Factsheet Commentary : October 2020

In the future, COVID-19 will be remembered as another pandemic that humanity ultimately found a way to get through. In the here and now, though, the virus is front and centre in the world’s collective consciousness. Intense focus is being devoted towards the development of effective vaccines. As and when the first of these become available, it will surely lift the spirits of many the world over. However, a vaccine is only one piece of the puzzle: testing and treatment solutions will continue to play an equally important role. With this in mind, we are pleased to have been able to participate in SourceBio’s recent IPO.

SourceBio International Plc is a leading provider of laboratory services. Prior to this year, the company had three core business divisions:

▪ The Healthcare Diagnostics division provides outsourced cellular pathology services to over 130 NHS Trusts and private healthcare providers, growing revenue at a 34% compound annual growth rate over the last three years. Once COVID-19 recedes, further growth is expected from this division as medical departments work to clear their backlogs.

▪ The Genomics business provides DNA sequencing, an area that we expect to grow as the trend for personalised medicine accelerates in the coming years.

▪ Stability Storage provides contract medical storage and storage equipment to customers, generating strong recurring revenues.

Given the circumstances, the company turned the current crisis into an opportunity by forming a new Infectious Disease Testing division. By applying its clinical expertise to COVID-19 testing, barely five months on, the division now processes 8,000 to 9,000 COVID-19 tests per day.

From a standing start in May, the business is expected to generate £30m in revenue in 2020; after the company deploys the IPO proceeds to scale up its testing capacity and other infrastructure, revenue could exceed £100m in 2021. We hope that the need for this testing capacity will be short-lived, so we did not place too much emphasis on this transitory business.

Normally, IPOs are overpriced, with sellers leaving little upside for buyers. However, on this occasion, we were pleased to find that the company was offered at a price that we considered sensible – an assessment supported by the fact that existing investors took the opportunity to increase their holdings.

Irrespective of how short-lived the testing business turns out to be, we expect SourceBio’s other three divisions to grow strongly over the coming years. The IPO of this high quality business – with its first-rate management team – was, unsurprisingly, heavily oversubscribed and attracted several high quality institutions. Nevertheless, we managed to secure a meaningful allocation and are delighted to welcome SourceBio into our portfolio.

Sterling Investments Management Ltd
Lynwood House 2-4 Crofton Road,
Orpington, England, BR6 8QE

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