Company Announcements

Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the UK Market Abuse Regulation. With the publication of this announcement, this information is now considered to be in the public domain.

31 July 2024

Crystal Amber Fund Limited

("Crystal Amber", the "Company" or the "Fund")

Investee company update: Morphic Medical Inc.

The Board of Crystal Amber is pleased to provide an operational and valuation update on its investee company, Morphic Medical Inc. ("Morphic"), the creator of RESET®, a medical device designed to target the underlying cause of diabetes and which also serves the obesity market.

Background

The Fund first acquired 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$80 million and commanding a market capitalisation of A$304 million. In 2017, Morphic received formal notification of CE Mark withdrawal for Endo Barrier (now known as RESET®), its device to treat diabetes, preventing Morphic making sales in Europe and select Middle Eastern countries. Thereafter, Crystal Amber commenced more significant activism. By December 2020, the Fund effected a change of management and supported a delisting of the shares on the ASX. At that time, the Fund's investment represented 14p a share of the Fund's 129p a share of total net asset value. Since then, Crystal Amber has been and continues to be the sole provider of funding to Morphic.

Last October the Fund stated that, following the return of 55p a share in dividends amounting to £45.7 million arising from other investment disposals, Morphic represented 40% of net asset value of the Fund. Following additional investment in Morphic and the Fund's share buyback programme commencing last December, which has returned a further £8.3 million, the Fund's equity interest in Morphic together with the associated outstanding convertible loan notes, represented close to 50% of net asset value of the Fund at 30 June 2024.

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$23.4 million, with accrued interest currently at approximately US$2.13 million.  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$1.96 million of the Fund's shareholding in Morphic as part of their incentive package.

About Morphic's product - RESET®

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.

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 £125 billion by 2060. This is both a global problem and a global market, affecting around 1 billion of the world's population and expected to increase to 25% by 2035, or around 1.9 billion people, resulting in an estimated burden of $4 trillion in 2035 or 2.9% of global GDP (Source: IQVIA).

The Fund 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.

We believe 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.

Recent developments

The Fund is pleased to provide an update regarding several positive developments at Morphic.

CE Mark certification and commercialisation

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 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 Mike Gutteridge as Head of Commercial Operations, International in late 2023. Mike previously held a senior role at Apollo Endosurgery, which was acquired by Boston Scientific for around £500 million.

In order to ensure volume ramp ups can be achieved, Morphic has secured Medical Murray Inc. as its contract manufacturer to complete testing, validation and building inventory in preparation for launch.

Morphic continues to expand its innovation pipeline with new R&D projects and IP filings. 

FDA

Last month, Crystal Amber reported that Morphic had received approval from the U.S. Food and Drug Administration ("FDA") to Morphic's application for amendments to certain requirements for its pivotal study, which is approved as a staged study. These protocol changes are expected to significantly accelerate access to the key US markets for the treatments of diabetes and obesity, subject to, inter alia, successful completion of the study and trials.

Strategic discussions

Given the market opportunity and the ability to tap into other existing infrastructure and sales distribution channels, 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

Given the importance of Morphic to the Fund, the Fund commissioned an independent third-party valuation of Morphic (the "Valuation"). This has concluded that, at 30 July 2024, Morphic was valued at US$98.8 million (approximately £77 million) on a risk-adjusted basis and on a cash free, debt free basis.

This Valuation means that the Fund's equity interest in Morphic, on an undiluted basis (i.e. excluding conversion of loan notes and associated interest and exercise of Morphic employee share options) and after including net debt at 31 December 2023 (the most recently published balance sheet of Morphic), would be valued at approximately US$75.8 million (approximately £59.1 million). At 30 June 2024, the Fund's unaudited net asset value per share was 117.85p (31 May 2024: 117.78p), which would increase to 172.67p with the inclusion of this new Morphic equity valuation estimate. 

The Valuation is unaudited and the Fund's auditors are currently auditing the annual financial statements for the year ended 30 June 2024, which involves a valuation assessment, by the auditors, of the Fund's portfolio, including Morphic, and this assessment may produce a different conclusion on valuation than stated above.

Christopher Waldron, Chairman of Crystal Amber commented:

"The Fund is hugely encouraged that its collaborative activism with Morphic, together with providing the necessary investment, is reflected within the third-party valuation that now significantly increases the Fund's carrying value. The addressable market that Morphic serves is global. Continuing strong execution can therefore deliver even greater shareholder returns."

The FX rate used throughout this announcement is as at 30 July 2024, US$1.2838: £1, save for NAV calculations at 30 June 2024 where the rate used was US$1.2649: £1.

For further enquiries please contact:

Crystal Amber Fund Limited

Chris Waldron (Chairman)

Tel: 01481 742 742

www.crystalamber.com

Allenby Capital Limited - Nominated Adviser

Jeremy Porter/ Dan Dearden-Williams

Tel: 020 3328 5656

Winterflood Investment Trusts - Broker

Joe Winkley/Neil Langford

Tel: 020 3100 0160

Crystal Amber Advisers (UK) LLP - Investment Adviser

Richard Bernstein

Tel: 020 7478 9080