Genovis - Amazon S3 · 2020-04-10 · Equity Research 7 April 2020 KEY STATS Ticker Genob.st...

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Update

Equity Research 7 April 2020

KEY STATS

Ticker Genob.st Market First North

Price (SEK), April 3 21.9 Market Cap (SEKm) 1434 Net Cash 20E (SEKm) 33 Free Float 100 %

Avg. daily volume (‘000) 145

BEAR BASE BULL 15.0

50.0

100.0

ANALYSTS

Håkan Östling, tel +46 (0)70 520 1967 [email protected] Anders Hedlund, tel 46 (0)70 952 0912 [email protected]

KEY FINANCIALS (SEKm)

2017 2018 2019 2020E 2021E 2022E

Net sales 23 35 61 53 108 139 EBITDA (adj.) (6) 4 17 1 25 38 EBIT (adj.) (8)

1 14 (4) 21 35

EPS (adj.) (0.14) (0.06) 0.1 (0.06) 0.32 0.53 EV/Sales 8 9 20 26 13 10 P/E (adj.) NM NM 195 NM 67 41

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OMXS 30 Genovis

Paradigm Play Redeye lowers 2020 estimates in anticipation of a transition year for Genovis, a cutting-edge

enzymes producer, but ups its long-term fair value following company visits and a review of

the case. The emerging paradigm shift in bioprocessing plus solid fundamentals promises

superior long-term growth. Falls in the stock in the challenging current environment would

provide entry points to a compelling case whose best is yet to come. Genovis remains on

Redeye’s Conviction Buy List.

Exceptionally well positioned, strong balance sheet

Genovis benefits from excellent market positions, driven by its unique product offering

combined with the successful strategy of working closely with customers. This allows it to

launch innovative new products regularly. Its facilities are well invested, the organisation

strong and management outstanding, in our view. The recent capital injection provides a

cushion and should help Genovis muddle through in a difficult period.

Strong post-corona prospects

Genovis operates in an attractive niche that is set to grow by around 10% per year. Benefiting

from several secular trends through new launches and geographic expansion, it should grow

much faster and could even outdo its own target of 25% a year in the core Analytics area.

Bioprocess step change

We regard the new project that uses Genovis’s enzymes in a clinical test phase for the first

time as very exciting. This development has the potential to become a real game-changer

offering growth opportunities of an altogether different magnitude.

Unlocking long-term value

While sales and earnings are likely to dip substantially this year due to the corona crisis, we

expect an impressive revival in 2021-22 as Analytics grows solidly and the new Bioprocess

business starts ramping up. Apart from a stabilising global economy, possible catalysts

include new product launches and potential follow-up orders on the bioprocess pilot project.

Genovis’s profile and ownership structure suggest the company may also be a takeover

candidate in the longer term, which should lend further support to the case.

Please note that this Update introduces a change in analyst responsibilities. Håkan Östling is

Redeye’s new Lead Analyst on Genovis. Anders Hedlund remains on the team as No. 2.

Genovis Sector: Medtech

REDEYE RATING

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Genovis shares versus OMXS30 - LTM

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dsfdsf REDEYE Equity Research Genovis 7 April 2020

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Investment Thesis High-quality small cap

Genovis benefits from a combination of excellent market reputation, a unique and powerful

product platform and very close relationships with its key customers. Its integrated set-up and

dynamic culture make it highly innovative, launching smart new solutions regularly.

Furthermore, its risk profile is low: it generates cash and is not subject to traditional regulatory

burdens.

Steep curve from 2019 milestone…

Last year was a notable breakthrough for Genovis. Its overall development was very positive,

with new product launches, geographic expansion and a continued organisational build-up

spurring further organic growth. It also posted its first-ever full-year profit and received a

potentially game-changing order in a new and highly exciting field. The future promises much

more of the same.

…thanks to highly favourable outlook

Genovis’s future growth opportunities are exciting. Its traditional and core business area,

Analytics, appears excellently positioned to benefit from strong growth for a long time to come.

The underlying market is growing some 10% per year but Genovis, coming off a small base and

benefiting from several secular themes, should be able to more than double that for the

foreseeable future, we judge. On top comes the potential golden egg – the new bioprocess

business area, which won a strategic and pioneering pilot order last year.

Long-term potential not priced in

The stock has been an exceptional performer. It is up a further 50% or so over the past 12

months and has held up rather well this year. Even so, current valuation fails to do justice to

Genovis’s exceptional opportunities. If the bioprocessing paradigm shift that we are already

seeing indications of occurs, we firmly believe the stock will remain a compelling investment

for the future. In addition, the company looks increasingly like a takeover candidate, which

would merit premium pricing.

GENOVIS SHARE PRICE (SEK) PERFORMANCE 2018 - TO DATE

Source: Genovis, Redeye Research

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Bear points Temporary trouble

We acknowledge the risk that 2020 might end up being an in-between year. Not only is the

corona crisis a real challenge (see further below), but the company already delivered its pivotal

bioprocess order in full in 2019; even if this area is set for exceptional future growth, it is far

from certain that much further evidence will be visible this year. Similarly, the EBIT margin could

suffer temporarily as Genovis strengthens the organisation and invests in new capacity. We

regard this as reasonable and factor it into our forecasts, but investors may nonetheless react

with unease as the picture starts to show through.

Little margin for error

Valuation raises the stock’s near to medium term-risk. While it remains very attractive in view

of the long-term evolution we picture for Genovis, the combination of limited nearer-term

evidence of success and news of a more worrying kind may be unsettling - especially to

investors with shorter horizons.

Covid-19 challenge

Even if Genovis’s profile suggests it will be less directly exposed to the virus outbreak and

developments around the world, the strong reactions from many large countries - including the

US (the company’s biggest market) - to limit activity, travel and human encounters will take its

toll on marketing and sales for some time. The logistics chain may also face difficulties. As a

small, illiquid stock, Genovis may also suffer the common disproportionate impact on small

caps in times of market turmoil. On balance, however, and despite our view that 2020 is likely

to be somewhat of a lost year with a bottom-line loss, we still judge Genovis to be rather well

positioned even in this context - particularly for investors with long time horizons. Its business

profile and financial strength offer relatively defensive characteristics, in our view.

Catalysts Quarterly results

Over time Genovis’s steady quarterly progress should reassure investors that the company is

on track in executing on its aggressive growth strategy. Besides financial performance, news

could also emerge on new product launches, the interesting exciting cooperation with Thermo

Fisher and next steps on the new bioprocess front. We caution, again, about potential

challenges this year as a consequence of the corona and economic crises.

Product launches

New product launches are the most obvious new initiatives we are likely to hear about going

forward. The current portfolio of 13 enzymes is set to continue growing: we forecast around

four ‘smart’ launches in 2020. If the Thermo Fischer cooperation yields one of these, this would

be particularly enticing.

New orders

While not our expectation at this point, a follow-up order this year from the pilot bioprocess

customer is possible. If this happens, it is likely to be a powerful trigger as the incremental

volume would probably be substantial – and the signalling value would be huge. Other orders

might follow too.


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Table of contents

Page

Investment Thesis 2

Genovis in brief 6

Positioning 8

Financials 16

Estimates and valuation 23

Appendix: I – Key Financial Statements 28

Appendix II – Enzymes and Genovis’s products 30

Appendix III - Redeye Rating and Background Definitions 31

Appendix: IV - Redeye Equity Research Team 32

Disclaimer 33


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[This Page is Intentionally Left Blank]


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Genovis in brief Founded in 1999, Genovis initially focused on nanoparticles before launching its unique

enzymes for the analysis of biological drugs around 2010. The enzyme portfolio grew, and by

2015, Genovis had streamlined its operations to specialize in development, production, and

sales of enzymes to the global pharmaceutical industry. Genovis has been successful for the

past five years, seeing strong growth. 2019 brought a tangible breakthrough with an exciting

pilot order in a new area, Bioprocess, as well as figures in the black. Genovis runs its operations

from Lund in southern Sweden, where its production facility is also located. It employs about

35 staff (including the recently acquired QED Bioscience). Sales in 2019 reached SEK 61m and

its current market capitalization is SEK 1.4bn.

Sarah Fredriksson, the original founder of Genovis and the CEO until 2015 (when the current CEO, Fredrik

Olsson, took charge), left the company in 2016 having served for a year as Chairman of the Board.

Interestingly, she returned to Genovis and an interim role as Chairman early this year, after Mårten Winge

abruptly resigned from the position, citing personal reasons. On March 23, the Nomination Committee

announced its proposal to appoint Torben Jørgensen as new Chairman at the AGM on May 5. Torben served

as CEO of Biotage in 2006-20 and is currently Chairman of that company’s board. Biotage is a life science

company active in the field of organic and analytical chemistry. Torben is also the Chairman of Atlas

Antibodies’ board and serves on a number of other boards in the industry.

A world-leading developer of analytical tools for biopharmaceutical companies

Genovis offers a broad portfolio of enzymes, known as ‘SmartEnzymes’, aimed at global

pharmaceutical companies that develop biologicals for immunotherapy. Common therapeutic

areas include cancer and inflammatory and autoimmune diseases. The development of new

biological drugs for the treatment of such serious diseases requires new and advanced

analytical tools, and Genovis’s enzymes address the pharmaceutical companies’ needs in this

respect. Appendix II offers a brief description of enzymes and Genovis’s product areas.

On a strong financial curve

Genovis’s financial progression over the past five years has been impressive. Steady growth

and increasing momentum have fuelled the top line. Sales growth for 2015-19 averaged 50%.

Gross margins are very high, averaging 88% over the same period, with the EBIT margin

trending decently after Genovis reached critical mass, thanks to higher volumes. In fact, 2019

was the first profitable year for the company.

Exceptional stock price performance

Mirroring the fundamental progress, particularly over the past few years, the shares have

performed phenomenally. Currently trading at SEK 21.9 apiece, the shares are up 742% over

three years and about 50% in the last 12 months. In this note, we will explain why we believe

this success story is likely to continue.

ANNUAL REVENUES & GROWTH RATE EBIT & EBIT MARGIN

Source: Genovis, Redeye Research Source: Genovis, Redeye Research

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1923

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6161%

40%23%

51%

75%

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Revenues (SEKm) Revenue Growth (%)

-25

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-8

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143.0%

22.3%

2015 2016 2017 2018 2019

EBIT (SEKm) EBIT Margin (%)


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As is evident from the chart, the share started its recent phenomenal run in the second half of

2018, spurred by a series of reassuring quarterly results and strong progress overall. Highlights

include the company breaking even, the co-operation agreement with Thermo Fisher Scientific,

and the bioprocess order.

During the first quarter of this year, the stock has obviously been hurt by the impact of the

corona crisis and the resulting economic uncertainty and stock market turmoil. It initially

plunged with the rest of market, also suffering from poor liquidity, but it has recently recovered

quite encouragingly. Indeed, it now trades at SEK 21.9 and it appears the market views Genovis

as relatively well positioned as far as the corona crisis.

Investor sentiment, however, soon to be stress-tested

We highlight the large prevailing risks in terms of the ongoing economic turmoil for investors

looking at the Genovis case. While the long-term story is arguably strong and intact, in our view,

near-term news flow is likely to challenge market sentiment on the stock regardless,

particularly as it has been holding up rather well of late.

Several of Genovis’s main markets are severely affected by far-reaching restrictions, including

key European countries, such as Italy, France, and Switzerland. Moreover, Germany, the

Netherlands, and Belgium are other important markets and are also affected, albeit a little less

so. It also appears that its single largest market, the US, is heading for a perfect storm in the

coming months, and more severe measures are currently being imposed there. Asia may be

seeing some light at the end of the tunnel, which is positive, but this region has also been

constrained for most of the first quarter of 2020 and it is also too early to announce a

sustainable recovery there.

The sudden and simultaneous halt of economic activity across virtually all Genovis’s core

markets will, in our view, prompt a severe (if temporary) slowdown for the company and its

aggressive growth strategy. Indeed, we expect the top line to drop considerably year-over-year

(on an underlying basis; note that we have pencilled in the QED acquisition from Q2), which is

likely to bring operating losses as early as Q1 20 and almost certainly for the full-year.

It is difficult to predict how things will pan out, but our base case implies that Q2 will be the

hardest-hit quarter and Q4 is when matters will start to return to normal. By the same token,

we expect a real recovery to take hold next year, with Genovis gradually returning to previous

trends. It is comforting that the world is likely to come out of this crisis with a renewed interest

in medicine and drug development. To sum up, we caution that the near-term news flow and

Q1 20 and Q2 20 results are likely to be poor and may disappoint the market.

SHARE PRICE HISTORY (SEK)


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May 5th: FredrikOlsson becomes the new CEO

April 8th: Genovis enters into a collaboration agreement with Thermo Fisher

November 27th: Genovis shows a positive EBITDA result for the first time

September 18th: Genovis signs distribution agreement with Chinese Beijing Zhongyuan

November 11th: Genovis signs license agreement with Life Technologies

February to date: Corona crisis hitsAugust 19th: Genovis receives

order worth 13.5 MSEK in the Bioprocess segment

June 30th: Genovis and Promega reach a settlement in the patent infringement lawsuit

2015 2016 2017 2018 2019 2020


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Positioning One of several distinguishing features of Genovis is its close relationship with its customers.

In combination with its attractive product palette, we regard this strategy as highly compelling

and believe the decision to switch to direct sales in 2015 was a very positive move. Deep

relationships and close interaction help Genovis stay at the forefront and swiftly transform

customer needs into specific new products.

▪ Unique and competitive product offering

▪ Close relationships with customers

▪ Innovative and agile business

▪ Covers the entire value chain

Genovis’s product offering is unique, differentiating itself through high quality, reliability, time

efficiency, and flexibility. The company today offers 13 different smart enzymes for the

biopharma industry (further information is available in Appendix II).

To get closer to its customers, Genovis took the decision in 2015 to reduce sales via

distributors and switch to direct sales. Direct contact with customers is critical for Genovis as

full information in real time about the underlying market is a key input in its development of

new products. Genovis is effectively positioning itself as an important partner to its customers.

According to Genovis, customer satisfaction is very high and complaints extremely rare.

Genovis is an agile and innovative company that continuously launches new products. It

carried out two new product launches last year, and we expect about four this year. Genovis

has developed all its products in-house and its facilities in Lund are configured for efficient

product development. Indeed, the exciting new bioprocess business area, established in Q4 19,

is the result of Genovis’s innovative work.

Further strengthening its good grasp of customers’ requirements, Genovis has built an efficient

and reliable organisation for support and deliveries. It has skilled support personnel and local

warehouses in both Europe and the US (San Diego) and, impressively, Genovis offers next-day

delivery to virtually all customers worldwide.

BUSINESS AREAS

Source: Genovis


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Brand reputation is top-notch We regard Genovis as an exceptionally strong brand. It has a reputation as an innovative and

customer-oriented quality leader in its field and has fully proven this over the past several years.

It seems able to combine a sound, hasten slowly approach with creativity, flexibility, and new

ideas. We believe Genovis simultaneously stands for both stability and change.

Genovis has a proven record. Its products are used by 24 of the 25 largest pharmaceutical

companies in the world. The company has been in business for more than 20 years and is now

profitable. It has a diversified business base. It is active in a field that is likely to enjoy structural

growth for a very long time.

The company has a reputation as an astute quality supplier of tools for advanced analytics. It

is innovative and clearly one of the leading players in the field. The partnership agreement with

Thermo Fisher Scientific, a large player and global leader, is also a clear stamp of quality (as

well as being an interesting project).

Genovis has developed all its products on its own and its overall setup allows for an integrated

process across the value chain. This ensures a solid base and strong operational control.

It has a well-protected business with strong recurring characteristics. Indeed, we believe the

majority of sales and sales growth to be driven by the existing customer base.

The business is, by its nature, sticky. Research tools are a totally negligible part of the overall

costs of the biological process for a pharmaceutical company, and the incentives to change

supplier of analytics tools are very small.

Unusually attractive risk profile As a healthcare company and part of Redeye’s Life Science universe, Genovis distinguishes

itself as an unusually low-risk corporation. Consider this:

▪ Little or no regulatory risk

▪ Diversified portfolio

▪ Established company with a validated technique

▪ Profitable

As Genovis is not itself a pharmaceutical company, it is able to work and help (all) such

companies, without suffering their inherent risks. Genovis’s tools are needed regardless of

CUSTOMER BASE

Source: Genovis


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whether the pharmaceutical companies successfully develop new drugs or not. In other words,

Genovis is not exposed to the typical risks the pharmaceutical companies are subject to, the

extreme but not uncommon examples of which are companies consisting of a single

development project, facing a binary outcome.

