April 13, 2011 - 3:06pm EST by
2011 2012
Price: 9.30 EPS $0.00 $0.00
Shares Out. (in M): 22 P/E 0.0x 0.0x
Market Cap (in $M): 200 P/FCF 0.0x 0.0x
Net Debt (in $M): -80 EBIT 0 0
TEV ($): 120 TEV/EBIT 0.0x 0.0x

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Trinity Biotech plc

• Stock price: $9.35
• F-D market cap: $200MM
• EV: $120MM
• TRIB (headquartered in Dublin, Ireland trades on NASDAQ) develops and markets diagnostic systems, including both reagents and instrumentation, for the point-of-care and clinical laboratory segments of the diagnostic market. The products are used to detect infectious diseases (the company sells to point-of-care HIV detection market in Africa and the US), Lyme disease (90% market share in US), and HbA1c for diabetes monitoring
• Summary Investments Highlights
   o Great balance sheet
   o Good free cash flow generation
   o Returning some capital to shareholders via repurchase and dividend
   o Two key growth initiatives in clinical lab market for diabetes monitoring and in point-of-care market for numerous indications leveraging lateral flow technology
   o Compelling valuation...
• Majority of the company's revenue comes from the US market
• Research and production facilities at three primary US sites and in Ireland
• In May 2010, TRIB completed the sale of its worldwide coagulation business to Diagnostica Stago for $90MM of gross proceeds leaving the company with an approximately $73MM point-of-care and clinical lab diagnostics business
   o Sale of least profitable, most capital intensive product line
   o $67.5MM paid at closing
   o 25% of consideration was deferred
      ? 12.5% to be received after 12 months
      ? 12.5% after 24 months
      ? Bank guaranteed; no conditions or earn-out provisions apply
• Business description
   o Point-of-care HIV market: $17MM in revenue
      ? $9MM in Africa and $8MM US
      ? 20% share of ~$90MM global market
      ? 55-60% gross margins
      ? Africa is subject to lumpiness in orders. Sales are primarily to charitable organizations and NGOs
      ? One of only handful of players with license to use lateral flow technology (which can be leveraged for other indications)
   o    Clinical lab market - infectious disease: $25MM in revenue
      ? Dominant in Lyme disease screening and confirmation
      ? Strong gross margins (>55%)
   o Clinical lab market - diabetes: $19MM in revenue
      ? 7% share of $250MM market
      ? Major growth market (low double-digit growth)
      ? HbA1c is a long-term indicator of diabetes management
• HbA1c requires testing 4x/year
      ? Company's existing instruments represent older technology and not growing
• Key area of investment for company (see below)
   o Clinical lab market - life science supply
      ? Catalog of bulk antigens, antibodies, and bioresearch reagents
      ? Revenue of $12MM per year; 25% operating profit margin
      ? Great business run with just 14 people
• Financial profile
   o Solid consolidated gross margins at ~51%
   o High-teens operating income margins
      ? Margins ticking up with exit from coagulation business
• 18% in last six months (1st two quarters with no coag revenue) vs. 11+% in 2009 (full year with coag business)
   o Adjusted EPS (backing out gain on coag divestiture) of $0.63 in 2010
   o Low tax rate (12-15% going forward) given Irish domicile
   o Good free cash flow generation
      ? $15.2MM of FCF (after all capex and capitalized intangibles)
      ? Management has indicated that the company is generating FCF of "over $1MM/month"
      ? Management has targeted $7-8MM of capex in 2011
   o Great balance sheet with $80+MM of cash and deferred payments
      ? Equates to ~$3.75/share
   o Capital allocation
      ? Initiated small annual dividend of $0.10/share
      ? Received necessary authorizations from Irish court to conduct a share buyback
• Did not give an indication of size in terms of dollars or number of shares
• Presumably a material amount given
• A) the amount of cash on the balance sheet and continued FCF generation
• B) the fact that initiating the buyback was more complex in Ireland than in the US, requiring court approval
• Growth planks
   o TRIB has made investments to grow in the Clinical Lab - Diabetes business
      ? Business is currently flat as the company's existing testing instruments - the Ultra and PDQ - are legacy systems with outdated technology at high price points
      ? TRIB has invested $5MM to develop a new clinical lab HbA1c instrument called the Premier Hb9210 (PDx) for launch in 2011
• Leading edge design with intuitive touch screen display and software
   o Leads to greater ease of use, shorter training time for lab technicians
• Much smaller form factor than legacy instruments (occupies much less benchtop space)
• Faster than any assay on the market at one minute vs. nearly two minutes
• Modular configuration for ease of service
• Lower price than competition
• Interference free testing based on boronate affinity chemistry as opposed to ion exchange
   o [could describe the advantages of boronate affinity vs. ion exchange if necessary - short answer is that BA requires less chromatography so is faster and has greater accuracy among populations with high frequency of hemoglobin variants]
• "Closed" system that can only use TRIB's reagents
       ? Unit economics
• Company's legacy Ultra system is costly to manufacture and is sold at too high of a price point at $38,000. Sales of the Ultra system are break-even at best
