cellestis with a lot of help from forrest

Thought a piece written by Forrest on his blog was worth repeating with some input and additions.
Cheers

CELLESTIS (ASX:CST)

Startup biotech companies can have huge promise. Unfortunately, in the end very few live up to their promise. Investors need to be very choosy about which biotech investments they risk their capital on. ASX listed Cellestis is one of a very few such companies, unlike many biotech?s, it has developed past the research and development stage, selling its product (TB blood test) here and overseas. Cellestis has gone from a start up to a profitable business, a fact that only a handful of Australian biotech companies achieve..

✔ A potential market of ~ $800m - $1bn
✔ Cash flow positive, Profitable
✔ Paying Dividends increased dividends by 100% this financial year
✔ FDA approved (twice), Centre for Disease Control USA. (CDC) guidelines accepted June 2010. All regulatory approvals are in place, clinical data required to support sales has been generated.
✔ Recurring and largely compulsory market
✔ Strong and lengthy IP protection until 2023
✔ Extensive product pipeline CMV, Leishmania, Lyme disease etc. new product development represents the future growth of the company
✔ Honest and competent management with integrity

COMPANY OVERVIEW
Cellestis owns the patented QuantiFERON (QTF) methodology for medical diagnosis (originally developed by the CST Directors whilst employed at CSIRO back in the 1990?s). The technology is an Intereferon Gamma Release Assay (IGRA) which has the potential to revolutionise the diagnosis and treatment of a wide range of conditions that are otherwise difficult or impossible to effectively diagnose. Potentially, QTF could be used to diagnose Tuberculosis, Cytomegalovirus, Lyme Disease and many forms of cancer. The company has elected to concentrate initially on the huge potential of a diagnostic for TB.

The company was floated on the ASX in 2001 and has spent the subsequent time in refining the diagnostic and developing a consensus acceptance in the medical community. With over 400 independent peer reviewed studies, the QuantiFERON technology is now well recognized throughout the medical community. The methodology now has full FDA approval in the USA and the CDC has released positive guidelines for its use. For the Investor, CST now presents an exposure to the exciting biotech field with an unusually low risk profile. Ten years of solid building has the company making profits, currently paying a modest dividend and intends to give dividends in line with the company?s profits.

TUBERCULOSIS
Around the world, every year, around ten million people are diagnosed with active TB and two million die from this curable disease. One of the main reasons for this appalling and unnecessary loss of life is the lack of an effective diagnostic for TB infection. After 100 years of this state of affair, only one company, Cellestis, has developed a clinically practical, whole blood serological diagnostic for TB ? QuantiFERON-TB Gold is superior in accuracy and specificity to the current test and delivers better value for money. Tuberculosis itself exists in two states. Many people are unknowingly infected with TB but show no symptoms (latent TB or LTBI). It is only when their immune system is unable to contain the latent infection that this TB becomes active and communicable. Many conditions can cause this conversion, including other diseases, HIV, immunosuppressive therapies (eg arthritis treatment) or ageing. Once latent TB becomes active it is highly communicable.
TB is endemic in much of the world and is an issue of extreme concern in every country. The combination of HIV and TB is particularly deadly and it has been estimated that one-third of the deaths of HIV patients can be attributed to TB.
In more recent times drug resistant forms of TB (MDRTB, XDRTB) are becoming more common.
The treatment of these forms of TB are very expensive and are not always successful.
All experts agree that the only way to ultimately control TB is to diagnose and treat the pool of latent TB.
The only existing test for latent TB is a more cumbersome skin test that has been in use for well over 100 years. The skin test is notoriously inaccurate, not specific enough to differentiate between those vaccinated against TB and those with latent infection. As a result it gives a large number of false positives. It has often been referred to as "the most hated diagnostic" amongst medical practitioners.

MARKETS
Cellestis have defined their initial markets for QuantiFERON-TB Gold as the developed world, currently more than 50million skin tests are carried out each year.

