Bioventix: Satisfactory 2019 Results Reveal (Yet Another) Special Dividend And Indicate Growth During 2020-2025 Depends Entirely On Troponin

17 December 2019
By Maynard Paton

Results summary for Bioventix (BVXP):

• Satisfactory double-digit growth spearheaded by notable demand for the group’s main antibody.

• Progress beyond 2020 now appears dependent entirely on the new troponin product, revenue from which remains low.

• An unsettling tweak to management’s outlook suggests the pipeline antibodies may require a further five years of development.

• The accounts remain in excellent shape with terrific margins, appealing equity returns and minimal reinvestment requirements that have prompted yet another special dividend. 

• The valuation remains rich with an underlying P/E of 28. I continue to hold.

Contents

• Event links and share data
• Why I own BVXP
• Results summary
• Revenue, profit and dividend
• Vitamin D
• Other established antibodies
• Troponin
• Pipeline developments
• Pipeline timescale
• Financials
• Valuation

Event links and share data

Event: Preliminary results and presentation for the twelve months to 30 June 2019 published 21 October 2019

Price: 3,250p
Shares in issue: 5,142,674
Market capitalisation: £167m

Why I own BVXP

• Develops diagnostic antibodies for blood-test machines, direct competition for which is limited due to regulatory hurdles, scientific innovation, customer switching costs and revenue ‘lock in’ through ‘captive’ hospital end-customers.

• Boasts founder/entrepreneurial chief exec who has overseen an attractive growth record, retains an 8%/£14m shareholding and has declared four special dividends.

• Employs asset-light royalty model that encompasses terrific margins, super returns on equity, decent cash flow and no debt.

Further reading: My BVXP Buy report | All my BVXP posts | BVXP website

Results summary

Revenue, profit and dividend

• Bumper first-half figures issued during March had already supported the prospect of a very satisfactory full-year performance.

• Excluding back-dated royalties collected during 2018, revenue advanced 16% and operating profit advanced 14% to deliver record results for the ninth consecutive year:

Year to 30 June	2015	2016	2017	2018	2019
Revenue (£k)	4,333	5,517	7,246	8,752	9,290
Operating profit (£k)	3,098	4,205	5,716	6,833	6,931
Other items (£k)	-	-	-	-	-
Finance income (£k)	8	14	56	34	35
Pre-tax profit (£k)	3,106	4,219	5,772	6,867	6,965
Earnings per share (p)	50.7	69.2	96.4	110.2	114.0
Dividend per share (p)	32.6	42.5	51.0	61.0	73.0
Special dividend per share (p)	-	20.0	40.0	55.0	47.0

• Progress slowed during the second half. 

• H2 revenue and profit gained 11% and 8% respectively, versus c24% advances reported for H1:

	H1 2018	H2 2018	FY 2018		H1 2019	H2 2019	FY 2019
Revenue before back-dated royalties (£k)	3,523	4,457	7,979		4,365	4,925	9,290
Back-dated royalties (£k)	772	-	772		-	-	-
Revenue (£k)	4,295	4,457	8,752		4,365	4,925	9,290
Operating profit before back-dated royalties (£k)	2,599	3,461	6,060		3,236	3,695	6,931
Back-dated royalties (£k)	772	-	772		-	-	-
Operating profit (£k)	3,372	3,461	6,833		3,236	3,695	6,931

• Progress was also influenced by the absence of revenue from a now-terminated product. 

• The terminated product once generated annual revenue of approximately £1m, and I estimate it contributed revenue of £125k during the comparable year:

	H1 2018	H2 2018	FY 2018		H1 2019	H2 2019	FY 2019
Revenue before back-dated royalties (£k)	3,523	4,457	7,979		4,365	4,925	9,290
Loss of product revenue* (£k)	(125)	-	(125)		-	-	-
Revenue before back-dated royalties and loss of product (£k)	3,398	4,457	7,854		4,365	4,925	9,290

(*estimated)

• Exclude the terminated product, and 2019 revenue perhaps gained 18%.

