Description

Bioventix (BVXP) VIC

Disclosure: Small market cap ($161m), trades on the AIM (London Stock Exchange), low liquidity, suited mostly for small funds. Financials are reported only twice a year. Calendar year ends in June. We are long shares of Bioventix.

Description:

Bioventix (BVXP) is a UK company that creates and manufactures sheep monoclonal antibodies (SMAs). Bioventix sells its antibodies to manufacturers of blood-testing machines (e.g. Siemens, Roche). Those manufacturers incorporate the (SMAs) in reagent packs for use in their machines.

BVXP sells liquid “physical” SMAs and derives royalties from their downstream use. BVXP receives royalties each time a test is performed. Royalties are perpetual, and the model creates very high margins (79% net operating margin as per the last calendar year), substantial free cash flow (all earnings are converted into cash) and enables the company to maintain a pristine balance sheet with zero debt and increasing cash balances, while funding an ever-growing dividend.

BVXP has grown revenues for the last five years at 25% CAGR to $7.2m in 2017 and given the royalty business model, earnings after tax have grown at an impressive 31% CAGR to $4.9m in 2017, accelerating to 38% CAGR over the last three years alone.

2018 marks a key year for BVXP as Siemens released its Troponin test to the market. Bioventix created the antibodies for this test and will receive royalties for each test that is performed. Troponin is a test that plays a critical role in the diagnosis of heart attacks, it will allow clinicians to rule in/ rule out a myocardial infarction in a fast and much accurate way.

The Troponin test is expected to be widely adopted and the source of the majority of BVXP’s revenues going forward. China presents an additional, large market opportunity, with a growing number of new diagnostic companies and with clear evidence of interest in BVXP’s antibodies as per management latest remarks.

We believe Troponin, and to a lesser extent revenue from new markets especially China, are a £4m opportunity that will ensure BVXP can sustain 30% - 35% growth rates for at least the next five years. Importantly, these new revenue streams have virtually no incremental costs, with any additional £ in sales will flow directly to the bottom line, and revenues will be incremental to BVXP’s existing perpetual royalties (with the exception of royalty streams from NT ProBNP).

For reasons explained below, we expect the company to report June 2018 FY after tax earnings of £4.5m to £5m, essentially flat from the last reported earnings of £4.9m in June 2017, before resuming growth of at least 35% to £6.5m for the year ending June 2019. At its current share price of £30, with 5.2 million shares outstanding and excluding cash, BVXP trades at a forward PE of 23x.

We think the shares at 23x forward earnings are cheap for an asset light compounder that has 80% net operating margins, has grown earnings at a 38% CAGR for the last three years, with a ROE over 100% (excluding cash), and will benefit from one of the most important tests for heart attacks ever produced (Troponin test) which will ensure high rates of growth for years. All while the company distributes generous dividends. In the last financial year Bioventix paid £0.51 per share in regular dividends and announced a special dividend of £0.40.

Management and Company’s history:

Peter Harrison,60, is the CEO, founder and retains an 8.3% shareholding (down from 20%). The other two major shareholders are Miton Group and Sanford de Land, both smart and long-term investors.

In 1991 Mr Harrison joined KS Biomedix and KS established a division to create sheep monoclonal antibodies. In 2003 Xenova Group acquired KS Biomedix and Mr Harrison led a management buy-out that culminated in the creation of Bioventix.

While individual salaries are not reported in the financials, the AIM admission document highlighted Mr Harrison salary of only £120.000 in 2014. This is a very small salary that helps explain some of his share sales and ensures his main objective is to increase Bioventix’s value.

Bioventix Business Model:

Blood testing can be performed in three ways: Large automated machines (very large number of samples), Point of care (one sample, one patient, one test) and Lab kits.

Bioventix’s antibodies are involved in all three areas but the vast majority of the revenues come from the large automated machine segment. This segment is dominated by the manufacturers of the machines, such as Roche, Siemens, Abbott, and J&J.

