Bioventix: 67% Margins From Monoclonal Antibodies

06 May 2015
By Maynard Paton

Today I’m continuing my hunt for Watch List shares with a look at Bioventix (BVXP).

Here are the initial attractions that prompted this research:

Super profitability: Operating margins were a stratospheric 67% in 2014
Asset rich: The balance sheet carries net cash and freehold property
Owner management: The chief exec owns 12% of the business

As usual, I’m applying a question-and-answer template to help me pinpoint companies that match the criteria set out in How I Invest. I’m looking for as many Yes answers as possible.

Activity: Developer and manufacturer of sheep monoclonal antibodies
Website: www.bioventix.com
Share price: 850p
Shares in issue: 5,050,931
Market capitalisation: £42.9m

Does the business boast a respectable track record?

Yes.

BVXP was established in 2003 and creates and supplies monoclonal antibodies to companies that manufacture blood-testing machines. The group’s products are used in tests for heart disease, fertility, thyroid function and vitamin D deficiency.

BVXP joined ISDX during 2010 and migrated to AIM during 2014. My financial archives stretch back to 2006, when revenues were just £594k and operating losses were £4k. By 2014, however, revenues had reached £3,535k and operating profits were £2,372k.

The growth rate since the initial ISDX flotation has been impressive:

	5 years to 2014
Sales CAGR	16.5%
Operating profit CAGR	19.2%
Dividend per share CAGR	24.5%*

(*4 years to 2014) 

BVXP’s record is not perfect, though.

During 2007, turnover fell about 10% and losses widened, while during 2010 profits dropped from £984k to £775k. I’m disappointed that the associated annual reports did not explain the reasons for those setbacks.

The dividend has made dependable progress over time, with the payout marching from 10p to 24p per share between 2010 and 2014.

Year to 30 June	2010	2011	2012	2013	2014
Revenues (£k)	1,578	1,974	2,384	2,706	3,535
Operating profit (£k)	775	1,080	1,495	1,809	2,372
Costs of listing on ISDX/AIM (£k)	(96)	-	-	-	(169)
Finance income (£k)	3	4	11	12	28
Pre-tax profit (£k)	682	1,084	1,506	1,821	2,231
Earnings per share (p)	11.2	17.6	24.6	30.3	36.1
Dividend per share (p)	10.0	11.0	12.1	14.5	24.0

Exceptional items from the last few years have related only to admission fees to ISDX and AIM.

Has the business grown mostly without acquisition?

Yes.

BVXP has not paid a penny on acquisitions since at least 2006.

Has the business mostly self-funded its growth?

Yes.

BVXP’s only external funding since 2006 occurred in 2010, when the group received £1m following the conversion of a convertible loan note. However, BVXP did generate free cash that year — and in fact has added to its cash pile every year since 2008.

Overall, the latest balance sheet displays share capital of £310k versus earnings retained by the business of £4,925k.

Does the business possess an asset-strong balance sheet? 

Yes.

At the last count, cash was £3,795k (75p per share) while debt was zero. A bonus is freehold property with a book value of £382k.

Does the business convert profits into free cash?

Yes.

Year to 30 June	2010	2011	2012	2013	2014
Operating profit (£k)	775	1,080	1,495	1,809	2,372
Depreciation and amortisation (£k)	47	46	43	44	31
Cash capital expenditure (£k)	(31)	(11)	(17)	(21)	(2)
Working-capital movement (£k)	(86)	(62)	(69)	(513)	(546)
Net cash (£k)	1,349	1,531	2,179	2,586	3,351

The last five years have seen minuscule amounts spent on capital expenditure and an acceptable level of working-capital movements given the uplift in profits.

(BVXP services a small number of much larger companies, so I am pleased the group is on top of outstanding customer payments — trade debtors represent a very manageable 34 days of revenue.)

Does the business enjoy a competitive advantage?

Yes.

BXVP claimed within its AIM admission document that it was the only company producing sheep monoclonal antibodies, and such antibodies apparently provide better blood-test results than traditional mouse-based antibodies. Operating margins were 67% during 2014 and have topped 39% since the group became profitable in 2008.

(I should state that BVXP does pay a third party to use “patented manufacturing technology” to develop a particular antibody. So not everything here has been created in-house. But the group’s margins are sufficiently high for me to assume the business has been built generally upon proprietary assets.)

Does the business produce a respectable return on equity?

Yes.

