Healius: Pricey clinical testing splash; takes backseat to COVID

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

20 December 2021, 8:30 AM

Sectors Covered:

Healthcare

• Healius (ASX:HLS) is acquiring Agilex Biolabs, a leading Australian bioanalytical laboratory, for A$301.3m in cash funded via existing debt.
• We see limited conditions to close (Jan-22), with the transition expected to be low single digit EPS accretive in the first full year.
• However, paying a peak multiple (20x EV/EBITDA) in a frothy market sees return metrics fall short and reliant on future above market growth for shareholder value.
• While we believe the clinical trial sector complements existing lab services, synergies are negligible and a main focus on small molecules a bit outdated, but all eyes remain on COVID testing as Omicron drives a new phase of the pandemic, with material earnings revisions and risk to the upside.
• We adjust our FY22-23 forecasts, with our DCF/SOTP target price rising to (login to view). Move to Add on increased COVID testing.

Events

Healius (ASX:HLS) is acquiring Agilex Biolabs, a 25 year old Australian bioanalytical laboratory, for A$301.3m.

Agilex provides a comprehensive suite of bioanalytical services for biotech and pharmaceutical companies, primary focus in Preclinical Toxicology, Phase I and II trials, with estimated CY22 turnover A$36-40m and EBITDA A$14-16m.

The all cash transition will be funded via existing debt, is expected to deliver low single digit EPS accretion in the first full year and is slated to close Jan-22.

Analysis

We view Australia’s clinical trial market as attractive (CY15-19 c17% CAGR), underpinned on the back of its reputation for quality medical research, high regulatory standards and fast clinical trial commencement (4-6 weeks vs 6 months in US).

Agilex is a high operating margin business (c40% vs HLS c26%), fairly capital-light, and appears well placed to benefit from this growth, with c33% market share, good geographic mix (APAC 14%, 30% China, US 30%, 10% EU, 15-17% ANZ), broad therapeutic services (Oncology 32%; CNS 16%; 17% infectious diseases), a large library of biomarkers and assays to drive volumes, and a strong pipeline of 6-12 month+ planned work (as Nov-21 amounted to >A$36m, +55% on Jun-21 levels).

However, while clinical trial services complement other laboratory operations and the acquisition in EPS accretive, it is return dilutive (5% vs c9% WACC), with shareholder value possible in outyears if the business can sustain above market growth, which could be challenging given its main focus on small molecules, as we view large molecules as a key growth area in an age of personalised medicine.

Beyond the Agilex acquisition, all eyes remain on COVID testing as Omicron drives a new phase of the pandemic, with 2H testing remaining quite strong and an ongoing feature into FY23/24, despite fluctuations and declining overall trend.

Forecast and valuation update

We have adjusted FY22-24 forecasts on the Agilex acquisition, AASB 16 adjustments to D&A estimates and significant increases to COVID testing assumptions, driving material increases to underlying profit.

Our (login to view) price target is based on a blended DCF, PE and SOTP analysis.

Investment view

While we view adding a pricey clinical testing company adds another layer of complexity as the company continues to transition to a specialist diagnostic and day hospital operator, the near term remains all about COVID testing, with Omicron driving a new phase of the pandemic which we view as underappreciated by the market.

Price catalysts

1HFY22 results 24 Feb-22.

Risk

While we view adding a pricey clinical testing company adds another layer of complexity as the company continues to transition to a specialist diagnostic and day hospital operator, the near term remains all about COVID testing, with Omicron driving a new phase of the pandemic which we view as underappreciated by the market.

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