In an automated machine, a blood sample can be tested for different elements of a testing menu, such as testosterone, heart disease or fertility. The machine has specific areas for the test menu and each segment will be divided into each individual test. Each individual test has a reagent pack that is responsible for testing a particular molecule (e.g. testosterone). Every reagent pack has to have an antibody to facilitate the test. Antibodies are created to bind to a particular molecule so it can perform the test. Bioventix basically creates and supplies the antibodies and sells them to the makers of the reagent packs for the machines.

The below slide helps illustrate:

How Bioventix generates revenues: Bioventix has a commercial arrangement with its clients agreeing that when a customer (e.g. Hospital) operates a test with antibodies from Bioventix in its reagent packs, Bioventix then derives a downstream royalty on the use of the antibody on that test (irrespective of its size). Bioventix also generates revenue by supplying the antibody.

For example, each time a test is performed in a hospital on a Siemens machine that uses a Bioventix antibody, the hospital pays to Siemens and from that sale Bioventix receive a royalty per test (around 2%). These royalties are perpetual.

Bioventix’s activities are divided into two kinds of projects:

·         Own Risk (Non-Exclusive): Bioventix pays the R&D and can sell the products to anyone.

·         Contract R&D (Exclusive): R&D is paid by their customers and they can commercialize the product only with that customer (this is the case for Troponin).

Both projects share the perpetual royalty model.

Below is an old slide (they stopped using it) showing the split of projects and how long it takes to get an SMA In Market; In Market means a SMA in use on a machine generating revenue for Bioventix.

The only exception to the revenue model is the analyte NT proBNP which has two revenue streams that terminate. One was terminated in August 2017, the other terminates in 2020.

Bioventix’s Know How

Bioventix does not have intellectual property nor patents on any of its antibodies. It only has the “Know how”, but as we will explain below, this is not an impediment for Bioventix to generate perpetual royalties and it is not a risk to its business model.

Bioventix started its activity in 2003, while roughly at the same time an incident in France led to the discovery that some tests for testosterone in women and children with the same blood sample produced different results in different machines, in other words the antibodies were not effective and new ones without the deficiency needed to be produced. Bioventix created a new version that performed equal results and were tested by Roche which published a prototype assay in 2008. This assay mentioned the  antibody’s efficacy to facilitate and improve the test. The test was on the market in 2009 and today that antibody for testosterone is the market dominant globally (as per the CEO).

The main reason to drop antibodies is when tests do not work; however, once a test is accurate it makes little sense for a manufacturer to switch antibodies given the lengthy process to get them to market.

The slide below helps illustrate the entire process in order to get an antibody to market:

As shown above, the process can be as little as two years and as long as 12 (Troponin). Customers incur in heavy investments to conduct field trials, submit data and finally market the new test. It makes little sense for a customer to drop an antibody that works and spend years and money in this process again for an uncertain outcome, which is why we think Bioventix is well protected.

As of date, no antibody from Bioventix has been dropped from an existing test. Of course, this is backward looking and does not mean that tomorrow all the antibodies cannot be discarded. There is always that possibility, but the fact that not a single antibody has been dropped to date (Bioventix was founded in 2003) shows the quality of its products.

Competitive Dynamics

The global market for in-vitro diagnostics is estimated to be at  $63 billion. In it the market for

Immunoassays (the market for antibodies is part of it) represents approximately $19 billion.

Bioventix produces monoclonal antibodies are produced in sheep, while the majority of monoclonal antibodies are produced in mice, sheep has more diverse antigen recognition than mice and a better immune response to small antigens.

Management believes that there are no other companies producing sheep monoclonal antibodies together with its sub-licensees. However, there are a few companies producing sheep antibodies with a different business model such as Randox-life sciences. In addition, there are other companies that can compete with Bioventix that provide a different kind of antibodies such as Abcam which offers rabbit monoclonal antibodies. The diagnostic companies can also compete with Bioventix wit their own internal resource, however they will not be creating sheep but murine antibodies.

Troponin, the game changer

The biggest cause of deaths worldwide is cardiovascular diseases. Troponin’s test will tackle that important disease, it will improve patient care and ensure clinicians can act quicker with a more accurate assessment. We think Troponin is a game changer for Bioventix and can even accelerate its growth rate given its widely expected use.