• The PDx system has been designed for manufacturability at lower cost -- $13,000 - so TRIB can make a wholesale profit selling at a lower end user price point (~$20,000) than that of the Ultra system
• More importantly, management has indicated that they expect sales of reagents to range between $4,000 and $20,000/year depending on the test volumes at a given lab
      ? Distribution
• Placement of new PDx machines is obviously critical to this growth opportunity
• In February, TRIB announced that it had become the exclusive supplier of PDx instruments to Menarini Diagnostics for distribution in European territories
   o Menarini is the market leader with 40% share of HbA1c measurement in Europe with an installed base in the thousands of unit
   o Menarini expected to launch sales effort by May after two key European tradeshows
   o Menarini had been distributing ArkRay's instrument and reagents
   o Since the sales model is a "reagent rental" model in which the distributor places the instrument and recoups the cost via reagent sales, Menarini and TRIB do not have to wait for labs to make a capex decision to replace existing equipment
• Annual opportunity with Menarini should be several hundred units/year
   o Assume 5,000 instruments in the European market with five-year life so assume 1,000 new units/year
      ? With 40% share for Menarini this could translate into 400 units/year
      ? Assuming $15,000 wholesale price from TRIB, that is $6MM of incremental instrument revenue from Europe alone on a base of $71MM ($73MM less $2MM of current instrument sales) plus, using a $10,000 per instrument rule of thumb for reagent sales, another $4MM of reagent sales
      ? Management has not shared what the margins are from either portion of its razor/blade model, but using simply the corporate average, the PDx opportunity in Europe alone equates to $5MM of incremental gross profit or 12-13% growth
• TRIB also has distribution agreements in place in the US (with Fisher Scientific), Brazil, and China
   o Point-of-care test development program
      ? A bigger, but longer dated growth opportunity surrounds the Company's point-of-care test development program
      ? TRIB is one of three company's with a license from Alere (f/k/a Inverness Medical) to utilized lateral flow technology in point-of-care diagnostic testing (other than in women's health and cardiac arenas)
      ? To pursue this opportunity TRIB has established a new R&D team in Carlsbad, CA and expanded its R&D team in Ireland
      ? The Company already has distribution into hospital labs and emergency rooms that it can leverage. TRIB not focused on doctors' offices
      ? Will focus on disease conditions known to the Company
• For the nine indications TRIB is targeting in its Phase I development over, TRIB is already in the business of making reference lab tests
      ? Development program began after the divestiture of the coag business and the Company has set an 18 month time frame for Phase I
• So some of these new PoC tests could be available during the first half of 2012
      ? The worldwide market for point-of-care testing for the nine disease conditions in Phase I is in excess of $800MM with one to three players around each condition
• So if TRIB is able to garner just a 5% share at presumably very high gross margins, that would represent substantial incremental profit
   o Management in their investor presentation has a "Revenue Plan (Not a Forecast) through 2013 with revenue growing from today's $73MM to over $100MM on the back of PDx and new point-of-care testing growth
• Valuation
   o Attractive absolute value
      ? At $9.35/share, TRIB has a market cap of $200MM and an enterprise value of $120MM
      ? Using $73MM of revenue (pro forma for the coag divestiture), the stock is trading at 1.6x trailing revenue
      ? Using estimated D&A for 2010 (20F not yet filed), multiple of trailing EBITDA of $18MM = 6.6x
      ? 8.5x TTM operating income of $14MM
      ? Pro forma EPS, excluding tax-effected interest income = $0.53
• $9.35 stock price less $3.75/share in cash = $5.60 business value per share or 10.6x earnings
      ? Trading at 1.5x 2011 Street estimated sales (2 sources)
      ? Roth is only estimate source on the Street for EBITDA with 2011 estimate of $18.5MM (6.5x)
      ? Mean 2011 EPS estimate (3 sources) = $0.72 or 13x; cash-adjusted P/E of 8.5x
   o Attractive relative value
      ? ALR: professional diagnostics still 2/3rd of revenue
• Trading at 2.8x TTM sales and 14.1x TTM EBITDA
• Trading at 2.6x forward sales and 9.3x forward EBITDA
• Trading at 14x pro forma forward EPS
      ? QDEL
• Trading at 4.2x TTM revenue and NM multiple of TTM EBITDA (bad flu season)
• Trading at 2.9x forward sales and 11x forward EBITDA
• Trading at 25x forward EPS
      ? OSUR
• Trading at 4.2x TTM revenue and NM multiple of TTM EBITDA (negative EBITDA)
• Trading at 3.9x forward sales
• Negative earnings forecasted for 2011
      ? ASD LN
• Trading at 1.7x TTM revenue and 11.9x of TTM EBITDA
• Trading at 1.6x forward revenue and 10.1x of TTM EBITDA
• Trading at 20x forward earnings
   o Stock could be worth as much as $15 on trading basis
      ? Conservative 15x cash-adjusted EPS of $0.74 = $11.25 + $3.75/share in cash equals $15 or 60% upside
• $0.74 cash-adjusted EPS probably not a 2011 target but company could achieve that run rate in by the end of the year


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