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Date : 30/08/2021

Universal Biosensors

ASX :

UBI

Market Cap : $147.51 Million

Buy

52 Week Range : $0.26 - $0.97

Share Price : $0.83

High potential company with a rockstart CEO. We recommend a "Buy"

Company Analysis

Universal Biosensors (ASX: UBI) is a medical diagnostics company focused on the research, development, and manufacture of diagnostic test systems for point-of-care (POC) professional and home use. The point-of-care diagnostic market is worth $20 billion a year and continues to grow. UBI has partnered with global healthcare company Siemens Healthcare Diagnostics to develop the Xprecia Stride blood coagulation analyser, launched in December 2014, to help patients taking the anticoagulant drug Warfarin and manage their medication. UBI has also developed a blood glucose monitoring product that is being commercialised globally by LifeScan, a Johnson & Johnson company under the OneTouch Verio brand.

UBI’s innovative electrochemical sensor platform is being applied to a range of other medical diagnostic applications but we have seen the company progressively expanding its applications to other industries recently. We think that UBI is an exclusive opportunity to gain exposure in a niche market. UBI is now not just a life science business. The company is now expanding its applications to be used in other industries such as what we have recently witnessed with the use of its product in the Wine industry.

A transformational year for UBI

Since the last financial year, we have seen UBI refining its proposition. The business has become neater and more focused on the monetisation of its products. UBI’s ambition is to develop a range of biosensors and invest in new technologies that expand the capacity to detect analytes. The company has defined five fields of applications to which it concentrates its development and commercialisation of its biosensors: Veterinary, Human Health, Wine, Food and Agriculture and the Environment.

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Source: UBI

  • Application in the Wine industry: Recently in March, UBI launched the Sentia wine testing platform. This product is built on UBI’s electrochemical detection platform and is UBI’s first new product in more than seven years. Sentia is a wine testing platform designed to test for Free SO2, Malic Acid, Glucose and Fructose, Acetic and Total Acid. Whilst the Free SO2 product was launched in March, we expect Malic Acid, Glucose and Fructose to be launched very soon by the end of this year. What looks very promising is that UBI is developing a distribution network of commercial partners who will represent Sentia in key markets around the world. Obviously, we anticipate earnings to grow rapidly as per this initiative. To date, UBI has secured distribution agreements in Australia, the USA, Canada, and Chile. We expect to see additional distribution agreements covering the remaining wine regions of the world throughout this year.
  • Application in Human Health: In the medical field, during the last month of April, UBI announced a licensing deal to develop and commercialise a biosensor that can detect Tn Antigen which is a known biomarker for the early stages of cancer. The company also announced a licensing deal for a technology that increases the detection limits of its existing technology from Micromolar to Picomolar levels, extending its detection limits by one million times. What we see as massive potential for UBI in regard to “Tn antigen”, is the company’s ambition to use its platform technology to develop a biosensor strip and device that can identify, map and monitor Tn Antigen from a finger prick of blood. UBI’s proof-of-concept work is complete, and the firm has confirmed that it can detect the Tn cancer biomarker in six microliters of whole blood spiked with Tn Antigen. The company is now working to identify and measure Tn antigen in patients’ blood before progressing to a commercial manufacturing process.

Earnings to get back on track ahead of FY22

Currently, the only sales generated by UBI is derived from its blood coagulation product and services. Most of the other fields of applications are under development or in an early phase of distribution and are expected to produce earnings onward FY22. COVID-19 has been a challenge for many companies around the world, and it has not been an exception for UBI, where the pandemic negatively impacted its coagulation business segment and its blood laboratory in Canada.

On a positive note, we are starting to see progressively a return to normalcy which we expect the company’s coagulation and laboratory business to recover throughout the second half of this year and onward FY22. Hence, we are anticipating sales to get back on track during the remaining months of this year. In addition, regarding its new application for the Wine Industry, we expect the rollout of Sentia products and the building of a global distribution network which we believe will contribute substantially to the company’s earnings growth.

John Sharman joined UBI as the new CEO to turn the business Around

If you have been following the life sciences sector for some time, you may have noticed that in March last year, UBI announced that John Sharman would become the new CEO of the company. That was one of the biggest pieces of news for the firm and it was very well-received by the community of investors, thus UBI shares completely reversed its multi-year bear market toward a terrific bull-run upon the announcement.

