Covid-19 tester makes AIM debut

SourceBio International is valued at £120 million, but will it trouble booming Novacyt and Avacta?

Covid-19 testing continues to be a big focus for AIM investors after huge share price gains for Novacyt (LSE:NCYT) and Avacta (LSE:AVCT), and now the debut of laboratory services company SourceBio International.

AIM's latest player in the rapidly expanding sector joined the junior market with a valuation of £120 million after the oversubscribed placing of shares raised £35 million from City institutions.

Some of the proceeds will be used by Nottingham-based SourceBio to rapidly scale up the Covid-19 side of its business to meet demand for its antigen PCR tests from the NHS and private hospitals. It managed an average of 5,150 tests per day within four months of establishing its testing capability in May, but wants to achieve a capacity of 10,500 by the end of the year.

The company's shares were 10p higher than their placing price of 162p on today's first day of dealings on AIM. Other Covid-19 testing companies, including Genedrive (LSE:GDR) and Avacta, have already soared in value this year, with the best example being the 21,000% surge for Novacyt shares to a high of 1,249p last week.

Additional government funding for Covid-19 testing is in place until March 2022, with the next year expected to see peak demand as Boris Johnson aims for millions of tests every day.

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This provides an unprecedented opportunity for the likes of Novacyt and SourceBio to generate significant cash flows that can be used to accelerate their strategic development plans.

In the case of SourceBio, the company is already one of the UK's biggest providers of outsourced pathology services and provides DNA sequencing as well as controlled stability storage for big pharmaceutical, medical device and healthcare companies.

It is the second time on the London stock market for SourceBio, having joined the main list in 1999 as Medical Solutions before a name change to Source BioScience in 2008.

The company was taken private in 2016 following a £63 million deal led by Harwood Capital before a turnaround plan under current executive chairman Jay LeCoque refocused the business on high margin core services. Those operations now generate annual revenues of £19.8 million and underlying earnings of £2.8 million, with compound growth of 47%.

The largest revenue stream within healthcare diagnostics comes from cellular pathology, with SourceBio testing patient tissue for over 130 NHS Trusts and private healthcare providers. A shortage of NHS pathologists has contributed to increased waiting times and is driving demand for outsourced services such as those offered by SourceBio.

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In March, the company's healthcare diagnostics and genomics divisions were materially impacted by Covid-19, but the group saw an opportunity to enter the testing market by using .

Laboratory facilities already in place and the strong contacts it has within the NHS.

The group established a new infectious disease testing business unit, with the first revenues generated in May. Since being established, the company has expanded its laboratory space following a fit-out in July and now has more funds to drive expansion.

LeCoque said it was an exciting time for the business:

“Our initial public offering on AIM allows us to significantly increase our Covid-19 testing capacity, accelerate earnings growth in our core business and execute on potential merger and acquisition opportunities.”

He has 20 years’ experience in the life sciences sector, with a significant focus on UK listed companies. LeCoque was executive director of Bioquell from 2016 when shares were 146p until its acquisition in 2019 at 590p. He was also CEO of Celsis International from 2000 and was part of its buy-out in 2009 before an exit in 2015 with a 7.6x cash return to shareholders.