Anteo signs licensing agreement with eBioscience
Here are the key highlights from the announcement (emphasis mine):
Under the terms of the agreement, Anteo will supply Mix&Go®™ for use in the manufacture of biological reagents for all applicable markets in which the company operates. Anteo will receive an initial upfront payment, fixed revenue for Mix&Go®™ reagent supplied, and a royalty fee paid quarterly based on a percentage of worldwide net sales.
“Anteo will receive an immediate upfront payment and we consider that a successful partnership with eBioscience will significantly contribute towards allowing us to meet our corporate objectives
“Anteo is in excellent shape and the Board has sound reasons for continued optimism, with the company in active, and in some case advanced, discussions with a range of other parties that are assessing the merits of the Mix&Go®™ technology. These negotiations are ongoing and positive and we are committed to building a pipeline of commercial supply agreements across a range of healthcare sectors to build and diversify our revenue streams.”
Commentary:
eBioscience: Currently under take over from Affymetrix in a $330m deal, eBioscience has annual revenues of ~$70m. From the announcement of the takeover:
“With 2011 sales expected to exceed $70 million, gross margins in excess of 70% and EBITDA greater than 30%, eBioscience makes Affymetrix a much stronger company, both operationally and financially. The purchase price represents approximately 4.5 times 2011 revenue and 14 times 2011 EBITDA.”
The ADO announcement states that Mix&Go will be used in "all applicable markets", so presumably it will be for a large portion of the $70m of revenue.
The announcement also makes reference to eBioscience's FlowCytomix product line. Now, according to this news story:
In comparison, Witney said that eBioscience has 16 percent share of the $200 million North American flow cytometry market and an 11 percent share of the $450 million flow reagent market. Witney described eBioscience as a "solid number two player worldwide." In both North America and globally, the firm's main competitor is BD Pharmingen, a business unit of BD Biosciences.
Assuming the eBioscience product "FlowCytomix" is the revenue earned in the "cytometry market" referred to in the ADO announcement: 16% of $200m = $32m
So at least $32m of eBioscience's revenue should be using Mix&Go.
Royalty: The up-front payment amount and royalty rate was not disclosed. While not surprising, it does make valuing this deal very difficult. Previously the company has talked about royalty figures of 2-5% for large IVD companies and approximately 10% for companies the size of eBioscience. So it should be safe to assume somewhere between 5 - 10% royalty.
Up-front payment: There was no mention of the value of the up-front payment, although it may appear in the next quarterly released in a couple of months. Often these up-front payment amounts are released, but in this case either ADO or eBioscience wants to keep it quiet for the time being.
I struggle to see why eBioscience would want / need to keep the amount quiet, however ADO may be concerned that releasing the amount would influence other deals currently being negotiated. If that is indeed the case, we should expect another deal announced before the market is made aware of the up-front payment amount, which is likely before the release of the next quarterly cash flow statement.
The company appears rather confident about further deals with mention of several in "advanced" stages of negotiation.
What's this deal worth? We don't know for sure, but can make some educated guesses.
Option 1 (Minimum): 5% royalty on $32m of sales (minimum royalty on minimum known market to use Mix&Go) = $1.6m pa
Option 2 (Maximum): 10% royalty on $70m of sales (maximum royalty on all sales) = $7m pa
I would assume somewhere in the middle, perhaps $3m pa.
Valuation: So how does this impact on the valuation of ADO? The company is currently burning approximately $2.5m pa and has over 60 companies in various stages of testing / negotiating to use Mix&Go.
If we assume this deal will provide $3m pa, then the company should be cashflow positive to about 500k pa (not including the one off, up-front payment).
Personally, I expect another couple of small bead manufacturing deals, a deal for a Point of Care device and 1 or 2 IVD company signings in the next 12 months. One or more of those could be on an exclusive basis with a significant up-front payment.
If we assume another $10m pa of deals can be secured over the next 12 months (which I feel is conservative), that will go straight to the bottom line. On a PE of 20 (reasonable for such a large growth company), ADO should be worth closer to $200m than the current $65m - a return of 300%.