Company Overview: Medlab Clinical Limited is engaged in the sale of nutraceutical products and pharmaceutical research. The Company operates through two segments: Nutraceutical and Pharmaceutical Research. Its Manuka-C is scientifically formulated to support optimal immune system function and includes evidence-based ingredients containing a blend of over three ascorbates combined with glutathione and Manuka honey powder. Its NOS NITRIC OXIDE SUPPORT is a pre-exercise sports food containing a selection of evidence-based ingredients combined to support and optimize exercise performance. Its Saccharomyces cerevisiae ssp. boulardii (SB) 5B is a probiotic yeast that helps to maintain gastrointestinal function and integrity by supporting a healthy gut microbial profile; by increasing the production of secretory Immunoglobulin A (sIgA), short-chain fatty acids (SCFAs) and helping to promote the activity of brush border disaccharide enzymes. It also offers Mg Optima and BioClean EPA:DHA + CoQ10.
MDC Details
Rise in Revenues in Half-Year to December 2018: Medlab Clinical Limited (ASX: MDC) is a small-cap Australia based medical life science company with the market capitalisation of ~$84.41 million as of 24 May 2019. It had earlier released the results for the six months to December 2018 in which it generated revenues amounting to $3.07 million which is higher than the prior corresponding period where the same stood at $2.43 million. This represents an increase of 26.3% versus 1HFY18. During six months to December 2018, the company’s loss after providing for income tax and non-controlling interest stood at $3.66 million. As per the report issued by the company, there has been significant progress in the first six months and, as a result, MDC is well-positioned for the year ahead. Also, the company had made an announcement that it has entered into a collaborative agreement with Chronic Pain Australia with regards to consumer and health practitioner medicinal cannabis education throughout Australia.
Net Cash Used in Operating Activities (Source: Company Reports)
The company has also released the key information related to the quarter ended March 2019 in which net cash used in the operating activities amounted to $3.26 million. During the same period, the company incurred $1.636 million towards research and development while $0.955 million were incurred towards staff costs. The company also noted that it had achieved monthly sales of more than $1 million for the first time in the month of April 2019 which might help the company to post decent numbers in the upcoming quarter. We believe that the company has an unhindered opportunity in years to come at the back of robust balance sheet, strategic partnerships, positive results for NanaBisTM product under clinical trials, new product launches, focused strategy, and attractive earnings model, etc. Key risks: intense competition, reliance on key supplier relationships, intellectual property, foreign exchange risk, credit risk, and liquidity risk, etc.
Top 10 Shareholders: The following table provides the broader picture of the top 10 shareholders of Medlab Clinical Limited:
Top 10 Shareholders (Source: Thomson Reuters)
Improvement in Margins Witnessed in FY 2018: Medlab Clinical Limited had witnessed a improvement in its key ratios in FY 2018. The company’s gross margin in 1H FY 2019 stood at 65.6%, which implies a growth of 5.5% on the YoY basis that reflects the improved position of MDC to address its operating expenses. Additionally, there has been an improvement in its RoE for 1H FY 2019 on the YoY basis, which reflects that the company has delivered improved returns to its shareholders.
Talking about the liquidity position, the company’s current ratio stood at 9.90x which is higher than the industry median of 4.55x reflecting that the company is in a better position to meet its short-term obligations and it has sufficient headroom to make further deployments towards its business activities. These deployments might act as a tailwind for the company and support its long-term growth prospects. Additionally, the company’s Assets/Equity ratio stood at 1.05x which is lower than the industry median of 1.53x and, therefore, it looks like that the company’s assets are largely being funded by equity and it has a lesser dependency on debt. Debt-to-Equity ratio stood at 0.01x with a cash conversion cycle of 23.6 days in 1HFY19 which are lower than the industry median of 0.25x and 479 days, respectively.
Key Metrics (Source: Thomson Reuters)
Collaboration with Chronic Pain Australia: Medlab Clinical Ltd has made an announcement that they have inked a collaborative agreement with Chronic Pain Australia with regards to consumer and health practitioner medicinal cannabis education throughout Australia. The purpose of the project revolves around providing professional education services to the people living with chronic pain as well as their relevant healthcare providers about medicinal cannabis. Chronic Pain Australia happens to be a not-for-profit consumer-lead organisation which is dedicated to reducing the health and social barriers faced by the people living with chronic pain. In the same release, the company also stated that NanaBis™ is in the clinical trial at Royal North Shore Hospital, as well as available under the Australian Government’s Special Access Scheme (or SAS). The current data provided from both the mechanisms are positive as well as encouraging.
