Universal Biosensors, Inc. (ASX: UBI) has given back much of the day's gains despite posting a better-than-expected quarterly result. Don't be surprised as the company is arguably the most mistrusted name in the small cap life science sector.
The blood glucose test kit developer surged 15%, or 3 cents, to 23 cents after it posted a 135% jump in service fees to $2.3 million in the three months to end December 2014, when compared to the same period in 2013.
But the stock quickly gave ground to trade at 20.5 cents even though the latest result is ahead of what I, or the market, was expecting. In fact, group revenue for 2014 (its financial year is the same as the calendar year) is likely to come in around 15% ahead of my forecast of around $6.5 million.
Further, the fall in the Australian dollar against the greenback will likely give company earnings a welcome boost as a service fee is paid in US currency by LifeScan, which is a Johnson & Johnson subsidiary, for each test strip (a consumable that is used in the blood glucose testing device) sold.
Unfortunately for shareholders in Universal Biosensors, LifeScan has the option to pay a relatively modest lump sum of between two and three times of the service fee collected in the year LifeScan exercises this option. This option is only available once LifeScan has paid at least $US45 million in cumulative service fees, which could be as soon as the second half of 2016.
Universal Biosensors has guarded this information well and supporters of the stock got a very rude shock in May last year when management revealed details of the exit clause.
The stock has shed 60% of its value in the past 12 months and had been trading comfortably above $1 before 2012.
While there is usually a reshuffle of senior executives at life science companies after a significant destruction in share price – think QRxPharma Ltd. (ASX:QRX) and Alchemia Limited (ASX: ACL) – Universal Biosensors' board and senior executives are still steering the ship.
This, in my opinion, is the biggest barrier to a re-rating of the stock. Regardless of how many test strips LifeScan sells or the success of Universal Biosensors' blood coagulation testers (the next product line the company is trying to commercialise), it's difficult to see the stock surging higher without a board/management shakeup.
Until then, Universal Biosensors better hope it doesn't need to undertake a capital raising in this country. I am not sure if any fund manager will be answering that call.
