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.
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:
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.
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.