Geoff Buys a Gomer

I’ve been waiting for this moment all day, a quiet hour to sit down in my man-cave and tell you all a little story.

When I first read about ADO’s acquisition of DIAsource ImmunoAssays, SA (DIAsource) yesterday, a little flicker of neural recognition took place inside my head. Not in the vague way that, for example, you might experience in a shopping centre upon seeing a distantly familiar face pass by, possibly belonging to someone you went to school with 30 years ago. Sure, they have pudged out a bit, and the hair is a little thinner and grayed, but you’re pretty sure it was the classroom clown that mooned the maths teacher back in the fourth grade. No, for me it was more like going to the doctor and being diagnosed with genital herpes and then having an instantaneous associative flashback to an unfettered threesome you had back in college, just knowing …

I’m joking, of course.

About the herpes.

Anyhow, fruity analogies aside, I read Anteo’s (ASX : ADO) big announcement and I thought to myself, “Hmmm…. I have heard that name before but where?” It turns out that for many years I have had a fairly strong association with the Franco-Belgian nuclear medicine industry. I’ve advised several companies, I’ve led an academic collaboration with the “Biowin” initiative that is part of the Wallonia Health Cluster and I am friendly with people in the technology transfer offices of the universities in Liege and Louvain. I even helped to start a non-profit to try and develop some of the translational medicine opportunities in the area. I have visited Université catholique de Louvain (UCL) quite a few times (lots of smart people) and I surely must have walked past DIAsource’s building on multiple occasions.

I then went to DIAsource’s web site and noted that one of their purported “strengths” is radioimmunoassays (RIA). I was frankly gobsmacked to find out that there was an RIA company that I didn’t immediately recognise and so I picked up the phone called a few people. It turns out that my “instinct” was correct. I did know of DIAsource, except that I knew it in its former incarnation as “Biosource”. The story of DIAsource is interesting because to really understand it you actually need to look at the lineage of not one, but thee companies – CISBio, DIAsource and DiaSorin.

In Louvain-la-Neuve there are quite a few small biotechnology companies that gravitate around the university, and several of these companies can trace their lineage directly or indirectly back to L’Institut National des Radioéléments (IRE). Probably the most famous company is Ion Beam Applications SA (IBA), which was a spin-off of the Cyclotron Research Center at UCL back in 1986. I should note that UCL is truly an international powerhouse in radiochemistry and nuclear medicine. In 2006, IBA acquired the CISBio Diagnostics business from Schering (in a consortium purchase with IRE, I believe because of the “status” of certain nuclear assets that the company was proximal to, specifically its R&D facility at France’s Marcoule fast breeder/plutonium processing site*). Schering had originally acquired CISBio International in two tranches from the French nuclear company Areva SA (in 2000/2002). It turned out that this business wasn’t a very good fit with IBA and in 2013 CISbio Diagnostics was spun-out of IBA through a management-led buyout and became CISBio Assays. If I remember correctly, at the time of the spin, the company did maybe €10-12m* in revenue mostly around RIA technology (it is now a private company). It’s important to note that the “CIS” in CISBio refers to a consortium of “CEA, IRE and Sorin” and was formed as a partnership to combine Sorin’s strength in immunology with the nuclear assets of IRE and their French counterpart (CEA) in order to develop RIA technology. I guess somewhere along the way the major immunoassay assets were also divested from Sorin Group because we now have DiaSorin (market cap of €2.3Bn).

[29/09/2015 Correction: my memory was only partially correct. This revenue (actually €14m) was only the RIA component. The company’s total revenue stream was about €34m at the time of the MBO, the rest mostly attributable to CISbio Assay’s HTRF assays. It is also worth noting that CISbio’s revenues/profitability has grown dramatically through the focus on the HTRF technology, though the company still remains #2 after Beckman Coulter in RIA. Thank you to the company for the correction.]

DIAsource is also a spin-out from IRE. The original company was called Medgenics and was acquired by a US company called BioSource International Inc. (CA) in about 1996 and renamed to BioSource Europe SA. BioSource International was acquired by Invitrogen in 2005 for $130m (which became Life Technologies through the merger with Applied Biosciences in 2008 and then, last year, became part of Thermo Fisher). However, in 2007 BioSource Europe was taken out of Invitrogen by a bunch of private investors at the same time as BioReliance was also spun-out. Company was re-branded as DIAsource ImmunoAssays soon afterward.

