Abcam still offers abundant growth

Many people are comparing online antibodies vendor Abcam to Amazon and even Google, such has been its success. Since listing in 2005, shares in the AIM-quoted company have increased in value by more than seven times, while sales have climbed almost fivefold.

Recent half-year figures showed Abcam delivering growth in abundance, with sales soaring by just under 38 per cent to £31.8 million and profit before tax increased 64 per cent to £11.2 million. And there is much more to come, with broker Seymour Pierce expecting 16 per cent growth in revenues and a 19  per cent increase in profit before tax for 2010.

Abcam is tapping into a research antibody market that is currently worth around $1 billion and growing at 10 per cent a year. These products are used by scientists in research to develop new blockbuster drugs. Abcam’s chief executive, Jonathan Milner, is adamant that competitors won’t rain on his company’s success on the basis of the group’s business model: ‘We use the internet in a clever way that enables scientists to research better, and the more it’s used, the better it gets. From that perspective, we can push prices up and it’s like Amazon. But unlike Amazon, we’re very much in a niche market – we have a much more sophisticated customer base.’

As Milner’s statement suggests, the key reason for Abcam’s success lies with its product and the integrity and useful nature of its website to its scientific client base. The company continues to build its online catalogue of antibodies – it now has almost 48,000 products in its catalogue. Although this is set to continue to grow, a key factor is that its older products do as well, and in some cases increase in value, which increases profit margins. Revenues per product climb as scientists add more comments, increasing the value to other researchers.

The more antibody products that Abcam can manufacture itself, the higher its margins will be. This is high-risk territory however because of the difficulty in producing products that cannot simply be churned out. Milner estimates that the success rate is 40 per cent of the total antibodies his company produces.

What is proving to be more successful is the original equipment manufacturer (OEM) product that Abcam markets on its website, because this product is not held as stock by Abcam, so there is very little product risk. Only if the product is a success and there is demand for it does Abcam take stock of it, for a maximum of four months. Another factor is that, as the product’s ordering history builds up, it is easy for Abcam to know exactly how much of it will be required.

‘This means we keep our working capital down, and that de-risks the business,’ says Milner.

Abcam has aggressively expanded into new markets, which is also key to its growth and reduces its reliance on any one region. Around 44 per cent of its sales come from North America and that continues to grow, albeit in low single digits.

The UK represents about 8 per cent of its revenues and this market is under pressure because of its reliance on charities and their funding issues.

Elsewhere, however, Asia is proving to be a source of growth. Japan represented 6.4 per cent of revenues in the first half of 2009, climbing to 9.3 per cent at the end of last year. China grew from 2.8 per cent to 4.1 per cent over the same period.

The increased weighting towards Asia could potentially dent gross margins, which stand at an impressive 66.2 per cent. But more importantly, the growth story remains, although any new investor will definitely be paying for it – the stock trades on a 2011 multiple of 24 times.

This seems expensive and is actually past Seymour Pierce’s target multiple of 22.5 times, which delivers a price of £12.

It has to be remembered that, in uncertain economic times, Abcam’s earnings growth potential remains. In its short history it has demonstrated an enviable track record that continues to be worth investing in. Buy.