Specifically, Genovis’s traditional business – its core Analytics business chiefly used in the

discovery and pre-clinical phases – is not subject to regulatory approvals of any kind in any

market. As Genovis is making advances up the value chain, however, and by aspiring to play

an increasing role also in clinical development, it will be affected indirectly. The pharmaceutical

companies will place greater demands on Genovis as a reflection on the requirements they

themselves are facing. Still, Genovis will not have to interact with regulators directly.

Genovis has gradually established quite a broad business base. Launching new products on a

yearly basis, it today offers 13 smart enzymes. Its exciting aspirations to expand further up the

value chain (clinical phase) and an increasingly global business make Genovis a rather

diversified company in its field.

Genovis has been in business for many years and its technique and business idea are well

established and validated. Almost all the world’s leading pharmaceutical companies are

business partners. Thus, Genovis is here to stay – in contrast to the many small make-or-break

stories seen across the sector.

Crucially, Genovis has also delivered financially. In 2018-19, the company was profitable for

several consecutive quarters and it started to generate cash in 2019. Expansionary

investments may need special funding, of course, such as the recent acquisition of QED

Bioscience, but the underlying business is now cash flow positive in normal circumstances.

Apart from the corona crisis, the ’only’ pertinent risk investors should consider concern

valuation, according to us. We will discuss this later in the note, but again, the company-specific

analysis tells a story of a high-quality company with quite a low risk profile. Such companies

never come cheap.

Management & Ownership We have met CEO Fredrik Olsson several times. We value his down-to-earth approach. It is easy

to get carried away when looking at Genovis’s progression over the past five years, but Fredrik

always appear humble and realistic. He has been with the company since 2002.

Overall, we regard the company’s management and board as truly first class, and we believe

shareholders can rest assured that the company will continue to execute on its strategy in a

PEER REVIEWED PUBLICATIONS USING GENOVIS PRODUCTS


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skilful manner, making the most of the many exciting opportunities that the company is

presented with.

Encouragingly, institutional investors have started to take an interest in the story over the past

few years. The divestment of Hansa’s position and the block trade of part of Mikael Lönn’s

holding during 2019 provided liquidity and led to a number of institutions entering the scene.

Early in 2020, Genovis raised SEK 50m in a directed issue, which brought a further inflow of

institutional owners.

Uplisting a possibility during the second half of 2021

While a move to the Main List from First North appears logical in light of Genovis’s evolution,

we see no reason for the company to rush such a decision and do not expect this to happen

until 2021 or 2022.

In our central scenario, Genovis returns to its steady growth path towards the end of the year

and accelerates again in 2021 and beyond. On such a basis, we believe the interest among

institutional investors, even internationally, will continue to grow – helping the stock to perform

and further boosting the company’s market cap.

Against such a backdrop, we believe an uplisting to be logical and highly likely. The added

visibility and attention that such a strategy would generate, in our view, would be positive for

the valuation of the shares. Although there is little point in doing this in 2020, events could likely

unfold in this manner 18-24 months ahead.

At present, we estimate that institutional ownership amounts to about 15% of the company

(up from virtually zero only one year ago). Mikael Lönn remains the single largest shareholder

with 15.3% following the recent capital raising.

Poised for growth Genovis is well positioned to enjoy strong growth for a long period of time, in our view. Its end-

market is growing significantly (at around 10% per year, we believe), while Genovis also benefits

from a number of secular trends. On balance, we see good scope for the company to meet its

OWNERSHIP STRUCTURE

Number Total

Rank Shareholder of shares Capital

1 Mikael Lönn 9 990 653 15.3%

2 Avanza Pension 7 262 121 11.1%

3 Nordnet Pensionsförsäkring 3 352 352 5.1%

4 Aktia Asset Manager* 2 132 986 3.3%

5 TIN Fonder 1 709 679 2.6%

6 Andra AP-fonden* 1 700 000 2.6%

7 Handelsbankens Fonder 1 500 000 2.3%

8 Leif Ohlsson 1 107 000 1.7%

9 ÖstVäst Capital Management 1 070 000 1.6%

10 Lars Björck 880 000 1.3%

Other shareholders 34 760 923 53.1%

Total number of shares 65 465 714 100%

Source: Modular Finance, Redeye Research

* Participated in the rights issue in February with unknown size

** Other participants in the February rights issue that could potentially join the list are:

Core Ny Teknik, Coeli SICAV II - Absolute European Equity and Islet 2


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own target of 25% annual growth for many years to come. The USD 100 million question,

however, is the extent to which the new bioprocess project will succeed and potentially

transform the company by driving exceptional growth.

▪ Solid underlying growth

▪ Taking market share

▪ New product launches

▪ Geographical expansion

▪ Moving up the chain

Solid underlying growth

The underlying driver of Genovis’s end-market is the development of new antibody-based

biologics based on proteins. According to MarketsAndMarkets, three clear trends can be seen

for the next decade that will drive demand for analytical tools:

▪ New mAbs1 will be approved

▪ The biosimilar2 market

▪ Second-generation mAbs

In addition, drug regulatory authorities put patient safety first and want the industry to increase

their understanding of regulatory processes, resulting in more testing. A further trend is the

robust growth of mass spectrometry, which is boosting the enzymes market, and especially

smart enzymes. We believe the end-market may grow by around 10% per year.

Taking market share

Genovis’s core business, Analytics, has been growing by about 40% on average over the past

five years. The company is still quite small, so there should be good scope for it to grow faster

than the market for many years to come. Genovis’s own financial target is 25% top-line growth

per annum.

New product launches

Genovis launches new products on a continuous basis. In 2019, it introduced two new

products, and we expect this pace to continue. New product launches typically drive higher net

sales.

Geographical expansion

Genovis is also expanding geographically. Asia, in particular, is an untapped region and

strategically important. China, India, Japan, South Korea, and Singapore are likely to be in focus

but will require a different approach to Europe and the US. Geographical expansion is likely to

add an extra component of future growth for Genovis.

1 mAbs = monoclonal Antibodies. Since 1986, more than 30 monoclonal antibodies have been

approved and about half of the best-selling drugs in the world are mAbs. 2 Biosimilars are generic drugs that are similar but not identical to already approved biological drugs.

Both new biological drugs and biosimilars must be analyzed biochemically. During 2020, patents with a

commercial value of approximately USD 70bn are expected to expire, opening up the market for

biosimilar offerings.


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Moving up the chain

Genovis has traditionally focused on the discovery and pre-clinical phase (illustrated below),

and is increasingly seeking to make advances into clinical phase in Analytics.

Bioprocess, its new business area, also breaks new ground in the clinical landscape. We will

discuss this important new area in more detail later, but it clearly has huge potential and could

generate substantial further sales.

Competition The key competition generally stems from relatively large, broader players, particularly two

private US companies: Promega and its product Ides Protease, and New England Biolabs.

These are enzymes companies that started during the 1970s and the early phase of the DNA

era. They are fairly large operations with quite broad product portfolios, mostly reagent profiles,

and with limited overlap with Genovis.

Indeed, most product offerings in the marketplace represent older technology. A leading

supplier in this regard is Thermo Fisher Scientific, a huge instrument company, with which

Genovis is involved and co-operating on a special project.

GE Healthcare, BioRAD, and ProZyme are other key players. Wako, controlled by Fuji Film,

Genovis’s distributor, is also competing to a certain degree. Waters is originally an instrument

SALES BY MARKET - 2019 PROFORMA*


* QED's sales are included

65%

28%

7%

US Europe RoW

GOING CLINICAL


GENOVIS OPPORTUNITYGENOVIS TODAY


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supplier, but also operates a consumables business. Sigma-Aldrich is quite a large speciality

chemicals company with a small enzymes business.

Genovis’s focus on new technology and high-end solutions differentiates the company in the

competitive landscape. Flexible, high-precision tools that are easy to use and very time-efficient

represent a largely unique offering in this segment of the industry. Characteristically, Genovis

is not represented at the commodity end of the spectrum. True, its recent acquisition of QED,

a US antibodies supplier, arguably adds a such flavour but Genovis aims to facilitate a value-

enhancing move up the curve.

