Human tissue specialist Asterand (LON:ATD) said it expects to ask for shareholder approval for the sale of its non-BioSeek Tissue Based Solutions business in the next few weeks.

Shareholders applauded the news with the shares up 37 per cent today.

It is also considering options for its other subsidary, BioSeek which provides cell-based human disease models for drug discovery. 

Asterand said: “The board also continues to explore a number of alternatives in respect of the BioSeek business including the continuation of the business on a stand-alone basis or the sale of the business after the potential disposal of the Tissue business.”

It also said it is managing its cash flow carefully so that it will have the necessary funds to complete a transaction for the Tissue business.

In April, the company said it had been unable to find a single buyer for the business as a whole.

Asterand said that despite ‘volatile’ trading conditions and the distractions of the sales processes, revenue remained flat overall in the period to 31 March.

Revenue for the Tissue business improved, while BioSeek revenue reduced.

The sale of the Tissue business enable Asterand to repay its creditors but additional funding would need to be sought to keep the BioSeek business going or if it needs funds for its sale.

The group is also considering delisting after the disposal of the Tissue business in order to cut costs.

Human tissue specialist Asterand (LON:ATD) said it is ‘exploring a number of alternatives’ after the potential bidder for its BioSeek business dropped out today.

Asterand said it was making good progress with sale of the Tissue business.

On Monday, Asterand said it had signed letters of intent to sell each of its two businesses, BioSeek and non-BioSeek Tissue Based Solutions, separately. The company initially put itself up for sale in October 2011.

It added today: “The board is exploring a number of alternatives in respect of the BioSeek business, including securing additional funding from a third party, with the intention of reaching an agreement alongside its potential disposal of the Tissue business.”

Bioseek provides cell-based human disease models for drug discovery and development.

Asterand acquired BioSeek in February 2010. Asterand is a global supplier of human tissue and human tissue-based research services to drug discovery scientists.

The share price dropped 18 per cent to 2.15 pence today.

Human tissue specialist Asterand (LON:ATD) said today it was still confident talks with potential bidders would result in a deal despite several deadlines passing.

Asterand, which put itself up for sale in October, added that after several months of talks it has narrowed the field to a small number of preferred parties and is now in advanced negotiations with these groups.

It said it was not possible to conclude an agreement in February because of the complex nature of some of the discussions, but it remains confident that a transaction will be completed, albeit in a longer timescale than previously envisaged.

Asterand put itself up for sale after receiving notices of default from two of its creditors last year after trading conditions worsened and it was in danger of breaching bank covenants. 

Business subsequently picked up towards the end of 2011 with revenues for the twelve months expected to exceed 2010.

Today, Asterand said it was in a constructive dialogue with the two creditors and continues to receive their support during the sale process.

The sale process was previously extended in November last year and in January.

It said that it has received strong interest from a number of parties but it was not possible to conclude talks prior to the Christmas break.

A new deadline of January 17 has now been set. This gives the interested parties almost two weeks to submit their proposed offers so that Asterand can potentially announce a recommended offer by the middle of February, the company said.  

Asterand added that it continues to update its key creditors on the process and the developments to date.

The company was originally put up for sale in October, after it revealed in August that it would be in breach of its funding covenants in the near future. It has also explored its funding options in recent months.

Operationally the business has revealed positive news in recent months with a significant contract extension with America’s National Cancer Institute (NCI) in November. It has also achieved a research milestone in its drug discovery collaboration with Japanese pharmaceutical firm Ono Pharmaceutical.

The BioSeek subsidiary is applying its BioMAP platform to perform a number of tasks on a drug discovery target selected by Ono.  

Under the three-year agreement BioSeek is receiving research funding and is eligible to receive success payments based on the research-phase progress of this collaboration and further milestone payments based on the clinical development-phase progress of a drug candidate discovered under this collaboration.

Human tissue specialist Asterand (LON:ATD) announced today that its BioSeek subsidiary has achieved a “research milestone” in its drug discovery collaboration with Japanese pharmaceutical firm Ono Pharmaceutical.

