Much ADO About Nothing

Ok, that’s it. I’ve had it…

The last couple of months I have endured a barrage of abusive emails from Anteo (ASX : ADO) shareholders and received a ton of crap on trading forums. I get that I am at best misguided and at worst, a flaming idiot. But I have decided that the only thing I respect less than this company, are the shareholders that have invested in it. It is a fundamental tenant of investing that when your money ain’t working for you, you pull it out and put it somewhere else. In the case of ADO shareholders, I have a few creative ideas where they can put their share certificates…

Just as a reminder, this is what your investment looks like:

The last 12 months... enjoy.

The last 12 months… enjoy.

The first time I wrote about ADO, my timbre was quite respectful. I invited comment and discussion about why the company was better than I thought it was. All I wanted was for someone to really come forth and explain why Mix&Go (after 10 years) was going to challenge something like AlphaLISA (or the bead based-proximity assay variant thereof) that PerkinElmer sells quite a bit of (and I use one PEI product as one example, there are many other surface chemistry offerings on the market). I questioned ADO’s commercial strategy, I questioned why they don’t have any “content” to their product offerings and I questioned why the CEO is paid so damned much money relative to the income and capitalisation of the business.

If you are an investor or an analyst, don’t you think those are fair questions to ask?

I do.

My second review of ADO was a little less friendly, frankly because of I was tired of getting emails from angry Western Australians by that stage, usually after they had quaffed a bottle of excellent Margaret River chardonnay and were keen to augment my lexicon in all kinds of wild and wonderful ways. But I was also a bit irritated by the sort of underwhelming marketing vapourware of “Nanoglue” (and those that chose to spruik it), frankly an embarrassment to any firm claiming to be a nanotechnology company. I have written several fairly detailed analyses of nanotech companies over the years based on personal experience of trying to commercialise nano/material science platform technologies (and studied a couple of hundred companies as a journal reviewer / editorial board member, a small business grant reviewer for the NIH/NCI/NSF and doing diligence for VCs).

By the time I got to my 3rd review of ADO, I guess you could say it was gloves off as far as the punters were concerned.

I am not going to cover ADO any more on this forum because there are some delusional individuals that believe my continued “pokes” only serve to reinforce that there must be either a personal grudge or affirmation that there is “something there” worth investing in. Crazy, I know – conspiracy theories abound. In this post, I am not going to talk about the company because there is nothing more to say that has not already been said (and to be fair, I have never really said anything unkind about individual people, except that Geoff is overpaid – which is a statement of fact based on annual industry compensation surveys that we all have access to).

Instead I am going to talk about ADO shareholders. There are two types of ADO shareholders (ignoring any “sophisticated” investors that may, for whatever reason, hold equity in this company). They are the “Snake Oil Salesman” and the “Whinger”. I will address each in turn.

The “Snake Oil Salesman” (hereafter “SOS”) is all in. This person wants to climb back up the Everest that is ADO’s depleted stock price and as soon as it is a smidgin’ over their entry point, they are going to be heading for the fire escape like a bat out of hell. This species of shareholder believes that if they spruik enough imaginary, correlative deals and throw around enough headline numbers from Frost & Sullivan reports, that some stupid wanker will buy up or at least hold their position long enough for a miracle to happen with the share price (yes, that’s the trainwreck that the ASX is sometimes). These shareholders talk to God on a regular basis, they have found new ways of interpreting the English language that astound even amateur hacks like myself. They run analytics on top of analytics to the point where you might actually be led to believe that this turd is a juicy fillet steak cooked rare with black truffles and a side-order of French asparagus. I despise them for their thinly veiled manipulation and the fact that half of them are probably “second cousins”.

In contrast, the Whinger is the insecure, intellectual type that specialises in reading tea leaves, consulting fortune tellers and endlessly complaining about the travesty that obviously everyone has failed to grasp that this company is actually brilliant. The Whinger faces every day with a puckered sphincter, perversely watching the stock price edge ever lower, without the courage to simply pull out and walk away. When I get emails from Whingers they are long, exploratory missives – heavily versed in the quasi-science that they effortlessly regurgitate from both SOSs and management like some sort of deranged parrot that was locked in a science lab. They plead, they argue, they beg for understanding in the hope that I will join them in their exquisite misery, like a cuckold watching his wife getting an ecstatic servicing from the guy next-door.

