Omega Diagnostics (ODX) is a small-cap medical devices company with enough potential to stand out from the crowd. While the company is doing well from its existing testing business, and particularly its focus on emerging economies, it is the significant upside that could be on offer from a new HIV test that means the shares warrant closer attention and make them a speculative buy for investors willing to take on the risks associated with the development of medical products.
- Interesting niche in HIV testing
- Exposure to emerging markets
- Generates cash
- Sensitive to development newsflow
- Possibility of delays
- Will need cash at some point
Omega's business making tests for auto-immune diseases, allergies, infectious diseases and food intolerance conditions is currently profitable with a direct sales force in the UK and Europe and an expanding presence in India. The company has grown quickly with the help of a number of acquisitions and boasts a decent three-year compound average sales growth rate of 25 per cent. But the real interest for would-be investors lies in the fact that the revenues the business generates have been invested in developing tests for niche, high-value markets and the group is now in the late stages of development of a new product that could produce major upside.
Omega is developing an automated assay for HIV patients, called Visitect CD4, which, if successful, will help doctors decide on the correct time to start treatment and monitor its efficacy. The company recently reported "very encouraging" results from tests by an external lab looking at manufacturing protocols and the first sample tests for evaluation of the product are expected later this year. If registration and regulatory approval goes smoothly, then the first commercial sales could come in the second half of 2014, according to analysts at finnCap. The broker believes the commercial opportunity of the test has the potential to dwarf the existing business. Indeed, Omega's test has major advantages over those of rivals due to its low-cost and simplicity to carry out, which should be especially attractive in less-developed parts of the world.
The emphasis on testing for HIV-related diseases should interest non-governmental organisations involved in combating the disease, while the strategy of selling tests to small- and medium-sized labs should help it avoid direct competition with much larger diagnostics companies - the fact that Omega is aiming small looks like a realistic strategy.
OMEGA DIAGNOSTICS (ODX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 15.37p | MARKET VALUE: | £13m | |
| TOUCH: | 15.25-15.50p | 12-MONTH HIGH: | 10.6p | LOW: 18p |
| DIVIDEND YIELD: | nil | PE RATIO: | 10 | |
| NET ASSET VALUE: | 16p* | NET DEBT: | £100,000 | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 6.20 | 0.21 | 1.0 | nil |
| 2011 | 7.90 | 0.10 | 0.1 | nil |
| 2012 | 11.1 | 0.48 | 0.6 | nil |
| 2013** | 11.3 | 0.80 | 1.3 | nil |
| 2014** | 12.2 | 1.10 | 1.5 | nil |
| % change | +8 | +38 | +15 | - |
Normal market size: 5,000 Market makers: 8 Beta: 0.38 *Includes intangible assets of £9.1m, or 11p a share **finnCap forecasts, underlying forecasts not comparable with prior periods | ||||
Omega already boasts good exposure to developing markets. The company has a direct distribution presence in India, which came about after an unsatisfactory distribution agreement with a partner was terminated and management decided to launch its own subsidiary. The directly-owned company should increase revenues through the use of direct sales representatives, rather than the catalogue-based approach that had previously crimped growth rates in the Indian market. All other territories are currently covered by third-party distributors, although Omega is targeting other emerging markets such as Brazil for further expansion.
The chief risk for investors in Omega relate to disappointments in the development of its experimental testing technology and the possibility of delays if regulators if take their time in approving the test for general use. Also, while Omega does produce cash, it looks like a fundraising to scale up its operations will be necessary in the medium term.
