Urbem's 'Wonderful Business' Series: Bioventix

A profitably-structured biotech bond proxy

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Steven Chen
Dec 13, 2019
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U.K.-based Bioventix PLC (

LSE:BVXP, Financial) creates and supplies high-affinity monoclonal antibodies for use in blood-testing machines that are used in hospitals and other labs around the world. The science behind high-affinity monoclonal antibodies is complex, but it should not scare away investors, as the business model of the 12-person company is simple and clear: it licenses the use of its antibody products in exchange for royalty payments.

Global healthcare giants, including Roche (

XSWX:ROG, Financial), Siemens (XTER:SIE, Financial), Abbott (ABT, Financial) and Danaher (DHR, Financial) develop blood tests based on the Bioventix antibodies to diagnose conditions related to heart disease, thyroid function, fertility, cancer and other diseases. In terms of partnerships, the company conducts projects based on both the own-risk (Bioventix-funding and no exclusive usage) and no-risk (partner-funding but exclusive usage by the partner) basis. We notice that a gap of four to 10 years exists between the start of the research work and the receipt of royalty revenue from the successfully launched product. Significant uncertainties along the process involve research and development (at both Bioventix and the partner) and regulatory approval.

Bioventix was formed as the result of the management buyout led by the current CEO, Peter Harrison, in 2003. Per the latest filing, Harrison owns over 8% of total shares outstanding, indicating an aligned management interest. In the meantime, we are also aware of the concentration of shares among a small number of institutional investors. Such an ownership structure could lead to corporate decisions that do not maximize the interests of the minority shareholders.

As of fiscal 2019, the downstream royalties represented nearly 70% of total revenue at Bioventix. The vitamin D antibody product contributed to roughly half of the sales. While we appreciate the highly recurring, small-ticket, reliable cash streams, the concentration risk should be closely watched.

Per the chart below, Bioventix steadily increased its top line and annual free cash flow while improving its return on capital and margin since the initial public offering. Its capital efficiency and profitability are top-notch among the healthcare sector. The free cash flow margin stood at an enviable 60% level for recent years. Meanwhile, the business needed to spend a scant 1%, on average, out of its annual sales as capital expenditure to sustain operations. In our opinion, a high switching cost associated with Bioventixs franchise-like model will remain a substantial moat for the companys high-margin, capital-light business.

As indicated previously, clinical diagnostic products (compatible with Bioventix antibodies only in most cases) typically take years to develop and obtain regulatory approval for. Additionally, diagnostic machines sold to hospitals are so expensive that they hardly get replaced. As a result, once the blood-testing product is approved and installed, there is the naturally continuous consumption of the Bioventix antibodies as a result of reluctance to buy other machinery. Furthermore, we know that the demand for clinical diagnostics is insensitive to the economic cycle. Therefore, the royalty stream at Bioventix, by nature, acts as a bond proxy for equity investors.

Going forward, the company can increase its shareholder value by launching new products (e.g. pollution bio-monitoring) and expanding overseas (e.g. in China, a double-digit-growth market). Also, the aging population, rise of obesity and increasing demand for point-of-care diagnostics will continue to benefit the company by enlarging its total addressable market in the long run.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of Bioventix.

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Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist. Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital). Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005). Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen