A tiny pharma stock with three shots at the big time

Tom Bulford looks at a small-cap pharmaceutical stock that could prove very lucrative for investors.

It's not as common as it used to be, but lung cancer is still one of the biggest killers of men in this country. Each man in England has a one in thirteen chance of contracting lung cancer in their lifetime. For women, the biggest cancer risk is breast cancer. About one in eight can expect to get this.

Progress has been made in cancer treatment, but there is still a huge benefit to spotting it early. A few weeks ago, I described a new method of cancer detection developed by Parsortix, a subsidiary of Cambridge-based Angle (AIM: AGL).

Angle's share price has increased four-fold this year to 80p. But now broker Cenkos has valued the shares at 200p, on the basis of assumptions that that could prove to be very conservative.

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This company shows just how lucrative medical technology can be for investors even during troubling times for the market.

The lesson is that great innovators will win out. Take Angle. The way I see it, Angle has at least three shots at the big time

Shot one: Parsortix

There are so many other types of cancer that more than 40% of all men and women will suffer from it in some form in their lifetime.

Progress has been made in cancer treatment as I said. Parsortix is among the leading small technology companies in this field. Yesterday the company announced its first research agreement with the University of Surrey's Oncology Department. And there are great prospects in store for the company

Cenkos calculated the value of Parsortix to Angle. They assume that sales to research laboratories start next year, with clinical sales to follow in 2013. Again Cenkos applies a discount to the latter, this time of 37.5%, to allow for clinical uncertainty as well as the 40% per annum discount to forecast cash flows. The upshot is a value for Angle's interest in Parsortix of £39.7m or 110p per share, making 200p in all.

Cenkos has discounted future earnings heavily. So the real message is that the potential for Angle shareholders could be a lot higher than this.

But Angle has other interests, the most significant of which are Geomerics and Novocellus.

Shot two: Novocellus

Novocellus was originally established to commercialise the work of Professor Henry Leese of York University in the field of IVF treatment. IVF means the fertilisation of an egg in a test tube to create an embryo that is then transferred into the womb. The problem of infertility is growing around the world and for many couples IVF treatment represents their best chance of having a child.

The problem today is that IVF does not work very well. Current clinical practice relies upon subjective methods of assessing the quality of the embryo and results in a low live birth rate of 20%. In an attempt to increase the pregnancy rate, multiple embryos are transferred to the womb, but this leads to the opposite extreme: multiple births.

What is needed is a more effective method of assessing embryos. The EmbryoSure method devised by Professor Leese works by measuring the turnover of natural amino acids by the embryo in its first 24 hours of development. This allows the embryologist to determine which embryos are likely to result in a successful pregnancy, and these can then be transferred immediately to the womb or frozen for use later on.

Worldwide there are over one million cycles of IVF annually, with a single cycle costing between £4,000 and £8,000 in a UK private clinic. Novocellus believes that EmbryoSure can improve the pregnancy rate by 25% and is in a partnership with Denmark's Origio, a supplier of the IVF culture medium, to bring this to the market. EmbryoSure has already been successfully evaluated in two pilot clinical studies at hospitals in the UK and is now waiting on further trials with Origio.

Ominously these have been delayed, but if things proceed according to plan then Cenkos attributes a value of 28p per share to Angle's holding in Novocellus, this is already discounted by 40% to allow for clinical uncertainty, and with a further 40% per annum discount applied to forecast cash flows.

Angle has one other very interesting venture

Shot three: Geomerics

Geomerics developed 'Enlighten', a complex physics engine that creates realistic lighting effects in computer games. The fiercely competitive computer games industry is expected to be worth $65bn by 2013, and the winners will be those that can offer the most lifelike experience.

Geomerics has already secured key reference customers including Electronic Arts, CCP, Zombie and FunCom, and Enlighten has been used in the recently launched Battlefield 3 game, which sold five million copies in its first week. Geomerics has an unnamed partner that is on the hook to make one last milestone payment. This is expected by the end of April after which Angle has suggested that Geomerics might be sold.

Cenkos suggests that, based on the achievement of 20% market penetration in 2013 rising to 40% - an ambitious rate of progress- a sale could deliver c.£29m to Angle. This is equivalent to its entire current stock market value.

Angle looks a great prospect.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.

Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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