Bioventix is James Faulkner’s small cap of the week

As predicted at t1ps.com, antibody supplier Bioventix (BVXP) has enjoyed a strong start to its AIM listing. A specialist in supplying sheep antibodies to the diagnostics industry, this little company already has an excellent track record of profitability and growth behind it – and we expect the strong performance to continue as new products reach the market in the years to come. Bioventix operates a very tight ship, with a firm lid kept on costs, good cash conversion and a healthy cash balance (and no debt). Its maiden set of results demonstrated further growth in the product pipeline, which should underpin growth in the future.

The business…

Bioventix occupies an interesting little niche that could prove a good place to be in the coming years. The company develops and supplies sheep monoclonal antibodies for use in the in vitro clinical diagnostics market. These antibodies are then used to develop diagnostics assays, of which there are currently six that use Bioventix antibodies on the market. Bioventix receives fees during the development process, followed by a perpetual royalty on sales of any diagnostic that utilises a Bioventix antibody. On average it takes around one year for Bioventix to develop an antibody, and then a further two to four years for the client to develop the relevant assay, gain regulatory approval and get the product to market. However, the firm already has a strong stable of launched antibodies, as well as an exciting pipeline of future products that should underpin growth going forward.

In some cases Bioventix may be instructed by a client to generate a specific antibody, in which case it is paid for the development. However, management also make speculative decisions to generate antibodies based on the company’s own market knowledge of what is of interest to industry at any given time.

Thereafter there are two options open to the client. Either they pay Bioventix to manufacture the antibody for them (at a rate of around £300/mg protein), after which Bioventix receives a single-digit royalty on assay sales; or the client manufactures the antibody itself and pays an annual access fee to Bioventix (usually in the order of several tens of thousands of pounds) accompanied by the usual single-digit royalty on sales. Either way the business model is highly cash generative given the annuity-like nature of the business.

One key point to bear in mind is that most of the firm’s commercial agreements are non-exclusive in nature, which means antibodies can be licenced multiple times with different companies, thereby providing multiple revenue streams.

For example, the firm’s Vitamin D antibody, which was developed at Bioventix’s own risk, has subsequently been licensed to 12 diagnostic companies, of which two have launched assays to date. Regulatory filings reveal that regulatory approval of some assays containing Bioventix’s antibodies has only been secured in relatively recent times, which suggests the firm’s growth profile will be strong going forward. In terms of the pipeline, the firm expects three new antibodies will be added to its portfolio over the next year (BNP (similar to NT proBNP for heart failure testing), p24 (part of HIV testing protocols), and PTH (parathyroid hormone testing)), while on-going pipeline development has resulted in new antibodies being supplied to customers in the form of evaluation samples (androstenedione (an androgenic steroid similar to testosterone), TSH (thyroid stimulating hormone), T4 (thyroxine, a thyroid hormone), and estriol (an estrogen)).

Numbers…

Over the five years to 2013, revenues quintupled, albeit from a low base, at a CAGR (compound annual growth rate) of 13.2% and pre-tax profits grew at a CAGR of 20.3%. This impressive track record was maintained in the year to June 2014, with revenue up 31% to £3.5 million, gross profit up 28% to £3.2 million, and profit before tax (after flotation and staff option costs) up 22% to £2.2 million. In addition, the firm continues with its very generous dividend policy having declared a second interim dividend of 14.4p per share, giving a total of 24p per share for the year (c.3.3% yield).

The outlook remains very positive, with niche opportunities arising where other antibody technologies fail to deliver the required assay (i.e. test) performance, resulting in an opportunity for the company to supply SMAs (sheep monoclonal antibodies) with superior properties.

We believe Bioventix is a highly scalable business which operates a very lean business model, which should see profits grow in the coming years as new royalty streams come on line. The fact that the firm also pays a meaningful dividend and operates a progressive dividend policy also shows that earnings are of a high quality and adds an income element to the investment case. Meanwhile, the strong cash position (£3.35 million at period end) and lack of debt leave the financial position looking solid.