Deborah Honig letter (Adelaide Capital)
tWe are booking meetings for Cameron Groome, CEO of Microbix (TSX:MBX), next Tuesday. Please let me know if you have any interest in hearing the full pitch or getting an update. This pitch was written to be shared beyond my roadshow booking efforts so please feel free to pass along. I often get told this is a complicated story and so here is my attempt to simplify the investment proposition as best I can and discount the sell thesis that has been circulating. I welcome any questions, commentary, or feedback via email, WhatsApp or phone call. For those of you that know me I can report that I have returned to Canada and am stuck in a covid hotel hence why you are receiving this at a later than usual hour. Again, I welcome any outside communication! A special thanks to Bruce Krugel for allowing me to steal parts of his well-researched Q2 report which is also attached. For nearly four years, I have been working with a small infectious disease diagnostics company called Microbix Biosystems (TSX: MBX). Four years equates to an eternity in IR mandates and throughout this time, Ive seen the company grow at an ever-increasing rate, create new product lines and license/register its products in dozens of countries all during an incredibly challenging time. Management has effectively managed cash flows, fortified the balance sheet, and made smart business decisions in terms of which avenues to pursue for growth. Obviously, I should be considered biased as Im compensated directly by MBX, and hold options and stock, BUT I can honestly say that Ive never seen the Company better positioned. So what do I mean about the Companys position and why am I so excited about MBX even after the stock has already has such a great run/return? In terms of valuation, MBX is trading at 5.3X EV/EBITDA and 10x P/E for its ongoing fiscal year, which is a big discount to peers, all of which have much lower and/or declining growth rates. See Bruce Krugels (BKs) report for a full explanation on the valuation of Microbix. This is based on facts, as the Company recently put out a fantastic Fiscal Q2 and has the table set for record quarters in its Q3 (ending June 30) and Q4 (ending Sept 30). Table Description automatically generated Chart, scatter chart Description automatically generated From whats already been reported, here are some FQ2 2021 highlights: Revenue growth of 51.5% Y/Y The Antigens* business is beginning to recover from pandemic slowdown in non-COVID testing The QAPs* business was up 251.1% Y/Y VTM* sales commenced in FQ2 but has not materially started to impact financials. This newest business unit will be a main driver of growth over the balance of 2021 and beyond. Ontario has placed an initial order of $4.25M to be delivered by Sept., and we anticipate follow on orders by ON, other regions, and groups. Gross Margin was strong at 59.8%, as was EBITDA Margin at 31% and Net Margin at just under 20%. The current cash position of >$7M is the strongest we have seen, and the Company is well financed to expand production capabilities to 1M vials/month of VTM and also automate QAPs (test controls) production to support much greater monthly volumes. This translates into 90% revenue growth in 2021E and 62% in 2022E (BKs estimates) The recent capital raise was strategic. MBX has been setting-up some large growth opportunities and needed to show the ability to ramp volumes in anticipation of global-scale expected orders. So, while the company turned the corner in Q2/21 with regards to cash flow generation, it could not wait to fund expansion from cash flow from operations. The result of it financing is a stronger balance sheet and production expansion pulled forward to meet near-term revenue growth opportunities. The offset to all these positives is a questionable End of COVID-19 Sell Thesis. Specifically, there has been a thesis circulating about MBX rolling over into declining revenues in a post-COVID world. I believe this thesis to be incorrect for several well-supported reasons. First, Ill point out that we are sitting in front of two record quarters so I dont believe investors will be selling a stock in advance of the balance of fiscal 2021 because the next year might be slower. Maybe some will sell after Q4 results are released, but I believe that would be short-sighted for a multitude of reasons. Microbix has been a specialist in infectious diseases for three decades and was not just a COVID stock that went for headlines and played the theme. Microbix has created and sold millions of dollars of pandemic-related products in Ontario, across Canada, and around the world. But its activity is not limited to COVID. Of course the pandemic provided growth opportunities the company was able to execute upon BUT the focus of the company remains on the whole spectrum of infectious diseases, not just SARS-COV-2. Even testing for COVID-19 will be with us for a long time still, so VTM for COVID-19 testing is unlikely to disappear, particularly when everyone gets the sniffles again this fall. Plus, there is a global shortage of VTM that Microbix has not even begun to pursue in a meaningful way and VTM has many uses beyond COVID-19 testing. In 2019 for example, Canadian imports of swab and VTM were US$56M (thats pre-COVID) and MBX is the ONLY domestic manufacturer of VTM. Beyond the VTM opportunity there are multiple growth avenues including the QAPs HPV and other STI opportunities, which could be massive, and the antigens business has actually declined during COVID and is only now starting to rebound so there will be resuming growth in what was historically the Companys largest business line. Also, let us not forget that Kinlytic, the companys biologic drug asset, remains in play and could be a huge catalyst for the stock if a partnership or sale of that business were to materialize. Finally and more broadly, Microbix has demonstrated its ability to pivot and create new products during a difficult time with supply chain issues, manufacturing constraints, and rapidly-changing government policies and regulations. If they were able to execute so well during the pandemic, it is sensible to believe they will continue to innovate and develop new products and business lines in a post-pandemic world, particularly now that the company has built-out global distribution, raised its profile in the diagnostics industry, strengthened its balance sheet, and is now generating free cash. *Glossary for lay people like me that dont live-and-breathe microbiology: Antigens purified and de-activated viruses or bacteria that go in diagnostics panels to test someones immunity to a particular disease bug. Quality Assessment Products (QAPs) test control panels, used so a lab or testing facility can find/minimize false positives and false negatives to improve the accuracy of their infectious disease testing Viral Transport Media (VTM) the liquid in the bottom of the vial that they stick the swab into after they shove it up your nose to get the sample to test for COVID-19 and other diseases Deborah Honig T: (647) 203.8793 E: deborah@adcap.ca www.adcap.ca