Healthy return: Stockopedia speaks to Nick Ash, Managing Director of healthcare and pharma services group, Source BioScience plc

When Nick Ash took the reigns as managing director of Source Bioscience (LON:SBS) in February 2007, the company was facing a crisis. Several years on London’s Alternative Investment Market had failed to produce a profit and a string of strategy hiccups had left it flailing and over-exposed to non-core markets. In the years that followed Ash’s transition from FD to CEO, he worked closely with chairman Laurie Turnbull (who recently stepped down as chairman of insurance group CBG Group - LON:CB.) to get the business back on its feet. By 2009 it was posting its first ever profits and this week Ash came back to the market to report that the business had remained in positive territory through the first half of 2010.

Source BioScience is a healthcare and biotechnology company that provides outsourced diagnostic and screening services to the healthcare sector together with genetic analyses and biomolecular tools and products to the life science research and pharma biotech sectors. The two sides of the business are broadly even in size and revenue and benefited from the bolt-on acquisitions of Geneservice in June 2007 for £3.9m and Autogen Bioclear in February 2008 for £6.0m. Those deals were partly funded by a £16m war chest generated by the sale back in 2007 of some non-core hospital laboratories in Dubai. Still Ash and Turnbull are sitting on £5.5m of that cash and are keen to expand with more acquisitions.

In the six months to June 31, 2010 the company delivered a modest rise in revenue to £6.9m and a pre-tax profit flat at £0.1m. Those figures compared well against an exceptional performance in the first half of 2009, when the death of reality TV star Jade Goody triggered a surge in demand for cervical screening – one of the company’s specialisations. A series of contract wins, including the award of a cervical screening deal in Wales worth £5.0m over five years have kept up the company’s strong momentum. Stockopedia spoke to Nick Ash about Source BioScience’s journey into profit and the opportunities that he sees to expand the group even further.

Nick, back in 2007 your main focus was on turning Source BioScience into a focused, profitable business. How have things progressed since then and what impact has the recession had on you?

From a business point of view, over the last 18 months we have continued to make progress and were able to report profits in the full year to December 2009, which was the first time the business had ever been profitable. That was a great position to be in and it has continued into the first half of this year – we are profitable at the half-year, which we have never been before. So the business has continued to grow. In terms of the environment, the recession has had interesting consequences, one of which you see in the numbers and another one you see in the opportunities that are being presented to us.

Traditionally, in the short run, NHS funding has not changed, whether it is a recessionary environment or not, and the NHS represents 60% of our business. In Life Sciences, we are anticipating a squeeze on grant funding but a lot of that squeeze is being put on capital funding for equipment. Grants of perhaps half the money are still being made on the premise that researchers can’t go out and buy more kit because the kit is available out there in the marketplace, from people like us. So it’s a case of “use what is out there and spend the money on your research”, which is perfect for us offering an outsourced solution.

So, there has been no impact on the underlying business – cancer diagnostics is still the same and people are still doing research – but generally, while people aren’t expecting more for their pound, you are having to work harder to get the pound out of them. People are a little bit more conscious of what they are going to get for their money. When we are in the business of delivering expertise and time in the lab, that’s fine, we can manage that.

How would you describe the market conditions now? You’ve had some notable contract successes in the first half. What impact will they have on the business and what scope is there for more of the same?

There are certainly opportunities for us out there and that is reflected in the fact that revenues have continued to increase and we have managed to maintain the gross margin. The contract wins have been good on both sides of the business. The big one was renewing the cervical screening contract in Wales for three years plus two years on better terms – that is £1m per year of revenue. We had to renew it and we expected to win it but you don’t take anything for granted until it is signed and sealed. Another two were with pharma companies to do genetic testing. While you don’t expect a flood of work to arise from those, what you do see is the recognition that you are a credible provider of that kind of expertise when you have got the likes of Astrazeneca (LON:AZN) and Roche (SIX: RO, ROG) signing up as their approved lab. You still have go and win new business but it proves that you are in the game and that is very satisfying.

Of your divisions, Healthcare had been one that was particularly troublesome in the past. You seem to have fixed that now and it delivered a £1m profit in the first half of 2010. What factors are driving that area of the business forwards?

Initially, we made a big number of operational changes just to improve the way that we delivered the work and to get people focused on the things that matter to customers – turnaround times and responsiveness – things that makes you more attractive to your customers. On the commercial side, it was a case of starting to migrate some of the genetic testing into Healthcare. We had talked about doing that for a couple of years and we always said there was a demand from pharma companies for target therapies, which in turn leads to a requirement to test the genetic signature of a lot of diseases, and that is great for pharma. But that is only relevant in a healthcare environment when people are prescribing those targeted therapies and they are needing to do the segmentation of the patients. That is now starting to come through. So a lot of the growth in that part of the business has come from penetration of genetic testing of cancers so that clinicians can make a decision over some of the new therapies. Again, that is perfect for us because that was exactly what the plan was when we bought the genetics business three years ago.

Source BioScience has pulled off acquisitions in the past and clearly would do so again in the right environment. When do you predict market conditions might swing in your favour and which areas of the group would you look to strengthen?

We have not stopped looking for opportunities at all, we want to grow the business and we want to accelerate that growth. We have got £5.5m of cash in the bank for and no debt so we are ideally placed to grow through acquisition. Despite the fact that there has been a recessionary environment, the aspirations of people in private businesses and their appreciation of what their businesses are worth, have not really changed. So while the views of the buyer have changed, the people selling private businesses have not really reflected that and are holding out for values that we think are unrealistic – particularly given the operational or financial performance and given the general market conditions. We are simply not going to over pay. There is some value in listed companies, where we can see they are undervalued by the stockmarket, but the counter to that is that we feel that we are also undervalued. We will not want to give away our paper at a discount to buy somebody else’s cheap paper. There is a balance of getting it right at the right price. There is a collection of companies that we are monitoring and they are operating across our range of activities.

Overall, what can we expect to see from you in the second half of the year?

We came in to January 2010 knowing that the first six months of 2009 had been very exceptional for us. There had been an exceptional hike in revenues from cervical screening, which had been triggered by the death of Jade Goody. So it was a high hurdle just to reach the figures for 2009. Then as we entered January and February this year it was very quiet because of the weather and we were hit by the ash cloud debacle, which meant we couldn’t source equipment from the US. However, the half-year turned out to be better than the first half of 2009, which I am very happy with. That also gives you an indication that the second quarter must have been good. The satisfying thing about that is that no one area of the business outperformed the other – there was just a general strong performance across the board. That leads us nicely into the second half of the year.

We have also carried out some initiatives to push the business forwards. First, we have invested in the next generation of sequencing equipment, where we spent £1m to drive that part of the business forward, which should increasingly come through during the second half. We have also talked about a new e-commerce platform for our Life Sciences business, which is now live. This is important because for that last two years we have been selling sequencing on one website, products on another and clones through another site. With the site now in one place, everybody can access their entire portfolio, we can cross sell things much more easily, we can bundle our products and services together much more readily and it is a completely unique offering. Nowhere else can you buy all these key components of life sciences research in one place and now we can really start to push that. We are very happy going into the second half.

Thanks for speaking to Stockopedia News.