Interestingly, prevailing industry trends suggest that some competitors could even be excellent

partners for Genovis. ProZyme, a competing US enzymes company (mentioned above), has

been part of Agilent, a large global instrument company, since 2018. This acquisition is a

pertinent example of forward integration among hardware manufacturers (see further below).

Genovis’s strategic co-operation with Thermo Fisher is indicative of such a move and we

expect activities of this kind to continue, as Genovis has proven itself and reached a position

that implies it could be an interesting partner for particularly large instrument companies.

Its work in the new area of bioprocess is also of greater scale and allows Genovis closer

customer relationships at a more strategic partnership type level.

A clear takeover candidate As a small, fast-growing company in the biotech space, Genovis is increasingly an interesting

target for larger industry players. Indeed, our belief is that a public bid for Genovis is a distinct

possibility in the longer term. Also, its ownership structure is no hindrance whatsoever for such

a development. Therefore, in our view, Genovis should trade with a meaningful takeover

premium.

A theoretical possibility is for a large pharmaceutical company to acquire Genovis and fully

integrate its operations. This would ensure control and pave the way for the perfect adaptation

of the Genovis product range, focused on the specific needs and wants of the pharmaceutical

company concerned. If the tests currently taking place in the new bioprocess area prove

successful, the resulting shift in terms of strategic weight and volumes would likely require

customers to evaluate all options for future collaboration.

FASTER AND MORE EFFICIENT ANALYSIS OF BIOLOGICAL DRUGS

Source: Genovis


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At present, the most obvious alternative is large instrument companies. Instrument companies

are struggling to protect margins on hardware sales and are increasingly looking for new ways

to grow their business and earn money, such as adding consumables to their product offerings.

Consolidation among instrument companies and downstream integration have fuelled M&A

activity over the past several years.

Thermo Fisher is a world-leading and giant instrument producer, with annual revenues of USD

25bn and 75,000 employees. Thermo Fisher is a US company, listed on the NYSE. To add to

this, it has, since 2018, had a co-operation agreement with Genovis in the field of automation

in quality analytics of biopharmaceuticals. We note that Thermo Fischer is a very acquisitive

company.

In 2018, Agilent, a US instrument company and peer to Thermo Fisher, acquired ProZyme, an enzymes

company.

Agilent, a public US company and 1999 spin-off from Hewlett-Packard, is a large global player in the test

and measurement industry. The company generated revenues of USD 5bn in 2019 and employs about

16,000 people worldwide. An acquisitive company, in 2009, Agilent acquired Varian (chemical analytics)

and in 2012, it bought Danish company Dako (cancer diagnostics).

Agilent spun off its electronic measurement business in 2014 and stepped up acquisitions in the core Life

Science area, buying companies such as Seahorse Bioscience (instruments) and Multiplicom (a European

diagnostics company) during the following years.

Striving to become a complete workflow solutions provider to its large base of customers worldwide,

Agilent acquired ProZyme, a private US company, in 2018 – an illustrative example of an instrument

company expanding its consumables portfolio.

Founded in 1990, ProZyme was a leading developer of glycan reagents, which are required for efficient

sample prep in the analytics of free glycans. ProZyme had about 50 employees at the time of acquisition,

and our guesstimate is sales to the tune of USD 10m.

Sergey Vlasenko, then president and CEO of ProZyme, was quoted at the time: “ProZyme and Agilent make

a perfect strategic fit. Our glycobiology and glycoanalytics expertise together with Agilent’s market-leading

position in LC and LC/MS will allow us to provide our biopharma customers with the complete solutions

they need to accelerate their research.”

Details of the deal were not disclosed. However, Agilent acquired seven companies in 2018 for a total

consideration of about USD 500m.

AN ILLUSTRATIVE EXAMPLE


16

Financials

Summary: financial progression mirroring strategic and tactical gains Genovis’s financial performance over the past several years has been very impressive, in our

view. Multifaceted and strong growth – with 2019 boosted by the pilot order in the new

Bioprocess area – has paved the way for a staggering sevenfold increase in the top line since

2014 (when sales were SEK 8.2m).

Gross margins have been largely stable at a very high level and the last few years have seen

phenomenal operating leverage, which Genovis will benefit from should the strong growth

continue. Indeed, the EBITDA and EBIT margins jumped considerably (adjusted for non-

recurring items) in 2018 and, in particular, during 2019.

The recent, well-timed equity infusion (SEK 50m) secured financing for the planned expansion

and strengthened the balance sheet at a time when a cushion is valuable.

The corona crisis will almost certainly cause a few bumps in 2020, but in the longer term we

find the financial picture reassuring and promising.

SUMMARY KEY FINANCIALS

SEKm 2015 2016 2017 2018 2019

Net Sales 13 269 18 542 22 867 34 568 60 549

Growth % 61% 40% 23% 51% 75%

Gross Profit* 10 810 17 061 20 501 31 206 53 717

Margin % 81% 92% 90% 90% 89%

EBITDA** (23 482) (18 574) (6 227) 4 091 17 020

Margin % NM NM NM 11.8% 28.1%

EBIT** (24 801) (19 868) (7 836) 1 052 13 523

Margin % NM NM NM 3.0% 22.3%

Pre-tax Profit** (24 835) (20 000) (7 927) 412 13 124

CapEx 189 10 456 937 4 179

Equity/Assets (%) 52% 71% 69% 69% 73%

Nr. of Employees 13 14 17 20 24


* Adjusted for non-recurring items, change in inventory & other operating income

** Adjusted for non-recurring items


17

EQUITY & TOTAL ASSETS EQUITY & NET DEBT


8.8

15.518.2

26.1

35.6

16.9

21.9

26.3

37.8

49.0

52%

71% 69% 69%73%

2015 2016 2017 2018 2019

Equity (SEKm) Total Assets (SEKm) Equity / Assets (%)

8.8

15.518.2

26.1

35.6

-1.9-4.1 -2.8

-4.4

-10.0

2015 2016 2017 2018 2019

Equity (SEKm) Net Debt (SEKm)

EBITDA & LIQUID ASSETS INVESTMENTS AND DEPRECIATION


* Capex includes investments in intangible assets

** Depreciation includes amortization charges

-23.5

-18.6

-6.2

4.1

17.0

2.14.3 4.9

9.6

15.0

2015 2016 2017 2018 2019

EBITDA (SEKm) Liquid Assets (SEKm)

1.71.4

1.8 1.8

5.2

1.3 1.31.6

3.0

3.5

128%

111% 110%

60%

147%

2015 2016 2017 2018 2019

Capex (SEKm)* Depreciation (SEKm)** Capex/Depreciation (%)

ANNUAL REVENUES & GROWTH RATE GROSS PROFIT AND GROSS MARGIN


* Adjusted for non-recurring items, change in inventory & other operating income

11

1721

31

54

81%

92% 90%

90%

89%

2015 2016 2017 2018 2019

Gross Profit* Gross Margin*

13

1923

35

6161%

40%23%

51%

75%

2015 2016 2017 2018 2019

Revenues (SEKm) Revenue Growth (%)


18

Phenomenal sales progression

Genovis has grown steadily for the past several years. Average top-line growth over the past

five years has been an impressive 50%, or 42% when stripping out the new bioprocess area,

which added SEK 15.5m to 2019. The sales CAGR has been of the same magnitude.

We see two things that stand out. First, ever since the increased focus on expansion and direct

sales in 2015, Genovis has enjoyed strong and broad-based momentum. Second, 2019 saw a

new breakthrough with the promising first bioprocess order, further propelling sales, which

climbed 75% last year. Encouragingly, sales still grew 36% when excluding this large order.

Operating margins starting to respond to increasing size

Genovis enjoys exceptionally strong gross margins. The average for 2014-19 was 88%. Note

that our definition of gross margin differs from the reported gross margin – we strip out

inventory changes and other income, focusing on the simple difference between net sales and

raw materials. We consider this the best way to capture Genovis’s real gross profitability. It

reflects the company’s high-end product mix, in our view, and its strong market positions.

Operating costs consist of raw materials (about 10%), personnel (about 50%), and other

external costs (40%). Other external costs are driven by contractors and sales provisions in the

US operation, marketing activities, R&D projects, and subcontractors to Bioprocess.

