Gamble of the week: promising biotech firm

published 28 April 2008

This company supplies human tissue and other biomaterials, such as blood and DNA, to the pharmaceutical and biotechnology industries. The group collects these products from hospitals and medical premises around the world, stores them in specially controlled conditions and then sells them to healthcare firms for use in their research. These substances typically fill the gap between preclinical (animal) and Phase I (human) trials, with the aim of shortening drug development times and weeding out ineffectual treatments earlier in process.

Asterand (LSE:ATD)

Growth in this niche sector is being driven by increasing research into biomarkers and the trend for customers to outsource this service to specialists. Currently, in-house operations account for about 75% of the tissue-supply market, but this is steadily falling as research staff struggle to cope with tighter laws and the need to test tissues from a wide variety of ethnic backgrounds and disease types/stages.

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The group's finances also look healthy. Turnover (at constant exchange rates) was up 9% to £7.6m in 2007, despite a temporary supply disruption caused by a restriction on Russian exports of human materials. This year Asterand is aiming to move into profitability for the first time with Edison Research forecasting 2008 sales and normalised earnings per share of £10.9m and 0.4p respectively, rising to £12.4m and 0.8p in 2009. Moreover, as at 31 December the group had net cash of £2.2m, along with potential carried-forward tax losses of £41m (subject to approval by HM Revenue & Customs), equating to a deferred tax asset of up to £10.5m.

But if Asterand can achieve Edison's targets, then the shares look undervalued, particularly for such a science-rich company operating in a niche sector with solid long-term prospects. Chief executive Martyn Coombs seems to agree as he purchased 200,000 shares in April at 5.25p each. Finally, it is worth noting that 12 months ago Asterand received a takeover approach from a consortium of its shareholders, pitched at 7.75p per share. Although the bid was rejected as being too low, it should help underpin the present downtrodden valuation.

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.