All Change at Intercede, and Drug Development Costs

An interesting announcement this morning was the news that founder Richard Parris is losing his role as Executive Chairman at Intercede Group (IGP). He is stepping down to the role of Non-Executive Director and they are looking for a new CEO.

The company operates in the digital identity area. I once held quite a few shares in it but became disillusioned with the leadership some years ago and the company’s remuneration arrangements, so I now only have a nominal holding. For a company with interesting technology in a hot sector, it has a disappointing financial track record. Slow growth and lumpy sales, and consistent losses in recent years.

It is surely good news that Mr Parris is stepping down, although the share price has fallen today at the time of writing. He and his wife do hold quite a significant proportion of the shares. Let us hope the new management is able to make this company a world beater after all – it seems to have suffered the problem of many UK technology companies in failing to develop a sales and marketing strategy to turn good technology into market leadership.

I spent an interesting day on Wednesday meeting with Professor Jonathan Barratt at Leicester University. He is researching IgA Nephropathy, a disease that can lead to kidney damage and ultimately the need for a kidney transplant (as in my case). It included a tour of the labs and attending a lecture he gave on the subject which was most interesting. It’s a worthy cause if any investors have surplus cash after the recent stock market rout as Prof. Barratt and his team are making significant progress. Remember there are tax benefits from charitable donations.

One of the things Prof. Barratt mentioned was the enormous cost of drug development. According to the Tufts Centre, they suggested the cost was $2.6 billion in 2016 to get a drug to the FDA approved stage. One can see why relatively rare diseases do not get a lot of interest from drug companies, particularly those like IgA Nephropathy where the progression of the disease can be so slow that clinical trials take years to complete. I also now know exactly why I don’t invest in drug development companies, where the chance of success and obtaining a good financial return is so low.

But one aspect that Prof Barratt is working on is the possibility of improved diagnosis by using blood tests based on antibodies to identify the disease at an early stage which might assist with prevention. This is an area where I am invested though with holdings in Abcam (ABC) and Bioventix (BVCP). The latter produced some unexpectedly good interim results due to one of their customers identifying some royalties due that had not previously been reported. But even without that the figures were good.

One important future revenue stream for Bioventix is a troponin test which is a marker for heart attacks. This might speed up the diagnosis of chest pain. That is important if you arrive in A&E with severe chest pain as there can be many other causes although doctors often focus on that to the exclusion of problems such as gall stones or gall bladder infections which I was once told were more common. Delayed or misdiagnosis is obviously a major issue here that the new test might prevent.

Roger Lawson (Twitter: )

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Lloyds Case Impressions, Ideagen AGM and Return on Capital

Yesterday I attended the Annual General Meeting of Ideagen (IDEA) at 12.00 noon in the City of London – see below – and afterwards spent an hour in the High Court listening to one of the witnesses being cross-examined in the Lloyds Banking Group case. What follows is just an impression of the scene because the whole case is running for months so in no way can this be considered a comprehensive report. I have covered some more details of the case in previous articles, but to remind you the litigants are suing Lloyds and the former directors of the company over the takeover of HBOS which they declare was contrary to their interests as shareholders in Lloyds TSB. Lloyds deny liability.

The case is being heard in the Rolls Building in New Fetter Lane – a modern building very different to the ultra Victorian main Courts of Justice building in the Strand. See this link for a video tour of the building:

The witness being cross-examined on the day was Tim Tookey, the former Finance Director of Lloyds TSB. Richard Hill QC was undertaking the task for the litigants under the eyes of a single judge, Mr Justice Norris (sans wig). It was a pretty impressive scene with at least 6 barristers in wigs and gowns plus about another 10 supporting legal staff. Why do barristers still wear wigs? To quote from the web: “The courts didn’t officially add wigs to the legal dress code until the 18th century when they became culturally chic. … They continue to wear them because nobody has ever told them to stop”.

It was a pretty impressive scene, somewhat lost on the few members of the public present – half a dozen litigants and members of the press. But the court was digitally up to date with every desk holding a screen on which the written evidence was displayed as it was invoked. However the witness being cross examined still referred to a paper copy, extracted from 150 large A4 binders stored in shelves on the left hand side of the court – filling almost the whole wall.