QUARTERLY REVENUES, 2015-2019


* Growth excluding Bioprocess

2.9 3.5 3.4 3.5 3.8 4.6 4.6 5.5 4.8 5.8 5.37.0 6.2

8.6 9.210.5 9.9

11.5 10.812.8

2

13.5

0%

20%

40%

60%

80%

100%

120%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017 2018 2019

Revenues (SEKm) Bioprocess (SEKm) y/y growth (%)*

LTM QUARTERLY REVENUES, 2015-2019


* Growth excluding Bioprocess

9 10 12 13 14 15 17 19 20 21 21 23 24 2731

3538 41 43 46

22

15.515.5

0%

10%

20%

30%

40%

50%

60%

70%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017 2018 2019

Revenues (SEKm) Bioprocess (SEKm) y/y Growth (%)*


19

While raw material costs are closely linked to sales volume, personnel and other operating

costs are less so. Clearly, the structural and ongoing build-up of the organisation drives a larger

general cost base, but the leverage from growing volumes is strong, as is evident from the

progression in EBITDA and EBIT.

Indeed, Genovis experienced a financial breakthrough in 2018 when both EBITDA and EBIT

turned positive. 2019 was a real milestone year for the company. Given the exciting bioprocess

order and the company’s solid underlying progress, Genovis produced EBITDA of SEK 17.0m

and EBIT of SEK 13.5m, corresponding to margins of 28% and 22%, respectively, paving way

for the company’s first year with black figures on the bottom line.

Zooming in on the two latest quarters provides further clarity into these dynamics and

prevailing trends. On an underlying basis, in Q3 19, the quarter during which Genovis delivered

the new SEK 13.5m bioprocess order in its entirety, the company reported an impressive

EBITDA margin of 33% and an EBIT margin of 29%.

In Q4 19, the traditional Analytics business kept pulsing along at record pace on the top line,

but operating margins suffered as a consequence of substantial investments in the

organisation. Increased marketing activities, new staff in production and sales, work on new

projects, and investments in the production plant brought a hike in expenses and caused

QUARTERLY EBIT* (SEKm), 2017-2019


* Adjusted for non-recurring items

-2.9-2.0 -1.7

-1.1 -0.9-1.4

0.9

2.41.9 1.6

10.5

-0.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018 2019

LTM QUARTERLY EBIT* (SEKm), 2017-2019



-14.2

-8.2 -8.8-7.6

-5.6 -5.1

-2.5

1.0

3.9

6.9

16.5

13.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018 2019


20

margins to drop. The EBITDA margin came in at 4% in the quarter, whereas EBIT fell back into

the red.

These figures are, in our view, encouraging overall. Not only are the financial trends highly

positive in all key respects, but the picture for operating margins is particularly so. Assuming

that the growth prospects materialise, and certainly if bioprocess does become a new volume

business (which we anticipate), the strong operating leverage promises excellent prospects for

future margin expansion.

In particular, Q3 19 – which benefited from such ’dual growth’ – is a clear indication of the

embedded margin potential should growth accelerate. And keep in mind that Q3 19 shows a

company still very much in its infancy.

Well-invested; no financial debt

Genovis has been investing in its organisation and production facility in Lund over the past

years. In 2019 in particular, capex rose markedly as Genovis expanded its plant and laboratory

equipment to prepare for growth at a greater pace.

Genovis’s solvency is strong, and the company has sufficient cash resources to continue to

grow. At the beginning of 2020, Genovis carried out a directed equity issue, raising SEK 50m

from institutional investors. About SEK 20m was ear-marked for the acquisition of US company

QED Bioscience, while about SEK 10-15m will be set aside for further capacity additions (we

have pencilled this in for 2021) and the balance is at the company’s disposal for general

corporate purposes.

As Genovis has reached a profitable state, and sustainably so in our view, we regard its financial

position as strong. Indeed, given the grim state of the financial markets and the global

economy at present, this strengthened liquidity and balance sheet should come in handy as

the current year is now likely to see a temporary dip back into red figures.

In terms of financing history, Genovis made one small directed equity issue in 2017 and one in

2018, before following up with the more significant, recent transaction. In fact, we believe

Genovis to be bankable going forward and we expect no further equity issuance from the

company. Instead, we believe Genovis might start paying dividends in 2023, possibly even in

2022 (such a dividend being based on corresponding year earnings, and thus being paid during

Q2 of the following year).

Financial goals for 2020

Genovis retains the same goal as for last year in terms of growth, profitability, and new product

launches:

▪ Organic sales growth of +25%

▪ Positive EBITDA for all quarters

▪ At least three product launches during the year

On a long-term basis, we believe Genovis is excellently positioned to comfortably beat these

growth and margin targets. For 2020, however, we think the current crisis will take its toll on

the company’s progression, and we forecast a dip well below the financial targets.

TRANSACTION HISTORY

Transactions Date Size Seller/Issuer Investors Advisors

Directed Issues 20-02-20 50 SEKm Genovis Core Ny Teknik, Coeli, Islet 2, AP2, Aktia Genovis

Block 19-05-09 45 SEKm Mikael Lönn Handelsbanken Fonder, Aktia, Strand Redeye/Carnegie

Block 19-04-15 89 SEKm Hansa Biopharma TIN Fonder, Handelsbanken Fonder, AP2, Aktia Danske Bank

Directed Issues 18-04-29 11.1 SEKm Genovis Qualified Investors Redeye

Directed Issues 17-04-10 11.5 SEKm Genovis Qualified Investors Redeye



21

Turning to product launches, however, we believe Genovis will be able to launch about four new

products, more than meeting its target, despite the dire circumstances. In fact, we think

Genovis will increase its focus on development this year so as to use resources wisely at a

time when marketing activities are both difficult and less effective.

Recent developments, immediate outlook

▪ On a decent financial curve

▪ Product launches to continue

▪ Further focus on growth – capacity investments

▪ Expansion driving up costs, weighing on margins in the near term

▪ Complementary acquisition strengthens US presence

▪ Equity issue directed to institutions secures the necessary funds

▪ The effects of the corona crisis will weigh on 2020

▪ Launch of the Online Store

Genovis’s Q4 19 and full-year 2019 report on 5 February strongly confirmed several promising

trends. Genovis continues to grow its top line handsomely, it is now a profitable company, and

it is stepping up investments to scale up growth further.

In particular, we expect new product launches this year and investments in production facilities

for the new bioprocess area and in the sales organisation. Genovis launched two new products

last year and we expect about four new launches this year (surpassing the company’s official

target of +3).

In February, Genovis announced the SEK 20m acquisition of QED Bioscience, a US antibodies

producer. The move signals an expansion in the strategic US market and secures the company

a greater presence in the US, particularly California – the nucleus for the company and much

of its client universe. More on this below.

Genovis also carried out a directed issue of SEK 50m, aimed at new and existing institutional

investors. The placing secures the necessary financing for both the acquisition and the planned

capacity expansion. It also strengthens the balance sheet and provides a buffer, which may

come in handy at times like these.

The company also recently launched a new sales channel, its Online Store. Customers can now

review the product range and compare enzymes, as well as place orders, digitally. We consider

this initiative to be more about visibility than a real, new channel, and it also likely has nothing

to do with the current world order of restrictions on physical meetings.

More on the QED acquisition

The ’new Genovis’ really took form from 2015 and on - a focused enzymes company seeking

control of the entire value chain and obtaining a broader base for strong organic, global growth.

So what prompted the successful company to make the recent acquisition?

In fact, Genovis had been working closely with QED for several years and the acquisition

appears a natural step, bringing benefits such as:

▪ Adding a well-established supplier of antibodies for the research and diagnostics

market

▪ Providing access to an enlarged customer base for Genovis’s GlyCLICK® antibody

labelling technology, a future core area for the company

▪ Securing a physical presence with laboratory premises in San Diego; California is

strategic location for research and development of biological drugs in the US market

▪ Bringing concrete synergy potential

QED is predominantly a US business (we guesstimate 80% of sales) with a sales split of 65%

antibodies and 35% service, plus contract research. Clearly, Genovis was attracted to the


22

antibodies portfolio, which represents an interesting cross-fertilisation opportunity with

antibody labelling, a new customer base, and greater US presence.

