Current Trade: Anteo Diagnostics (ADO.AX)
I have traded ADO in small quantities on and off over the past 12 months, however I have now decided it's time to get serious and put half my portfolio into the stock. Here's why.
About Anteo Diagnostics (ADO)
ADO is a biotechnology company that has developed a molecular "glue" that significantly improves pathology tests (Mix&Go). The company has licensed the product to two major healthcare companies -- albeit for small revenues so far. This patent protected technology has the potential to earn ADO $100m's per annum through product sales and royalties with limited expenses.
Quick Facts
ASX Code: ADO.AX Shares on issue: 762m Options: 58m Fully diluted: 820m Fully diluted market cap (@ 0.076): $62.32m Cash: $6.8m Cash burn: ~$700k / quarter Liquidity: Very Good
Anteo Technology - Mix&Go
Anteo's primary technology is the Mix&Go product. According to the company, Mix&Go is a novel "glue" - like a two sided velcro. It provides a better molecular surface for antibodies to bind to. This results in the following benefits:
Faster, easier and less variable than current practices
Improve sensitivity of tests, enabling previously impossible tests
Reduction in COGS
Better and earlier disease detection
Simplifies and speeds up R&D activities - bringing products to market quicker
Less raw materials required (Up to 80% reduction)
For example, Mix&Go can be used to enhance IVD (Pathology) tests. This is where you donate some blood which is sent to a laboratory and tested for known antibodies which identify particular medical problems. Mix&Go can be used to enhance existing IVD tests -- or enable new ones that are not currently possible.
Potential Markets
The company has outlined the following potential markets in the healthcare sector:
IVD (Pathology) - Bead manufacturers such as Dynal, Merck, Bangs, Seradyn. Test manufacturers / suppliers such as Roche, Beckman, Abbott, Dia Sorin, Ortho, bioMerieux
Healthcare Research - Membrane manufacturers (Pall, Millipore)
Point of Care - Test manufacturers / suppliers (Alere)
Molecular Diagnostics - Instrument manufacturers (Life Technologies)
Immunoprecipitation - Proteomics manufacturers / suppliers (GE Healthcare)
ADO has two signed contracts in the R&D sector and are talking to companies in the others, but are primarily targeting the IVD market due to its size and earnings potential.
The company has also outlined other potential applications for Mix&Go including; Solar cell production, Biosensors / Biochips, Verifiable product authenticity, Artificial cartilage.
Market Size
ADO is initially targeting the IVD market, which includes the $10 billion pa Immunoassays sector and the $2.4 billion pa molecular biology sector.
The other markets being targeted aren't as large, however the company plans to earn royalties on products using Mix&Go so there is potential for future blockbuster products to be developed that will earn additional revenue for ADO.
Current Contracts
ADO has licensed Mix&Go to two major healthcare companies - Bangs Laboratories and Merck. The agreement with Merck is over four years to manufacture two new bead based products for them to package and sell.
In February Bangs laboratories added Mix&Go to their best selling product - Silica Bind-IT. This was the second product offered by Bangs using Mix&Go and is a strong vote of confidence in the technology. Under this agreement, ADO receives double-digit royalties on product sales and revenues from sales of Mix&Go.
Patent Protection
The company takes patent protection very seriously. It currently has six families of patents filed in multiple jurisdictions, with eight patents granted and others pending.
Potential Earnings
The company summarised the potential value of Mix&Go in its May 2011 presentation:
The numbers above are annual revenues that ADO could potentially achieve across the various market segments.
As mentioned above, the company plans to earn royalties on products that utilise Mix&Go, so there is further blue sky potential above from the development of new products built on Mix&Go.
Future Commercialisation Progress
ADO is currently talking to over 60 companies at various stages of testing Mix&Go across the various healthcare sectors.
Recent company announcements have suggested the large IVD companies evaluating Mix&Go are taking a very rigorous and cautious approach as they intend to offer it across their whole product range.
Potential Valuation
ADO has earmarked a potential $600m pa market opportunity, which would be an amazing achievement, but take many years to reach. In reality, the true potential of this technology will take a long time to be realised - especially if it spawns new products not possible with existing technologies.
Alternatively, lets look at the scenario where a couple of the existing IVD market participants integrate Mix&Go across their entire product range. Such a goal could be achieved within the next 12 - 18 months. The IVD market is dominated by a few large participants which the company expects $30 - $150m could be generated on an annual basis.