Troponin is a marker for heart attacks. Troponin is a part of a heart muscle that has leaked into the blood. When a person suffers a heart attack, the blood supply to the muscles in the ventricles becomes constricted by a blockage. This causes the heart muscle to die and leak into the blood. When the blood has too much Troponin, it indicates that a heart attack is likely to happen or has happened.

Troponin’s tests have been around for some time, what is new in this Siemens test it  is the substantial increase of the accuracy in establishing if a heart attack is about to happen or has happened. The change is in the acid test for a change in level of Troponin within a few hours (this is key as the patient only needs to wait 30 to 120 minutes).  Once a person is submitted to the hospital, a test is performed, and his Troponin levels are tested. After approximately two hours the person is tested again to evaluate if his Troponin levels have changed. In case they have increased, it demonstrates that the person has dying heart muscle, indicating a heart attack. Siemens’ new test measures this change (change in Troponin levels within a few hours) with improved precision at the 99th percentile.

In 2006 Siemens realized the need to create a better Troponin test, meaning better antibodies needed to be produced and it handed the task to Bioventix. 12 years later and the tests are on the market (Europe).

This is the Siemens’ press release in 2017 announcing the launch and main points:

·          “The presence of cardiac troponin is specific to heart muscle death. The detection of circulating troponins has long been recognized as the gold standard for the diagnosis of AMI in patients who present with chest pain in the emergency room. Fast, accurate troponin testing that delivers actionable results to help clinicians rule-in or rule-out AMI quickly is critical to optimal patient outcomes.”

·         “Compared to traditional troponin assays, the Siemens Healthineers TNIH assay is able to detect lower levels of troponin and smaller changes to a patient’s troponin levels, which may be an early indication of AMI. This design affords clinicians greater confidence in patient results at the low end of the assay range by delivering precision that provides the ability to measure slight, yet critical, changes between serial troponin I values. Precision at the low end is important to minimize analytic variation that could confuse a clinician's assessment of a clinically significant change. With this data in hand, clinicians have the ability to more quickly diagnosis and treat patients with suspected AMI, in some cases in as little as one to three hours.”

·          “Cardiovascular diseases remain the biggest cause of deaths worldwide. By 2030, almost  (23.6 million people will die from cardiovascular diseases—mainly from heart disease.3 Siemens Healthineers offers customers the benefit of a comprehensive cardiac menu, including its new high-sensitivity troponin I and a choice of natriuretic peptide solutions.”

*acute myocardial infarctions (AMI)

Bioventix started generating revenues from Troponin since January 1st, 2018; however, as the company reports only twice a year the results are unknown today. Full calendar year ended June 2018 is reported in October with an update either at the end of August or early September. Those revenues will include some early results coming from Troponin worldwide (excluding US).

The good news does not stop there. On the 12th of July 2018 Siemens announced that it had received FDA clearance for its sensitivity Troponin test. While it is unclear when the test will be available in the US, the green lights have been given and Bioventix is ready to collect royalties for this test worldwide perpetually.

Norway, The free option

Bioventix holds a 10% stake in CardiNor a Norwegian company involved in creating the Secretoneurin (SN) IVD test. CardiNor’s research has shown that in heart disease testing the molecule Secretoneurin in addition to NT proBNP and Troponin was additive to help doctors understand the rhythm of the heart and more specifically identify which patients were closer to death.

Bioventix is producing CardiNor’s antibodies and in case the project works, Bioventix not only will incur new revenues but also benefit from the new valuation of CardiNor. Bioventix’s total investments of £195k include CardiNor’s holdings. CardiNor is an early stage company, therefore the probability to get Secretoneurin (SN) IVD test to market is low. We assign no value to this investment but clearly it is a free option.

Bioventix is also involved with a Norwegian Alzheimer’s company called Pre Diagnostics AS. Pre Diagnostics AS is developing an IVD test with the aim to detect dementia at an early stage. Bioventix will develop and provide the antibodies for this project.

This Is another high-risk high-reward project for Bioventix that we assign no value to, however the optionality of it is huge.

Financials

Royalties from Troponin should start modestly in 2018 and accelerate into 2019 and beyond.