QED’s 2019 sales were about SEK 17m, with EBIT of SEK 2.4m. The company has

approximately 10 employees. We have included the acquisition with full financial effect from

the beginning of Q2. We believe QED might grow at an annual rate in the high single digits,

potentially at double digits as it is gradually integrated and as synergies begin to accrue.

Further filler acquisitions a possibility

While Genovis is unlikely to become particularly acquisitive, or to aim big, we do not rule out

further complementary acquisitions of a small size. Likely areas of interest include technical

platforms within reagents and consumables, which have high-margin potential, rather than

lower value-added instrument suppliers or service companies.

The weakening SEK should offer some relief

A word on the currency situation is relevant in light of Genovis’s operations and the weakening

SEK lately, in turn much related to the corona crisis.

As almost all sales are sourced internationally and the majority of costs are local, Genovis has

a significant net currency exposure. We estimate that 65% of sales are USD-denominated and

about 30% in EUR. We believe about 60-65% of operating costs are in SEK (the acquisition of

US company QED has changed the picture somewhat).

The SEK has depreciated significantly versus the USD and EURO, respectively, so far this year.

Should current rates prevail, we are looking at significantly different average exchange rates

both for the forthcoming quarter and for 2020 compared to corresponding periods.

In SEK terms, all things being equal, this translates into higher revenues and a positive net

contribution. We estimate that the top line might get a boost of an extra 5% or so thanks to

currency effects this year.


23

Estimates and valuation

Strong long-term growth to drive margins Excluding the new Bioprocess area, we assume the core Analytics area’s annual top-line

growth will exceed 20% for the next several years. Besides several secular drivers, Genovis’s

growth will continue to be fuelled by its small base at the outset. It will take many years before

Genovis’s size starts to compromise growth.

The newly acquired US antibodies company, QED, is built in using more modest growth

assumptions of 7-9% per year for the years immediately ahead. It is being consolidated from

Q2 this year.

Our model also factors in a main scenario with the new Bioprocess area taking off and growing

rather quickly in 2021-22 and beyond. We assume growth with the pilot customer spilling over

into new customers. While we pencil in no more business this year, as we assume new orders

will only occur towards the end of the year at the earliest, we forecast sales of SEK35m in 2021

and SEK50m in 2022.

We assume gross margins of 85%, which we believe errs on the conservative side. The overall

gross margin slips slightly as a result of consolidating QED, while the core Analytics business

should keep progressing at around 90%. We expect the EBIT margin to spike as soon as

volumes take off, with the traditional business and the new bioprocess business growing nicely

in tandem and the strong operating leverage showing through. Although we forecast a

significant loss at the EBIT level this year, margins should be positive again in 2021 (19.8%)

and 2022 (25.0%).

2020 lost to corona crisis

As a result of the corona crisis and the abrupt halt in global economic activity, however, we

expect 2020 to be challenging and probably ’a year in between’. Genovis has not experienced

any real problems yet, according to management, as the company is focusing on securing

production and distribution. At this stage, operations appear to be running reasonably

smoothly, even if a tad slower, but marketing and new sales are starting to be affected in a

more meaningful way, we believe.

In addition, the recent decision to put California in quarantine will not help the QED acquisition,

and increasingly severe restrictions on the movement of people suggest difficulties ahead with

laboratory work. The industry conference calendar is basically halted and most universities

have closed. Moreover, many end-customers have been sending staff home and societal

priorities to concentrate on covid-19 patients will constrain clinical trials (directly influencing

the bioprocess area). Although Genovis holds stock and its supply chain seem to be holding

up, but there are likely to be risks on this side too if the current situation persists.

As Genovis prepared for accelerating growth during the second half of last year, its current

cost base is also not ideal for slower market conditions. Overall, we look for a 12% decline to a

2020 top-line of SEK 53.2m and doubt that Genovis will manage to stay in the black; our 2020

EBIT forecast: minus SEK 3.8m. We anticipate a strong revival next year, though, and see

excellent prospects beyond 2021 unless the global pandemic and economic downturn spiral

out of control.


24

Capacity expansion delayed

Due to the unforeseen changes to the whole landscape, we expect Genovis to postpone its

plan to invest in more production capacity until next year. Not only is the outlook highly

uncertain, but the lead time for procurement and installation has also risen. Accordingly, we

have moved this investment one year further out and pencil in rather large capex of SEK 11m

in 2021. Reassuringly, Genovis has a plan B in place if demand stays very firm – commissioning

a CRO could bridge any gap in such case, according to the company.

In 2022 or 2023 at the latest, we expect Genovis to take the next step and move to entirely new

premises in south-western Sweden. The existing set-up is adequate for a while longer, but

Genovis will need a new facility for the future.

Possible future scenarios Let us look at the valuation of Genovis a number of years out, using various assumptions about

growth and margins. As we are at an inflection point, some thought about the potential

situation in 5-6 years’ time is called for. 2025 seems an appropriate horizon – some way off

but not too visionary.

Below we run different scenarios for 2025 EBIT contribution from the traditional Analytics

business, including antibody labelling, and the new Bioprocess area. This discussion is

admittedly somewhat theoretical but is meant to illustrate the strong leverage in its eco-

systems, should Genovis embark on the dual growth trajectory that the company is aiming for.

Thus, the figures below are not official estimates – we only make forecasts through 2022.

REVENUE & EBIT, 2015-2022E



13.3 18.5 22.934.6

60.553.2

107.9

139.2

-24.8 -19.9-7.8

1.113.5

-3.8

21.334.8

2015 2016 2017 2018 2019 2020E 2021E 2022E

Revenues (SEKm) EBIT (SEKm)*

Historicals Estimates

ANALYTICS VERSUS BIOPROCESS APPROACH

• Smaller volumes (ug/mg) • Materially higher volumes (kg)

• High-margin business • Slightly lower margins

• Regulatory approval not needed • Regulatory and quality scrutiny

• Genovis's traditional business • Revenue fluctuations in early stage

• Market size around USD 500m • New market opportunity


Enzymes for analyical applications Enzymes for bioprocess applications


25

The traditional core business is subject to less uncertainty and is easier to forecast. We

anticipate 2025 EBIT in this area of about SEK 60m against sales volume of some SEK 150m.

This represents an EBIT margin of 40%.

The bioprocess area is far more difficult to specify. It has huge potential and could grow very

fast if large orders start flowing in. It could also take a while to gain traction as the industry is

rather conservative and slow-moving. Orders are much larger and revenues likely to fluctuate

much more on this side of the business, particularly during the ramp-up phase.

Our simulation factors in a reasonably fast but far from exceptional uptake. We forecast EBIT

in this area in the order of SEK 50m in 2025 on the back of a step-change in activity with 2025

sales volume of around SEK 150m for this area too. The implied EBIT margin is somewhat

lower at 33% in this example.

Overall, we derive possible EBIT of SEK 110m in 2025 in a scenario of ‘dual growth’ for Genovis,

corresponding to pro forma 2025 EPS of SEK 1.75 or SEK 1.30 if conservatively applying full

tax.

This would suggest that the stock is trading at 12 times implied 2025 earnings. However, it is

likely to trade at much higher levels if these earnings materialise, assuming that Genovis is still

in strong growth mode at that point with the bioprocess area firing on more and more cylinders.

Bioprocess potential

While pristine territory for Genovis and a bit experimental at this stage, Bioprocess is an

extremely exciting new area for the company. The upside could be enormous if the new

business takes off.

Future growth could follow three related paths, we judge:

▪ The existing customer placing follow-up orders (of much larger scale) as the project

continues into later clinical phase studies

▪ The existing customer choosing to engage Genovis in a similar fashion on other

projects too

▪ Other customers recognising the benefits of using Genovis for this type of application

and opting in

Our base case assumes no additional bioprocess order this year (we expect a delay in the

current circumstances). We have built in a gradual but far from aggressive ramp-up in 2021

and the years ahead.

An expectation of 2025 sales on the order of SEK150m from this business area (the mid-point

in the right matrix above) is not overly optimistic, in our view. We recognise that it would take

a fair amount of follow-up orders to reach these volumes, but if this area does gain real traction

higher numbers are also possible.

