Asterand plc has shown a dramatic improvement in its financial report for the year 2008 and has turned its consistent financial losses into a £3.9 million operating profit. The revenues doubled from being £7.6 million in 2007 to £15.2 million in 2008. The company has consolidated its position in the human tissue and human tissue-related services market by deals with clients such as the US Department of Defence Armed Forces Institute of Pathology (AFIP) Tissue Repository. Asterand's stock was also listed as the top performing stock at the London Stock Exchange for the year 2008. The company now finds itself with cash resources of £6.9 million with no long-term debt.
These changes along with the rapidly growing market for human tissue and related services make Asterand plc an attractive option for acquisition. On comparing the financial performance of Asterand plc with that of Concateno plc (a chosen standard company), it can be concluded that Asterand is a very lucrative company and is headed in the direction of generating high revenues. A detailed explanation is provided in the report and an acquisition of Asterand plc by GlaxoSmithKline is recommended.
Asterand plc, a holding company, is the leading supplier of high quality human tissues and tissue-based research services to drug discovery scientists globally. The company primarily operates in the UK, US and Japan. It has its headquarters is in Hertfordshire, the UK and employs 90 people. (Asterand plc, Annual Report and Accounts 2008). The company recorded a revenue increase of 100%, from £ 7.6 million in 2007 to £15.2 million in the year ending December 2008. The company's operating profit was £ 3.9 million in 2008, a significant increase from the operating loss of £ 2.1 million in 2007. The net profit for 2008 was £ 3.9 million as compared to the net loss of £ 1.9 million in 2007.
Pharmaceutical research is at a critical stage in the business of drug discovery. Despite the ever rising R&D budgets, the success of drug applications is low because failure during the stage of clinical trials is very high. Animal models just help researchers in assuming the effect of a newly found drug on humans. However, it is just an assumption and can always go wrong. This has resulted in the scientists relying upon human tissue based models for a more detailed and satisfactory experiment. It is here a company like Asterand comes in.
Asterand provides researchers with access to human tissues through its global network of 83 collaborative donor institutions. The company's XpressBANK, which is a biobank, contains several hundred thousand specimens from a wide range of therapeutic areas and also diverse ethnic representation. The company provides another service called ProCURETM , where human tissues and clinical data can be custom collected to meet special requirements. Another known service is the PhaseZERO drug discovery, where the company provides a collaborative scientific approach in delivering human tissue-based data on target and biomarker validation as well as the safety, efficacy, potency and disposition of the compound. The company boasts of its experience of over 10 years in providing top multinational pharmaceutical companies with human tissue-based services.
The turnover generated by the company over the last 5 years and the profit before taxation has been on the rise at a constant rate. The turnover and profit before taxation are graphically analysed below:
In the year (2008) the company saw a sudden jump in its revenue (~100% increase) and its profit before interest. This is mainly accounted for by a successful deal with the US Department of Defence Armed Forces Institute of Pathology (AFIP) Tissue Repository. This deal lead to the generation of £1.4 million for the one year contract, and also added to the market value of Asterand due to the image AFIP carries. There are possibilities of successful deals in the future between the two parties.
§ Asterand was founded as BioSamplex in 2000.
§ The name of the company was changed from BioSamplex to Asterand in 2001.
§ In 2005, Asterand started its office in Europe.
§ In 2006, Asterand entered into a licence agreement with BTG, where BTG acquired the rights to a series of compounds discovered and developed by Asterand.
§ In 2006, the company became a public company by the reverse takeover of Pharmagene by Asterand. Also in 2006, the company entered into a partnership with Rubicon Genomics to discover a novel biomarker for cancer diagnostics.
§ In October 2007, Asterand entered into an agreement with the US Department of Defence Armed Forces Institute of Pathology (AFIP) Tissue Repository. This was a big achievement as the one year contract was valued at £1.4 million, and the group also hopes to conclude further agreements with AFIP which a prestigious reputation worldwide.
§ In June 2008, the company entered into an agreement with Eolas Biosciences to represent its product lines in Japan.
Asterand came up with a changed strategic plan in June 2007, shortly after Martyn Coombs joined the company as CEO. The new strategy is aimed at enhancing the selling model and developing more collaborative relationships with key customers. They also aimed at improving the company's tissue supply logistics to ensure enhanced availability of specimens whenever the clients needed them and to increase the efficiency of the company in order to reduce costs and improve profitability. These measures have paid off and the latest financial statement speaks for itself.
The company formed an alliance with Eolas Biosciences to improve its performance in Japan. The relationship between the company and customers has been placed high on the priority list. Asterand has also gone to the extent of involving their scientists in order to get a better understanding of their customer needs. The company ensures it provides a proper and friendly environment for all its employees. It has been named in one of the top 20 “Best Places to Work” for 2008 in a survey conducted by The Scientist magazine. This is another important strategic plan of the company. Employees that are happy and satisfied with the company they work for will definitely perform to their best potential.