Well, for both the SOS and the Whinger, I have some news for you. Even if ADO has in fact done a deal with Philips and the “revolutionary” Minicare system based on the astounding “Magnotech” technology (yeah, no marketing there) incorporating ADO’s technology, who cares? You are still not going to get rich. By the way, anyone who has ever wielded a pipette in a laboratory (and I will be the first to admit, I am not personally that accomplished in terms of lab skills) knows that this kind of magnetic bead technology is neither here nor there. Philips is using concepts that have been around for at least a decade – the magic of Philips is in their productisation and their consumer marketing. Unfortunately most ADO shareholders don’t seem to get this.

So let us look specifically at the widely discussed troponin Minicare application.

Let’s ignore the existing players in the high-throughput testing area – like Siemens and Roche (both of whom have about a 30% market share). Let’s ignore some of the small players that already have approved products in the troponin PoC space (like Trinity). Let’s be SOS-style evangelists and take the position that emergency room / ambulatory applications for troponin testing (and maybe a few other things like CRP, etc.) is an exclusively accessible $350m global market (out of a $1.2Bn market, inclusive of centralised testing).

Now make a few very “reasonable” assumptions:

  • That $350m addressable market is available today. Hmmmm…
  • Philips does what Philips does … and becomes a top-three player, and captures 30% of the PoC cardiac biomarker market. That would be a stunning accomplishment by the way. Let’s call it a $100m business.
  • We can ignore that this will take between 5 and 8 years to accomplish and let’s also be kind and forget about the time-value of money or the investment $ that need to be recovered.
  • Assume that in terms of the intellectual property stack, less the machine, the reagents, the magnetic doo-dah system, etc. ADO manages to pick up 1% of net sales as a royalty. No, dammit, let’s be optimistic and imagine that they do a phenomenal job of inserting themselves in to the patent stack for the product and pick up 3% (that would be amazing for a surface chemistry by the way).

That’s THREE MILLION DOLLARS OF REVENUE. 

Now let’s ignore profitability and just focus on the top-line. If ADO were PerkinElmer, they would have a market cap based on approximately 12 x revenue (keep the math simple and take 2014 GAAP top line as $500m). This is a reasonable benchmark for a life-sciences company. In this scenario, at steady-state, the valuation contribution of a Philips deal to ADO would be USD $36m. As an approximate rule of thumb.

With a current market cap of AUD $67m, I think it is fair to say that the company is overpriced. If you apply a reasonable NPV (with a discount factor suitable for a growth-stage company) and generously allow that full market capture will happen in 5 years, the story is even less compelling. If anyone is confused by this and trades on the stock market but doesn’t know how to use Microsoft Excel, send me an email and I will send you a spreadsheet (DYOR).

Now both the SOS and the Whinger will tell you that I have this wrong, that Philips isn’t the only deal in town, that ADO has a veritable pipeline of partnerships just waiting to be disclosed at the appropriate juncture. Unfortunately, I have seen exactly ZERO proof of this other than some dodgy comments from punters on HotCopper, who have allegedly had “wink wink nudge nudge” suggestions from the CEO. We don’t even know if Philips gives a shit about ADO technology, the only real evidence we have is an accidental comment a couple of years ago and some keen correlative shenanigans around the timing of press releases and marketing information from Philips.

Well, let me tell you about correlations…

Another example of a spurious correlation (Courtesy: Journal of Irreproducible Results)

Another example of a spurious correlation (Courtesy: Journal of Irreproducible Results)

The bottom line is this.

One day, ADO may indeed pull off a collaboration for its technology. It may even be a “big one” as far as top-line device/consumable sales go. But because it is a platform technology, and because its “contribution” to an overall product will be fairly minor, the “piece of the pie” for ADO is going to be inherently small, and it is going to take some time to get there. Shareholders (SOSs and Whingers alike) have a very long way to go before the current valuation of the company is justified. Meanwhile, plenty of other firms are going to have a go in the PoC space and I can promise you that it will never even occur to them to contact ADO, that’s how unimportant this technology is.