BioSeek is applying its BioMAP platform to perform a number of tasks on a drug discovery target selected by Ono. These tasks include phenotypic screening, hit identification, lead optimisation and clinical candidate selection.

Under the three-year agreement with Ono, BioSeek is receiving research funding and is eligible to receive success payments based on the research-phase progress of this collaboration and further milestone payments based on the clinical development-phase progress of a drug candidate discovered under this collaboration. Ono will have worldwide rights to develop and sell all pharmaceutical products discovered through the collaboration.

“We highly value our relationship with Ono since it enables us to take full advantage of BioMAP'’s power to discover and develop innovative new drug candidates,” said Jack Davis, Asterand’s chairman and chief executive officer. “We are looking forward to the successful continuation and further achievements of the collaboration.”

Asterand is a supplier of high-quality human tissue and tissue-based services. It takes a “comprehensive approach” to human tissue and associated research services, which it says offers pharmaceutical, biotech and diagnostic companies a “unique opportunity” to have one company meet all of their human biomaterial needs.

BioSeek is applying its BioMAP platform to perform a number of tasks on a drug discovery target selected by Ono. These tasks include phenotypic screening, hit identification, lead optimisation and clinical candidate selection.

Under the three-year agreement with Ono, BioSeek is receiving research funding and is eligible to receive success payments based on the research-phase progress of this collaboration and further milestone payments based on the clinical development-phase progress of a drug candidate discovered under this collaboration. Ono will have worldwide rights to develop and sell all pharmaceutical products discovered through the collaboration.

“We highly value our relationship with Ono since it enables us to take full advantage of BioMAP’s power to discover and develop innovative new drug candidates,” said Jack Davis, Asterand's chairman and chief executive officer. “We are looking forward to the successful continuation and further achievements of the collaboration.”

Asterand is a supplier of high-quality human tissue and tissue-based services. It says it takes a “comprehensive approach” to human tissue and associated research services, which means that pharmaceutical, biotech and diagnostic companies gain a “unique opportunity” to have one company meet all of their human biomaterial needs.

Asterand’s BioMAP systems are primary cell-based models of human disease biology, designed to replicate the intricate cell and pathway interactions as they are observed in human pharmacology and toxicology.

According to the company, drug compounds induce specific patterns of changes in these systems that can be compared to a large number of reference profiles in the BioMAP database. So, says Asterand, assessment using BioMAP can provide early insight into human pharmacological and toxicological properties of compounds.

Asterand, which began a formal sale process for the entire company in late October, reported in an interim management statement earlier this month that trading conditions had improved recently and that it expects tissue revenues to be in line with last year. It also said that the BioSeek business had consolidated its trading during the second half after achieving strong growth during H1 2011.

Overall, the firm expects group revenues for 2011 to exceed the US$21.3 million it achieved last year.

Human tissue specialist Asterand (LON:ATD) announced this morning that it believes it now has sufficient cash to last the company into early 2012, after its board reviewed cash flow projections and consulted creditors.

Previously, on October 24, the firm had said that it had begun a formal sale process with the intention of targeting the second half of this month to determine a potential offer for the business. Asterand’s board has now decided to extend the timeframe to allow potential bidders more time to carry out due diligence prior to considering whether to make an offer.

The revised timetable includes a period between November 28 and December 16 in which potential bidders can conduct site visits. January 5 is the deadline for submission of possible offer terms by potential bidders, while February 6 will be the deadline for an announcement of the result of the formal sales process.

At the end of August Asterand, which supplies human tissue and human tissue-based services to pharmaceutical and biotechnology companies, said in an interim management statement that volatile trading conditions had led to a reduced outlook for the year and that further funding would be required since the company was in breach of its banking covenants.

Today, the firm issued a further interim management statement in which it said that trading conditions had improved recently and that it expects tissue revenues to be in line with last year. Meanwhile, Asterand’s BioSeek business has consolidated its trading during the second half after achieving strong growth in H1 2011.

Overall, the firm expects group revenues for 2011 to exceed those for 2010.

Shares in Asterand (LON:ATD) soared almost 40 per cent in early deals after the stock market historian David Schwartz drew investors’ attention to the opportunity presented by the tissue science specialist.