Understanding MDC’s March 2019 Quarterly Results: Medlab Clinical recently released its results for the quarter ended March 2019 and, in the same release, the company added that it has commenced the launch as well as rollout of the self-branded nutraceutical range into Australian Pharmacy Banner Groups. The company stated that NanaBis™ has been growing as prescribed by the doctors under the Government’s Special Access Scheme. The data from Stage 1 as well as case studies reflect significant improvements with respect to the quality of life, inclusive of the sleep as well as movement with reduced pain/reduction and the reduction/replacement of previously prescribed medication. However, they also show a reduction in pain severity scores and reduction of symptoms. The company also pointed out that the Heads of Agreement for NanaBis™ had been executed with Canadian pharmaceutical company named Pharmascience Inc. for the Canadian distribution.
the March 2019 Quarter release, the company stated that its patent applications totalled 28 and it had the cash balance of $13.169 million at the end of March 31, 2019.
An Overview of NanaBidial™ and NRGBiotic™: In March 2019 quarterly release, Medlab Clinical had stated that its second cannabis product, NanaBidial™, had been released to Australian Doctors under the Government’s Special Access Scheme. It also added that safety study, human intervention phase has been wrapped up and analytical results are awaited. Also, phase 2b clinical trial of medicine (NRGBiotic™) for the treatment of depression had been developed by the company and is progressing well at Queensland University of Technology. The 150-patient trial has been designed in order to meet the TGA requirements for the expedited drug approval.
Strong Balance Sheet Might Attract Market Players’ Attention: As per May 2019 investor presentation, Medlab Clinical is possessing a robust balance sheet and is having net assets amounting to $16 million with debt of $400k. The company also stated that from April’s nutraceuticals launch, there are expectations that the sales would be increased substantially. Also, the company has witnessed strong quarterly sales in the quarter ended March 2019 and there was 39% growth with respect to the sales as compared to December 2018 quarter.
Strong Patent and IP Position (Source: Company Reports)
Additionally, the company is having a strong patent and IP position which might support the company moving forward. With respect to Nutraceuticals, the company stated that its product range includes 34 premium formulations, and many are protected under the patents. The company stated that its nutraceuticals happen to be scientifically validated, innovative as well as practitioner-only products which provide therapeutic support for the various conditions.
What To Expect from MDC Moving Forward: With respect to NanaBis™, the company stated that it is progressing towards registration as well as global market access and, for NanoCelle™ product, the company is preparing for the wider application and the discussions are underway. The company has been partnering in order to speed up the market access. MDC had stated that research has been driving the new product development and the current revenue and it would be helpful for the future revenue as well.
With respect to Partnering, the company also stated that four potential agreements are in the development. NanaBis™ happens to be strongly aligned to the global regulatory models, and the National health priorities for Australia, US, Europe, and the UK. Additionally, the company is expected to be helped by its strong balance sheet and by reliance on debt (compared to broader industry) when it comes to funding its assets (as evident from its 1H FY 2019 Assets/Equity ratio). The company has mentioned five key research areas with regards to chronic diseases i.e. pain management, depression, obesity, chronic kidney disease, and ageing & muscular-skeletal health.
Key Research Areas in Chronic Diseases (Source: Company Reports)
Stock Recommendation: The stock of Medlab Clinical had delivered the return of 5.26% in the span of previous one month and, in the time frame of past three months, the returns stood at 6.67% which can be considered at decent gain over the said period. The company’s revenues have witnessed a favourable momentum from the past few years (i.e. FY 2014-FY 2018) which further builds the confidence in its revenue-generating capabilities. Between FY 2014- FY 2018, the company’s total revenues have witnessed a CAGR growth of 75.13% which reflects the company’s revenue-generation abilities. Additionally, there has been significant CAGR growth of more than 100% in the company’s cash receipts which might help it in gaining traction among the market players. The company also stated that completion of NanaBis™ clinical trial, as well as registration with TGA, will enable the wider sale, through medical practitioner prescription. Also, the registration is being pursued with the US and European markets. Currently, the stock price of the company is trading closer to its 52-week lower levels of $0.340, proffering a decent opportunity to make an entry. Given the backdrop of its strategic partnerships, new product launches, improving financial performance and its capital position, the stock is expected to be witnessing improved momentum in future.
Hence, considering the aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.390 per share (down 2.5% on 24 May 2019).
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MDC Daily Chart (Source: Thomson Reuters)
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