, 18 tweets, 7 min read
I've written on Horizon Discovery #HZD before. I think this company may soon turn the corner into real operating leverage, then profitability.

Shares are dragging along the bottom and it's somewhere between 3-4x sales. If I'm right, this could be very cheap later on.

Briefly the story so far.

#HZD is a life sciences company. Here is how they describe themselves:

"Global leader in the application of gene editing and gene modulation technologies"

These things sell expensive and they rebuffed a bid from Abcam in 2018.

Woodford had a stake in #HZD.

He's now gone. His holding - and more - was picked up by Valueact, who just got Merlin Ent's in the UK sold into the Lego family.

Valueact have repeatedly raised their holding, so it's not just me that sees something here.

Why else might you be interested? Here's something Abcam CEO Alan Hirzel remarked on his last call:

"Cell line editing is in the same stage that antibodies was in the '80s. It's very early stages. Lots of people are doing their own work in their own labs."

HZD will do that work
In fact, it's ground floor stuff for all the things you may have heard about in medical science: Crispr, base editing, biologics, cell lines etc.

Here's how the company has been progressing:
Horizon is still loss making (well, they expect +ve adjusted EBITDA for the FY but hey, you get the idea)

Their gross margins of 69% stack up well next to their self-selected peers:

$ILMN 69% #ABC 70%
$XON 54% $TECH 66%
$RGEN 56% #EVT 31%
#QGEN 65% $TMO 44%

IDT went for ~$2B
That's all very nice but it's a way off yet. Let's look at the company itself and see what's happening there.

We can forget In Vivo, it was previously impaired and will be shuttered or sold if $CRL or someone will have it

So, 4 to deal with of which Research Reagents is key.
Bear with me on this part of the company and I'll promise to be quick on the other 3.

RR did 58% of the revenues in HY1, grew at 12% and is expected to grow faster in HY2.

RR does Alan Hirzel's 80s cell line editing and CRISPR reagents.

Important changes happening here.
Cell line capacity here has just been increased by 3x. By Q1/20 it will be 5x.

This is less important than just meaning you can sell more stuff - it means the company can bring prices down by a third to a half and most importantly *begin to sell what customers actually require*
Think of it like this: it's the difference between off the peg and bespoke. Soon #HZD will be able to sell bespoke at off the peg prices.

It's not just a question of cheaper prices making customers happy; there is a bigger issue in the market - customers like this need bespoke.
The growth rates here, if they come to pass, suggest that this approach is catching on in the market and that #HZD may be about to steal a march on bigger competitors. We'll see.

Next up: screening - and I won't get into the weeds on these.
Division does CRISPR screening for big pharma.

Grew 39% in H1.

Revenues lag, orders lumpy. Current order book 2x last year's. Demand is "very strong" and they've just signed their largest order to date here.

The science is hard and they've got a bit of a handle on it.
3rd: bioproduction (think biologic drugs - today's Next Big Thing)

Biologics are hard to make. HZD solution starting to be picked up by customers, who validate the tech - which allows others to jump in to licence rather than test from ground up: flywheel

And bioproduction was up 150% or so but it's small and orders are lumpy - as you see above, they've just signed another. A promising area and one to watch.

Last year was a "knockout" for the division but they expect to match or with luck, exceed it this year.

Last: diagnostics.
-28% in HY1

Does cell lines which validate diagnostic tests for diseases.

If you can see past the turd to the raisins, they've just put new management in here and despite an awful half, expect to match last year on an FY basis.

Last year was "robust", would be quite a recovery
Bonus tweet: they're also running the rule over doing base editing via licence with Rutgers.

CRISPR produces lots of errors whereas base editing (the next next big thing is at ~95%)

Only one company out there with it and they keep it to themselves. HZD may bring this to market.
So there you have #HZD.

What's it worth?

Mid double digit growth, clear trajectory on gross margins and no reason to assume operating leverage won't begin to kick in as it scales.

10% of cap in cash, no non-lease debt.

Major shareholder with record of achieving takeovers.
And a business which seems to be skating towards where the puck is going in medicine and life sciences - a reliably expensive part of the market.

Today's ex-cash 3-and-a-bit sales for close-to-breakeven, probably about right.

But look a few years down the line, could be cheap.
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