John Sharman’s previous role was the CEO of Medical Developments (ASX: MVP) where he took that company from a $7 market capitalisation to over $700 million as it reintroduced methoxyflurane to the world, brand name Penthrox, as a safe and effective treatment for acute pain. As Sharman is joining UBI, we could expect him to turn around the business and propel the company to the same destiny as he did for MVP.

In early 2020, UBI was not unlike MVP in 2010. In each case, UBI and MVP had superior technology that worked and products on the market, but those products had not gotten very far. In the case of UBI, the technology was a disposable, multi-layer test strip that could rapidly and accurately measure biomarkers in the blood using a proprietary electrochemical sensing system. That was better than comparable tech which had led to the development of two products, a blood glucose monitoring product marketed by Johnson & Johnson’s LifeScan business, and a blood coagulation analyser marketed by Siemens Healthcare from 2014. However, neither product had generated much value for UBI. Revenue from FY19 was just a mere $6.9 million.

However, we believe that the cash and resources generated from these early projects can still be leveraged. Hence, Lifescan had been paying quarterly service fees and in September 2018 Johnson and Johnson had given notice that it was buying out this obligation. Accordingly, UBI received in cash $44.9 million in early 2019. The firm burned some of that cash early last year to restructure the Siemens relationship, giving UBI ownership of the relevant assets and opening the door for further commercial pathways of its products.

However, by March last year, upon the appointment of John Sharman as the Chief Executive Officer, UBI held a bit more than $34 million of cash which the valuation of the company at that time at about 19 – 20 cents per share. As of today, UBI is holding more than $18.8 million in cash and all those exciting technologies awaiting to be commercialised. Sharman started to work at UBI in early June last year. One of his first priorities was to expand the use of the firm’s platform and technology beyond medical use.

It started with the acceleration of the development toward the Wine Industry. We see that approach as really promising and we expect sales to ramp up substantially. Sharman thinks that UBI’s product and technology could be useful for a variety of industries and can allow all sorts of chemicals to be detected in a sample. The new Sentia product that UBI has developed will provide winemakers with a handheld device to test the levels of sulphur dioxide (SO2) in their wine. SO2 is added continually during the winemaking process and plays a critical role in quality winemaking. Sulphur serves two main purposes in wine, it prevents the mixture from reacting with oxygen, which can cause browning and oxidation which subsequently inhibits the growth of bacteria and undesirable wild yeasts.

With Sentia, winemakers have a tool for diagnosing the concentration of free sulphur while they are standing at the barrel within a minute. That is quite a progress compared to the previous stringent method of analysis. Furthermore, we can expect UBI soon to add other tests to Sentia, allowing wine producers to check for the level of glucose, fructose, and malic acid in their wine. The first batch of Sentia analyzers was shipped not so long ago, earlier in June. The sales of Sentia are accelerating rapidly and according to UBI, we could expect to see the firm hitting the one-million-dollar sales mark before the end of September.

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FY22 outlook: UBI to accelerate the distribution of Sentia

We see two catalysts that we believe will launch UBI shares to new highs:

  1. Sentia sales debut: That said, since June, UBI has officially sold the Sentia product and its free sulphur dioxide test trips to companies in France, Italy, Germany, Spain, Portugal, and Switzerland. The company has launched the product and made its first sales through European companies Vinventions, AZ30eno and XC Oenology. As of mid-year of 2021, we are quite excited to see this progress as we believe it is a substantial step forward for UBI. If we consider the recent first batch of sales to Vinventions, AZ3Oeno and XC Oenologie, just from these three first clients, UBI has access to more than 26 thousand wineries across Europe. That is massive. As of today, UBI is working with nineteen distributors which are trialling Sentia devices across Europe. At the current progress, the company can expect to sell Sentia devices for $1 million by the end of the third quarter of 2021.
  2. UBI exclusive agreements for the development of Tn Antigen biosensor: Last April, the firm entered into exclusive agreements for the development of its biosensors. The agreements with Deakin University’s Institute for Frontier Materials and the Swinburne University of Technology will progress the commercialisation of the Tn Antigen biosensor, used for the detection, staging and monitoring of cancer, as well as the development of other biosensors using UBI’s electrochemical platform technology. We are quite optimistic about the outcome that these agreements will produce. Hence, this will result in the acceleration of the development of breakthrough technology with possible stellar earnings upside. In short, UBI plans to deliver a cancer biosensor capable of identifying, staging, and monitoring cancer from a finger prick of blood, using a portable handheld device.

