The Long Case for Trinity Biotech

| About: Trinity Biotech (TRIB)
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Business Description

Trinity Biotech (NASDAQ:TRIB) has two distinct segments:

  1. Clinical laboratory machines which function in the areas of haemostasis, infectious disease and clinical chemistry. These are machines designed for high through-put laboratories with the profit coming from high level of disposables. This segment accounts for 83% of revenues.
  2. Point of Care Tests for HIV and a Tristat test for Diabetes (about to be released late 2008). This segment accounts for 17% of revenues.

My thesis is that this is an excellent and cheap acquisition for a number of players. Due to its small size, TRIB's cost structure (a combination of direct [63% sales] and indirect sales force [37% of sales], which is somewhat out of proportion due to the $150m in sales size when melded into a larger organization) would be wildly accretive.

Financial Position and Valuation

TRIB has a book value of $7.06, which should largely be ignored due to the majority being goodwill. The solid book value is about $2.10.

Debt is $38m with 21m shares at $2.25. About $36m of the debt is with HBOS/AIB and is a 5 year loan which translates into an interest payment of $2.1m each quarter.

Revenues in 2007 were $144m and will be flat in 2008. TRIB is trading at a Revenue to Enterprise Value of 0.6x. The peer group trades at between 3 to 4x and the average acquisition multiple has been 2 to 3x in past three years.

TRIB had been hurt in the first half of 2008 by the fall of the US dollar, which should reverse in the second half. The US comprises about 50% sales, Europe 30% and Asia 20%.

My $4 price target makes the assumption that the new products will get some modest traction in 2009 and assumes a modest multiple increase to .75x 2009 sales. The announcement of a huge distributor for the Tristat product would alone be enough to justify such an increase.

What is the Problem?

Poorly managed business which has been late on refreshing their product (thereby losing share in the haemostatis core market) and a meaningful loss of a contract in Nigeria on their highly rated HIV test.

Both problems have a resolution in 2009.

Recent Events

TRIB's CEO resigned (never a good sign). The new CEO is the old CEO and  founder of the company. In this case, the resignation of the old CEO is a positive due to the fact they had two warring captains at the helm. The tough decisions had been taken by the old CEO in terms of product development and strategy.

Clinical Business

The main instrument in the clinical business is the Destiny line of products for the detection of blood disorders. TRIB did 61m in revenue from this sector in 2007. It is a global market with only three other competitors - the main one being Siemens (SI). TRIB has 8% market share of a worldwide total of 2000 machines. It is a great business where 85% of the revenue stream is recurring from disposables and a 40% gross margin on machines.

TRIB has been losing share due to the age of its machines. These machines are differentiated on two basis - throughput and downtime. The new product from TRIB is the Destiny Max, which has finished development and and is waiting approval from the FDA. It is expected to sell in Europe and the USA in early 2009. The new machines boast industry records for throughput and reliability.

Just replacing the existing base of TRIB Destiny machines would mean a meaningful boost to the bottom line.

The Infectious Diseases segment accounted for about $42m of sales in 2007 and up slightly for 2008. TRIB is especially strong in Lyme Disease (50% market shares), chlamydia and EBV.

The final part of Clinical Labs is a Chemistry segment which did $17m in 2007 and is growing low double digits. It is primarily focused on HbA1c and PDQ for Diabetes and other haemoglobin variants (especially in neonatal markets). This is a profitable business with a closed platform, 70% recurring revenue and strong gross margins of 60 to 65%.

Point of Care Testing

There are two products:

  1. Uni-Gold HIV which had no 2 position in Africa and US. This segment has strong gross margins - between 55 and 75%. TRIB did $24.5m in 2007 and then lost a contract in Nigeria, which means it will be YOY down 60%. The story is that they lost to a Korean company whose test is producing an unacceptable rate of false positives which means a blood lab test is required. The Uni-Gold Test has been the most highly rated HIV point of care test in terms of accuracy. TRIB is hopeful to win back market share in Africa and the US in 2009.
  2. Tristat is a Point of Care Haemoglobin test in doctors' offices for type 2 diabetes. In this market, Roche has 40% market share. This is a very profitable procedure for doctors to do in-house. TRIB's test, unlike the others, does not require refrigeration, is fully automated and gives results within 10 minutes. TRIB is waiting 510K FDA approval and will distribute though a major distributor who has access to most doctors' offices in the USA.

Risks

  • Inability to replace the Destiny line with the Destiny Max.
  • Quarterly revenue historically has been lumpy.
  • Debt servicing might be an issue if the turnaround doesn't work.

Valuation

Price: $2.30
Shares: 21m
Market Cap: 48m
Cash: 5.2m
Debt: 38m
Enterprise Value: 77m

Sales 2008E: 144
Sales 2009E:  168

Disclosure: Author holds a long position in TRIB