|Shares Out. (in M):||21||P/E||0||0|
|Market Cap (in $M):||87||P/FCF||0||0|
|Net Debt (in $M):||10||EBIT||0||0|
Quotient Limited (QTNT) is a long at these levels due to assymetric risk / reward. Biotech is in a bear market, and QTNT has clearly not been immune. For anyone inclined towards technical analysis, QTNT looks like it is on the way to zero. QTNT has a smallish business selling blood reagents to indentify the surface markers on a red blood cell, and sells to the market leaders in testing equipment...This business is an approximately $18mm per year revenue business, with slight growth. For the purposes of this write-up, I am not going to delve into that particular business, but rather on the MosaiQ, which is QTNT's next generation automation platform for blood grouping and testing. This new device is at an advanced stage of development and commercialization.
MosaiQ has the potential to completely change what could be charitably described as an old fashioned means of blood transfusion diagnostics. The launch is probably a year to 18 months out, and could have a dramatic positive effect on the share price. Transfusion diagnostics are mandatory to ensure the safety of the blood supply for both donors and patients. There are approximately 32 surface markers on a red blood cell, and in a perfect world, all would be matched, so as not to create a potentially catastrophic event. The current standard tests only 4 of these markers, that being blood types, A,B O, and D (rhesus). This has proven adequate in the majority of cases, but reactions occur in 5-10% of cases (because of matching only 4 of 30), which can create health issues, delays, and additional costs.
Over the last several years, QTNT has developed the technology and the IP, to take the reagents that it produces, and put them on to an automated device and consumable, which allows for the testing of between 25 and 32 of the surface markers. This is an absolutely huge leap in the development of blood banking. In fact, blood banks and collection centers have actually called the MosaiQ the Holy Grail if they can scale it to commercial production.
It might be obvious, but the advantages achieved are really three-fold. This device represents better medicine (no transfusion mismatch), it cuts down on delays, and it provides cost savings to the system. Pricing of MosaiQ will be competitive with the current standard of care.
The market : MosaiQ will serve an approximate $1.5B TAM. QTNT will go directly to a highly concentrated donor market, where approximately 20 customers screen over 90% of blood donations. The American Red Cross is the largest, domestically and globablly, and best known of these. This smallish customer base, will mean less SG&A needed for a sales force, and extremely healthy EBIT margins. One analyst has estimated that MosaiQ has the potential to save just The Amrican Red Cross approximately $50mm per year. The story with QTNT rhymes a bit with Tigress, which was launched by GenProbe in 2005 to detect pathogens (HIV, Hepatitis) in blood, and within 2 years, owned the market (GenProbe has since been taken private).
Why the opportunity exists : Until very recently, there was very little liquidity in the stock, and it is held closely by what I would consider to be very smart life science investors such as Perceptive and Sio. Along with no great comps (Immucor is also private), and paltry analyst coverage, the illiquidty has arguably led to difficulty in price discovery. Also, QTNT has mapped out a very tight timeline, and there was a 3-4 month delay due to broken equipment. This led to the decision last week to raise money, rather than risk what might happen in the capital markets over the next several quarters. On Thursday night, JPM priced 4.4mm shares at $9 per share, which is more than enough to get them to commercial scaling. Shares are currently trading at a 20% discount to that pricing of just several days ago. It is my understanding that the existing largest holders, including Joseph Edelman's Perceptive Advisors, all participated in the offering, with the addition of some new investors. I must admit I like the opportunity to buy at a discount to smart money, in what seems like it could be an open-ended story, the current bear market notwithstanding.
How big could this be?: If MosaiQ captures 25% of the market, you have $375mm in revenues. Ongoing R&D of perhaps $25mm per year, and COGS of 10%, and operating margins of approximately 70%, could produce operating income of approx. $265mm. The IP and manufacturing are in Switzerland, which is a 10% tax, so after tax net income of $238mm. Do you put a market multiple of 15 on that number? More? Less? This is after all a company, which if it executes, will have a dominant technology in an important market. I also don't think it is far afield to imagaine they capture more than a quarter of the market. The stock has very large upside potential.
Risks : The company has made the test in R&D scale, and now they need to take that to comercial scale. FDA and CHMP clearance.
Commercial scale and sale to Red Cross.