We expect UBI earnings growth to catch up relatively quickly, the company has substantially evolved since John Sharman joined the firm last year. Hence, since then we have witnessed UBI developing swiftly two income streams on top of its existing coagulation products and services revenue, the Sentia analyser for the Wine Industry, and the biosensor handheld which development is progressing rapidly as per the recent agreements with Deakin University and Swinburne University.

Balance sheet supporting the company’s growth

UBI exhibits a strong balance sheet. Debt is under control which is just a tad above 16% of the capital structure mix. It is also worth noting that debt has been reduced by 45% since FY17 while the company’s assets are increasing tremendously up by almost 22% in the last three years. What we like as well about the company is its amount of cash in the bank; thus, cash accounts for more than 33.5% of UBI’s total assets, therefore, we can assume that the firm is exceptionally well-funded. Taking into consideration the recent monetisation of its Sentia product and the rebound of the sales of its coagulations products, we expect UBI’s cash to remain steady even without the need for capital raising at the current conservative cash burn rate. We even anticipate a steady compound annual growth rate of 5.4% for its cash position by the next three years.

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Revenue forecast and valuation

Conservatively, according to our analysis, we project UBI’s revenue to reach $5 million by FY23 from the combination of income generated from its coagulation product and services as well as from the distribution of its Sentia product in the wine industry that recently started. Over the course of the next three years, we assume revenue to grow by a CAGR of 16% and this without accounting for revenue created from the high potential biosensor handheld which is currently under development. In line with earnings growth, we also anticipate a significant improvement in the company’s margin and forecast the gross profit margin to reach 63% by FY23.

Since the new CEO John Sharman joined UBI last year, the company’s share price quadrupled. We are quite optimistic that the trend will continue following the business transformation into a more diversified business with access to markets in five different fields. At the current price of under a dollar, we believe UBI has considerable room for growth and that it might be the right time to consider this early earnings winner.

Technical Analysis

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Trend

Following the announcement that John Sharman would join UBI as the new CEO of the company in March 2020, the share price completely reversed its multi-year bear market toward a terrific bull-run. Since March last year, UBI went from 14 cents all the way up to near the one-dollar mark. That was a remarkable four-bagger ride in just a few months. Since then, UBI pulled back to around the 23.6% Fibonacci retracement at around 78.5 cents per share. UBI is now sitting on the 13-day moving average and despite the recent 19% correction, it is still pretty bullish. There is one thing that needs to be monitored, and that is the RSI indicator on the weekly chart which is capped under a descending trend line. The downward trend line is in divergence with UBI’s price action which is perfectly holding a 45+ degree angle upward trend line. The divergence might suggest that a possible pullback might take place with UBI price action to head back to the 38.2% Fibonacci retracement of the recent swing high at 65.5 cents.

Key price levels

The key support to watch is the 65.5 cents per share which is the 38.2% Fibonacci level. We have found tremendous volume spikes around this price area which may suggest a possible rebound area for the next leg toward our primary target of one dollar.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -60%. The price action remains bullish in the near term, evolving in a range between $1 and 65.5 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support levels: 78 cents and 65.5 cents per share
  • Primary target price above $1.0 per share
  • Secondary target price at $1.5 per share
  • It is recommended exiting the trade below 55.5 cents

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Recommendation

Since the last financial year, we have seen UBI refining its proposition. The business has become neater and more focused on the monetisation of its products. Since new CEO John Sharman joined UBI last year, the company’s share price has quadrupled. Before joining UBI, John Sharman was the CEO of Medical Developments (ASX: MVP) where he took that company from a $7 million market capitalization to over $700 million. The expertise from Sharman has been rapidly effective and visible with the recent achievements from the company. UBI has expanded its range of applications and is now tackling up to five different markets with the Wine Industry. Sales have already started and UBI is expected to hit the one-million-dollar mark for its Sentia product by the end of the third quarter of this year. We are confident that the trend will remain following the company’s transformation. At the current price of under a dollar, we believe UBI has considerable room for growth and that it might be the right time to consider this early earnings winner. A “Buy” recommendation from us.

 

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