The halving of LBT Innovations Limited's (ASX: LBT) share price this morning is a painful reminder for investors in the life sciences sector that having a global giant for a partner won't guarantee a happy ending.
The €3 billion ($A4.4 billion) market cap French laboratory equipment company, bioMérieux, has given word that it intends to terminate its exclusive deal with the ASX market minnow that involved licensing LBT's automated culture plate streaker in the next 12 months.
There are a few lessons investors can draw from this unfortunate experience that can be applied to LBT's other product opportunity.
While striking a partnership with a large partner is an important milestone for any small aspiring ASX life science company, it doesn't necessarily lower the riskiness of the investment. It just shifts the risks – usually from product risk (i.e. whether the technology works) to sales/distribution risks.
Getting a handle on the latter is not always easy but keeping an eye on quarterly sales figures will give one an idea on whether the product is gaining market traction. Anyone following the LBT story will know the automated streaker is not gaining sufficient traction when compared with LBT management's initial expectations in 2007 when the licensing deal was struck.
This brings me to the next important point. Global companies have their own (and often complicated) agenda and you can always count on them to pursue that first. This is because these companies have multiple products that are consistently competing for scarce resources within the organisation.
If a new product is not making sufficient inroads, the issue of moral hazard will become a major risk factor.
LBT's experience is not unique. If anything, such issues arise fairly regularly. Biota had to launch legal action against GlaxoSmithKline, while Johnson & Johnson initially dragged its feet in marketing a blood glucose testing kit from Universal Biosensors, Inc. (ASX: UBI) because it cannibalised on sales of Johnson & Johnson's existing product.
LBT's share price crashed 50% to 5 cents to a seven-month low before recovering slightly to 5.5 cents in late morning trade. LBT has received around $A13 million in various payments from bioMérieux over the years and will continue to be paid royalties for 2015.
The $7 million market cap innovator has another product line it is trying to commercialise. It has struck a joint venture with Swiss lab instrument company Hettich to develop an intelligent imaging platform.
Let's hope this partnership is more enduring.
