Quick setting
Ortho Clinical Diagnostics Holdings (OCDX) has filed for $100 million in funding in an IPO of its common stock, according to an S-1 registration statement.
The company provides in vitro diagnostics and donor screening services worldwide.
OCDX produced slow growth even before the pandemic and is heavily leveraged due to its private equity stake.
I will provide a final opinion when we know more about management’s IPO.
Business & Technology
Ortho Clinical, based in Raritan, New Jersey, was founded to develop a suite of services for clinical laboratories in hospitals across the United States.
Management is led by Chairman and Chief Executive Chris Smith, who has been with the business since 2019 and was previously CEO of Cochlear Limited and previously held senior roles in a number of healthcare companies.
Below is a brief video overview of the company’s Covid-19 antibody tests:
Source: Orthoclinic Diagnostics
The company’s main offerings include:
Ortho Clinical has received at least $971 million from investors including The Carlyle Group
Acquisition of customers/users
The company seeks customers among clinical labs and said it sells to more than 70% of US hospitals.
Ortho Clinical has customers in over 130 countries around the world and was formerly a unit of Johnson & Johnson until acquired by current shareholder and private equity firm The Carlyle Group.
Since its acquisition by Carlyle, management said it has “consolidated and streamlined [its] manufacturing capabilities and other global functions to improve profitability and cash flow, realizing more than $200 million in savings since our acquisition by Carlyle.
Sales, marketing and administration expenses as a percentage of total revenue were generally flat while revenue increased, as shown in the figures below:
|
Sales, Marketing & Administration |
Expenses compared to income |
|
Period |
Percentage |
|
Nine Mos. Completed September 27, 2020 |
27.8% |
|
AF December 29, 2019 |
28.6% |
|
AF December 30, 2018 |
27.5% |
Source: Company Registration Statement
The sales, marketing and administration efficiency rate, defined as the number of dollars of incremental new revenue generated by each dollar of sales, marketing and administration expenses, has moved into negative territory during of the last reporting period, as shown in the table below:
|
Sales, Marketing & Administration |
Efficiency rate |
|
Period |
Several |
|
Nine Mos. Completed September 27, 2020 |
-0.2 |
|
AF December 29, 2019 |
0.0 |
Source: Company Registration Statement
Market & Competition
According to a 2020 market research report by Allied Market Research, the global in vitro diagnostics market was valued at approximately $67.1 billion in 2019 and is expected to exceed $91 billion by 2027.
This represents a projected CAGR of 4.8% from 2020 to 2027.
The main drivers of this expected growth are an increase in chronic and infectious diseases combined with a growing elderly population worldwide, more susceptible to immunological disorders due to weakened immune systems.
Also, increased focus on personalized drugs along with continuous innovation by market players will increase the demand in the long term.
Major competitors or other industry participants in various areas of the company’s business include:
-
Rock (OTCQX:RHHBY)
-
Abbott (ABT)
-
Siemens Healthineers (OTC: SEMHF)
-
Beckman Coulter (Danaher)
-
Thermo Fisher Scientific (TMO)
-
DiaSorin (OTCPK:DSRLF)
-
mindray
-
bioMérieux (OTCPK:BMXMF)
-
Bio-Rad (BIO)
-
Grifols (GRFS)
-
Immucor
-
Fujirebio
Financial performance
Ortho Clinical’s recent financial results can be summarized as follows:
-
Contract main turnover in the last nine-month period
-
Reduced gross profit and stable gross margin
-
Decline in operating profit and operating margin
-
Change to negative operating cash flow
Below are the relevant financial results from the company’s registration statement:
| Total income | ||
|
Period |
Total income |
% deviation from before |
|
Nine Mos. Completed September 27, 2020 |
$1,249,600,000 |
-5.9% |
|
AF December 29, 2019 |
$1,801,500,000 |
0.8% |
|
AF December 30, 2018 |
$1,787,300,000 |
|
|
Gross profit (loss) |
||
|
Period |
Gross profit (loss) |
% deviation from before |
|
Nine Mos. Completed September 27, 2020 |
$599,400,000 |
-6.9% |
|
AF December 29, 2019 |
$879,100,000 |
2.6% |
|
AF December 30, 2018 |
$856,800,000 |
|
|
