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: https://twitter.com/RogerWLawson )

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Johnston Press, Blancco Technology and Intercede

Companies in difficulties always make for interesting reading, and here’s a brace of them.

Firstly Johnston Press (JPR), a publisher of newspapers. That includes many local ones but also the Yorkshire Post and the Scotsman who cover national business news – the latter is particularly good on the travails of those big banks registered in Scotland such as RBS and Lloyds. The company had more operating losses than revenue last year, debt is way too high and dividends have been non-existant for years. Local newspapers have been shrinking as advertising revenue has moved elsewhere and traditional national newspapers have also been battered by the availability of free news on the internet. It is clearly operating in a sector in sharp decline.

Now it has become the subject of an attempted revolution by its largest shareholder, Norwegian Christen Ager-Hanssen who holds 20% of the equity. He wishes to replace some, if not all, the directors and called an EGM to do so. Removal of the Chairman of Johnston is proposed and the appointment of Alex Salmond, former First Minister in Scotland, and experienced newspaper executive Steve Auckland.

Apparently they feel confident of winning a vote, and would have been even more aggressive in removing directors if the company did not have a “poison pill”. One of their issued bonds includes a provision that if new directors form a majority of the board but were not appointed by the existing directors the debt could become immediately repayable. The company would have little hope of doing that. Mr Ager-Hansen says this mechanism is a “breach of fiduciary duties” and is consulting lawyers as to whether action could be taken against the directors. This writer certainly agrees that this arrangement was and is morally dubious and the sooner the Chairman of Johnston Press Camillia Rhodes, goes then the better. Shareholders should vote accordingly.

Whether a new management team can revive such an ailing business, even if editorial policy and management improves (which is one of the issues apparently) is surely doubtful.

Blancco Technology Group (BLTG) has been in turmoil for a couple of years. Results for the year to June were published today. They changed the nature of the business to focus on software for “erasure” and “mobile phone diagnostics” and new management was put in place a couple of years ago. But today’s announcement makes grim reading. The Chairman, Rob Woodward, spells it out to begin with by saying: “2017 has been a year of substantial challenges for the Group, with the business performing far below our expectations”, But he does say: “However, the underlying strengths of Blancco remain in place and I am confident that these, together with the significant number of remedial actions we are taking, will restore a sustainable growth trajectory and build long-term shareholder value”.

But the detail makes for horrific reading. For example: “During April the Group undertook a review of cash flow forecasts and identified anticipated pressure on the cash position of the Group.  This pressure was caused by the non-collection of £3.5 million of outstanding receivables relating to a sale booked in June 2016 and a sale booked in December 2016, and costs associated with past acquisition activity, including earn-outs and M&A advisory fees”; and “On 4 September 2017 the Group announced the reversal of two contracts totalling £2.9 million booked as revenue during June 2017, following a number of matters being brought to the Board’s attention”. As a result the 2016 accounts have been restated. In addition, the new interim CFO, Simon Herrick, was appointed interim CEO and the former CEO departed.

Last year’s accounts were full of adjustments and the complexity compounded by the number of disposals and acquisitions. This year is not much different, and they even report “adjusted cash flows”. I always thought cash was cash, but apparently not. But the share price perked up somewhat – up 30% at 72p at the time of writing after a long decline. The company does seem to have some interesting technology but whether all the problems have now been revealed we do not know. The Chairman is sticking around after previously announcing his departure but they are still looking for a new CEO.

I would not care to predict the future for this business. But one question worth asking is “what were the auditors doing last year?”. Revenue recognition is often a problem in this kind of company and it looks like a case of sales proving to be fictitious when some questions were asked about them. This is yet another example of the audit profession falling down on the job which we have seen so many times before. Shareholders in Blannco should consider asking for the Financial Conduct Authority (FCA) to undertake an investigation into the audits of this company. The auditors last year were KPMG.

Intercede (IGP) issued a profit warning yesterday in a Trading Update. A large order for its identity software solution that was expected will not now be received until the next financial year. Other orders are also apparently being delayed. As a result, revenue growth this year will be below market expectations. The share price fell yesterday and today and is 34p at the time of writing.

I first commented on Intercede back in 2011 when ShareSoc ran a campaign against the remuneration scheme in the company. The share price then was about 60p. It briefly went over 200p in 2014, on hopes of real growth in revenue and profits but then steadily declined before this latest announcement. In reality this company is a consistent under-performer. It operates in what should be a hot sector (personal id security) but never seems able to capitalise on its interesting technology in a growing market. Change is made difficult as Richard Parris runs it as “Executive Chairman”, assisted by his wife who is also employed in the business. An example of a “lifestyle” business, not uncommon on AIM, where the directors extract signficant sums while the business goes nowhere in particular.

This company would probably be worth a lot more than the current market cap to a trade buyer who could exploit the technology and improve the sales and marketing. What’s the chance of that happening? Not much I would guess.

Note: the writer has trivial holdings in Blancco and Intercede.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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