Bioventix (BVXP) is one of the more interesting newcomers to AIM. 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). The recent move to AIM should raise the firm’s profile among investors in due course.
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, Bioventix 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 has four antibodies which have been licenced and are expected to reach market between now and 2016. The most interesting of these is Troponin, which is being developed in conjunction with a major diagnostic company. Troponin is useful as a diagnostic marker for various heart disorders, including a highly specific marker for myocardial infarction or heart muscle cell death. Given that heart disease is one of the biggest killers in the developed world, this could prove a very lucrative product for Bioventix.
Numbers
The company has a very strong track record of growth. Over the past five years, revenues have quintupled, albeit from a low base, at a CAGR (compound annual growth rate) of 13.2% and pre-tax profits have grown at a CAGR of 20.3%. Earnings per share have increased by 134% since 2009. Most recently, results for the six months to 31st December 2014 saw pre-tax profits jump by 32% to £975,000, on revenues up 28% at £1.51 million, mainly due to an increase in sales of physical antibodies as well as receipts from product royalties which now account for the majority of total revenues. Profits after tax rose at a slightly less pronounced rate of 28% due to a slightly higher tax charge, with earnings per share also up by 28%, at 16.03p. On the balance sheet, cash levels rose to £2.88 million as at 31st December 2013, up from £2.31 million a year earlier. This was after a net inflow of £869,000 from operations, less tax paid (£158,000) and dividends paid (£437,000). An interim dividend of 9.6p per share was declared, up by 65% on last year’s 5.8p per share payment.
What’s it worth?
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 and lack of debt leave the financial position looking solid.
For the financial year just ended (30th June 2014), broker finnCap forecasts an adjusted pre-tax profit of £1.9 million on sales of £2.8 million, which should deliver EPS of 32.2p. For FY15 its estimates are £2.2 million, £3.2 million and 37.7p respectively. It also forecasts a 10% rise in the annual dividend, which should see a payment of 16p for FY14, rising to 17.6p for FY15. On these estimates, the shares trade on a historic rating of 18.3x falling to 15.6x, with a dividend yield of 2.7% rising to 3%. While it should be noted that an investment in an early-stage company like Bioventix is high risk, we believe the long-term growth prospects to be compelling.