If all of this lost (or bored) you, here is a visual showing the complete family tree from the original consortium formation between CEA, IRE and Sorin to the present day.

This remarkable diagram illustrates just how many times the CISBio RIA technology concept has changed hands / been reincarnated.

This remarkable diagram illustrates just how many times the CISBio RIA technology concept has changed hands / been reincarnated.

Now – why I am telling you all of this? Why do you care?

Well, firstly, DIAsource and CISBio Assays are basically competitors. They grew out of the same stable, they even have (I believe) some of the same original polyclonal antibody assets. If you compare their RIA product offerings there is 100% overlap. In specific RIA areas, CISBio is still the leader, not because the market grew, but because the market demand totally shrank and most of the major players have pulled out of RIA altogether. Even CISBio is transitioning to the HTRF/fluorescence platform in order to get away from radioactivity (nice technology by the way).

DIAsource (née Biosource) has historically derived most of its revenue from selling generic replacement kits for DiaSorin and Siemens RIA platforms (hence, by the way, the similarity of the name DIAsource to DiaSorin). I note that DiaSorin still sells RIA products (again, note the fact that DIAsource is basically a rip-off of DiaSorin) but Siemens has got out of the business. Why? Because it’s a shitty business and nobody cares about it anymore. I suppose in a nutshell, my point is that DIAsource’s business is not only long-in-the-tooth, but it is a business that has passed hands so many times, it only affirms its irrelevance.

DIAsource is just part of the inconsequential dregs of a whole history of transactions.

Now, getting to the financial nitty gritty of DIAsource. ADO has made some pretty lofty claims about how good this company is. However the financial information of all companies (public or private) in Belgium is a matter of public record. So if you know that DIAsource was formally called Biosource and you don’t mind brushing up on your high school French (or German or Dutch … those clever Belgians…), you can check it out for yourself. To save you the hassle of sniffing around a pretty average website, you can directly download the 2009/10, 2011/12 and 2013/14 financial statements as PDFs. They are filed every two years for a private company, hence why they are aggregated in pairs. For those of you that have an aversion to financial statements, I have also taken the liberty of plotting a little graph for you of top-line revenue and profit for the past 6 years:

DIAsource - revenue and profit 2009-2014

DIAsource – revenue and profit 2009-2014 (Source : public financial statements)

What you will immediately notice is that this company has basically had a flat revenue around €11m (primary axis) for the last 6 years. You will notice that he company makes anywhere from nothing (well, negative) to a few hundred €k in profit (secondary axis). ADO has made all kind of glowing statements about “strong” growth and performance, but in fact this is a highly stagnant business that basically hasn’t moved the needle in the last five years. It’s a non-entity, it’s a gomer. If it were a horse, you would take it out in to the back paddock and shoot it. This is certainly not a company that is in any way “cash generative”, “high margin” or financially “strong” and, in my opinion, ADO’s growth claims are completely unfounded, bordering on misleading, relative to the financial statements on record and the historical performance of the company.

A slightly deeper dive of the financial statements (noting that they are somewhat limited in granularity) will also tell you that about half of the cost-base of the business is in COGS and the other half is basically payroll. For anyone reading this post who has ever taken control of a European subsidiary, you’ll know that headcount reduction is pretty much impossible and the labour laws in Belgium are extremely tough to navigate. Having also personally (previously) attempted to acquire a Belgian manufacturing facility with a radioactivity license, I can tell you that the potential paperwork and the regulatory approvals that ADO will have to undertake can also be non-trivial, including possibly independent approval of the deal from the local economic agency and possibly even the payment of a site decomissioning bond to the nuclear regulator (even for a very low-level radioactivity site). All I see in the most recent annual report are glowing statements about a 1+1=3 accretive M&A scenario, but none of the grown-up risk assessment / post-merger integration strategy that is vital for a deal like this. For a public company, it’s pretty woeful, though sadly not atypical of the manure that ADO shareholders are regularly shoveled up.

