’s been on countless events presenting the company to investors. There’s dozens of videos on YouTube of him telling the company’s story.
He has been over promising and under delivering for many years, so I’m still not sure what to make of him.
If on the one hand I don’t like promotional managers, on the other hand I recognize the need for a promotional manager leading a research focused company that needs to keep raising capital by selling shares to enthusiastic investors who believe in the dream.
After so many unfulfilled promises, I believe that the market is in “show me first” mode, waiting for the company to actually show signs of growth before jumping in.
I am of the opinion that some of those signs are here already. One of them is the fact that the company is in negotiations with the big boys.
Another one is the hiring of Dr. Tom Butera as CEO of Volition Veterinary Subsidiary.
Tom is an industry veteran who have sold two companies to Mars Veterinary Health. He knows everyone in the industry and his contacts are crucial to the negotiations of a licensing deal.
A not so good hire (at least at first sight) seems to be that of the new Chief Commercial Officer, Gael Forterre.
He was in the hedge fund and software industries prior to joining the company and doesn’t seem to have any experience with Life Science companies. I wonder why they chose him.
But the largest shareholder, by far, is Cotterford with 26% of the company. And they’re not happy with the way things are going.
Activist letters
This became evident in June 2020 when they sent an open letter to the Board of Directors and then sent another letter in July 2020.
Cotterford argued that the management team lacks the ability “to articulate – and stick to – a coherent strategy“. First, the company was focusing on blood tests purely for cancer, then on tests for other diseases as well, and then on animal cancers. Although Cotterford recognizes the need for some nimbleness, they are of the opinion that this shows lack of focus and indecisiveness.
Also, when the management has communicated targets, it has missed all of them. This has led the revenue to stay at zero for the past 5 years.
On top of that they note that the recent proposals for voting on the annual meeting were shareholder-unfriendly. The company was trying to divide the Board of Directors into classes preventing the simultaneous election of all shareholders.
This is called a staggered board and it’s used to prevent hostile takeovers. If you can’t elect all of the board members at the same time, you also can’t fire them all at the same time.
Although this strategy ensures continuity of the company’s mission, it also prevents an activist shareholder from firing the entire board and correcting the course if needed.
After reading all the proposals that were up for voting, these guys seem to want to entrench themselves, but fortunately the shareholders voted against most of the proposals.
I’ve contacted Cotterford to learn more about this, but I’m not confident that I’ll hear back from them.
Risks and uncertain things
- New tech/competition – how easy is to copy the assays? What’s the level of protection that the patents guarantee?
- Not getting a licensing deal and having to market it on their own
- Issues with the technology
- Patent litigation might lead to additional costs
- Mixed messages from the CEO of the group and the CEO of the veterinarian segment.
Valuation
Volition is currently pricing its tests at $45 per test to Texas AIM which then re-sells them to the veterinarians. The veterinarians sell them for $160-$200 to the dog owners.
But the management wants to make this a low-cost mass market product just like other routine blood tests such as cholesterol.
Depending on the deal(s), I believe we might be seeing the retail price come down to around $50 per test.
I’ve inquired the company about the current capacity and once they answer, I’ll ask them for more details about the relationship with the A&M University.
Will the University be getting royalties on the sales?
Anyways, let’s say that Volition will be selling the tests for $10 and that each test will cost $2. If the company sells, what, 15 million tests per year and operating expenses double from here, we could be seeing the company reaching $54 million in net income.
Apply a 20x multiple to it (could be much higher), the marketcap could reach $1 billion, or 6 times the current market cap.
Could these estimates prove to be conservative? Yes, they can. I believe that we could be seeing the company selling many more tests, especially when they launch monitoring tests.
Although these estimates are just that – estimates – if some of the other human tests that the company is developing are successful, Volition could go on to become a 100 bagger.
Yes, I know. A lot would have to go right for it to reach hundred-baggerland, but the potential is there.
Thoughts
Volition has been developing its blood tests for the better part of a decade and the stock has gone nowhere.
As with any other pre-revenue company, this is a story stock.
As a fellow shareholder put it, Volition is a decent lottery ticket.
To remain a going concern, the company must land a good deal with an upfront payment significant enough to give it some air to breathe (or keep diluting the shareholders by issuing shares).
And although the appetite for money losing companies has been high in the better part of the last decade, no one knows if it will remain the same.
If their test is as good as they say, I put the chances of getting a deal at 90%.
Will pet owners be interested in taking the test?
If the tests are priced at, say $50, I believe there will be worldwide demand.
Right now, I want be a part of this history, but given the highly speculative character, I still need to get comfortable with the risks.
Conclusion
I’m thinking of building a speculative position in Volition, but I’ll wait to get some answers from the company and from other shareholders before I make a move.
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