USA. In the USA, QTF-TB Gold has received full FDA approval and more importantly has had full guidelines for its use, published by the CDC. These guidelines permit the use of QTF-TB Gold in all circumstances. Furthermore, in many situations it is recommended as the preferred test (over the skin test). These latest guidelines were released in June 2010 and will accelerate market take-up. It is estimated that the total market potential in the USA is 15 million tests per year.
Cellestis markets in the USA through a wholly owned subsidiary. Currently the Quantiferon-TB test sells for US$22.00 with a granted health rebate.

JAPAN. Japan has an enormous problem with TB due both to their social structures and the fact that their population is almost 100% BCG vaccinated (rendering the skin test ineffective). The use of QTF-Gold TB has been approved by the MHLW (similar to FDA) and has been incorporated into the Japan TB control guidelines. QTF-TB Gold is marketed in Japan by the largest TB control organization in Japan, Nippon BCG. The market for TB testing in Japan is estimated at around 12 million tests per year.

EUROPE. QTF-TB Gold has full CE-Mark approval in Europe. Many European countries have now adopted QTF-TB Gold into their TB control programs. The estimated market in Europe is 10 million tests per year. QTF-TB Gold is marketed in Europe through a wholly owned subsidiary based in Germany and qualified distributors.
Currently the QFT-TB test has around 3% of the developed world market.


RISKS
Every investment has potential risks. Cellestis has minimized most risks with a conservative management style and an aggressive approach to ensuring medical acceptance. This approach has resulted in a lengthy process but investment grade outcomes.

NON-ACCEPTANCE. The medical profession is inherently conservative and is often hesitant to change established procedures. With our health in their hands this is an understandable attribute. Cellestis have taken on the task of moving this market through the accepted approach of independent, peer reviewed trials. This approach has rewarded with even the most conservative of the medical community now publically stating their belief in the improvements that QTF-TB Gold brings to TB control. The risk of non-acceptance is now minimal ? the only question yet to be answered is the rate of adoption.

COMPETITION. The main competition is the incumbent skin test. This is a well known test and therefore has a certain market inertia. On the other hand, its deficiencies are well known, returns many false positives.
Another IGRA (T-Spot) has been developed but it is at a significant disadvantage to QTF-TB Gold because it cannot be used on whole blood, is far more complex to perform and much more expensive.

FINANCIAL RISK. The company has no debt, $20 million in cash, is cash flow positive and is making a profit,
The risk of failure through financial event is extremely minimal.

INTELLECTUAL PROPERTY (IP). Through a combination of patents and licensing the QTF-TB Gold product is well protected until at least 2020. Patents over the In-Tube technology used in the diagnostic further provides protection for other products through to at least 2023. It will be difficult for a generic test to just copy. Another company would have to go through the same process as Cellestis has undertaken (around 6 years), expensive process, cannot get me too approval, not many companies are going to do this when there is an incumbent.

PERSONNEL. The company is driven by the current Directors. Their ongoing involvement would be seen as of great import to the future of the company. There is no indication to date that their commitment to the company will change.
The biotech sector cops flak from attracting spruikers the Directors, Dr Radford and Dr Rothel are the exact opposite, bordering on reticent, they refuse to talk up sales figures or flood the market with boastful but immaterial announcements.
Among the board members is Chairman, Ron Pitcher who is also on the board of Reece and Macmillan Shakespeare also well lead companies.


FINANCIALS.
Cellestis announced a maiden profit in 2007 and commenced paying a dividend in 2008. F/Y sales 06/09 increased 83% to $34.4 million, net profit after tax grew 391% to $8.2 million this is due to the high 62.4% Gross Profit Margin and low overheads. ROE 37%.


EQUITY.
The company has 96m shares on issue, no options, 30% of shares are held by the
Directors and almost 40% are held by the top 20 shareholders.

This information should not be taken as financial advice. Always do your own research
July 2010