Possible 2025 EBIT Contribution - ANALYTICS Possible 2025 EBIT Contribution - BIOPROCESS

SEK in SEK in

millions 15% 20% 25% 30% 35% millions 50 100 150 200 250

20% 22 28 36 45 57 20% 10 20 30 40 50

EBIT 30% 33 42 54 68 85 EBIT 30% 15 30 45 60 75

Margin 40% 43 56 72 91 114 Margin 40% 20 40 60 80 100

50% 54 70 90 113 142 50% 25 50 75 100 125

60% 65 84 108 136 171 60% 30 60 90 120 150

Source: Redeye Research Source: Redeye Research

* Using 2019 as base year: Sales = Sek47.0m * 2019 sales = Sek15.5m

Annual Top-line Growth* 2025E Sales (Sek in millions)*


26

Share price performance and valuation multiples

As can be seen in the table below, Genovis’s shares have enjoyed a fantastic ride over the past

few years. The shares are up a staggering 742% on a 3-year basis, about 50% over 12 months

and have held up relatively well during the turbulent start to 2020.

Accordingly, it is little surprise that the stock appears expensive on traditional multiples and

near to medium-term earnings. Only on prospective 2022 earnings are we able to make some

sense of the multiples - EV/Sales dropping towards 10x and P/E no longer looking completely

out of bounds.

We emphasize that the case is NOT about earnings for the coming 1-3 years - all too often

investors’ narrow focus. On the contrary, Genovis’s real value and upside potential are likely to

emerge over a 3-5-year period, in our view. Hard evidence of progress on the journey should

eventually become visible, though we also expect the stock to perform relatively well on a 12-

month horizon too.

Accordingly, our stance is to take a long-term view and use potential weakness during what is

likely to be a somewhat challenging transition year to build exposure to the case.

Redeye DCF Analysis New Rating

Let us now turn to our DCF approach and Redeye’s analytical framework for assessing a

company’s overall quality, which we term our Company Rating. The evaluation focuses on

three main areas - people, business and financials - and the resulting score help us derive an

appropriate equity risk premium - the key component for computing the company’s WACC.

Further information about Redeye’s (new) Company Rating is available in Appendix III.

▪ People: 5 (up from 4)

Genovis is run by a highly skilled and competent management team, backed by a

strong board with ample expertise from the industry and financial markets. We regard

the CEO, who has been with the company for almost 20 years, as excellent.

Institutional ownership has increased significantly over the past year and is currently

running at around 15%.

▪ Business: 5 (unchanged)

Genovis has built a powerful business model, particularly in the past five years. It is

now fully established, enjoys critical mass and excellent market positions. It is poised

to benefit for many years to come from its attractive and multi-faceted growth

opportunities. We also regard the company as a natural takeover target in the longer

term.

STOCK PRICE PERFORMANCE

Stock Absolute Relative**

Price* 3 years 1 year YTD 1 month 1 week 3 years 1 year YTD 1 month 1 week

21.9 SEK +742% +49% -12.4% -1.8% +20.0% +748% +60% +9.5% +15.6% +17.3%

Source: Redeye Research

* As of Friday close, April 3 2020

** Relative to OMXSPI

VALUATION SUMMARY

Stock EV/Sales (x) EV/EBITDA (x) P/E (x)

Price* 2019** 2020E 2021E 2022E 2019** 2020E 2021E 2022E 2019** 2020E 2021E 2022E

21.9 SEK 19.5 26.3 13.1 10.0 69 1123 57 36 195 -356 67 41


* As of Friday close, April 3 2020

** Based on the average share price in 2019


27

▪ Financials: 4 (up from 2)

Genovis’s financial performance has made great progress over the past few years. In

2019 it managed to deliver black figures for the year as a whole - a key milestone for

any growth company, clearly. Its balance sheet was also strengthened considerably

through the equity injection of SEK 50m that Genovis carried out early this year. While

2020 is likely to be a bit of ’a lost year’ due to the corona crisis, we still believe the

medium to long-term outlook to be very promising. Also, we would not be surprised

to see Genovis start paying dividends on 2023 earnings (perhaps even earlier).

Risk premium and WACC

On the basis of our updated Company Rating, our assessed risk premium comes down by

about two full percentage points from the period before the commercial and financial

breakthrough.

At the same time, though, equity investors have responded to the ongoing crisis and economic

uncertainty by lowering overall appetite for risk, as expected.

On balance, we judge that a WACC of about 8-9% is justified for Genovis at this point.

Fair Value Range - Bear, Base and Bull

Applying Redeye’s traditional DCF valuation model allows us to present the following DCF

valuation grid:

▪ Base Case = SEK 50 per share

▪ Bull Case = SEK 100 per share

▪ Bear Case = SEK 15 per share

Base Case (SEK 50): Steady, solid and prosperous – but Bioprocess not yet a game changer

Our base case for Genovis sees the company continue on its recent path, growing the

traditional core business handsomely while the new bioprocess business gets under way too.

We see top-line growth in the order of +25% per annum in 2021 and for a number of years

beyond. The company’s strong leverage should pave the way for EBIT margins climbing to 30-

40% and subsequently to +50% in this scenario. Moreover, a merited healthy takeover premium

should add an extra layer of support to the stock.

Bull Case (SEK 100): Spectacular growth – Bioprocess unlocks paradigm shift, possible bid

Our bull case sees a real breakthrough for Bioprocess under which it ramps up faster than

under the base case and over time emerges as Genovis’s dominant area. This scenario is likely

to justify an even larger takeover premium – if not provoking an outright bid. Should the latter

occur on the back of strong progress, SEK 100 does not seem unreasonable.

Bear Case (SEK 15): Decent growth only – Bioprocess comes to nothing

In our most cautious scenario, we assume that the bioprocess order was just a one-off and

this activity soon falls away. We also count on only modest top-line growth (around 20%) and,

as a result, more moderate margin expansion.


28

Appendix: I – Key Financial Statements

INCOME STATEMENT

SEK in thousands 2015 2016 2017 2018 2019 2020E 2021E 2022E

Revenues

Traditional Core Business: Analytics* 13 269 18 542 22 867 34 568 45 049 43 666 55 928 69 227

New Area: Bioprocess - - - - 15 500 - 35 000 50 000

US Acquisition: QED Bioscience** - - - - - 9 500 17 000 20 000

Total Revenues 13 269 18 542 22 867 34 568 60 549 53 166 107 928 139 227

Raw materials and consumables (2 459) (1 481) (2 366) (3 362) (6 832) (7 329) (16 189) (20 884)

Gross Profit 10 810 17 061 20 501 31 206 53 717 45 838 91 739 118 343

Change in inventory, finished goods - 422 1 317 2 529 2 417 2 127 4 317 5 569

Other operating income 547 700 23 81 53 53 - -

Personnel costs (13 346) (10 750) (13 230) (16 148) (22 081) (27 413) (38 854) (56 387)

Other external expenses (21 493) (26 007) (14 631) (13 577) (16 996) (19 357) (32 378) (29 238)

Other operating expenses - 0 (207) - (90) - - -

EBITDA (23 482) (18 574) (6 227) 4 091 17 020 1 247 24 823 38 287

Depreciation (740) (683) (906) (2 728) (2 997) (4 451) (2 861) (2 744)

Amortization (579) (611) (703) (311) (500) (644) (621) (713)

EBIT (24 801) (19 868) (7 836) 1 052 13 523 (3 847) 21 341 34 831

Financial Net (34) (132) (91) (640) (399) (185) (85) (85)