My final thought for ADOs annoying* shareholders is this. Imagine if you were Philips, don’t you think it would be interesting to understand the vulnerability of the company (in the eyes of shareholders) before doing a deal by reading your thousands of pages of relentless speculation? If I were Philips, and I were (miraculously) interested in doing a deal, I would be setting a low-ball offer for technology, knowing that there would probably be a lynch mob if – and when – ADO disclosed to their fan club that they were not successful in closing a deal (which, by the way, they would have to disclose because based on your speculative shenanigans it would be a price-changing event).

So BOOM.

(Accessed under Creative Commons)

(Accessed under Creative Commons)

*as opposed to the nice shareholders that have just quietly gone about the business of losing money and have left me alone. Thank you.

 

Feature Photo Cred : Still from Hollywood’s version of Much Ado About Nothing (1993). 

14 thoughts on “Much ADO About Nothing

  1. Many years ago I had a meeting with Geoff who, with a lot of nodding and winking told me to “watch this space”. To be honest, I didn’t quite understand what the nodding and winking was about but I watched anyway….and I watched….and I watched. After several years of watching, I started to think that Geoff wasn’t really nodding and winking at me. I think instead he might have accidently sat on an ice cube.

    One thing for sure, I wasn’t supposed to be looking for revenue….at least I hope not because it hasn’t happened. All the deals seem to be “proof of concept” except that the concept never seems to get much beyond the concept stage. Fortunately, like many companies with something to hide in this sector, ADO combines their “receipts from customers” with “government grants” in any cash flow reporting they do. Thus you need to fossick around in the back end of their financial statements to learn that what has been reported as $1.85M of revenue actually only includes $230K from what a normal business would call customers. The rest comes from government grants, interest and other stuff that has nothing to do with nanogloop.

    I’m not as convinced about how effective all this marketing jingoism has been. To be frank, the name “Mix&Go” always seemed to me to be a bit cheesy…I guess it would have been worse if they had taken the next step and gone for Mix’n’Go….but not much worse. I mean, it sort of is in there with “shake’n’bake, schnitz,n,titz etc….just doesn’t seem…well…very biotechy. And when I got on the internet, I found out why. If you Google for Mix&Go you end up with: a blender, two different brands of flavoured drink, some quick setting cement, a very orange looking cement mixture, a hair bleaching product, some frozen yoghurt, a kit for making competent bacteria, and some strangely inedible looking instant food.

    All of this makes me just want to go without doing the mixing. ADiOs ADO.

    PS. Were there any Eagles songs in the Rolling Stones Greatest 500 Songs Of All Time?

    Liked by 1 person

  2. Hi CB,
    I read hotcopper chat and reckon I have been in ADO longer than most and have not berated you for your audacity to question “GC who must be obeyed”. Being the fool I am I didn’t follow your logic and get out in the heady price days earlier this year (seems like last decade), so must fit your description of “nice shareholders that have just quietly gone about the business of losing money and have left me alone”.
    I have seen the ADO evangelists in action and it can be a bit daunting, if not thoroughly amusing. This mob (like to think they) really know their stuff.
    On the up side, the AGMs have gone from the typical microcap snorefest to something that resembled (to me) a cross between the Diggers & Dealers conference and Hillsong.
    However, the CEO is grilled at length about tech application development in minute detail as if the shareholders were representing prospective business partners looking to use Mix n Go. When putting questions to the CEO, they speak of Philips Healthcare as their (POC1) partner as if it is widely accepted. (BTW – these casual assumptions were/have never been refuted or even challenged by the board or CEO)
    On HC they talk extensively and knowingly of the market opportunity for health technologies that have yet to be developed, as if they were digging minerals from the ground or making food ingredients. In the next breath they become experts on myriad non-health technology applications for Mix n Go.
    Some of these shareholders are substantial (top 20) holders. Were they to go feral on you, I could imagine the vitriol would be intense.
    But, f-ck ’em I say. Your opinion is just that, an opinion. From what I can tell you are looking to identify well managed businesses with a compelling (or potentially compelling) business case. If, in that search, you uncover a raft of rancid turds being eaten from within, I commend your efforts to hold them to account – at least at this micro level.
    As i have said before here, nobody likes to admit the emperor is naked, and maybe you are just pointing out the hairs on ADO’s arse?