In his piece published by the Financial Times, Schwartz said Britain’s small caps offered much higher potential returns than some of the blue-chip stocks.

He then revealed his favourite type of target was a “beaten-down tiddler that is ripe for a rebound”. 

According to Schwartz, Asterand is just one of those "tiddlers" - the company has recently revamped its strategy, while keeping a keen eye on the cost base. Both initiatives have gone largely unnoticed by the market. 

The 2010 results are also expected to show a major improvement in the company’s financial fortunes, according to the Schwartz.

The company quietly adjusted its strategy and has reduced its reliance on the pharmaceutical majors, which are cutting their spending on contract research. It is now focusing on government work and targeting the diagnostics market too. 

Apparently, the strategy is working, which was confirmed by a prestigious contract with America’s National Cancer Institute worth as much as US$24.3 million over five years, which was secured by Asterand in September 2010.

A little over a month ago, Proactive Investors noted that former Goldman Sachs (NYSE:GS) analyst Charles Elliott had taken a stake in Asterand.

The news that Elliott’s firm Inflection Point (IP) now had a shareholding of over 4 per cent in Asterand drove the pharmaceutical junior’s shares up 16 per cent.

However, even with all these signs pointing to growth, the investment opportunity went largely unnoticed and the potential of the business was hardly reflected in the share price, even after the appreciation that followed IP’s taking a stake in Asterand.

Back then, Proactive Investors spoke to Asterand’s chief executive Martyn Coombs in an effort to find out what the market missed about the stock that IP was able to see and capitalise on.

“What we found out is there’s a quiet revolution taking place which should eventually prompt investors to re-appraise the valuation they currently ascribe to Asterand – which at less than one times sales is a fairly low one,” said the report.

This came to pass today, with a little help from the FT report.

At 11.00 am the shares were up 5.1 pence at 22.6 pence and hit a session high of 25.78 pence. In the past three months the stock has risen 88 per cent.

His strategy as head of Rowe & Pitman’s Tokyo operation in the 1980s was an interesting one. 

Realising that most companies commanded extraordinarily high stock market ratings, the young Elliott was forced to seek out emerging growth trends and companies piggy-backing on them.

It helped him identify potential “multi-baggers” (investments that might double, or triple in value over a period of time), which were an antidote to the giant blue-chips whose progress was rather pedestrian in comparison.

It was an approach that served Elliott well: among his top picks was a fledgling Nintendo, the semi-conductor firm Tokyo Electron and Shimano, a name synonymous with cycling. 

It also saw him voted Japan’s top foreign analyst while at R&P and Europe’s leading technology analyst with Goldman.

And it is why people sit up and take notice when Inflection Point takes a position in a company.

Note the market’s reaction to the news IP had taken a stake in Asterand (LON:ATD) – the share price advanced more than 16 percent. 

Elliott’s firm now owns more than 4 percent of the company. 

But what exactly has the wily old campaigner spotted that the rest of the market missed?

To answer that question Proactive Investors spoke to Martyn Coombs, the chief executive of the human tissue science group.

What we found out is there’s a quiet revolution taking place which should eventually prompt investors to re-appraise the valuation they currently ascribe to Asterand – which at less than one times sales is a fairly low one. 

Last autumn, Asterand was faced with a problem as its traditional customers, the big pharmaceuticals companies, cut their spending on contract research. 

Coombs and his team knew Asterand needed to reduce its reliance on this cyclical business.

So they decided the group would go after US government work as well as targeting the diagnostics market.

To add to the mix it acquired Bioseek, a specialist in predictive human biology, which broadened the company’s research offering.

Comined with Asterand’s existing business Bioseek could provide the launch pad for a whole new direction for the company as big pharma eschews animal research for human based models. But more of this later.

Coombs had a nervous wait before he knew the change of strategic tack was working. 

Confirmation came in September when Asterand won a prestigious contract with America’s National Cancer Institute worth as much as US$24.3 million over five years.

There are a number of points to note about the deal that were perhaps not apparent in the original announcement. 