So to sort of wrap it all up, this is a crap deal. Not because ADO paid too much for it, they probably didn’t. I’m reliably informed that a few of the senior members of the company and the original investors in the spin-out from Invitrogen want to retire and leave the company, so they probably were happy to get a middling pay day for their lifestyle company. Presumably Geoff has a good succession and employee retention plan as part of the sophisticated post-merger integration planning we would reasonably expect from a polished company like ADO. No, it’s a crap deal because it doesn’t add anything to the company as far as I can see. RIA isn’t interesting anymore. A few automated platforms are basically a commodity. Ironically, DIAsource’s purported strengths in ELISA are pretty much the opposite direction ADO is supposed to be going with Mix&Go (i.e. sophisticated high-multiplex “nano-patterned” surfaces, sensors, blah blah blah). They did buy some content (per my prior analysis of the company), which is good. The problem is that they bought the same content that everyone else has, and it isn’t going to be enhanced or improved by adding Mix&Go, so who cares?

Look, I will admit that sometimes I have probably underestimated Geoff. He’s obviously a very tactical guy and an out-of-the-box thinker. But in my honest opinion, the company has done a very poor job of articulating the real risks and benefits of this acquisition. I personally think it is a lousy company and I wouldn’t have spent the money. I also don’t really see the assets, the synergies or even the “global market access” that comes with this deal. To me, this is just another way for Geoff to continue to build a fancy story, take a good paycheck, and continue to not have to deliver anything to shareholders that demonstrates the commercial efficacy of ADO’s core technology. I can just see what is going to happen – Mix&Go will get arbitrarily added to DIAsource’s existing products and it will get pushed out to the market as a “revenue-generating success” for the technology.

Ho hum.

I have another little nagging theory in the back of my mind as well. Aside from the fact that this deal will generate “revenue” for ADO, and therefore be a great success, the quanta of revenue is also meaningful. Combined with whatever paltry income ADO might be able to bring in from its existing commercial activities, the DIAsource revenue gets the company to pretty much bang-on the USD $20m mark. $20m is kind of a magic revenue number because it is the number that US institutional analysts need to see in a diagnostics company in order to get enthusiastic about a NASDAQ listing. It’s pretty much an institutionally ingrained threshold.

I wonder if Geoff is thinking about NASDAQ? Hmmm… that should keep the punters on HotCopper speculating…


*which I have had the privilege of visiting. Not only was it a fascinating site-visit, but is a mere 20 minute drive away from Châteauneuf-du-Pape. Visiting a nuclear site and a top wine growing area in the same afternoon is, quite frankly, pretty hard to beat if you are a geek.

23 thoughts on “Geoff Buys a Gomer

  1. Thanks for your take on the deal.
    Geoff is nothing , if not flexible in his strategy.
    At first they were going to disrupt the market with their groundbreaking technology. that didnt happen, then it was going to be a company maker, selling and making their own products.
    Hmm, that didn’t happen, and now they are going to make themselves a company by buying one – if only they can find enough people to still believe in them and finance it for them.

    I am half expecting that shortly they will do a deal with Philips for their POC system before October, blow the trumpets, rally the troops and then present their financing package to starstruck groupies.
    Of course, the POC deal won’t be anywhere near as financial as will it’s inuendo, but it will serve it’s purpose and Geoff can remain living in the lifestyle he is accustomed to.

    Like

    • I agree with you. I have also never said Geoff Cummings was an idiot, what I have said is that I don’t trust the integrity of his wildly unsubstantiated claims. Contrary to repeat assertion, I have no grudge against him or the company. It’s just that the more the company spouts bullshit, and the more that rabid shareholders on HotCopper post wild and misleading perspectives (with the implied persective of Geoff’s “winks”), the more I am going to take pains to make my position clear.

      I’m also not saying that ADO couldn’t do something useful with this asset. One man’s trash is another man’s treasure and Geoff is a smart guy. What bothers me is that this is not the only way of achieving these outcomes and I don’t think it is the best way – BY FAR. I’ve seen all kind of BS posted, even this morning, about what their facilities are and are not. I’ve read crazy stuff about CLIA and FDA-audited facilities, as though that was worth spending this kind of cash (shows that people just don’t understand). The only real gem in this deal is the fact that DIAsource has huge experience developing assays – and ADO, to a first approximation, is frickin’ clueless.

      In fact – the ironic take-home message of this acquisition, is that ADO needed to buy an asset like this in order to learn how to do what it has been telling the market all along it knew how to do. Think about that. But also think about the fact that they accomplished it by buying a product portfolio and team that nobody else wants.

