Gamble of the week: Life-saving pharma

This small-cap pharma is set to benefit from NHS cost-cutting with its innovative cancer-screening technology, says Paul Hill.

According to Cancer Research UK, there are more than 273,000 fatalities annually worldwide from cervical cancer. But, helped by excellent screening regimes, mortality rates in Britain are almost 70% lower than they were 30 years ago.

One company at the forefront of this improvement is Source Bioscience. It is already Britain's largest provider of cervical cancer screening for the NHS, serving nearly half the domestic market. In 2011, its cytology service conducted 1.8 million tests for GP surgeries, clinics and NHS laboratories across England and Wales.

The firm also provides a wide range of other vital diagnostic activities for personalised medicine, such as testing patients to find out which drugs will be most effective. Together, these healthcare activities account for about half the business, and help fund its rapidly expanding life sciences arm. This offers an overnight DNA sequencing service for academic research and online access to the largest portfolio of cloned DNA, RNA and antibody products sold by a single provider in Europe. This clinical database supports drugs trials for pharma/biotech clients.

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In an era of tightening budgets, its customers can save a small fortune by outsourcing these type of life-saving tasks to Source Bioscience. For example, 3.8 million slides are screened manually every year in Britain, so automation is the next step to improve turnaround times and reduce costs.

Source Bioscience (LSE: SBS)


In December, the NHS approved the firm's proprietary FocalPoint application. This can analyse up to 25% of all samples automatically, representing a significant saving. Since then, four NHS Trusts have signed up with others expressing interest.

House broker Nplus1 Brewin is predicting 2012 revenues and underlying earnings per share of £17.4m and 0.5p respectively, rising to £19.7m and 0.8p in 2013. I expect sales to climb to £25m by 2016, by which time earnings before interest, tax, depreciation and amortisation (EBITDA)could have risen to £5m (compared to £1.9m in 2011). Using a ten-times multiple, discounting back at 12% and adjusting for £2.2m of net debt, I estimate the stock is worth around 13p a share.

Source Bioscience is a relative minnow in this giant industry, and could get squeezed by larger rivals or NHS cutbacks. Yet with its main markets growing at 10% per year, it looks well placed to benefit from its expertise in cancer and molecular diagnostics. Nplus1 Brewin has a price target of 12p.

Rating: SPECULATIVE BUY at 7.25p

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.