    Liked by 1 person

  3. Evening Chris,

    Your posts are both entertaining (often hilarious!) and interesting and gut-wrenchingly, utterly horrifying to read as a holder. Please do keep it up, and even please don’t stop writing about the ADOs, and its like. It’s unfortunate in its case that you are getting personal attacks for criticising a company people seem to be extremely emotionally (and, it seems, in a lot of cases very financially) attached to. You are asking the tough questions that even the most cynical holders don’t.

    I gather that your don’t feel ADO is a “lifescience” company, and hence off-topic to your blog. However, I’d remind you their primary focus is in the lifescience applications of the technology, so it is (indirectly, perhaps) relevant. (I will ignore the under-cooked energy applications side, sensibly.)

    I ask this because I’d really like to read your opinions on the underlying technology itself. You have only mentioned it in passing, but an industry expert’s view would be great to read.

    Like

    • G’day East-Oz,

      Thanks for the support, and thanks for reading. All you need to know about this company is that it is genuinely lousy. But you only have to look at the stock chart and their disclosures to know this.

      I am not going to cover it anymore but happy to take personal emails to discuss science (I am not a financial advisor).

      All the best,

      C

      Like

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  5. I have to confess, there is something in my last post that I kind of skated over because I was having too much fun talking about ADO….but it pisses me off big time. And that is the practice of rolling up “receipts from customers” and “government grants” when companies file their cash flow statements.

    Now let me be clear, I think the R&D tax rebate scheme is probably the only area of government policy that has been good in the last two decades, maybe longer. Those of us who lived through the previous manifestations of R&D Start Grants, Commercial Ready and PIIP know that they were the deranged output of some dreadfully misguided public servant who still lived with his mother and probably bred guinea pigs for a hobby. While their intent may have been to help the sector, the byzantine forms that asked hundreds of inane and unanswerable questions only served to deforest large tracts of the Amazon jungle, led to the extinction of several species of pharmaceutical-generating tree frog and create strange liabilities on companies balance sheets that would make any sensible investor flee clutching their pockets to prevent having their wallets lifted.

    But somehow, by some accident, the R&D tax rebate scheme came into being and it is fantastic. It really is. It is very simple, it provides real leverage to every dollar that is spent on R&D, it encourages companies to do more of their development work in Australia and has even prompted a number of overseas companies to look at migrating to Australia to get access that leverage. What is more, the ATO has been very un-ATOish in its definition of appropriate R&D activity and has extended it to R&D that is conducted offshore when that is the most sensible thing to do. It is so simple, so effective and so brilliant that I suspect it will have replaced soon with something that is vastly more complex and inefficient…I mean isn’t that the role of government.

    However, what is disappointing is how some companies have found a way to abuse this generous and effective scheme by reporting this rebate in a way that it could be confused with revenue or, at the very least, makes it more difficult to establish what the company is receiving from its customers. And by no means is ADO the only company that does it. That companies have decided to use what is a very good and supportive scheme to window dress their operations is, to say the least, deeply disappointing. And the practice seems to be spreading throughout the sector like crabs in a brothel. Whenever I see this (which is several times every quarter) I get this strange tingling feeling in my temples, my skin starts to take on a greenish tinge, the buttons on my shirt pop as my muscles flex and I have this indescribable urge to run down into the street and throw cars against neighboring buildings while carelessly swatting passing planes out of the air.

    While this may seem like a slight over-reaction, I do have two very big problems with this practice. First it that it is a deliberate and blatant attempt to be either deceptive, or obstructive, or both. Anyone who claims it isn’t is simply lying. No bones about it. Previously, these receipts were typically reported as either their own line item (as standalone or as a subgroup under “other”) in 1.7 of the 4C cash flow statement. Then some smartarse financial weasel started reporting it in line 1.1 along with receipts from customers. At first glance, this makes it look as though the company is doing some serious revenue. It is only when you compare the current quarter with the year to date does it become evident that some financial skullduggery has been at work here. Now, in order to start to figure out how the cash runway looks for this company, you have to trawl through past cash flow statements, press releases, half-year reports etc. All quite doable, but just a waste of time and unnecessary