The first is that this is a blue-chip tie-up – as good if not better than a joint venture with one of the major players in the pharma space. 

Why? Well the NCI spends around US$4billion a year on oncology research in the US, making it the biggest spender in the field by a mile.

The agreement also marks a critical phase in the rubber stamping process of Asterand as key partner of the US government. 

As Coombs points out it is always difficult to land that first contract “but once they know you it becomes a lot easier”.

Analysts believe more collaborations of this sort will follow, and the Asterand chief executive went as far as describing the NCI contract as a game changer in the immediate aftermath of the contract win.

“Working with the NCI is very prestigious,” Coombs adds. 

“They are seen as opinion formers and opinion leaders. So the fact that they want to work with Asterand is a validation of what we do.  

 “I hope also it bodes well for doing further work for the government. Certainly we intend to make a good job of this collaboration.”

What he also points out is Asterand is also making progress with the second strand of the strategy, with currently, in the tissue business, two of the company’s top five customers being diagnostic companies.

“A year ago we saw big pharma companies cutting down on their spending,” Coombs says. 

“We thought we can either sit still here and wait for this to pass or we can do something about it. 

“So we chose to do the latter and to go after two different markets. 

“One was to go after business with diagnostic companies and the other was to go after government work. 

“Going after both requires different skill sets and is not something you do lightly.

“We thought they offered us great opportunities. 

“But it has taken us nine months to get real traction in these two markets. 

“Now we have. We got the contract. And we are making some traction with diagnostic companies as well.”

Coombs isn’t satisfied with simply sitting back and admiring his and his team’s handiwork. No, he is looking at yet more areas in which to deploy the company’s ground-breaking science.

The use of some of the company’s technologies could help save the cost-conscious big pharmaceuticals companies money by indentifying drugs that are likely to fail clinical trials early in the process – well before hundreds of millions of dollars have been ploughed into R&D.

The strategic direction of the group will be the focus of Dalia Cohen, the company’s newly appointed chief scientific officer, who was recruited from Rosetta Genomics, but is perhaps even better known from her fifteen years at a senior level at Novartis.

It was a bold move for such a small company, but one that sums up its ambition.

Asterand’s team isn’t happy being just a small cap company. You sense Coombs sees it as mid-cap niche specialist, and he says as much during our conversation.  

“We have brought in a senior, big hitting player who has worked at a senior level in Big Pharma... into a job where the fruits of her labour won’t come in just a couple of weeks,” the Asterand boss says of the Dalia Cohen appointment. 

“The message we want to send is we plan to be the scientific leader in this space. We won’t react to what other people do. We are going to set the leadership position. 

“At the moment, over 90 per cent of compounds in clinical trials fail, even after many years of testing in animals. This shows that animal-based models are at best a partial guide to responses in humans.  There is an urgent need for early stage, human-based methods that can predict, from an efficacy and safety perspective, likely success in humans.”   

“We are looking at how human based methods will dramatically improve the discovery process.

“Dalia will be taking a long term agenda on how we want to take the company forward. 

“We want the name of our company, Asterand, to become synonymous with science, with innovation, with disruptive change, with growth.  As an example, we have been very pleased with the enthusiasm that our customers have shown to our new BioSeek platform.” 

“We are not intending to be a US$20 million revenue company in a few years time.”

“We are going to grow organically. But we are also going to grow by acquisitions.“

So, acquisitions will form part of the strategy, Coombs says. That said the group has just recently finalised the financing of the Bioseek takeover, agreeing a US$4 million term loan with the Silicon Valley Bank to do this.

So any deal would require the financial backing of shareholders, though price of the shares, currently languishing at 12 pence each even after the recent spike, would have to much higher before I sense Coombs would be comfortable diluting down shareholders via an equity fundraiser 

“Human-based solutions in drug discovery is a very fragmented niche,” Coombs says.

“There are some interesting companies doing some exciting things. 

“The companies we may look at will have a strong technology that creates an immediate barrier to entry, that we can sell through our collaborative distribution channel.  Oh, and they will be human based.” 

