A Small Cap with Big Potential: Oxford Biodynamics and the Future of Prostate Cancer Testing

We lay out our expectations for the future of this small UK biotechnology firm, and why we are buyers in Jan 2024.

When a company announces its new cancer test is 94% effective, you might typically associate it with big pharma or a biotechnology player.

Not this time.

The little-known company, Oxford Biodynamics (LON: OBD) which today trades over the counter for £69 million, announced their EpiSwitch Prostate Screening Blood Test (PSE) on 26 September 2023 to rapturous applause among investors, healthcare practitioners, and patients.

Since being listed in 2016, its performance has been comparable to many companies in the development stage - in other words, somewhat abysmal. The share price has declined by 80% during this time, such volatility is typical of biotechnology companies, small and large. 

However,  one piece of good news can change the game overnight. Following the company’s announcement, its share price experienced a ~400% increase and has since undergone a period of consolidation, remaining at an elevated level. This consolidation creates an opportunity for the savvy value investor.

For contest, here is the technical setup and price movement over the past 6 months:

Chart courtesy of Zak’s Trader Cafe (https://twitter.com/ZaksTradersCafe)

We believe that the market is substantially undervaluing the ability of Oxford Biodynamics to generate outsized revenues over the next 12 months.

The two products that will drive the next phase of growth will be the newly launched PSE test and the CiRT test. We will touch on both below:

The PSE test significantly outperforms the standard PSA test currently available, offering 55% accuracy. With Oxford Biodynamics’ PSE test, the accuracy of the prostate cancer screening test gets boosted up to 94%. See below for more detailed figures:

We hope that this test will drive positive outcomes for millions of patients, and generate substantial revenues over the next 12 months. Oxford Biodynamics has already received a PLA Code in the USA, allowing the sale of the PSE test through insurance reimbursement. This step has essentially opened up the US healthcare market, providing a huge potential revenue stream.  

The global cancer care diagnostics market was estimated to be worth $132 billion in 2022 and is expected to reach around 305 billion in 2032 at a compound growth rate of 8.8%. Furthermore, with a lab in Malaysia, there could be a case for also offering the test in the Asian market.

However, the prospective earnings to be announced on Wednesday the 17th, will be driven predominantly by its EpiSwitch Checkpoint Inhibitor Response Test (CiRT). This is the company’s non-invasive blood test for cancer patients. There has been a rising demand for the CiRT - the exponential growth rate is evident in the graph below, taken from the company’s Nov 8th Presentation.

It took nine months following release for the CiRT to reach 100 orders. It took just half that time to get to 200, and between May and June, around 100 tests were sold.

This kind of early-stage compounding can be very powerful as Paul Graham (Co-Founder of Y-Combinator, the world’s most successful startup incubator) once wrote on the topic of compounding in early-stage startups: 

“We encourage every startup to measure their progress by weekly growth rate. If you have 100 users, you need to get 10 more next week to grow 10% a week. And while 110 may not seem much better than 100, if you keep growing at 10% a week you'll be surprised how big the numbers get. After a year you'll have 14,000 users, and after 2 years you'll have 2 million.”

We expect this curve to have continued at around 20% per month, meaning by year-end in September, the results should show around 800 CiRT tests sold (for the financial year). Revenue, at $2500 per test, could reach $2m / £1.5m for FY23. There can be substantial delays between orders and receiving the cash, so the order numbers are the most important metric here. At that growth rate, they could reach 400 orders per month by February 2024, and ~4,000 by Feb 2025.

The CiRT growth rate also has promising implications for Oxford Biodynamics' launch of its market-leading PSE test. The above theories are even more applicable to the PSE test.

We eagerly await the presentation & results to the end of September 2023 (reported on 17th Jan 2024), and any forward-looking statements around both products.

Risks

We always like to discuss the risks of companies we invest in. What are the threats? Where can it all go very wrong, and how likely are they? You should do the same.

Scaling

The substantially improved accuracy of the PSE test means that uptake should be healthy. As such, one of the risks is that OBD simply can’t scale fast enough to utilise its considerable competitive advantage, which has the potential to help millions of patients and generate significant cash flow. A larger player could conceivably come along with a similar product, more funding, and better economies of scale and blow them out of the water.

Funding

In August 2023, Oxford Biodynamics raised £10 million as a war chest at a 30% premium to the stock price at the time.  While there is a clear path to profitability without further raising, the company has a high burn rate (~£9m per year based on annualizing its March 23 results)  the company needs to achieve substantial commercial progress in 2024. There are also a lot of investors already up 300% since the 11p placing in August, which could cause an overhang on any big news. This is likely the reason for the consolidation in the share price since September.

If the company met cashflow issues, it could reduce expenses, raise more capital, or simply actively seek someone to buy it. Of course, its options/valuation depends entirely on its performance in the next 12 months, but we expect its technology alone could be worth more than the current market capitalization. 

Exit Scenarios

We think the most likely scenario given the company’s technology, is a buyout by a bigger player who can simply add the company's excellent products to their pre-existing infrastructure. The payoff would be healthy, and the main risks (funding/scale) would be eliminated. A realistic price would be £200m within 12 months, but by itself, the company could produce results to justify a much higher valuation. To confirm, £200m would be around 3x from its current market cap.

Disclosure 

The Writers of Sharelock Holmes are both small shareholders in Oxford Biodynamics. At the time of writing, our average sits around 30p.

This is a personal blog/newsletter and we are not financial advisers. This is not financial advice. All content is provided for information and educational purposes only. Nothing we say should be interpreted as investing advice or recommendations.

You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that the information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles need to be updated.