    The second reason this practice pisses me off is more emotional, as it is a continual reminder of how little much of the sector has progressed and how far it has to go. Let me be crystal clear on this, R&D tax rebates are not revenue. They never will be. The government is not a customer for your goods and services. Unless, of course, you are an academic. And that is the problem. Most of our companies are run by academics who really have not moved on. They may think they have moved into the commercial world but, mentally, they are still in some dusty old university department where everyone turns up to morning tea at 10.30 on the dot so they can share the same teabag. These are people whose whole life and being is obsessed with trying to get the next grant and, if they don’t get it, spending their days concocting personal vendettas against others in their department who they perceive may have slighted them in some bizarre and unfathomable way…or simply got the grant that they thought they should have received. I suspect that several years of this actually must lead to permanent changes in cognitive processing and augment those parts of the brain that a responsible for experiencing feelings of victimization and entitlement.

    So, I guess it should be no surprise that when these people step out of the warm, moist cocoon of academic life, they still see the government as their main benefactor and source of easy monetary gains. Whether they tell you or not, these people are still thinking of the world in terms of grants, papers, conference presentations, gee-whizz research that inspires accolades from colleagues, and the possibility of one day getting their own tea bag. Unfortunately, this is not who we need running our companies. We need people who are thinking products, markets, customers, needs and customer benefits. The sad reality is that most of our companies are based on technologies looking for a product, which is why they do so badly. And when these academics-disguised-as-CEOs pitch to potential investors, all they provide is all sorts of hand-waving gobbledygook techno-speak while they try to bulge out their eyeballs to show how passionate, and excited they are. What they don’t realize is that they end up looking like Catweazel on a bad acid trip and they scare the bejesus out of the poor investors who sit their wondering if they will ever get out of the room alive or are going to be shredded into a plate of human sushi.

    This may sound like the rant of someone who drank too much wine last night and too much coffee this morning to try to counteract it, but I think if CEOs want to be treated like adults, they need to mentally move on from sucking the teat of government. The R&D tax rebate is a fantastic scheme to help companies development their products. It is not an end in itself. And reporting it like it is just reflects a mentality that is not healthy and is restrictive.

    Like

    • Hi Matty,

      I think you make a strong point and I have seen this as well, and it irritates the shit out of me too. I’ve even seen commentary in annual reports to the effect that getting an R&D tax rebate was a “management accomplishment”, as if somehow spending money (however effectively) on R&D and then filling in some paperwork somehow reflects execution competency.

      I do think your rant was fuelled by too much wine and coffee but I wouldn’t have it any other way. These are the issues that we all bitch and moan about over a pint in a pub but never get actual airplay.

      As for the R&D tax scheme itself, it is obviously something that is at risk given the mental retardation (I am sorry, I know that is a un-PC and insensitive turn of phrase) of our current government. I don’t really care whether the scheme brings companies to Australia or not, it is never going to be really powerful industrial recruitment exercise because the cost of building research capability in Australia is too expensive relative to the depth of the labour pool. But that’s ok, for companies getting off the ground here, it can be a big benefit and for more established companies it certainly makes the bar a little higher to just simply head offshore.

      It needs to stay as part of Australia’s policy landscape and let’s face it, it’s not like sits at a burdensome “level” in the Treasury balance sheet. Now if the government could properly reform VC/PE taxation and de-f*ckify equity incentive schemes (despite three decades of talking about it), we might actually see some progress. Of course what will unravel all of these good things will be if we simply stop investing in our universities and public research institutions. When our government doesn’t even have the spine to appropriately extract natural resource extraction – you know, for an economic rainy day and our children’s – it’s hard to imagine that they will invest in our fundamental capabilities to take advantage of all this good stuff.

      … sigh.

      Thanks for reading…

      Like

    • On this track, something that has been mentioned a couple of times on Hot Copper (or, the shareholder-forum-that-shall-not-be-named, if Chris prefers). ADO leases the whole, or a large part, of their building, and there seem to be several sub-tenants occupying the extra office and lab space in the building. Looking at the 3/4 4C, it seems any income from this source seems to be in this “customers and government grants” statement as well.

      Seems a bit on the nose, really.

      Like

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