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The New Criterion: drug development and computer viruses

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Redflex (RDF) 41c

Just as the traffic camera operator looked to be “moving forward” – obeying all speed limits and red lights of course – along comes another snafu for the strife-prone company.

This time Redflex is in the poo in its home state of Victoria, after close to 100 of its cameras were afflicted with the WannaCry ransomware virus. The glitch forced Spring Street to cancel or suspend about 10,000 fines and we all know governments love to forego such revenue.

Tetchy Victorian police minister Lisa Neville – who alleges Redflex was tardy in reporting the virus – has ordered a full review, which in political speak means heads will roll other than the minister’s.

Redflex has not commented on the issue and – more pertinently – has not said anything to the ASX. Presumably it’s not material.

The Vic tech glitch comes after a string of good news for Redflex, which from 2013 was embroiled in a US ‘cash for cameras’ bribery scandal that saw the jailing of the company’s US chief, Karen Finley.

In December last year Redflex struck a non-prosecution agreement with the US Department of Justice: no fine, $US100, 000 restitution to Ohio’s City of Columbus and an unquantified payment to the City of Chicago (where most of the shenanigans happened).

Redflex then settled a civil action in Chicago for $US20m, $US10m by December this year and the rest by 2023.   The headline claim was for $US377m.

The City of Chicago then restored Redflex as a “responsible business” able to bid for new contracts. In the company’s words, this reflected “extraordinary changes” to the company’s leadership, culture and risk and compliance practices over the last four years.

In further good tidings, NSW Roads & Maritime Services extended Redflex’s mobile roadside enforcement contract by one year, for expected revenue of $13m over this period.

And the eyes of Irish speedsters are not smiling after the company secured a six-year contract with the GoSafe enforcement arm, worth $8.5m over six years.

The US remains a crucial geography for Redflex, with The Americas (mainly the US) delivering 56% of revenue in the last half. Unlike elsewhere, Redflex operates a “build own operate’ model which involves running the programs on a “per citation” basis.

As you could imagine, that goes down hank with motoring lobby groups and the more populist politicians. But the model can be lucrative, albeit requiring more upfront capital.

“Our contract renewal rate remains strong and the terminations are generally the result of the cessation of photo enforcement in a particular locality, not losses to our competitors,” Redflex says.

In a business update in mid May, Redflex flagged full-year ebitda of $10-12m, compared with last year’s $25.6m. Redflex generated $6.98m in the first half, on revenue of $62m. A $32m pre-tax loss reflected the $25.9m discounted cost of the Chicago city settlement.

Over its 20-year listed life, Redflex has severely tested the patience of investors.

It’s proved too much for long-term holder Thorney Investments, which held a circa 7% stake but has moved below the 5% substantial level.

Redflex shares peaked at $3.35 in November 2007 but now trade well below net tangible asset backing of 53c a share.

Redflex’s balance sheet and cash flow are fine, but the company needs to show it can drive consistently in the fast lane to regain the market’s battered confidence.

Innate Immunotherapeutics (IIL) 6.1c

Innate chief Simon Wilkinson put it succinctly after the multiple sclerosis developer’s phase-two trial bombed out, spurring a share sell off that wiped off 90% of the company’s value in a matter of minutes.

“Clearly it’s been a very bad day at the office for myself and my staff,” he said, adding that he was distressed about the impact on the advanced (SPSM) MS patients involved in the trial.

Not for the first time, the shock result highlights the high stakes of big-ticket drug trials that, in the case of ASX listed developers, have a tendency to fall short.

MS is a disabling condition of the nervous system, with 60% of sufferers advancing to the SPSM stage.

Globally, MS drug development has proved especially tricky and there is no current approved treatment for SPMS.

To management’s credit, the company made little attempt to spin the results as a temporary setback.  It baldly admits the trial drug, MIS416, showed “no clinically meaningful or statistically significant differences in measures of neuromuscular function or patient-reported outcomes.”

The trial – at five sites in Australia and NZ – enrolled 93 patients, 62 of which were randomly (and evenly) assigned the drug or a saline placebo.

Among the group receiving the drug, 17 patients (27%) discontinued treatment for various reasons – a high drop out rate even for a cohort with an advanced disease.

As is the norm, the company plans to parse the data to check if the drug was more effective with a particular sub-group of patients. It is also analysing the treatment effect among the “per protocol” patients, that is, the ones who completed at least 75% of the required study visits. But “there is nothing to suggest at this time that this analysis will result in a favourable conclusion.”

While there are never any guarantees with clinical trials, the results are baffling because MIS416 has been made available to needy patients for the last eight years, under a compassionate use exemption that allows a non-approved drug to be approved.

These patients had reported benefits, such as reduced fatigue and pain or improved hand movement and bowel control  

Only on June 21 received FDA approval for IND application, which would have allowed the company and the regulator to co-operate on the design of a phase-three trial. But without some radically improved data emerging from the clinical review, this one is going nowhere.

Bizarrely, the NZ-based Innate was an investment of choice for a group of White House insiders: Innate’s (biggest) 17% shareholder (and director) Chris Collins is a New York congressman who sits on the health subcommittee of the House Energy and Commerce committee. He is also Trump’s congressional liaison.

Tom Price, Trump’s pick as health secretary, also owns shares acquired when he was a member of the House ways and means sub committee.

Suffice to say, the smart money on Capitol Hill now looks not so clever.

"For those that invested in Innate including me, we all were sophisticated investors who were aware of the inherent risk," says Collins .

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Published: Tuesday, July 04, 2017


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