Interim results reported in March 2018 for the six months ended December 2017 showed a net profit of £2.8m, this number though includes a back dated royalty of £0.77m. Without it earnings should have been £2.050m, slightly higher than a year ago. This is very impressive given that in the period there were not revenues from Troponin and a revenue stream of £400k was terminated. Bioventix had only two revenue streams that were not perpetual, both coming from NT proBNP. The first ended in August 2017 and the second will end in 2020.

The yearly revenue from NT ProBNP, which is terminated, represented approximately £1,0m. From that the company already stopped receiving £400k as of Dec 31 2017. Revenues for that period grew 13% YoY despite the revenue stream loss of £400k from NT ProBNP and the fact that there were no sales from the Troponin test.

Research and development expenditure is written off in the year in which it is incurred; therefore, all future revenues coming from Troponin will impact directly the bottom line.

·         The bottom line (purple) is R&D paid by customers (contract R&D) to create antibodies for them.

·         The red line shows revenues coming from physical antibodies shipped to clients. The lumpiness happens as some clients order regularly (e.g. every three months) and other clients order every year; the timing differs.

·         The green line shows revenues coming from royalties, which is the biggest source of revenues and has the highest margins. This is very important as BVXP is protected from the miniaturization of the technology. Bioventix receives royalties per test irrespective of the size of the blood sample.

Bioventix ‘s costs are in British Pounds while most of the revenues are in US Dollars and Euros. Bioventix does not FX hedge, therefore it is naturally protected from a fall in the value of the British Pound.

Revenue split by region:

·         United Kingdom: £305k

·         Other EU: £2,378m

·         Rest of the world: £4,561m

Earnings are flowing almost entirely into cash flow. There is a timing difference with the payment of taxes that can reduce/increase cash flow from time to time (as it happened in 2017 and 2016). The biggest outflows are dividends. Despite the increasing dividend the company continues increasing its cash pile.

The royalty model for Bioventix ensures that the company enjoys extraordinary margins (~80%) as shown above, its ROE excluding cash is higher than 100% and maintains a pristine balance sheet, with an expected net cash position of £8.1m at the end of June 2018.

As mentioned above, the loss of the revenue stream from NT ProBNP and the fact the Troponin sales should start modestly will make the year ended June 2018 a transition year. Revenues for the year ended 2018 should come close to the numbers achieved in 2017 (approx. £4.5m), and once Troponin’s revenues start, its high growth should be reflected again with the financials of the current year (June 2019) and beyond.

Valuation and Conclusion

Warning: Trading on Bioventix shares is dominated by retail investors that probably have not factored in that the company is not expected to grow exponentially in calendar year ended June 2018 nor the huge effect of Troponin in its future results. The stock has occasional drawdowns of 40% to 50% without news (very short lived). If that was to happen again, the opportunity would be extraordinary.

Bioventix is a high growth, high quality business, extremely profitable with a unique business model that guarantees recurring revenues without incremental costs; hence, the company can maintain net operating margins around 70% to 80%. In addition, the most important revenue stream for BVXP is starting this year (Troponin) and as such we think Bioventix should trade at least 30x forward earnings today.

With 5.2m shares outstanding, approximately £8.1m net cash, estimated forward earnings of £6.5m (June 2019), and a share price of £30 the company trades at 23x forward earnings. This estimate can be proven to be very conservative as Troponin has green light to be sold worldwide and a CAGR of 30% to 35% for future years can prove to be in the lower end.

On top the company will continue returning money to shareholders via dividends and has two free options that can dramatically change Bioventix’s story if they were to work out.

Risks

·         Peter Harrison is fundamental for Bioventix, not only due to his knowledge but to his connections within the industry. If Mr Harrison is no longer with Bioventix the company might struggle to develop new antibodies and/or commercialize them.

·         Bioventix’s customers are the largest manufacturers of blood testing machines, – Roche, Siemens, Becton Coulter and J%J. If something happens with any of these companies, Bioventix can be hugely affected.

·         Revenues coming from the Troponin test  depend exclusively on Siemens, anything that affects Siemens or the use of the test can have vast consequences to Bioventix.

Catalyst

The launch of the new test Troponin by Siemens