At the moment the focus is on getting the fundamentals right, and driving performance.   Coombs says: “I should stress that we won’t be gung ho on acquisitions.  Organic growth is most important.  “Acquisitions are important also, given the stage of the company and the fragmented nature of our niche, but this is secondary.  Acquisitions are challenging to integrate successfully, we feel we have done well with BioSeek, but we are realistic in that we kissed a lot of frogs before focusing on BioSeek, and would evaluate any other potential targets equally prudently.”

If Asterand delivers there is nothing to prevent the firm acquiring the sort of rating ascribed to successful, growing platform companies,  for example, Manchester-based stem cell research group Epistem (LON:EHP), analysts say. Its market value is currently more than double that of Asterand, yet its annual sales are much smaller.

Broker Religare in a recent research note valued Asterand’s shares at 23 pence each (incidentally this was before the announcement of the NCI contract).

“Asterand should be a core life sciences portfolio holding for investors,” it said.

“The company is well placed to take advantage of two important long-term trends in the pharmaceutical and biotech industries. 

“(They are) the increasing importance of human tissues and tissue-related services in drug discovery and development, and the growing trend for companies to outsource research services, to support internal development programmes.”    

Coombs is happy Asterand’s story is being recognised by the market – as the investment by Elliott’s Inflection Point shows. 

“I think a few things are happening. We have done a lot to build our business on the supply side and generally internally,” he says. 

“We are working out how to sell BioSeek to our customers and have re-directed our business towards government business and diagnostics as well as towards our traditional pharma business. All of those things are now in place. 

“Most importantly, we are fortunate to be in a growth niche that is ripe for change.

“As a company, I believe that we are in the right place at the right time.”

The acquisition was completed earlier this year with a down-payment of US$1 million, with the total price tag based on the company’s 2010 revenues.

The tissue science specialist revealed it will satisfy a US$3 million tranche by issuing equity based on November 2009 price of 22p a share.

The remainder (US$5 million) will be met from a new three-year, US$3 million term loan from Silicon Valley Bank and the company’s existing debt facilities.

The news is bound to have a positive effect on the share price as it removes the uncertainty over how the deal will be funded and means the company doesn't have to tap investors for the cash.

Bioseek was the outstanding performer of the company’s portfolio when it reported first half results in August and is the foundation stone for chief executive Martyn Coombs' buy and build strategy. This year its revenues have grown more than 50 per cent.

The Asterand boss said: “"We are pleased that our first acquisition has been a success. BioSeek's performance has met our original expectations."

"We believe that electing to make the final payment for the BioSeek acquisition in cash is in the best interest of Asterand shareholders. 

“Our new facility will allow us to meet our obligations for the acquisition without dilution to our shareholders or a reduction in our cash reserves. 

“Silicon Valley Bank has once again proven to be a strong, long term partner by providing us with a very attractive loan package in a tough banking environment."

The acquisition price of 12.25 pence represents a premium of approximately 11.5% to yesterday’s closing price 0f 11 pence. Shares in Asterand rose 2.3% to 11.25 pence on the news this morning.

The shares acquired by Coombs account for 0.07% of the issued capital of the company, giving him a total of 484,764 or 0.42%.

The acquisition occurred yesterday, when Asterand issued a third quarter trading statement, which included a revenue increase of 30% year-on-year to US$5.4 million.

Overall Asterand has generated US$14.1 million in revenue in the first nine months of 2010, with US$3.8 million being contributed by the BioSeek business.

Asterand completed the BioSeek acquisition in February 2010, thus expanding its tissue supply business to include new contracted research capabilities. BioSeek’s proprietary drug profiling technology is used to assess new drugs as they are being developed.

The company said that BioSeek integration is progressing well and revenues are on track to meet its projections.

Revenue was up 30 percent to US$5.4 million in the three months ended 30 September 2010. The base tissue business achieved 9 percent revenue growth in the period.

"2010 has been a year of bedding down our acquisition of BioSeek, diversifying our client base beyond large pharma and building our business with the government,” chief executive Martyn Coombs said. 

“Through these efforts we've added significant diagnostic customers.” 