Gross margin |
||
|
Period |
Gross margin |
|
|
Nine Mos. Completed September 27, 2020 |
47.97% |
|
|
AF December 29, 2019 |
48.80% |
|
|
AF December 30, 2018 |
47.94% |
|
|
Operating profit (loss) |
||
|
Period |
Operating profit (loss) |
Operating margin |
|
Nine Mos. Completed September 27, 2020 |
$47,900,000 |
3.8% |
|
AF December 29, 2019 |
$85,500,000 |
4.7% |
|
AF December 30, 2018 |
$66,500,000 |
3.7% |
|
Net profit (net loss) |
||
|
Period |
Net profit (net loss) |
|
|
Nine Mos. Completed September 27, 2020 |
$(171,000,000) |
|
|
AF December 29, 2019 |
$(156,900,000) |
|
|
AF December 30, 2018 |
$(248,800,000) |
|
|
Operating cash flow |
||
|
Period |
Operating cash flow |
|
|
Nine Mos. Completed September 27, 2020 |
$(48,600,000) |
|
|
AF December 29, 2019 |
$143,000,000 |
|
|
AF December 30, 2018 |
$69,600,000 |
|
|
(Glossary of terms) |
Source: Company Registration Statement
As of September 27, 2020, Ortho Clinical had $68.6 million in cash and $4.4 billion in total liabilities.
Free cash flow for the twelve months ended September 27, 2020 was negative ($52 million).
IPO Details
Ortho Clinical intends to raise $100 million in gross proceeds from an IPO of its common stock, though the final figure could be as high as $800 million.
No existing shareholders have expressed interest in purchasing shares at the IPO price.
Management says it will use the net proceeds from the IPO as follows:
[i] to redeem $160.0 million in aggregate principal amount of the 2025 Notes,
[ii] to redeem $270.0 million in aggregate principal amount of the 2028 Notes,
[iii] to reimburse [an as-yet undisclosed amount] the aggregate principal amount of borrowings under our dollar term loan facility,
[iv] pay the offering fees and expenses as well as accrued and unpaid interest on the debt to be repaid and the related premiums for a total amount of [an as-yet undisclosed amount] and
[v] for working capital and general business purposes, which may include further repayment of debt under the credit agreement.
The presentation by management of the company’s roadshow is not available.
Listed bookrunners of the IPO are JP Morgan, BofA Securities, Goldman Sachs and many other investment banks.
Comment
Ortho Clinical is seeking public capital market financing to pay off its large debt burden.
The company’s financial statements show a contraction in revenue and gross margin in the most recent period, likely due to the effects of the Covid-19 pandemic on demand for various non-critical diagnostic tests.
Selling, marketing and administrative expenses as a percentage of total revenue were relatively stable; its efficiency rating in sales, marketing and administration has slipped into negative territory, likely due to shrinking revenue.
The market opportunity for various forms of diagnostics is very large and is expected to grow at a moderate growth rate over the medium term.
Risks to the Company’s business model include significant competition in each of its market sectors. With a gross margin approaching 50%, this will likely attract more competition, which will put pressure on margins over time.
JP Morgan is the lead underwriter on the left and IPOs conducted by the company over the past 12 months have generated an average return of 113.4% since their IPO. This is a leading performance for all major underwriters during the period.
Ortho is a private equity firm owned by The Carlyle Group, so it’s no surprise that the company is heavily leveraged, which is typical for such companies when going public. Private equity owners usually pay themselves a large dividend by burdening the company with debt.
In addition, weak corporate revenue growth prior to the onset of the pandemic is also a common feature of private equity-owned companies; I’m generally not a big fan of equity-owned companies at IPO for the characteristics of heavy debt and slow growth.
When we know more about management’s IPO, I will give a final opinion.
Expected IPO pricing date: to be announced.
Note: This report is intended for educational purposes only and does not constitute financial, legal or investment advice. Information referenced or contained herein may change, be inaccurate, become out of date and irrelevant, or be removed at any time without notice. You should do your own research before making any decisions. Investing in an IPO involves significant volatility and risk of loss.
