Genera finds an ideal partner

In June Last year we recommended Genera Biosystems (GBI) as a “speculative buy”, and in July we updated our call on the company's plans for a potential merger.

The merger discussions occurred with US-based company IncellDx. They have a complementary technology to Genera's HPV screening Assay, PapType. As a reminder, HPV or human papilloma virus can develop into cervical cancer.

Although the merger discussions didn't lead to a transaction, there was much more significant news in October of a strategic agreement with Beckman Coulter.

Beckman Coulter is a multi-billion dollar US-based subsidiary of Danaher Corporation (NYSE: DHR). They are a global leader in flow cytometry based instrumentation systems, and the ideal partner to commercialise Genera's tests.

Genera, a $25 million ASX-listed company, specialises in the development of molecular diagnostic tests. The patent-protected AmpaSand platform enables laboratories to run simultaneous tests. So far the company is on its way to developing three such tests – PapType, RTI-plex and STI-plex, with plans of more to come.

The reason Beckman Coulter is a critical partner for Genera is because they provide the capabilities to sell the company's tests to labs globally. Specifically, the marketing, sales, customer and equipment support which Genera can't do themselves.

Genera is also important for Beckman Coulter, as the company has publicly announced its strategic intention to sell tests as well as the instrumentation. Beckman Coulter and Becton Dickinson sell around 85 per cent of global flow cytometer instruments but only Becton Dickinson currently sells the corresponding tests to laboratories.

The next step

Given Genera has been in discussions with Beckman Coulter since 2013, we assume both companies have a fair idea of the chances for successful integration. Specifically, Genera needs to first prove that its HPV PapType tests work on the Beckman Coulter flow cytometry platform. After Paptype, Genera will then integrate its RTI-plex and STI-plex assays.

The RTI-plex checks for the pathogens of the airways in acute respiratory tract infections. STI-plex is a test for five common sexually transmitted diseases.

Genera will also complete the predictors 3 study: a HPV-screening study on 6,000 patients with the Wolfson Institute in London. This is a head-to-head comparison with seven commercially available HPV tests and is conducted by an independent global key opinion leader in cervical cancer screening.

The outcome of this study is likely to be that Genera's PapType test provides a competitive advantage in genotyping the strand of HPV over its competitors. The reason this is important is because HPV becomes particularly dangerous when the same strand is found in a woman for multiple consecutive years. Some other tests can only provide a yes/no outcome to HPV without been able to identify the exact strand.

At the recent half-year result management commentary suggested a partnering deal with Beckman Coulter is targeted for mid-year after successfully proving that Genera's tests and AmpaSand platform is complementary with Beckman Coulter's instrumentation.

Given Genera's current $25m market cap, any such deal should lead to significant shareholder value given the strong prospect for global revenues in the $6 billion molecular diagnostics market.

Regulatory approval

Genera's PapType, RTI-plex and QPlots software for in vitro diagnostics (IVD's) have all been included on the Australian Register of Therapeutic Goods (ARTG) as Class 3 medical devices.

This is particularly important given the 2016 revenue opportunity in Australia, HPV testing being recommended as a standalone alternative to the Pap smear for cervical cancer testing.

This change is likely to lead to a market in Australia of approximately 1.3m HPV tests in 2016. If Genera can capture one-third of this market it will lead to around $6m of revenue.

Further, the approval is likely to lead to the fast tracking of CE mark for both PapType and RTI-plex. This will enable marketing opportunities for Genera within Europe as well as certain parts of Asia that utilise CE mark.

Small but committed team

Genera has now worked its way towards a position where profitability is within sight. This has come about due to the team's commitment to a low-cost operation. Directors have recently been paid in stock rather than cash.

Further, a loyal shareholder base has continued to provide equity when required. Late last year the company secured approximately $2m through convertible notes, and received an approximate $500,000 research and development (R&D) concession from the federal government in January.

In the second half of last year Richard Hannebery was appointed CEO, and Lou Panaccio remains Chairman. Panaccio is also on the board of Sonic Healthcare (SHL) and was interviewed by Alan Kohler in late November.

Summary

The next four to five months are a critical period for Genera as it works to prove its capabilities to the ideal partner in Beckman Coulter.

Large IVD companies such as Beckman Coulter traditionally pay six to 10 times revenue to acquire companies like Genera.

We see the first step in value creation for GBI shareholders as a formal partnership in the second half of this year. Genera has an approximate $13m revenue opportunity in Australia and Germany in 2016. Although there are potentially significantly greater revenue opportunities available, to balance out the risk our $0.50 target price is based on four times the initial revenue opportunity.

The reduction from our prior $0.54 valuation is due to the dilution from the capital raising late last year.

Genera remains speculative due to not yet being profitable and we caution that the stock is only appropriate for those with a high risk tolerance.