Fusion Antibodies Profit Warning: Shares Down over 30%

The ticker code may read FAB, but the news is anything but for holders in this AIM-listed company. A Fusion Antibodies profit warning has knocked a whopping 30% off the share price. The base case is that it ‘significantly’ reduces profit expectations for FY19, although expectations for the current year remain unchanged. The markets hated this at the start – sending the price down over 50% initially, but since have recovered steadily, albeit still at a big loss to the previous day.

Fusion Antibodies are a new company for me. Their market cap is small = currently £17.5m at today’s prices. Like a lot of other companies that have issued warnings, the share price presents a rather sad story for investors, as even in January 2018 the price of the shares were above 200p.

In short this is what they do, adapted from their site:

Fusion Antibodies is a Contract Research Organisation (CRO) established in 2001 and located about 6 miles outside Belfast city centre in Northern Ireland, UK. Our unrivaled experience in the medical research industry makes Fusion Antibodies your first choice for development of antibodies for both therapeutic drug and diagnostic applications. Our mission is to enable biopharmaceutical and diagnostic companies to develop innovative products in a timely and cost-effective manner for the benefit of the global healthcare industry.

They are also a relatively recent listing to the exchange, with their placing dating back to 2017. They gave a mild profit warning in March which was attributed to the management focus on the IPO, and the market seemingly gave that a pass, with little share movement.

That wasn’t the case today with their latest announcement, which read:

Trading to date for the current financial period ending 31 March 2019 (“FY19”) has been slower than anticipated due to increasing competition and consequential pricing pressures, as well as a delay in securing some large contracts. Therefore, the Directors anticipate that the results for FY19 will be significantly behind current market expectations. However, the Directors believe that, based on the current pipeline, the Company will still achieve a modest year on year revenue growth.

It is easy to see why the market was disappointed. Significant usually implies a big miss, and because this is another year out makes it harder to quantify. We know that from the last trading statement that revenue growth was predicted to be 40% for FY18. The point of the IPO was that the firm could progress into new geographical markets and new products which were to be the drivers of growth, so only a ‘modest’ increase so early on seems fairly poor.

More alarmingly, adjusted EBITDA was predicted to be ‘around breakeven’, suggesting that for the next year there will be a loss.

The reasoning given look a bit daunting to me. In a niche market, competition and pricing pressures are rare, so the effects of these suggests to me that perhaps their platforms are not proprietary enough. The company seems to be reliant on lumpy contracts – in the last report, the top 20 clients accounted for 67% of revenues, so disruption to a few key contracts can have quite a large effect.

There sort of things appear par for the course for these type of companies though, and they make for volatile investments. The big pay-day, as always will be if their research into new treatments can pay off. And it does seem that FAB are operating in a field where antibody treatments may become much more important in the future.

Is the Fusion Antibodies profit warning a buying opportunity?

It is hard to know what to make of this. Stockopedia grades this as a ‘Sucker Stock’ and with a Stock Rank of just 4, it seems difficult to see that there will be any interest soon. But the scores I’m sure are related to the lack of data, there is very little to go on. My gut feeling is that they went to market too soon, backed by a previous year profit which was mostly a tax refund. But perhaps their view was to strike while the iron is hot.

Some of the good news is that the effects of the money raise are still yet to be seen:

We are pleased to confirm the laboratory capacity expansion has been completed, delivered on time and within budget, and the affinity maturation project is on schedule for completion in December 2018. The Company is continuing to build its sales and marketing capability internationally.

Although it would be a bit of a push to expect miracles: the IPO document signalled that c.£0.7m of the raise would go towards sales and marketing (£2.6m for the new facility, £1m for product development). That doesn’t exactly go far in these times.

It should be worth noting that these shares are very difficult to purchase in size, and even for a small investor, the spreads are horrendous: even now the spreads are 78/88 for a small purchase, enough to rule out any casual investments. Anyone getting in early might have made some profit, but at this spread it would have to be perfect timing.

I am inclined to only rate this at 2/5: the company is profitable for now, but seems to be heading into loss next year. On a breakthrough, these shares could easily multiply in value, but I think they might have to tap investors for more cash before that happens.

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