Lets assume two players that make up a total of 20% of the $10 billion market sign up for Mix&Go - that's a $2 billion pa market. Southern Cross Equities produced a report on ADO in July 2010 (an excellent read) that assumed ADO could earn 10-20% on diagnostic sales down to 1-5% for the bigger products.
Lets assume ADO earns 2% on the $2 billion of sales, that equates to $40m pa in revenue to ADO. In such a scenario, the IVD companies would be performing their own manufacturing and simply paying a license fee to ADO for the technology, so ADO has no costs associated with this revenue (other than scientists helping utilise the technology effectively).
Lets assume ADO's expenses grow to $5m pa (currently ~$2.8m) then the company will have EBITDA of $35mpa. Assuming a PE of 20 (high growth company with lots of further earnings upside) ADO would have a market cap ~$700m = $0.85 / share fully diluted.
Potential Timeline
Here is where things get murky. Twelve months ago the CEO stated that ADO was "imminently close" to signing a large IVD customer. Accordingly ADO ran up to $0.10 fairly quickly in December 2010. As it turns out, this was wildly optimistic as the level of testing and analysis conducted by these companies is still taking place. This is partly because these IVD companies raised the stakes by planning to introducing Mix&Go across their whole product range. Accordingly ADO fell back to recent lows around $0.06.
Recent announcements have hinted that the IVD companies have been conducting stability testing as a final step in validating the shelf life of products using Mix&Go. This process typically takes 6 months, which is almost up, and may explain the recent price movement heading back towards the $0.10 area.
Accordingly, I don't feel comfortable providing any estimate timeline other than to highlight that the company is in various stages of commercialisation discussions with over 60 companies. At any time the company could announce a deal with a small R&D company or a large IVD company. These processes take a lot of time, but one would assume that things are getting to the pointy end by now.
Company Risks
Unlike other companies I have posted recently, liquidity is not an issue with anywhere from $20k - $1m in shares traded / day.
As stated by the company, they have enough cash to satisfy current demands until the end of 2013 - when they should be cash flow positive (or failed to commercialise Mix&Go).
The biggest risk is an insurmountable problem being identified with Mix&Go. At this stage, this seems unlikely as there are two companies already selling Mix&Go who conducted extensive due diligence and another 60+ companies still evaluating the technology without any problems identified to date.
It's difficult to know if there will be much impact from the unfolding financial crisis in Europe. It could scare some companies away from taking a risk and implementing a new technology across their entire product range -- however the potential cost savings may encourage it.
Probably the biggest risk to longterm shareholders is a potential hostile takeover from one of the many companies evaluating the technology. Such an attempt may be successful and not allow shareholders to realise the full potential of Mix&Go. That being said, it may also start a bidding war... which is not really a risk :)
Summary
Mix&Go is a breakthrough technology and the company has made fantastic progress in marketing the product - opening its doors to scientists and researchers across the world. The success of this approach is highlighted by the numerous new leads ADO has obtained via word of mouth or companies looking to Mix&Go for a solution to their problems.
There is a huge market potential for Mix&Go, provided management can structure appropriate licenses and royalty agreements to give ADO shareholders a strong return on their investment.
Due to the game changing nature of the Mix&Go technology, I would expect that once a large IVD company takes it up, the others will follow very quickly to ensure they don't lose any competitive advantage.
I've outlined a fairly conservative scenario above which values ADO at $0.85 / share, which is > 10x the current share price. If there is a strong uptake by the 60+ companies ADO is in discussions with, I expect ADO will be measured in dollars, not cents.
As existing shareholders would know, this process will take time -- but it appears the wait could well be worth it.
Important Notes
Anteo Diagnostics is speculative in nature and none of the above may eventuate. It is likely that some (or all) of the assumptions outlined will prove to be inaccurate. Please read the About page for a full disclosure on this post, NOT being financial advice or a recommendation to buy or sell this stock.
Disclosure
I currently own shares in Anteo Diagnostics.
Useful Links
Anteo Diagnostics Website
Southern Cross Equities Report (30 July 2010)
Breakdown of IVD market share (2006)
Silica Bind-IT (Bangs Laboratories) - Scroll to bottom of page
Merck
ADO on HotCopper
12 Month Chart