Crystal Amber is in wind up mode, as its portfolio shrinks, it is becoming increasingly concentrated. One investment – Morphic Medical Inc. – is starting to dominate. Crystal Amber’s stake in Morphic represented close to 50% of the NAV at 30 June 2024.
Morphic is the creator of RESET®, a medical device designed to target the underlying cause of diabetes and which also serves the obesity market. RESET® is a thin, flexible implant that lines the proximal small intestine and mimics gastric bypass bariatric surgery as food bypasses the duodenum and the upper intestines. Unlike gastric bypass surgery, RESET® is reversible, minimally invasive, and temporary. It does not permanently alter the patient’s anatomy and uniquely targets the body’s own blood glucose control mechanisms. This is achieved through a 20-minute endoscopic procedure. The patient will typically retain the device for nine months, after which the device is removed.
The fund first bought a small equity interest in Morphic in 2014. Morphic is a US based company which listed on the Australian stock exchange in 2011, raising A$80m. It soared and then crashed in 2017 after its CE Mark was withdrawn for Endo Barrier (now known as RESET®), its device to treat diabetes, preventing Morphic making sales in Europe and select Middle Eastern countries. Crystal Amber encouraged a change of management and supported a delisting of the shares on the ASX. At that time, the investment represented 14p a share of the 129p NAV. Since then, Crystal Amber has been and continues to be the sole provider of funding to Morphic.
The fund currently owns 95.3% of Morphic’s share capital via common shares and preferred shares and holds interest bearing convertible loan notes totalling US$23.4m, with accrued interest currently at approximately US$2.13m. The loan notes are repayable from 13 January 2025, unless converted to equity, and accrue interest at 5% and 7.5% per annum. The fund’s representative executive director on the board of Morphic has an option to acquire approximately US$1.96m of the fund’s shareholding in Morphic as part of their incentive package [This is not an arrangement that I feel comfortable with].
In April 2024, based on the body of evidence submitted, key US and European medical societies provisionally endorsed RESET® therapy in conjunction with lifestyle modification, for treatment of metabolic disease. Morphic is now said to be in a very advanced stage of securing CE Mark certification, with an anticipated commercial launch in Germany and the UK in autumn 2024. Sales in other European markets and the Middle East are planned for the first half of 2025.
Whilst in product development and regulatory approval processes, Morphic currently has no revenue. In anticipation of receiving regulatory approval and so that the business is ready to commence sales early in Q4 2024, Morphic recruited a ‘head of commercial operations, international’ Mike Gutteridge in late 2023. Mike previously held a senior role at Apollo Endosurgery, which was acquired by Boston Scientific for around £500m. Morphic has also secured Medical Murray Inc. as its contract manufacturer to complete testing, validation and building inventory in preparation for launch.
In June, we reported that Morphic had received encouraging news from the FDA. Crystal Amber says that Morphic is in early-stage discussions with a number of large-scale medical devices companies. These discussions aim to achieve significant equity investment via a strategic stake, as well as sales and distribution agreements. There can be no certainty as to a successful outcome of these discussions.
Valuation
An independent third-party valuation of Morphic has concluded that, at 30 July 2024, Morphic was valued at US$98.8m (about £77m). That would value the fund’s equity interest in Morphic at about $75.8m (£59.1m). That would push the end June NAV up from 117.85p to 172.67p. This excludes the potential effect of converting the loan notes and the associated interest and exercise of Morphic employee share options. It also takes account of Morphic’s net debt position as at 31 December 2023 (the most recently published balance sheet). The shares are currently up 22% at 112p.
The valuation is unaudited and the fund’s auditors could come up with a different number.
Market opportunity and scientific results
According to the World Obesity Federation, the impact of being overweight and obese on the UK economy will continue to grow and is projected to reach 2.4% of GDP or £125b by 2060. This is both a global problem and a global market, affecting around 1b of the world’s population and expected to increase to 25% by 2035, or around 1.9bn people, resulting in an estimated burden of $4trn in 2035 or 2.9% of global GDP (Source: IQVIA).
Crystal Amber believes that Morphic’s RESET® device can deliver superior and durable results without changing the anatomy. A UK study by Dr Bob Ryder of the Sandwell and West Birmingham NHS Trust demonstrated an average 17.9 Kg reduction in weight and a 2% reduction in HBA1C (the amount of glucose in blood cells) at the end of treatment with RESET®. Three years after treatment, 75% of patients maintained most of the improvement achieved. It believes that these results compare favourably to the Wegovy and Ozempic treatments and importantly, without the side-effects experienced by this currently popular weight loss drug category.
CRS : Crystal Amber jumps as it says its Morphic investment could be worth £59m