Mr Tookey gave his responses to questions firmly and without emotion. A confident witness giving clear answers. He was questioned about the events leading up to the announcement of the acquisition of HBOS and over how much capital Lloyds anticipated would be required to ensure the deal was “bullet-proof” (i.e. not creating unacceptable risks if the economic circumstances worsened). He was questioned about the extent the risks had been considered and whether enough due diligence on HBOS had been done before the decision was taken to proceed. Apparently it came down to a decision at 4.00 am on a Monday morning to proceed. They we being forced to decide to proceed or not by the Government before the markets opened on Monday. But he said that he thought all the risks had been considered and the board was supportive of the deal because of the strategic advantages of the HBOS takeover in the longer term. Recapitalisation involving the Government was necessary because there was no way it was possible to raise even £3 billion (underwritten) by the Monday, which was the minimum requirement. Government involvement “de-risked” the deal. The case continues….. for another dozen weeks.

One can see from the above exactly why the costs of such cases are so enormous.

Ideagen AGM

Ideagen (IDEA) is a software company in the Governance, Risk and Compliance sector. I have held the shares for some years when it has grown revenue and profits considerably, both from acquisitions and organic growth. They have a strong emphasis on the importance of recurring revenue. They are presenting at the ShareSoc Seminar on the 8th November, although that event is fully booked I understand.

There were fewer sharesholders at the Ideagen AGM than members of the public at the Lloyds hearing, but that’s not exceptional for small companies. But it was still a useful event – a brief report follows.

One question I raised was about return on capital. Now you might think this was prompted by an interesting article on that subject by Leon Boros in the latest ShareSoc Newsletter, but I did not get around to reading that until later in the day so it’s somewhat of a coincidence. Leon compared the return on capital at Bioventix (one of his favourite stocks which he likes to talk about regularly), and YouGov. He pointed out that not only are measures such as Return on Equity (ROE), Return on Capital Employed (ROCE) and Return on Assets (ROA) better at Bioventix calculated on the headline numbers, but that those for YouGov are somewhat doubtful because they capitalise and amortise the cost of recruitment of their survey panels. Plus they capitalise and amortise software development costs. But they then produce adjusted earnings figures that excluded the amortisation of both those costs, effectively pretending they are not real costs. He has a point.

Now I always look at returns on capital when I am investing in new companies because I consider it one of the most important measures of a company’s performance – as I told the directors of Ideagen. Hence at the Ideagen AGM I asked a question on that subject. On page 18 of their Annual Report they give the “Key Performance Indicators”, 9 of them, that the directors use to monitor the performance of the company. They all look good, but none of them measure return on capital. Should they not include a return on capital measure?

In reality the headline figures for ROE, ROCE and ROA reported by Stockopedia for Ideagen are all less than 2%, and that ignores even the large number of shares under option that the company has that would dilute the earnings. The reason for this is partly the fact that the profit measures used are “unadjusted” and as the company has very substantial amortisation of goodwill from past acquisations, and £1.2 million of share-based payment charges, these distort the numbers. The CEO David Hornsby, responded with “what measure would I like to use?” to which I responded that I did not mind so long as it was consistent from year-to-year. Companies often publish such figures, which are frequently based on “adjusted” profits. I also suggested cash return on assets might be a good measure, something I also look at.

The company actually generated Net Cash From Operating Activities of £8.3m last year which on Net Assets of £30m at the start of the year is very respectable, although technically one should probably write back the cost of past acquisitions that have been written off. In addition some of the cash generated was spent on contingent consideration on past acquistions and on “development costs” which they class as “investing activities”. This demonstrates that for some businesses, looking at headline return on capital figures or those reported by financial web sites can be misleading. One needs to look at the detail to get a real understanding on what is going on in such a business.

A short debate on the issue followed. Otherwise after a couple of other questions, the CEO mentioned the half year for the company ends today, and shareholders should be very pleased with the results.

In summary, a short AGM meeting, but a useful one. And the ShareSoc newsletter is well worth reading – it even includes some articles from me.

Roger Lawson (Twitter: )

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