      But the thing that really gets on my tits about this deal is the way it is communicated to the market and in proximity to an annual report (noting that it might not have aligned perfectly with the process of releasing that report) is that the company has an obligation to explain to shareholders/investors what the deal looks like transparently and without hype. This is not a financially lucrative deal – this company will never be cash generative in its current form. ADO has an obligation to note that there are significant liabilities and impairments associated with this deal. Geoff needs to acknowledge that he is more than doubling his burn rate on personnel – personnel that, incidentally, he can’t just fire if things don’t work the way he expects post-acquisition.

      So the bottom-line is for me, I get the strategy. I understand why they did it. I don’t believe they either chose the right gameplan or the right asset but above all else, the articulation of the acquisition really illustrates that the company doesn’t have the foggiest idea of what it is in for and I think that the risk profile of ADO has increased – not decreased – dramatically.

      Like

      • “..don’t trust the integrity of his wildly unsubstantiated claims. ”
        I agree, but I think that the wearing of the outrageous ties that he does, is in fact his tacit disclaimer for credibility and really he is just taking the piss. 😉

        Like

    • PS: If any rabid ADO fan (i.e. cashman2284) wants to write a similarly detailed and substantiated piece on why this makes great sense, I will be happy to post it (with clear identification of the author and any declaration of conflicts of interest).

      Like

  2. Our boat sprang a leak and now we’ve been out in the ocean for 24 hours waiting for rescue. A small sea plane spots us and lands nearby. The pilot gets out and offers a hand. Cbehrenbruch replies:

    Have you washed that hand? Never mind. What’s the engine like on your sea plane? When was it last serviced? I piloted a sea plane once and it was a lot bigger than that! Actually, now that I’ve thought about it, that sea plane is a piece of junk. I wouldn’t fly anything less than a Chinook helicopter myself.

    The friendly pilot tries to convince poor Cbehrenbruch to come with him, but fails. Despairing, the pilot asks Cbehrenbuch what his plan is to get rescued.

    The End.

    Like

      • Agreed, but it’s the story of this post.

        Most of your analysis is sound and your questions reasonable, but you offer no solutions. Just a resume, some bragging, name dropping, and criticism.

        Looking to be the next ADO apprentice?

        Like

      • I think your post is disrespectful. I am allowing it in order to provide you a response, but it will be your last post on this site.

        I’m not the guy balls-deep in this equity, and I am not a director or an officer of the company, so I don’t have to offer you any “reasonable solutions”. You clearly have missed the point of this site, and you have also clearly not read my prior posts on ADO. That’s fine, I don’t expect it.

        As for the bragging and name-dropping, well I call it “qualification”. I want you to know that my opinion is grounded in a unique and detailed perspective. If you don’t like it, don’t read my posts.

        The only thing you have written that is a remote proxy to intelligence is the use of the word “criticism”. Yes, I am critical because when I see this kind of misleading and inappropriate behaviour from a public company, shameless propaganda, unsubstantiated claims and no evidence of risk management, I am critical. And you should be too.

        Thanks for reading.

        Like

      • I’m sure I read on here some months back that you were sick and tired of writing pieces on ADO for your blog, and that the one I was reading at the time was going to be your last….ah, found the reference!

        cbehrenbruch June 19, 2015 at 9:22 pm
        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).

        It seems you are drawn like a magnet and have gone to a lot of effort/trouble to provide this piece where you said you’d provide no more, so it’s difficult for me to believe there’s no agenda here, as you keep stating.

        I find it interesting reading both sides of the coin.

        BTW, his name is Cumming……unlike like Bart.

        Like

      • Hi Steve,

        Thanks for the correction. When I go through and re-read my pieces before posting, I sometimes notice this mistake but I occasionally miss it, perhaps for the very reason you have illustrated.

        To be honest, Steve, I don’t really care about your opinion regarding my “agenda”. I don’t have one. I said I would stop commenting on ADO but then they went and acquired a company. Read my site policy, it says I am entitled to change my position. I have never had any interaction with ADO, been an employee of ADO, I have never applied for job at ADO, I have never been recruited on behalf of ADO and – unlike a few warped speculations – I am not looking for a job at ADO (which, quite frankly, is a ridiculous assertion because I would argue that what I am doing is “anti-job” if that were my agenda, which it isn’t).

        Thanks for reading.

        Like

  3. Thank God, you are the moderator and not these turkeys.
    The poor hc ado shareholders (they call themselves adorites) have a siege mentality.
    They are unable to argue on points so denigration is the name of their game

    Like

  4. Nice post Chris and details of the history.

    I was once going to do a Jeff (of OBJ fame) versus Geoff (of ADO fame) skit one day. Their personalities and sales pitches to investors have been remarkably similar over the years.