• Another factor to consider is currency movements. 

• Just 5% of 2019 revenue was generated within the UK, with 19% from Europe and perhaps 50% or so from the United States to leave approximately 26% from elsewhere.

• BVXP has never disclosed its revenue growth on a constant currency basis.

• BVXP does not undertake any currency hedging arrangements.

• I understand BVXP’s royalty income (representing 68% of revenue) is translated into GBP when overseas customers pay their royalties during February and August.

• The USD had strengthened 7% against the GBP during the twelve months to February 2019 and the twelve months to August 2019.

• Currency movements may therefore have contributed up to 7% of the aforementioned 18% revenue advance (adjusted for back-dated revenue and the terminated product).

• At least the dividend increase was a straightforward 20%, with the final payout raised 19%.

• The results highlight was the commendable declaration of a 47p per share special dividend — the fourth extra payout during the last four years.

• In fact, BVXP has effectively distributed its entire earnings as ordinary or special dividends between 2016 and 2019. 

Vitamin D

• BVXP’s vitamin D antibody remains the group’s best-seller — the product represented 46% of 2019 revenue:

• Vitamin D full-year revenue improved by 27%, which BVXP said had “surpassed our expectations”

• BVXP expressed some caution about vitamin D growth (my bold):  

“Despite this pleasing news, we are increasingly sure that price pressure… is balancing the increase in market volume leading to a flattening total market in US Dollar terms. This is clearly evidenced by a number of our vitamin D customer revenue streams which, after a period of significant growth now appear to have reached a plateau.”

• The “plateau” reference about vitamin D was used within the previous two annual statements:

“…we nevertheless perceive a plateauing of the vitamin D testing market.” (2018)

“Our prudent belief is that the vitamin D market will plateau in the near future”. (2017)

• Within the 2016 annual statement, BVXP said (my bold): “we remain optimistic that revenues from vitD3.5H10 will continue to grow modestly over the next year.”

• Despite the references to “plateau” and “modestly“, vitamin D revenue has soared an estimated 93% during the last three years. 

• Perhaps BVXP likes to under-promise and over-deliver.

• Or perhaps BVXP has been surprised by “certain individual customers”. This results RNS stated:

“An element of the growth in sales this year has come from certain individual customers who appear to be performing well in the downstream market with our antibody.

Diazyme (San Diego, US) have made progress with their vitamin D assay which has the attractive feature of being run on general “chemistry” analysers. 

Boditech (South Korea) is another Bioventix customer who use the vitD3.5H10 antibody and has achieved significant success in the growing Asian vitamin D market with their vitamin D assay.”

• Or perhaps vitamin D revenue will actually plateau during 2020.

• I understand BVXP’s royalties on vitamin D remain at 4% to 5% regardless of the customer. Other BVXP antibodies earn 2% royalties.

• I also understand that vitamin D ‘plateauing’ could mean the associated growth reduces to wider industry levels of between 5% and 10% per annum, rather than stagnate completely.

Enjoy my blog posts through an occasional email newsletter. Click here for details.

Other established antibodies 

• Five of BVXP’s other six “established core” antibodies increased their revenue during 2019: 

• Total revenue from the six gained 14% to almost £4m.

• BVXP once again claimed “the increase in most of these core antibodies that are sold to a number of customers in many countries does not have a single explanation over and above the 5-10% increase in the global diagnostics industry that is reported by third party analysts.”

• Revenue from the NT proBNP antibody will expire during 2021. 

• NT proBNP’s £1.25m revenue represented 13% of total group revenue:

Year to 30 June	2016	2017	2018	2019
Revenue
Vitamin D (£k)	2,200	2,750	3,400	4,300
Troponin (£k)	-	-	-	120
Established antibodies (£k)	1,600	2,100	2,450	2,730
Contract NT proBNP (£k)	??	610	1,050	1,250
Terminated product (£k)	800	1,000	125	-
Other products (£k)	917	786	1,727	890
Total (£k)	5,517	7,246	8,752	9,290

• All other sources of revenue will have to expand by a collective 16% to make up the forthcoming £1.25m shortfall.