Return on average equity for 2014 was £1,815k/£4,720k = 38%. Stripping out the group’s cash from the equity base gives a figure in excess of 100%. My sums for previous years show similarly eye-popping results.

Does the business employ capable executives?

Yes.

Chief executive Peter Harrison led a management buy-out during 2003, has been in charge ever since and can therefore claim responsibility for the group’s impressive growth and development.

Mr Harrison is in his mid-50s, so I trust a succession plan is not an obvious requirement at present.

Does the business employ good-value-for money executives?

Yes.

Mr Harrison is the sole BVXP executive and his current wage is £120k — quite reasonable for a £2m-profit business. I couldn’t find any references to executive bonuses, but that may be due to BVXP’s minimal annual-report disclosure.

Does the business employ owner-orientated executives?

Yes.

Mr Harrison enjoys a 12%/£5m stake, although he has sold about a quarter of his holding since the shares joined AIM. Mr Harrison’s latest disposal took place last week at 800p and was “due to institutional demand”.

The staff option scheme looks small at present, with potential dilution at less than 2%.

Does the business enjoy reasonable growth prospects?

Probably.

Interim results issued in March showed revenues up 28%, earnings up 32% and the dividend up 15%.

The board’s commentary was upbeat (my bold):

“The core business has remained robust with additional growth coming from our vitamin D antibody vitD3.5H10. We have reported previously on our positive outlook for vitD3.5H10 and revenue from this product has continued to grow from antibody sales and from royalties as customer products (assays for vitamin D deficiency) reach markets around the world. More customer product launches have now taken place in the valuable US market and this has been a significant contributing factor such that this vitamin D antibody has now become the largest revenue stream for the Company.”

Plus, the 2014 annual report did reveal the following “future developments”:

“On-going pipeline development has resulted in new antibodies being supplied to customers in the form of evaluation samples as follows:

– androstenedione (an androgenic steroid similar to testosterone)
– TSH (thyroid stimulating hormone)
– T4 (thyroxine, a thyroid hormone)
– estriol (an estrogen)

Over the next year, we expect that new antibodies will be added to our portfolio as follows:

– BNP (similar to NT proBNP for heart failure testing)
– p24 (part of HIV testing protocols)
– PTH (parathyroid hormone testing)”

Does the share price stand a good chance of becoming a bargain?

Not in the short term.

Operating profits are currently £2,672k and after applying the 15% tax seen within the latest interim results, I get possible earnings of about 45p per share.

Subtract the aforementioned 75p of net cash from the 850p share price and BVXP’s enterprise value is 775p per share. The potential P/E on that EV is 775p/45p = 17. Not an obvious bargain. The 25.4p trailing dividend supports a 3% income.

Is it worth watching Bioventix?

I hope so.

Because let’s face it, there are very few quoted businesses around that offer vast margins, cash-rich books, decent cash flow, an owner-friendly boss and appealing growth prospects.

All those positives no doubt explain why these shares seem to trade at 17x profits.

But you never know — things could go wrong at BVXP. Here are three reasons for possible disappointment:

i) The vitamin D tests dry up:

Within its latest results, BVXP acknowledged there were some doubts about the growing number of vitamin D tests:

“However, there are […] experts in the field who argue that this strategy of vitamin D testing and supplementation has not yet actually been demonstrated to be of overall patient benefit. There is ongoing research around the world to investigate this area of medicine further and those involved in the vitamin D field – such as Bioventix – will continue to monitor the evolution of the science with interest.”

ii) The loss of a large customer:

BVXP’s has admitted its “core customer base” consists of only “five large multinational diagnostics companies”.

One of those five disappearing could hurt profits significantly.

iii) Staff are poached or demand greater wages:

BVXP employs only 13 people and the average employee cost the firm just £45k last year.

I can’t believe the present wage structure in this type of scientific business is sustainable, and I wonder if higher salaries will one day be needed to keep everyone happy — which in turn may dent those incredible margins.

(For the record, I also found it odd that BVXP continues to present its accounts in ye olde UK GAAP (and not IFRS) and that it has used three different auditors since 2009.)

Whether or not these or other mishaps ever occur is anyone’s guess.

Anyway, for now I shall keep watch on BVXP and hope for some bad news that thumps the share price and provides an attractive buying opportunity. But given the present quality of the company, I admit I might be in for quite a long wait!

Maynard Paton

Disclosure: Maynard does not own shares in Bioventix.