Asterand completed the BioSeek acquisition in February 2010, thus expanding its tissue supply business to include new contracted research capabilities. BioSeek’s proprietary drug profiling technology is used to assess new drugs as they are being developed.

Crucially Asterand highlighted that the last revenue figures do not include the ‘game changing’ tissue supply contract with the America’s National Cancer Institute, which was awarded in early October.

Asterand will provide bio-specimens to the NCI as part of the prestigious Cancer Genome Atlas, it is worth an initial U$5 million and up to US$24 million over five years.

“We are encouraged by our revenues in Q3, particularly as we have not yet recognised any revenue from our new contract with the NCI,” Coombs added. 

“Our contract with the NCI is a game changer that offers the possibility of a step change in the business.” 

“These efforts set a sound foundation for our future growth."

Overall Asterand has generated US$14.1 million in revenue in the first nine months of 2010, with US$3.8 million being contributed by the BioSeek business. 

Additionally the company emphasised that it continues to control expenditure, with cost savings reaching $0.3 million per month in August.

On 30 September Asterand had US$2.9 million in cash resources.

The deal, to provide bio-specimens to the NCI as part of the prestigious Cancer Genome Atlas, is worth an initial U$5 million and up to US$24 million over five years.

It vindicates the decision to chase new sources of business following the downturn in spending in the contract research market. 

“Last autumn we saw the pharma market go into a pause in spending,” Coombs said  

“We couldn’t sit on our hands. So we made the decision to build up other sources of revenue, in diagnostics and in government. 

“It has taken a while to retool the business and appeal to these different markets. 

“I am very proud we have achieved this. We now have a far more de-risked and diversified business. 

“This will stand us in very good stead next year as we believe the pharma market will begin to come back - and now we have the other sources of revenue as well.

“Another thing we should say is clearly with our sort of business, a lot of our costs are fixed. 

“What we are doing now is putting additional revenue through the same machine. 

“You can imagine what will happen to the business when you start adding a contract like this, which is not far shy of 20 per cent of revenues this year. It makes a very material difference.”

Coombs has already described the tie-up as a “game changer”. 

Victoria Blanc, vice-president of government affairs at Asterand, said: “(It is) a launching pad to the next level of business and Asterand has a real opportunity to build a meaningful company.”

She told a conference call with City analysts:  “Our government contract strategy is paying off. Our capabilities are being recognised by the National Cancer Institute. 

“We are the largest contractor through the tissue network of the cancer genome atlas.....We see multiple prospects for future government contracts.” 

Prior the NCI deal, Asterand’s customer base was big pharma, which used its human tissue research services.

However a series of mergers and cost cutting initiatives put the brakes on outsourcing of this kind.  

Coombs said in August that the market is unlikely to pick up until early 2011.

Daniel Stewart, the firm’s broker, is predicting the company will make a full-year loss of £900,000 on revenues of £13m.  In 2011, however, it forecasts a significant growth in revenues to £17m, with profits of £900,000.  

Analyst  Vadim Alexandre said: “Not only is this contract expected to push Asterand back into profitability but it also further demonstrates the group’s success at expanding its work with government institutions.”

On Friday, the human tissue supplier announced a five year contract worth up to US$24.3 million with the US National Cancer Institute (NCI) to supply clinically annotated human biospecimens.

The base award is valued at US$5.4 million over 17 months with provisions for renewal at the NCI's option.

According to DS&C, the contract demonstrates Asterand’s success at expanding its presence in the public sector.

As a result the 2011 sales forecast for the company has been upped from £15.1 million to £17.2 million.

The broker also expects the deal to push Asterand back into profitability, foreseeing pre-tax profits of £0.9 million compared to previous projections of no profit and earnings per share of 0.5 pence per share.

Back in August, chief executive Martyn Coombs told Proactive Investors that the second half was expected be a lot better than the first, and this substantial deal goes some way to evidence his point.

The contract with the NCI is something of a ‘game-changer’ for Asterand, whose primary human tissue business has been squeezed by slower spending by the world's big pharmaceuticals companies in the economic downturn.