Troponin

• BVXP’s new troponin antibody — used to help detect potential heart attacks — produced 2019 revenue of just £120k. I understand £50k was earned during H1 and £70k was earned during H2.

• The 2018 statement admitted that troponin sales had been “below our expectation”.

• The 2017 statement claimed the slow troponin take-off was due to hospital staff undertaking an “education period”: 

“Whilst it is clear that a quicker test will be of benefit to patients, clinicians and hospital budget holders, it is also clear that there is likely to be an education period during which clinicians become comfortable with a significant change in diagnostic practices”. 

• Back in 2016, BVXP had talked of “significant” troponin sales by 2018 (my bold):

“Troponin remains an important product for Bioventix’s future performance as we expect to commence significant sales during the financial year 2017/2018 and we anticipate that this revenue will offset revenues of £0.7 million – £0.8 million from another product which will terminate during this period.”

• For what it is worth, BVXP’s house broker reckons troponin revenue can increase to £0.5m for 2020, then to £1.1m for 2021 and then to at least £3m by 2025 (click here to read the full broker note). 

• According to investment blogger Roger Lawson, BVXP management described the near-term troponin forecasts as “reasonable” at the recent AGM.  

• BVXP will only say in an RNS that troponin is expected to have a “significant influence” on revenue.

• The results presentation indicated growth beyond 2020 could be dependent entirely on troponin (see Pipeline timescale below).

Pipeline developments

• BVXP’s product-pipeline chart contained two changes:
  • Biotin was demoted from having a “high” potential value to a “medium” potential value, and;
  • Pollution biomonitoring was introduced and marked as having a “high” potential value and a “medium” probability of success:

• The biotin change seemed to be caused by a large potential client (which I understand to be Roche) creating its own antibody (my bold):

“We believe that the largest potential customer for these antibodies has solved their particular biotin problem through internal means and no longer represent a sales opportunity for Bioventix. However, we know that other customers exist reassuring us that a modest potential market exists for these biotin interference products should we find a technical solution.”

• BVXP said that the other potential customers would receive early biotin antibodies by the end of this month.

• Pollution biomonitoring sounds intriguing — the project tests for the effects of air pollution on people:

“Currently, atmospheric pollution is monitored using static air analysers but direct human exposure or “biomonitoring” is not routinely performed as no convenient tests exist. We are currently making antibodies and prototype tests that could be used in such direct human exposure biomonitoring. This project is outside our normal clinical focus but we speculate that human pollution biomonitoring could become significant in the years to come as populations become increasingly aware of the impact of pollution on health.”

• Given the position on the development chart, pollution biomonitoring appears to be BVXP’s best risk/reward opportunity within the pipeline.

• Among the other pipeline activities:
  • A development partner ought to confirm next year whether secretoneurin could be a useful cardiac biomarker, and;
  • £300k has been invested in another development partner that will (one day) assess the amyloid antibody for dementia testing. 

• The secretoneurin and amyloid partnerships have already been going for more than three years. 

• Whether any of BVXP’s pipeline developments ever bear fruit remains to be seen.

• BVXP says an antibody can take between four and ten years to go from the laboratory to earning an income (that is, assuming the antibody actually becomes commercially viable).

• For perspective, development of BVXP’s troponin antibody started during 2006 and is only now earning a (small) return:

• Bear in mind, too, that BVXP has confessed that “there are no antibodies in the future pipeline that are comparable to troponin in clear potential value and the ability to influence revenues in the next few years.”

Pipeline timescale

• This results RNS contained an unsettling change. 

• The outlook commentary referred to “2025/2030”:

“Beyond that, growth will be linked not only to the troponin project but also our continued research activities as we look to seed additional projects that will germinate in the period 2025/2030 to create additional shareholder value.”

The outlook commentary within the 2018 results used the exact same text but instead referred to “2020/2030”:

“Beyond that, growth will be linked not only to the troponin project but also our continued research activities as we look to seed additional projects that will germinate in the period 2020/2030 to create additional shareholder value.”

