Post by luxetvox on Oct 24, 2023 17:00:37 GMT
So it appears we have consensus on the board that BRLI must be sold, while there is also consensus that it never should have been purchased. Of course we all know that blood testing companies generically trade at lower multiples than pharma. And therefore even a lab that wasn't lying about profitability, like BioReference was under Grodman, but was making real money would've diluted the sex appeal of company like Opko, which appeared to be on the cusp of some impactful drug revenue from Rayaldee, and ripe with later stage candidates like Oxyntomodulin and Somatrogon. While nearly all of the latter became FUBAR, Frost may have looked pretty smart had the lab cranked out steady, if boring, profits quarter after quarter. And such profits would presumably have paid for the longer runway needed to land said drugs after extended turbulence and faulty engines.
The reason then that BRLI never should have been purchased was not because it was a sleepy, multiple-diluting business. The reason was that it was being run by a crook. And said crook was a gourmet cook.....when it came to the company books. He must've thought that he hit the lottery when Frost came knocking. So the company was damaged goods from the get go. Ironically however, had it not been for the pandemic, and a lab to generate (some) profits from it, Opko may either have folded its tents, or been forced to sell who knows how many more shares just to stay afloat. So, the original sin, as it were, was not buying a business with a low multiple; it was buying a business that was actually hemorrhaging money without the most basic due diligence to discover that....and walk away.
Now, here we are 7+ years on, and looking at quarterly losses in excess of $30 million. And the lab has had three people in charge since the purchase, with the latest guy being a scientist with an expertise in pharma R&D. But how does one value the business. While I agree with Bill that BRLI is the biggest fish in the M&A pond, for me the numbers posted by competitors are worth looking at for comps. Competitors like DGX.
Quest Diagnostics posted Q3 earnings results today. While quarterly revenue was down ~$190 million year over year, and down $45 million from Q2, management nonetheless guided higher for the year for both revenue and EPS. Clearly they expect a good Q4. 2023 Adjusted EPS was raised to $8.70/share (midpoint of range). At the current stock price near $123, the stock is trading at a tad over 14x earnings guide. DGX gross margins ticked down just a bit from Q2, but are still ~33%: $2.295 billion in revenue, $1.541 billion cost of services. Compare that to Q2 numbers from BRLI: $127 million in revenue, $113 million cost of services. So BRLI has 11% gross margins, while DGX has three times that.
So what do we have going for us, as a possible acquisition candidate? Well, we have......revenue. Declining, and low margin, but it is revenue. However, there's the issue of geographical redundancy. That is, how much of the +/-$500 million in annual BRLI revenue would actually be incremental/additive to DGX or LH? In other words, how much of the $500 million would be easier for DGX/LH to buy vs just taking through increased market share? Unknown, but I have to assume that there is some footprint overlap, which at the very least could mean a lower price paid per dollar of revenue in those regions.
Lastly, DGX currently has a $13.76 billion market cap, and is forecasting $9.23 billion in '23 revenue, a price to sales ratio of 1.49x. Would DGX pay a similar multiple of sales for BioReference? Not likely. Could they wring the same 33% gross profit margin from the $500 million in BRLI revenue that they do from their own established and (modestly) growing business? More broadly, what is BRLI worth right now, as a business losing over $100 million annualized? Versus a business that MAY become profitable early next year, per management forecast?
I'd be ecstatic if BRLI were sold for $750 million, or more, in its current financial state. But I have my doubts. I'd take 1x revenue now. Especially since Logal grunted in assent to Petusky's question last cc, that breakeven would take ~$600 million in revenue. Because I haven't seen the path to that figure. And again, would DGX pay even close to the 1.49x revenue multiple that that their own business is valued at? For a breakeven business? Whereas they (DGX) are generating ~10% net to their bottom line.
$400-700 million.....whatever is realized for BRLI, whenever it MAY happen, the elephant in the room is what Frost would do with it. Sadly, he's been a very poor steward of company resources. And that is precisely what has created the current purgatory to which shareholders have been banished. Therefore, while BRLI is important as a source of funds for Opko, it always gets back to the same thing: it's really all about Frost.
The reason then that BRLI never should have been purchased was not because it was a sleepy, multiple-diluting business. The reason was that it was being run by a crook. And said crook was a gourmet cook.....when it came to the company books. He must've thought that he hit the lottery when Frost came knocking. So the company was damaged goods from the get go. Ironically however, had it not been for the pandemic, and a lab to generate (some) profits from it, Opko may either have folded its tents, or been forced to sell who knows how many more shares just to stay afloat. So, the original sin, as it were, was not buying a business with a low multiple; it was buying a business that was actually hemorrhaging money without the most basic due diligence to discover that....and walk away.
Now, here we are 7+ years on, and looking at quarterly losses in excess of $30 million. And the lab has had three people in charge since the purchase, with the latest guy being a scientist with an expertise in pharma R&D. But how does one value the business. While I agree with Bill that BRLI is the biggest fish in the M&A pond, for me the numbers posted by competitors are worth looking at for comps. Competitors like DGX.
Quest Diagnostics posted Q3 earnings results today. While quarterly revenue was down ~$190 million year over year, and down $45 million from Q2, management nonetheless guided higher for the year for both revenue and EPS. Clearly they expect a good Q4. 2023 Adjusted EPS was raised to $8.70/share (midpoint of range). At the current stock price near $123, the stock is trading at a tad over 14x earnings guide. DGX gross margins ticked down just a bit from Q2, but are still ~33%: $2.295 billion in revenue, $1.541 billion cost of services. Compare that to Q2 numbers from BRLI: $127 million in revenue, $113 million cost of services. So BRLI has 11% gross margins, while DGX has three times that.
So what do we have going for us, as a possible acquisition candidate? Well, we have......revenue. Declining, and low margin, but it is revenue. However, there's the issue of geographical redundancy. That is, how much of the +/-$500 million in annual BRLI revenue would actually be incremental/additive to DGX or LH? In other words, how much of the $500 million would be easier for DGX/LH to buy vs just taking through increased market share? Unknown, but I have to assume that there is some footprint overlap, which at the very least could mean a lower price paid per dollar of revenue in those regions.
Lastly, DGX currently has a $13.76 billion market cap, and is forecasting $9.23 billion in '23 revenue, a price to sales ratio of 1.49x. Would DGX pay a similar multiple of sales for BioReference? Not likely. Could they wring the same 33% gross profit margin from the $500 million in BRLI revenue that they do from their own established and (modestly) growing business? More broadly, what is BRLI worth right now, as a business losing over $100 million annualized? Versus a business that MAY become profitable early next year, per management forecast?
I'd be ecstatic if BRLI were sold for $750 million, or more, in its current financial state. But I have my doubts. I'd take 1x revenue now. Especially since Logal grunted in assent to Petusky's question last cc, that breakeven would take ~$600 million in revenue. Because I haven't seen the path to that figure. And again, would DGX pay even close to the 1.49x revenue multiple that that their own business is valued at? For a breakeven business? Whereas they (DGX) are generating ~10% net to their bottom line.
$400-700 million.....whatever is realized for BRLI, whenever it MAY happen, the elephant in the room is what Frost would do with it. Sadly, he's been a very poor steward of company resources. And that is precisely what has created the current purgatory to which shareholders have been banished. Therefore, while BRLI is important as a source of funds for Opko, it always gets back to the same thing: it's really all about Frost.