A successful financial year for Asterand resulted in gains in share prices. The company's stock was the top performing stock of 2008 on the London Stock Exchange. The prices continued the upward trend and showed very positive results in the first few months of 2009.
The share price of Asterand is compared against the share price of Techmark mediscience in the graph below:
In the latter half of 2008, the world faced a severe economic crisis. However, Asterand has achieved strong results amidst this crisis. The reason why Asterand seems to be resistant to recession is that the number of companies requiring their services has increased. Asterand aims to further strengthen their ties with hospitals with which they collaborate and also to establish new ties with hospitals globally.
Current Market And Competitors
The global market for human tissues and associated research services is estimated to be around £350 million and is growing annually at a rate of 20% to 30%. The high growth rate of this market is mainly driven by the ever increasing demand of human tissues by pharmaceutical industries. The leading pharmaceutical companies now are relying heavily on human tissues for pre-clinical testing of their drugs. At the same time, several pharmaceutical companies are outsourcing their R&D to lower cost specialist companies in order to cut down on costs. Either of the two trends is beneficial to Asterand as it specialises in both. This market has been strong despite the economic crisis and has not been hit significantly.
Another important factor in the market of human tissues is that there is no single dominating company in terms of market size and share. There is no single company holding more than 3% of the global market. As a result, the scope of growth is considerable. Asterand claims to be the largest player in the industry. The advantage Asterand has is that its biobank already has over 200,000 samples from a broad range of human tissues. This makes its position safe with almost no threat from new entrants because for a new company to establish and construct a biobank that is comparable in size to Asterand will take years. Asterand stands out in the quality and range of samples and is unmatched by its competitors. The company has positioned itself so well in the last one year that it has also received takeover bids that have failed to work as both parties could not agree upon a common ‘fair' price.
The annual turnover for Asterand consists of a major contribution from the overseas market. The annual revenue from the UK and the revenue from the overseas market are compared in the graph below. It can be seen that the annual turnover from the UK accounts for a very minor percentage of the Gross Turnover. This indicates that Asterand has a relatively small market in the UK. With the increasing number of research experiments in the UK, penetrating this market is very important.
Asterand has a wide range of products and services. The company's key products and services include:
§ Human Tissues and Biofluids
§ RNA and DNA
§ Cell Lines
§ Tissue Microarrays
§ Human Primary Cells
§ XpressWay Profiles
§ In situ Hybridization
§ Biochemical Pharmacology Services
§ Metabolism and Toxicity Services
Despite several advantages that Asterand has over its competitors, it has its share of weaknesses. One of the biggest threats to its revenues is the company's heavy dependence on one country for supply of tissues, Russia. In 2007, Russia enforced restrictions on biometric exports. This had an effect on the sales of Asterand. The company is now trying to expand its donation sites in several locations such as Europe and Asia. Over 10% of the sales of the company are accounted for by its top three clients including AFIP. The threat here is that if these companies end their contract with Asterand, sales may be affected. Growth of sales has to be ensured by the company in order to consolidate its position in the market.
Porter'S Five Force Analysis:
The following companies are the biggest competitors of Asterand:
(1) LifeSpan BioSciences, Inc
(2) Stem Cell Sciences Plc.
(3) CryoLife, Inc.
(4) Aastrom Biosciences, Inc.
As mentioned earlier, there is no clear cut leader in the market as even the biggest of companies in this sector hold a market share of no more than ~ 3%. However, the above mentioned companies are the closest rivals in terms of products and quality of services provided by Asterand.
To carry out the financial analysis, various ratios for Asterand plc (2008) have been compared against those from Concateno plc's annual financial report 2007. Concateno is Europe's leading drug and alcohol testing provider and also manufactures clinical diagnostic products.
The financial statements in Asterand's annual report have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, International Accounting Standards (IAS) and IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. (Asterand plc - Annual Report and Financial Statements 2008). The company follows the policy where every financial year ends on the 31st of December.
Comparison of the ratios for Asterand plc against Concateno plc:
Comparison Of Performance Ratios:
The performance ratios of Asterand have been compared to that of Concateno in the above table and show a very positive result. It can be seen that the Return on Net Assets for Asterand are very high, 31.8%, as compared to Concateno, 1.31%. This indicates that Asterand has utilized its assets very well in the last financial year. It is a significant change from the previous years where the RONA was constantly a negative value.
The gross margin Asterand generates over its sales is a decent 56.37%. Although it is lower than that of Concateno which is at 59.27%, it is a steady increase over the values from the previous years. The sales margin for Asterand is a good 25.83%, far better than that of Concateno at 7.58%. The sales margin has shot up significantly and indicates that the business is highly profitable.
Asset turnover for Asterand is 1.23 as compared to 0.17 of Concateno. This indicates that Asterand has the upper hand at managing its assets to generate revenue. It should be noted that this ratio has fallen from 1.35 in 2006 to 1.29 in 2007 and finally to 1.23 in the year 2008. However, it was relative very low in the years before that. The asset turnover output is good but steps need to be taken to ensure that the ratio does not suffer further.
