CASE STUDY: Volition Rx (VNRX)
(Image: Zen Buddha Silence, by Marilyn Barbone)
May 8, 2022
Volition Rx (VNRX) is a small epigenetics company. The chief mission of Volition is to democratize cancer diagnosis by making it as fast and simple (and nearly as cheap) as a pregnancy test. Early diagnosis of cancer can save millions of lives.
Volition has 82 patents granted and 82 patents pending. Intellectual property is the company's key differentiator. It is remarkable that Volition has been able to develop such a broad IP portfolio and expand its product lines while having such a low cash burn over the years.
Here is the company's most recent investor presentation (March 2022): https://tinyurl.com/4vvb7cvc
The company currently has four broad product areas:
- Nu.Q Vet: Volition has developed a low-cost way to test for cancer in dogs with its Nu.Q Vet product. It plans to expand this test to cats.
- Nu.Q: The company has also developed a Nu.Q product that will be a low-cost way to test for cancer in humans, including blood, lung, colorectal, and other cancers.
- Nu.Q Nets: Neutrophil Extracellular Traps (NETs) are formed when white cells unwind their chromosomes and eject chromatin material. Sepsis, pneumonia, influenza, and Covid-19 involve the overproduction of NETs. Volition has a Nu.Q Nets product to diagnose and monitor these diseases as well and identify treatment responses.
- Nu.Q Discover: Volition has developed the ability to process samples for external parties such as pharmaceutical companies, biotech companies, and academic researchers.
Volition just signed a $28 million deal with Heska (HSKA). This is an exclusive license and supply agreement for Heska to distribute Volition's Nu.Q Vet Cancer Screening Test at the point of care. Volition will receive $10 million upfront and $18 million upon hitting certain milestones. Furthermore, Heska gains the non-exclusive right to tell Nu.Q Vet Cancer Screening Test in a kit format for companion animals. Volition will earn a percentage of these kit sales worth potentially millions of dollars.
Volition is currently in talks with other major veterinary companies to license their technology, which could potentially lead to an even larger deal. This would be transformational for the company.
Volition ultimately plans to sell its products not only in the United States, but also in the European Union and in Asia.
The company appears very undervalued based solely on the Nu.Q Vet test for dogs. There are approximately 20 million older dogs in the United States, 20 million older dogs in Europe, and 20 million older dogs in Asia. 50% of older dogs die of cancer.
Assume that, by 2025, the Nu.Q Vet test is used on 8% of these 60 million older dogs per year. That would be 4.8 million Nu.Q Vet tests per year. Assume the price per test averages $20. The total annual revenue would be $96 million.
Assume the profit margin is 70% (it will probably be higher). That would mean $67.2 million in net profit per year. EBITDA would be about $80 million. Cash flow would also be about $80 million.
The current market cap is $142.0 million, while enterprise value (EV) is $125.4 million.
This gives us the following multiples in four years:
- EV/EBITDA = 1.57
- P/E = 2.11
- P/B = 5.08
- P/CF = 1.78
- P/S = 1.48
The current Piotroski F_Score is 6, which is OK.
Cash is $20.6 million, while debt is $4 million. TL/TA is 35.2%, which is very good.
Insider ownership is 26%. This includes a 5% stake by the CEO Cameron Reynolds, worth $7.1 million. The insiders, including the CEO, clearly have a big incentive to make the company successful.
ROE should be very high if the company is successful.
Intrinsic value scenarios
- Low case: The company may fail to sign transformative deals for the distribution of its Nu.Q Vet test. The stock could fall 75% or more from today's $2.64.
- Mid case: Assume 8% of the 60 million older dogs in the United States, European Union, and Asia are given the Nu.Q Vet test each year. Net profit would be about $67.2 million. With a P/E of 12 and 21.4 million new shares issued, the intrinsic value per share would be $10.77, which is over 300% higher than today's $2.64. The CAGR of the share price from today's $2.64 would be 42.1% per year.
- High case: Assume 8% of the 60 million older dogs in the United States, European Union, and Asia are given the Nu.Q Vet test each year. Furthermore, assume $20 million in revenue from Nu.Q for humans. With a P/E of 15 and 16.1 million new shares issued, the intrinsic value per share would be $18.81, over 610% higher than today's $2.64. The CAGR of the share price from today's $2.64 would be 63.4%.
- Very high case: Assume 10% of the 60 million older dogs in the United States, European Union, and Asia are given the Nu.Q Vet test each year. Furthermore, assume $30 million in net profit in NU.Q for humans. With a P/E of 18 and 10.7 new shares issued, the intrinsic value per share would be $38.02, which is over 1,340% higher than today's $2.64. The CAGR of the share price from today's $2.64 would be 94.8%
Risks
The company may fail to sign transformative deals for the distribution of its Nu.Q Vet test. The shares could fall 75% or more.
Thus, although the upside for Volition is very substantial, it may make sense to have a smaller position, at least until a transformative deal is actually signed.
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