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Returning to growth
Time to revisit an old favorite of mine. For newcomers , Bioventix is a biotechnology company creating high-affinity sheep monoclonal antibodies (SMAs) for use in assays provided by large immunodiagnostic companies. In layman’s terms, Bioventix makes a component of the blood tests used in hospitals around the world, generating 2 types of revenue: the physical sale of the antibodies and a downstream royalty paid for each test sold. The market is dominated by the likes of Roche, Abbots, Siemens etc, who plant expensive diagnostic machines into hospitals often for free (but locking them into long term contracts) and then get paid each time they sell a test. The land grab strategy is vital, as once installed into hospitals, they are extremely difficult to dislodge. Bioventix takes about 1 year to create new antibodies. Customers take another 2-4 years to prototype tests, conduct field trials, submit regulatory data and obtain marketing approval. Once a test is approved, it introduces a high barrier to entry that helps deliver revenue continuity and more importantly, as the royalties make up c 65% of the revenue the company enjoys phenomenal margins as they fall straight into the bottom line.
Bioventix has a long track record of growth and profitability but the last couple of years were held back by covid ( less routine testing) and the loss of a major revenue stream: NT-proBNP c 12% of income whose contracted licence expired in July 2021. In spite of losing the above contract that was well flagged for years in advance, the earnings remained broadly flat which means the underlying business filled the gap with other products. Now that NT-proBNP will have no bearing on the numbers after full year results to 30/06/2022, the co is poised to return to pre-covid growth rates for the next few years. And it’s mainly due to, but not only, one test which should become the new best seller for the company.
HST (high sensitivity troponin) which is out-licensed to Siemens is entering the snow balling growth phase as well as exciting potential for new applications. Like with any other test launch, the growth is exponential: it has a slow start whilst it gets validated and understood by clinicians then it starts to snowball before it reaches saturation. Initially it was developed and its main use is for the detection of acute myocardial infarction ( heart attack), but the top dog in diagnostics Roche found that it can have multiple other uses and wherever Roche opens the floodgates, the others will follow. They were the first to launch HS troponin and only last year they introduced extra assays which expand the use of HST into biomarker as an aid in assessing the long-term risk of cardiovascular events (death, myocardial infarction, coronary revascularisation, heart failure or ischemic stroke) in asymptomatic individuals. Another test helps to predict the perioperative risk of a heart attack in non-cardiac surgeries to allow clinicians to tailor surgery and post-operative care accordingly. Roche estimates there are c.300m people undergoing non-cardiac surgeries who could benefit from this approach. These are very important developments which are not currently factored into mid-long term broker forecasts.
The co also very recently launched Exposure, a pollution test which has been in development for the past 2 years. At first, I was a bit sceptical as to the need for a pollution test, which is mainly measured by testing air quality or sewage. Then I remembered one of the presentations when the CEO had the same response to when they first created the antibodies for Vit D, some 10 years ago. Back then, people didn’t see the need to have a blood test for vitamin D- just go outside in the sun for 20 minutes a day and you’ll be fine. In a world where society is becoming increasingly adverse to fossil fuel and more health conscientious, especially in polluting Asian countries, this test is the real dark horse of the portfolio.
On top of that there are 2 blue sky developments and although the ceo did try to temper expectations, the two opportunities are making slow but steady progress:
Secretoneurin is being developed by CardiNor and promises to be the next generation of biomarkers for cardiovascular disease, complementing BNP and HST. It achieved CE marking for the ELISA test in December 2021 and in July 2022 has signed a distribution agreement with IBL-America to sell the test for research only customers in order to spread awareness and pave the way for commercialization upon regulatory clearance in USA.
Tau biomarker for use in neuropathological diseases of which most importantly Alzheimer’s disease is undoubtedly the most exciting prospect in development. Currently there are no ways to definitively diagnose Alzheimer’s other than a brain scan and this is done at a late stage of the disease. Research shows that Alzheimer's in early stages may cause changes in markers such as tau and beta-amyloid that form abnormal brain deposits. Antibodies have been in development for the last 2 years and some initial results should be published soon. Breakthrough in this field would be a game changer for Bioventix.
This week the company surprised the market with a positive trading update for the FY ended 30/06/2022 which will be significantly above market expectations. So, if we add at least 10% to forecasts, we have a minimum of 140p eps ( likely more) giving an historic PER of 24 (likely lower than that). I’m assuming a very reasonable c 20% growth for the current financial year to 30/06/2023 which will put the shares on a PER below 20 and a dividend yield of at least 4%. Again, this valuation is more than reasonable given the prospects and market conditions.
In an increasingly difficult macro climate where it’s getting tougher by the day to find reliable income growth in the small cap space, Bioventix stands out head and shoulders above the rest due to its defensive and predictable annuity type revenue as well as outstanding management. We’re at the beginning of a new and exciting growth phase.