Non-Recurring Items 4 978 5 098 - (2 012) (3 457) - - -

Pre-tax Profit (19 857) (14 902) (7 927) (1 600) 9 667 (4 032) 21 255 34 745

Tax (48) (129) (22) (110) (116) - - -

Net Income (19 905) (15 031) (7 949) (1 710) 9 551 (4 032) 21 255 34 745

Non-Recurring Items, tax adjusted 4 978 5 098 - (2 012) (3 457) - - -

Adjusted Net Income (14 927) (9 933) (7 949) (3 722) 6 094 (4 032) 21 255 34 745

Margins 2015 2016 2017 2018 2019 2020E 2021E 2022E

Gross Profit (%) 81.5% 92.0% 89.7% 90.3% 88.7% 86.2% 85.0% 85.0%

EBITDA (%) NM NM NM 11.8% 28.1% 2.3% 23.0% 27.5%

EBIT (%) NM NM NM 3.0% 22.3% NM 19.8% 25.0%

Net Income (%) NM NM NM NM 10.1% NM 19.7% 25.0%

Data Per Share 2015 2016 2017 2018 2019 2020E 2021E 2022E

EPS (0.66) (0.32) (0.14) (0.03) 0.15 (0.06) 0.32 0.53

Adjusted EPS (0.50) (0.21) (0.14) (0.06) 0.10 (0.06) 0.32 0.53

Dividend Per Share - - - - - - - -

Book Value Per Share 0.24 0.28 0.30 0.41 0.56 1.25 1.57 2.10

Weighted Average No. of Shares (m) 30.1 46.6 58.7 61.9 63.1 64.9 65.5 65.5

Shares Outstanding, Year-End (m) 36.9 55.3 60.3 63.1 63.1 65.5 65.5 65.5

Ratios and Estimates 2015 2016 2017 2018 2019 2020E 2021E 2022E

Revenue Growth 61% 40% 23% 51% 75% -12% 103% 29%

Return on Equity NM NM NM NM 20% NM 23% 29%

Return on Invested Capital NM NM NM 6% 57% NM 34% 41%

Net Cash 1871 4146 2811 4410 10001 33471 25222 46523

Nr. of Employees, Year-end 13 14 17 20 24 37 40 43


* Includes Glyclick

** QED consolidated from Q2'20 onwards (2019E total sales = SEK 17m)


29

BALANCE SHEET


ASSETS

Current Assets

Cash & Equivalents 2052 4281 4918 9581 14992 35605 27356 48657

Inventories 960 1503 3170 5740 6419 10012 22177 28608

Accounts Receivable 2271 4569 4090 5933 6635 5811 11828 15258

Prepaid Expenses and Accrued Income 5082 4770 4751 5303 5930 5317 10793 13923

Other Current Assets 453 489 595 591 661 532 1079 1392

Total Current Assets 10818 15612 17524 27148 34637 57276 73233 107838

Fixed Assets

Property, Plant & Equipment, Net 1756 1084 3022 6350 9470 9538 22866 27083

Goodwill 0 0 0 0 0 0 0 0

Intangible Assets 2622 3438 4042 2611 3218 3106 3564 4244

Other Long-Term Assets 1718 1718 1718 1718 1718 21718 21718 21718

Total Non-Current Assets 6096 6240 8782 10679 14406 34362 48148 53045

Total Assets 16914 21852 26306 37827 49043 91638 121381 160883

DEBT & EQUITY

Current Liabilities

Short-Term Debt / Revolver 46 135 352 2231 2857 0 0 0

Accounts Payable 945 1552 1332 1308 1675 1802 3992 5149

Accrued Expenses 4600 4252 4218 4622 5918 5317 10793 13923

Other Current Liabilities 2367 368 461 655 839 797 1619 2088

Total Current Liabilities 7958 6307 6363 8816 11289 7916 16404 21161

Non-Current Liabilities

Long-Term Debt 135 0 1755 2940 2134 2134 2134 2134

Total Non-current Liabilities 135 0 1755 2940 2134 2134 2134 2134

Shareholder's Equity 8822 15545 18187 26071 35620 81588 102843 137588

Total Liabilities & Equity 16915 21852 26305 37827 49043 91638 121381 160883

CASH FLOW STATEMENT


Operating Activities

Net Income (19 905) (15 031) (7 949) (1 710) 9 551 (4 032) 21 255 34 745

Depreciation - - - - - 4 451 2 861 2 744

Amortization - - - - - 644 621 713

Working Capital, (-) Inc. / + Dec. - - - - - (2 542) (15 719) (8 547)

Operating Cash Flow (16 117) (16 075) (8 355) (1 250) 10 067 (1 479) 9 019 29 655

Investing Activities

Capital Expenditures - - - - - 4 519 16 189 6 961

Acquisitions - - - - - 20 000 - -

Goodwill - - - - - - - -

Intangible Assets - - - - - 532 1 079 1 392

Other Investing Activities - - - - - - - -

Investing Cash Flow (3 314) 1 437 1 763 1 829 13 125 25 051 17 268 8 354

Financing Activites

Short-Term Debt / Revolver (Issuance) / Repayment - - - - - 2 857 - -

Share Repurchase / (Issuance) - - - - - (50 000) - -

Dividends Paid - - - - - - - -

Financing Cash Flow (14 167) (19 741) (10 755) (7 742) (5 411) (47 143) - -

Net Cash Flow 1 364 2 229 637 4 663 2 353 20 613 (8 249) 21 301

Cash Balance 2 052 4 281 4 918 9 581 14 992 35 605 27 356 48 657


30

Appendix II – Enzymes and Genovis’s products

Enzymes are proteins that act as biological catalysts

Enzymes are proteins that trigger biological reactions or chemical processes. They are

naturally present in the human body, where they drive processes in organs and tissue, to enable

them to function and to repair damage. Enzymes are also active in the digestive process,

breaking down nutrients and helping to protect against bacteria and viruses.

There are numerous enzymes and their properties vary greatly. One property all enzymes have

in common is that they act as biological catalysts: they trigger reactions and processes. In drug

development, it is important that an enzyme has a clear function that repeats every time the

enzyme is used. The unique function of an enzyme is called its specificity.

Genovis offers 13 different enzymes, called SmartEnzymes

Antibody-based drugs, diagnostics, and research tools have become established as state-of-

the art technology. Genovis’s product portfolio can be divided into proteases, glycosidases, and

labelling of antibodies.

Proteases are used as tools in the research and development of biopharmaceuticals and

biosimilars, where regulatory authorities place great demands on analysis. Genovis’s products

split the antibody into smaller fragments.

Glycosidases are mainly used to analyse and improve the function of drug candidates.

Genovis’s products cut off the sugar molecules that are attached to a protein. O-glycan

Analytics is a special and particularly challenging area (within glycosidases), where Genovis is

also active.

The antibody labelling market is large and the potential for Genovis here is huge should its

GlyCLICK technology be implemented into clinical development by pharmaceutical companies.


31

Appendix III - Redeye Rating and Background Definitions Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These

are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-

term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely accepted

and tested investment criteria and used by demonstrably successful investors and investment firms. Each sub-

category may also include a complementary check that provides additional information to assist with investment

decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for

each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that

ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to

generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business

is a significant part of understanding the long-term drive of the company. It all comes down to doing business with

people you trust, or at least avoiding dealing with people of questionable character.

The People rating is based on quantitative scores in seven categories:

• Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage

customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing the

business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.

The Business rating is based on quantitative scores grouped into five sub-categories:

• Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the

financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial

performance and valuation. However, you only need a few to determine whether a company is financially strong or

weak.

The Financial rating is based on quantitative scores that are grouped into five separate categories:

• Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.

REDEYE Equity Research Genovis 7 April 2020

32

Appendix IV - Redeye Equity Research team

Management Editorial

Björn Fahlén Eddie Palmgren

[email protected] [email protected]

Håkan Östling Mark Siöstedt


Life Science Team Technology Team

Gergana Almquist Jonas Amnesten


Oscar Bergman Henrik Alveskog


Anders Hedlund Havan Hanna


Arvid Necander Kristoffer Lindström


Erik Nordström Erika Madebrink


Klas Palin Fredrik Nilsson


Jakob Svensson Tomas Otterbeck


Ludvig Svensson Eddie Palmgren


Niklas Elmhammer Oskar Vilhelmsson


Mats Hyttinge Viktor Westman


REDEYE Equity Research Genovis 7 April 2020

33

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflicts of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:

• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date.

• An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions.

• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

• Redeye acted as financial adviser to Genovis in the directed shares issues in 2017 and 2018. Redeye acted as financial adviser to Mikael Lönn in the Sek45m placing of secondary shares in Genovis in May 2019.

• Mikael Lönn is the largest shareholder (15.3%) in Genovis and is also a member of the company’s board; Mikael Lönn is also a board member of Redeye and significant shareholder in the company (12.2%).

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analysed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2020-04-07)

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

Rating People Business Financials

5p 12 11 3 3p - 4p 93 71 31 0p - 2p 8 31 79 Company N 113 113 113

ANALYST OWNERSHIP

Håkan Östling currently does not own shares in Genovis Anders Hedlund currently owns shares in Genovis

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