    Changing the subject slightly could you Chris or someone write a good explanation of why taxpayer money goes into supporting zombie biotechs through R+D tax incentives.

    It seems to me the zombie biotech business model is only sustainable by taxpayer funds together with ASX broker inspired pumps and dumps into speculative markets. Railing against social media is tackling the symptom of the disease here.

    Doesn’t economics 101 teach us that when soft headed government money enters a sector hard headed money exits.

    Perhaps take the extreme absurd case in the long tail – Pharmanet (PNO) (now in administration) to argue why one cent of taxpayer money should have ever gone into that company.

    And the distortion to markets that occurs because of this which in PNOs case has led to thousands of naive rookie mum and dad shareholders now with worthless shares.

    All funded to some part by you and me. What is the justification?

    Like

    • Hi I believe that the R&D tax incentives are intended to encourage innovation. It is difficult to attract “hard-headed money” at the early stages of development due to the extremely high risk of failure so I’m supportive of these incentives continuing. However, I agree that perhaps there could be a more rigorous process so that money is not wasted.

      Like

  5. Hi SouthOz, Chris,

    I have had a little bit to do with the R&D tax credit stuff over the years. Nothing overly direct, but I follow it reasonably well.

    The whole thing comes down to how you decide what is worthy R&D and what it would take to administer a selective program.

    Markets have a hard enough time deciding what is worthy and what isn’t worthy research, as can be seen by the daily gyrations of even the better ASX listed biotechs. It would be hard to think experts, unless, perhaps, extremely well chosen ones could do a better job than markets, given the market’s collective knowledge.

    Lets assume the experts could do the job better. The experts for one technology, use of technology, etc will vary just about on an individual company basis (even more for companies with multiple technologies, etc). So, you aren’t talking about a set of experts, but many, many sets of experts. Then you need a reliable system for standardizing everything to determine who gets the help and who doesn’t. On top of that, you probably have to introduce a system for monitoring recipients to ensure they are actually doing the worthy research they said they would – research plans can change, companies that don’t get the rebate complain, etc.

    The R&D tax credit is a blunt tool, like the RBA and interest rates, but to do anything else gets complex and costly very quickly.

    If you believe, like I do, that eventually you’ve got to stop relying on digging crap out of the ground and shipping it elsewhere for value to be added, you gotta do something.

    Also, I have been watching the biotech market here really since its inception and I don’t think the number of crap companies has increased since the Credit was introduced. I just think in the early 2000’s we didn’t really realize how many were crap!

    Cheers,

    Marc

    Liked by 1 person

  6. Chris,

    Great to hear another point of view other than ADO’s and the HC happy clappers. Mum and Dad investors rarely find the time to find a counter view and are often sucked into the whirlpool of hype. Your site offers a life line for those willing to stop a moment and assess what the hell they have bought into

    Keep up the great work.

    Cheers

    Brian

    Liked by 1 person

  7. Pingback: Geoff Buys a Gomer – Part II | The Long Tail

  8. Not to blow your own horn further Chris (you don’t seem to be lacking in confidence) but that was a sensational write up. Leagues above anything anybody on hotcopper has posted. I’m fairly underwater with Anteo and don’t see the sun coming up anytime time soon, even more so after reading this thorough analysis. Lucky I have youth on my side and will bounce back! Please keep up the great work! It does not go unappreciated

    Like

    • James, I am sorry you are underwater. It is not lost on me that when I write about a stock negatively, people lose money. However, I am also grateful that you understand my motivation for doing so.

      Your attitude is spot-on. But also you have to consider that ADO is an irrational stock. You can’t trade on it, on the basis of an investment thesis, and so the slightest little tweak of news can double the stock price. That’s why on a lunatic would put a “short” on this stock because you’d end up sweating pretty fast. I can only hope that you are not exposed to the point where it hurts you personally and, if you are, you have to be “in it, to win it”. A share in ADO is just a lottery ticket, that’s all.

      Personally, I wish it wasn’t the case. I wish we had a bioscience sector that was truly investment worthy. Some of it is, some it isn’t.

      Thanks for reading.

      Like

  9. Pingback: The 2014 Compensation Hall of Frame | The Long Tail

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