UBI rallies on manufacture loss

Universal Biosensors may have found its feet with the company announcing this morning that it will no longer manufacture testing strips for LifeScan from January next year.

Universal Biosensors (UBI) may have found its feet with the company announcing this morning that it will no longer manufacture testing strips for LifeScan from January next year.

On the surface, the news looks bad given that manufacturing of the strips used in LifeScan’s blood glucose testing devices is the biggest revenue driver for Universal Biosensors.

The stock jumped to six cents to 59.5 cents this morning after plunging 41% since the start of the calendar year to its lowest level since the depth of the global financial crisis in early 2009 of 53.5 cents yesterday.

Management have long maintained that manufacturing is not relevant to the company’s long-term prospects or value as the real key earnings driver is the service fee it receives from LifeScan, which is a Johnson & Johnson subsidiary. Universal Biosensors gets a one cent for every strip made, regardless of who makes it.

In fact, Universal Biosensor’s chief executive, Paul Wright, claims the loss of manufacturing will yield a material increase in the company’s cash position going forward as the business has become loss making in the September quarter as LifeScan’s own manufacturing plant in Scotland ramped up production of the strip.

This led to a 70% drop in revenue from Universal Biosensors’ manufacturing division to around $1.5 million in the latest quarter. Universal Biosensors cannot make a profit at such low volumes and the cessation of this business is a good outcome.

What this means is that Universal Biosensors will be able to claim a research & development tax credit from the Australian government worth between $5 million and $6 million for 2013. There were doubts that it could as revenues may have exceeded $20 million for the year, a cut-off threshold for the R&D credit.

Further, Universal Biosensors will be able to release $2.5 million in working capital tied up in the manufacturing business.

The potential cash increase is very significant to a company with a cash holdings of $14.7 million, although the closing of manufacturing will leave a big hole in its topline in 2014 given that this business accounts for three quarters of total group revenue of $7.2 million in the first six months of this year (Universal Biosensors’ financial year ends in December).

This means its earnings results for the next 12 months will be messy, although the key things to watch for are the launch of its new blood coagulation testing device with Siemens and the continued strong growth in service fee from LifeScan.

Universal Biosensors will use its existing manufacturing facility to make test strips for the coagulation device, but this business will remain unprofitable until it gains sufficient scale.

Wright declined to offer a time frame on when that might be, especially since the launch of the device had to be delayed. Universal Biosensors is also undertaking a restructure and that will surely mean job losses at its Boronia manufacturing facility, but Wright was not prepared to release details of this until he had spoken to staff.

Universal Biosensors is part of the Uncapped 100