• The outlook commentary within the 2017 results also referred to “2020/2030”:

“Beyond that, growth in the period 2018/2020 will be linked to our troponin project and the success of Siemens in their product launches around the world. We continue our research activities as we look to seed additional projects that will germinate in the period 2020/2030 creating additional shareholder value.”

• The outlook commentary within the 2016 results also referred to “2020/2030”:

“Beyond that, growth in the period 2017 2020 will be linked to our troponin project and the success of Siemens in their product launches around the world. We continue our research activities as we look to seed additional projects that will germinate in the period 2020/2030 creating additional shareholder value.”

• The outlook commentary within the 2015 results also referred to “2020 to 2030”:

“The challenge for our continued research activities will be to seed additional projects that will germinate in the period from 2020 to 2030 to allow us to create further shareholder value.”

• BVXP’s additional pipeline projects had been expected to “germinate” between 2020 and 2030.

• Now BVXP says the expected germination period is 2025 to 2030.

• The timeframe change implies the current pipeline of products may require a further five years of development before potentially becoming commercial. 

• BVXP’s presentations partly explain what may have occurred.

• The slides from March’s first half presentation included these bullet points:

• The slides for these annual figures included these bullet points:

• The germination period of 2020-2030 has been split into two, with 2020-2025 progress dependent on troponin and 2025-2030 progress also dependent on the pipeline developments.

• The RNS text before 2019 suggested the development projects could have become commercial between 2020 and 2025 — which is how I interpreted the text.

• Mind you, perhaps BVXP has simply clarified the germination period — and the development projects were never likely to become commercial before 2025 anyway. 

• Nonetheless, seemingly minor changes in outlook commentaries can be instructive.

• Example 1) Andrews Sykes (ASY), which included the phrase “cautiously optimistic for further success” within the group’s outlook statement for six years until 2018. 

• ASY’s 2018 results then omitted the phrase, implying management was not “cautiously optimistic for further success” — at least for 2019. 

• Sure enough, first-half profit for 2019 dropped 25%.

• Example 2) Tasty (TAST), which used the phrase “since the year end trading has been in line with expectations” within the group’s outlook statement for four years until 2016.

• TAST’s 2016 results then included the word “broadly [in line]” — suggesting trading was not quite up to expectations.

• Sure enough, the firm’s expansion plans started to slow, and falter badly thereafter.

Financials

• BVXP’s accounts remain in extremely good shape:

Year to 30 June	2015	2016	2017	2018	2019
Operating margin* (%)	71.5	76.2	78.5	76.0	74.6
Return on average equity (%)	43.3	47.2	53.6	47.5	53.7

(*before back-dated royalties)

• The 75% operating margin underlines the lucrative nature of BVXP’s royalty income, although the margin was the lowest since 2015. 

• BVXP hinted the margin might improve during 2020:

“The cost of sales has been influenced (i.e. increased) to some extent by a reduction in antibody stocks. This is a transient effect that should be reversed during 2019/20 of approximately £200k on external contract chemistry services linked to the biotin and pollution projects described below.”

• BVXP’s return on equity figures remain attractive.

• The incremental returns are impressive. During the last five years, earnings have advanced by £4.0m while shareholder equity (i.e. net assets) has increased by £5.6m. The resultant incremental return on equity is therefore £4.0m / £5.6m = a stunning 71%.

• The 71% calculation is a result of BVXP lifting its earnings while maintaining a similar level of shareholder equity since 2017:

Year to 30 June	2014	2015	2016	2017	2018	2019
Earnings (£k)	1,815	2,557	3,494	4,922	5,663	5,859
Shareholder equity (£k)	5,236	6,584	8,207	10,144	11,011	10,826

• BVXP has kept its shareholder equity at the £11m mark following the payment of ‘surplus’ earnings as special dividends.

• BVXP does appear to be one of those very special businesses that can lift earnings without requiring too much extra capital. 

