Advanced Oncotherapy Plc (LON:AVO)
The developer of next-generation proton therapy systems for cancer treatment, yesterday announced that in September 2016, it commenced discussions concerning a proposal it had received from a potential strategic partner that involves, inter alia, non-dilutive financing arrangements. Discussions with this potential partner are continuing and their scope has been expanded. The Group will keep the market informed of any developments accordingly.
Our view: This is good news. Investors are aware that investment spending on LIGHT, as it moves toward final finalisation and demonstration of its first prototype, is burning perhaps £1.3m/month. Last October’s £14m (gross) subscription and open offer raise is rapidly disappearing, which suggests the balance sheet will find itself stretched again by Q3’2017, exactly the time when it could be disastrous for management to take their foot off the ‘development pedal’. Wishing not to suffered a further hit from deeply discounted equity placing which, in any case, would likely just encourage short-termers to flip holdings back and again undermine shares that have recently badly hurt over the past six months, AVO’s Board have sought an alternative solution. It did not see fit to identify the ‘potential strategic partner’ but there must be a strong likelihood that it is Thales Group, the giant French global technology leader for the Aerospace, Transport, Defence and Security markets that last year entered a manufacturing agreement with AVO. With 62,000 employees in 56 countries, having reported 2015 sales of €14 billion, Thales is an enviable partner; yet without irrevocable, binding agreements that formally lock the two enterprises together, both find themselves highly exposed. In the respect that Thales is creating series production lines, has trained up to 160 staff and even registered its own production IP for the manufacture of the LIGHT system, the agreement’s termination would be both severely embarrassing and gather accusations of lost opportunity for such a high-brow enterprise; for AVO it could put the Group’s ability to meet initial market demand back as much as two years and potentially even threaten its ability to continue operations. In a professional sense, the two Group’s need to limit such exposure at the earliest opportunity and, realistically, this is what yesterday’s announcement was all about. If true, the potential ramifications are significant; Thales could possibly agree to move their current manufacturing agreement, with all the cost burdens that AVO would need to shoulder before actually production commences, instead into a formal joint venture. This presumably would entail all such costs being borne by Thales in exchange for long-term exclusivity and a profit sharing arrangement. It would also underline the fact that Thales is both confident that LIGHT will be successfully demonstrated and will create a profit opportunity big enough to interest a business of its scale. On the other hand, such a deep cooperation, must mean that there could only ever be one single bidder for ownership of AVO’s technology, so those waiting for an eventual, highly rewarding, take-out battle to be fought amongst first generation proton bean suppliers stand to be disappointed. Whatever, such a funding solution has to be better than its alternatives for AVO shareholders and Beaufort for one still firmly believes that the commercial opportunity for the LIGHT system remains far from recognised by the markets. Beaufort has the firm belief that news over the coming months will confirm the true value of its technologies.
