James Faulkner on Bioquell: Benefitting from disease destruction

Infection control specialist Bioquell (BQE) seems to be having a spot of trouble living up to its motto of “eliminate doubt” lately, at least as far as shareholders are concerned. The shares, currently at 98.5p, are trading at the bottom of their historical range, despite the fact that the company has been receiving “significant interest” on the back of the Ebola outbreak in West Africa. The problem seems to lie with the fact that trading has historically been rather lumpy and unpredictable. However, the company is making progress with bringing a more recurring element into the business, and the balance sheet looks strong.

Bioquell’s hydrogen peroxide vapour (HPV) technology has been used to decontaminate Ebola patient rooms in three hospitals in the USA as well as in hospitals in the UK, France and Holland. Although the outbreak has only so far generated a “modest” increase in revenues, the firm is confident that its Ebola-related work has heightened awareness of the group’s capabilities. In its own words:

“Given the number of hospitals in Europe and the US who have used our technology it has helped establish our position as the “go to” suppliers of sophisticated bio-decontamination technology, when a customer wants to be confident that there are no viable micro-organisms left after the disinfection process. In addition, we now have a substantially broader range of prospective customers in the US and Europe who we believe will contact us in the event that they have a microbiological contamination problem, including issues associated with antibiotic resistant bacteria.”

While Ebola provides a short-term spotlight for the value of Bioquell’s products and capabilities, a more long-term underpinning comes in the sinister form of increasing cases of drug resistant microbial diseases, combined with fewer treatment options (no new antibiotics have been approved since 2011), which is causing an increasing number of deaths. 

In fact, each year 2 million people in the US get an antibiotic resistant disease resulting in 23,000 deaths and $20 billion in related costs – all numbers which are expected to grow in the future.

This is where Bioquell comes in. Its bio-contamination control technology is largely based around hydrogen peroxide vapour (HPV), which is highly efficacious at eradicating micro-organisms such as bacteria and viruses at room temperature. What’s more, the vapour is subsequently broken down using specialist catalysts to water vapour and oxygen (hence an extremely ‘green’ technology) at the end of the bio-decontamination process.

Until recently, Bioquell’s business model was largely predicated on equipment sales with few associated consumable revenues. However, since 2010, management has been working to reduce the proportion of equipment-related revenues and to increase the proportion of recurring revenues in the business. These recurring revenues are associated with the ICE-pod rental business, higher margin consumables (comprising hydrogen peroxide consumables as well as biological & chemical indicators) and the expansion of the specialist Room Bio-Decontamination Service (RBDS). All new HPV-related products have been engineered to incorporate the use of a captive hydrogen peroxide consumable. Good progress has also been made in securing the necessary regulatory approvals for the sale of its hydrogen peroxide consumables in a number of territories around the world.

On top of this, management has implemented a cost reductions plan which could save c.£1.4 million per annum. The plan involves changes to senior management (in US and China), a reduction in the R&D team and programme, a review of the patent portfolio, and consolidating the UK Biodecontamination businesses into one unit. Additionally, following the contractual dispute, management decided to no longer bid for larger Defence contracts, which should also help reduce the volatility of this part of the business.

Interestingly, broker N+1 Singer has not included the effects of the cost reduction plan into its forecasts, so presumably this could lead to upgrades in the event it is successfully executed.

Bioquell has some interesting and highly sought-after technology, although it has hitherto been a rather volatile business from year to year. With management taking steps to stabilise trading patterns along a more dependable model, there appears to be scope for upside in the future. However, it is very much a work in progress at present.