• Cash in the bank fell by £0.4m during the year. Earnings of £5.9m were offset by total dividend payments of £6.2m plus a £0.1m partner investment.

• Cash working-capital movements were minor during 2019:

Year to 30 June	2015	2016	2017	2018	2019
Operating profit* (£k)	3,098	4,205	5,691	6,060	6,931
Depreciation (£k)	46	42	39	58	76
Cash capital expenditure (£k)	(114)	(21)	(22)	(108)	(85)
Working-capital movement (£k)	(279)	(581)	(570)	(539)	(47)
Net cash (£k)	4,131	5,380	6,167	6,987	6,537

(*before back-dated royalties)

• During the last five years, just £2m has been needed for additional working capital from an aggregate operating profit of £27m. 

• Capital expenditure was very modest, too, although £300k will be spent during 2020.

• Year-end cash of £6.5m surpassed the “approximately £5m”  that BVXP says is “sufficient to facilitate operational and strategic agility with respect to possible corporate or technological opportunities that could arise in the foreseeable future.”

• The ‘excess’ cash has gone towards funding a 47p per share/£2.4m special dividend. 

• The balance sheet carries no bank debt and no pension complications.

Valuation

• BVXP’s outlook remarks included (my bold): 

“Looking ahead to the future, we keenly anticipate the roll-out of high sensitivity troponin assays and modest growth from additional vitamin D and other antibody sales and royalties.”

• The company does like to use the word “modest”.

• Last year BVXP said: 

“We are delighted to be able to report such positive news for the current year. Looking ahead to the future, we keenly anticipate the roll out of the Siemens troponin project and modest growth from additional vitamin D antibody sales and royalties.”

• Here is the outlook from the year before (my bold):

“For the financial year 2017/18, our challenge will be to make up for the approximately £1 million of lost sales mentioned above with revenues from the newly launched Siemens troponin project and modest growth from additional vitamin D antibody sales and royalties.”

• And the year before that (my bold):

“Furthermore, we remain optimistic that further modest growth next year will come from additional vitamin D antibody sales and royalties.”

• And the year before that (my bold):

“Furthermore, we remain optimistic that further modest growth in the next two years will come from additional vitamin D antibody sales and royalties.”

• Each time the “modest” growth projection turned into a welcome, double-digit profit advance.

• At some point, BVXP will actually deliver modest growth of perhaps a single-digit advance. Remember, H2 profit gained only 8% this year. 

• BVXP’s 2019 operating profit of £6.9m taxed at the 16% rate applied within these results gives earning of £5.8m or 114p per share.

• Subtracting the £6.5m/127p per share cash position from the 3,250p share price gives an enterprise value of 3,123p per share. 

• Dividing that 3,123p by the 114p per share earnings estimate gives an underlying trailing P/E of almost 28.

• Assume the cash position is not surplus to requirements — remember, BVXP wants to keep £5m “to facilitate operational and strategic agility with respect to possible corporate or technological opportunities that could arise in the foreseeable future” — and the trailing P/E is almost 29.

• Either way, the rating is undeniably rich at close to twice the market average. 

• However, BVXP’s growth history, operating margin and return on equity are perhaps (at least) twice as attractive as the market average.

• BVXP’s presentation (unusually) includes broker forecasts, which predict revenue growing by 9% and pre-tax profit improving 10% for 2020 (in green):

• Last year the broker expected revenue of £9.0m and an adjusted pre-tax profit of £7.1m for 2019 (in green):

• The revenue prediction was £0.3m below the actual £9.3m acheived.

• The pre-tax profit prediction was £135k above the actual £7.0m acheived.

• The trailing 73p per share ordinary dividend supports a 2.2% yield.

• Given BVXP has effectively distributed all of its earnings as ordinary and special dividends since 2016, the 3.5% yield based on the 114p per share earning guess may be a more appropriate income to assess the valuation. 

Maynard Paton

PS: You can receive my blog posts through an occasional email newsletter. Click here for details.

Disclosure: Maynard owns shares in Bioventix.

Share this post: on Twitter on Facebook on LinkedIn