The halving in Universal Biosensor’s (UBI) share price this week is harsh but understandable as management has shocked the market with news that an exit clause exists for LifeScan to walk away from making royalty payments to the medical device developer.
Universal Biosensors gets paid between US1.25 cents and US75 cents for every strip that LifeScan manufactures for its glucose testing device, but management revealed on Monday that LifeScan can opt to terminate the payments by paying a lump sum between two to three times the royalties (called a service fee) paid in the last four quarters.
However, LifeScan can only exercise this option once it has paid $US45 million in service fees. LifeScan has so far paid a little over $7 million in service fees, and in my estimates, will only reach the $US45 million mark in calendar year 2017 (the company’s financial year is the same as calendar year).
The question is whether the lump sum payment will largely offset the loss in forecast revenue from future service fees. The answer is “no” – not on a discounted cash flow basis.
The other question is whether Universal Biosensors deserves to be trading at around 15.5 cents, which is essentially its asset backing. This is a harder question to answer, even though the stock is priced as though the company is going out of business.
I’ll answer the questions in more detail in tomorrow’s edition of Eureka Report.