Sygnis — Update 19 May 2016

The Expedeon deal in strategic terms is excellent for Sygnis. The impact on Sygnis’s combined sales line will be dramatic as it broadens the product range and adds direct sales. This gives the possibility of profitability from 2017, assuming that the molecular biology kits become better established and that costs are controlled. Expedeon has seen a revenue CAGR of about 20% over the last five years and needed access to capital to maintain its growth. The businesses are complementary, with Sygnis operating in innovative molecular biology kits and Expedeon in convenience commodity markets for protein analysis (proteomics), with cleverly designed but standard products based around a core range of electrophoresis products. Synergies are expected from 2017, but the impact in 2016 will be limited as the deal will not complete until mid-year and integration and training will take some months. The deal requires AGM approval on 20 June 2016.

Expedeon Holdings reported a 2014 loss of £70k (after amortisation of £73k) and noted a historic value of £174k (€219k) for Expedeon, the trading subsidiary. Note that as a small UK company, Expedeon does not disclose full accounts so this is based on abbreviated balance sheet information. The last public accounts were dated 31 December 2014.

Expedeon was loss making until 2012 when it started to make profits and generated cash. It recorded a statutory 2014 profit of £131k (€165k). Cash in 2014 (so nearly 18 months out of date) was £173k with investments of £26k. In 2014, Expedeon made a 2014 capital investment of £357k, so cash generation was clearly strong; amortisation and depreciation were £17k, so not material.

In 2015, Expedeon sales were stated by Sygnis as €2.5m (£1.98m) with an EBITDA margin of 13%: €325k (£257k). 2016 expected sales are stated by Sygnis to be €3.5m; this would be 40% revenue growth, above the CAGR range of 20%. The higher expected growth is probably due to the Chinese deal with Tanon (signed with Expedeon in 2015) promising to add $1m to sales in 2016. The EBITDA margin is expected to rise to15% in 2016, according to Sygnis.

Sygnis’s core IP is a range of novel engineered enzymes for genetic analysis and genome sequencing. The two own brands are TruePrime and SunScript. TruePrime kits copy and amplify the whole genome before DNA analysis and gene sequencing. Sygnis has shown data on the advantages of avoiding random primers by using the TruePrime system. This gives better-quality genomic DNA with much less contamination from extraneous DNA sources. The SunScript kit converts short-lived RNA messages in cells into DNA for analysis or sequencing. The enzyme is stable with high yields and sensitivity claimed; it can work together with TruePrime. A planned Q3 2016 launch is for a cell-free DNA kit for liquid biopsy for research use. Sales are mainly through distributors, but with web sales building slowly over 2015. The deal with Qiagen on SensiPhi has been disappointing and is non-exclusive from 2016. This will allow Sygnis to develop its own products based on this novel enzyme.

Expedeon’s core sales seem to be a range of convenience electrophoresis products. The products offer good value through innovative features and are not discounted. These techniques have been used in biochemistry laboratories for decades to analyse mixtures of proteins and to get basic data like molecular weight. The method separates proteins using a high-voltage electric field to pass them through a gel. Researchers can pour their own gels, the traditional route, but precast gels are easier, safer (toxic chemicals), stronger (Expedeon offers a tear-proof gel) and give consistent results. Gels are stained with traditional coomassie, a blue dye also sold by Expedeon as Bradford reagent, or by luminescence, a more sensitive technique offered by several suppliers. Expedeon also sells other reagents for extracting and analysing proteins and some bench-top equipment. No sales breakdown by category is available, but we presume that precast gels are a steady volume seller with regular repeat orders. The many other products probably form a long tail, as is normal in reagent businesses. Expedeon’s marketing channels are shown in Exhibit 1. There are nine identified sales territories, with the emphasis on the UK home market and the US with almost two-thirds of sales, plus a presence in Germany, France and Singapore. There are 13 sales and marketing staff in total. Manufacturing is done in the UK and US.

The two product lines do not overlap and fit together well as shown in Exhibit 2.

The two types of product lines are often used by different types of researchers, although there may be a lot of overlap depending on the project. However, they will often be in the same research facility so it should be easy to add in extra sales calls and boost the sales per call as a result.

Sygnis plans to pay €1.7m in cash for 7% of the Expedeon equity with the balance paid in equity: a total price of €24m (£19m). Given the Expedeon 2016 sales guidance of €3.5m (£2.8m), this is a sales multiple of 6.7 times. If the EBITDA margin in 2016 is 13%: €460k (£360k), this is an EBITDA multiple of about 46 times. Sygnis plans a rights issue to issue up to 20.5m shares. Of this, €5m is expected to be for cash with €1.7m allocated to pay 7% of the acquisition cost. The rest of the cash covers fees, legal costs and working capital; we expect up to €1.5m in deal costs and at least €1.8m for working capital. If the cash portion of the rights issue in undersubscribed, the difference in the purchase price will be paid in shares. The lock-up on Expedeon shares is 18 months.

In terms of the combined business, these are two different sets of expertise so integrating the operations might not be straightforward. Some Expedeon sales people may be less familiar with the relatively complex, technical and fast-moving molecular biology area with multiple competing products. Electrophoresis technology is long established. However, once initial training has been done, the deal should deliver good synergies. These will be seen in 2017. The long lock-up period of 18 months should delay any share overhang effect on the share price until late 2017. This lock-up also extends to major Sygnis shareholders (owning more than 3%).

We have reduced our pre-merger 2016 forecasts following the revised guidance given with the FY15 results. Pre-merger, the revised expected operational loss was about €1.8m. Post-merger, this might reduce to no more than -€1.6m, Exhibit 3. The combined business could have consolidated 2016 revenues of around €3.2m, Exhibit 3. Expedeon might contribute over €228k EBITDA (at a 13% margin) in 2016 (half year) and about €630k in 2017 (full year). We assume that Expedeon brings €500k in cash.

After issuing 20.5m new shares to fund the acquisition, there will be about 37m shares in issue, up from 16.53m at the end of March. At the current share price of €1.38, the new group could have a value of €51m, which would be about a tenfold multiple on annualised combined sales guided for 2016 of €5m. The payoff is from 2017 when sales synergies should be in place, direct sales of molecular biology kits could have risen and costs might have been rationalised, which might take the merged business to profitability.

Financial forecasts assuming the merger completes by 1 July 2016 are in Exhibit 4. Sygnis’s 2015 sales were slightly lower than we expected at €555k (€650k forecast) due to a decline from €300k to €252k in caco cell royalties from LION Bioscience and lower royalties from Qiagen at €155k. Q1 2016 sales were €91k. Cash flow (including R&D and capex) was -€4.4m with -€1.2m in Q1. A capital raise of €6m in December 2015 yielded €5.1m net, giving 2015 year-end cash of €4.6m and Q1 cash of €3.4m. Sygnis had €0.7m of extra costs associated with rationalisation of the business during 2015. These have reduced overall costs. The interest charge has reduced from 2016 as the expensive loans have been repaid and the remaining debt is a soft loan at less than 2% interest.