The sales generated per employee at Asterand are £169,101 which is again better than the £129,030 generated per employee at Concateno. This is an indicative that Asterand are getting more out of every employee which is good for the business. This has increased by over a hundred percent in the last one year. The credits for this can be given to the effective management of the company. The profit before interest and tax generated per employee for Asterand was £43,667. This is very high and is far better than Concateno which generated £9,777 per employee in 2007. In the previous years, this value was constantly negative for Asterand as the company was suffering losses.
The graph above shows the significant change in the sales and profit generated per employee over the last five years. This is a very promising sign for the company and also for potential buyers.
The stock days for Asterand are fairly high at 245 and are far better than that of Concateno. Debtor days for Concateno are 75 days which is a reasonably small time in which they receive payments from the customers. It is again better than Concateno and helps Asterand maintain a good cash flow. Creditor days for Asterand are 39 days which indicates that the company is in a strong financial position. As far as the working capital is concerned, Asterand are far better placed than Concateno. The graph given below compares the working capital ratios of the two companies and indicates the clear edge Asterand has over Concateno.
The current ratio of the financial status of Asterand is 3.62, indicating that the firm has high liquidity. It is far better than the modest current ratio for the financial status of Concateno. This is very attractive from the creditor point of view and will in turn help in maintaining a healthy working capital. The acid test ratio for Asterand is 2.57 and this is highly attractive for possible bidders that look at taking over the company. Concateno on the other hand is not in a position to pay their current liabilities immediately. This is not a very good sign for the company.
Asterand fares better than Concateno in the Interest cover as well. The figures from Concateno indicate that it is not in a position to take additional debt, whereas the figures of 115.59 from the Asterand's annual report indicate that it is in a position to comfortably repay its debt.
A gearing ratio of 0.35 for Asterand indicates that it is capable of withstanding downturns in the business. The gearing ratio for Asterand has been unsteady over the past few years. It is indicated in the graph below:
It can be observed that the company was very vulnerable to changes that were taking place in the business in the year 2006, and the company was in a critical financial position. It has recovered well from there and now seems to be back on track.
The return on equity for Asterand was at 31.43% indicating that the company has had a successful financial year overall. It was far more efficient as compared to a mere 0.64% for Concateno. Earnings per share for Asterand are more than 3 times that for Concateno. It should be noted that Asterand plc's stock was the top performing stock in the London Stock Exchange for the year 2008.
The financial ratios have given a very positive indication of Asterand and it has done much better than Concateno plc on an overall financial performance basis. The company has come through the global financial crisis seemingly unaffected and has also turned around its losses into high profits with successful and calculated changes in the management and company policies. It is a promising company and generates serious interest for acquisition.
Conclusion & Recommendations For Acquisition
A thorough financial analysis of Asterand plc indicates that acquiring the company will be a good move. The company has doubled its revenues in the last one year from £7.6 million in 2007 to £15.2 million in 2008. The operating costs of the company have been successfully reduced by 4% from £5.6 million in 2007 to £5.4 million in 2008. Out licensing of certain pre-clinical compounds has lead to an upfront payment of £3.4 million. This deal could also provide payments and royalties of around £36 million in the future.
The performance of the company has significantly improved with the Core business revenue up by 60% to £11.8 million as compared to £7.4 million in 2007. The company saw 2008 as the first profitable year of its existence as a public company and this is set to improve. The basic earnings per share went up to 3.53p per share in contrast to a 1.83p loss per share in 2007. The cash resources of the company were written down as £6.9 million. Profit for the year was £3.9 million as compared to the £1.9 million loss in 2007. EBITDA went up to £3.8 million profit, a change of £5.0 million from the £1.2 million loss in 2007.
In all the company looks to be promising despite a gloomy history it has had in terms of its financial statements before the 2008 report. The demand for human tissue and related services is bound to increase in the future. Also, valuable clients like the US Department of Defence Armed Forces Institute of Pathology (AFIP) can be made regular clients by ensuring that their standards for quality are met at all times. This will attract several other clients to work with the company.
A significant advantage our company GlaxoSmithKline will have after acquiring Asterand plc is that the R&D expenses of GSK will be cut down. We will have the human tissue samples and other services available at our disposal to carry out our pre-clinical trials for various drugs. This in turn will increase the success rate of our products and help improve the global image of the company and make it better than what it already is. Therefore, to conclude, acquiring Asterand will be a good investment that will strengthen the position of GSK further and will lead to increased revenues.
Asterand plc, ‘Annual Report and Accounts 2008'.
Asterand plc, ‘Growth and Profitability'. Piper Jaffray Conference, June 2009.
Concateno plc, ‘Annual Report and Accounts 2007'.
Datamonitor, (2009), ‘Asterand plc - Company Profile'.
Daniel Stewart & Company, (2008), ‘Asterand healthcare'. (Daniel Stewart & Company acts as broker to Asterand).
www.asterand.com (Visited several times during 15/01/2010 and 08/02/2010).