Cellestis Potential

We have previously looked at a Discounted Cash Flow Net Present Value of Cellestis. The DCF/NPV valuation is a definitive method of calculating the value of an investment based upon a realistic examination or knowledge of the future projected returns from the investment. Through this process we have been able to show that the value of Cellestis is multiples of the $3.55 offer that has been made by Qiagen.

However, as investors, we often look at much more in making our investment decisions. Importantly, we develop a view of the potential of the business to achieve even more than what we can confidently express in dry accounting style numbers.

Many of us began our investment in CST anything up to 10 years ago. CST was a speculative investment but the research that many of us did allowed us to believe that this investment had a very good chance of bearing fruit. As investors in a business we accepted the challenges encountered along the way and we were content to exchange immediate rewards for the potential future rewards. 

We were right. The business has suceeded. In fact, it has succeeded to the extent that we have been able to perform the abovementioned DCF/NPV valuation with confidence.

However, success does not mean that the potential has disapeared. While some of the potential that we saw in this business has now turned into reality, much of the potential remains. In fact, the successes to date probably make the potential of this business even greater and more real. 

It is important that we do not lose sight of this. We mustn't be fooled by this lowball offer (or even our DCF/NPV valuation) into believing that the potential has dissipated. 

Cellestis' current sucessful business is almost wholly based around its lead product - the QuantiFERON TB diagnostic. This product has currently achieved about a 5% market penetration and our valuation has been based on reaching a 36% penetration by 2020. Given that QFT-TB In-Tube has no practical competition, is being received exceptionally well by the TB community and has a long patent life, we might believe that there is potential for its market penetration to happen more quickly and to be larger. Either of these events increase the ultimate value of Cellestis.

The QuantiFERON method and the In-Tube technique that has been developed and patented by Cellestis also has huge potential in diagnostics other than Tuberculosis.

Cellestis have already developed QFT-CMV for the diagnosis of Cytomegalovirus, a virus that causes particular problems for transplant patients. This is not as big a market as TB but certainly has potential to add to the bottom line beyond what we have projected.

At the 2010 AGM Cellestis indicated that in addition to further development, refinement and automation of the TB diagnosis, they have a pipeline of other products in development.

These include

Lyme disease

Leishmaniasis 

2 Cancer targets 

2 Allergy 

1 Autoimmune

Immune Function 

Nobody can guarantee that all of these products will reach commercialisation. However, we would expect that at least some will reach that status.

Furthermore, it has been suggested by the executive that at least one of these potential diagnostics has a market potential that is greater than that of QFT-TB.

Qiagen themselves seem to agree that there is much potential in the QuantiFERON technology with the statement in their own announcement

 "...strong pipeline, several new products under evaluation, cancer..."

Now, we cannot sensibly attach a specific value to the potential that all of the above provides. But, to the investigative investor they are something that we would certainly consider in making (or holding) our investment in Cellestis. There is every possibility that, in time, like QFT-TB, these potential diagnostics will turn into actual value.

Another potential that Cellestis has is the huge cashflow that the business will generate over coming years. This is a direct result of the Cellestis business model that includes low overheads and a minimal appetite for capital. Certainly some of this cashflow will be returned to shareholders as dividends but there is still much potential for Cellestis to utilize a strengthening balance sheet to leverage the business into becoming a significant player on the world stage. 

In the end, we have to look at all aspects of the business and decide whether we are happy to sell our Cellestis shares at $3.55. Given that the identifiable and justified value is significantly higher than $3.55 and the business has the potential to achieve even more in the future, it would seem that Cellestis is a fabulous investment. Qiagen know that. However, we know it too!

If we sold our Cellestis shares for $3.55 we would immediately face the perenial problem that faces all investors - finding another place to invest the money. I suspect that we would find it very difficult to find an investment that has such a great value and potential as Cellestis.

Vic  

CSAG

DISCLAIMER
This post has been prepared without knowledge of your individual investment objectives, financial and personal circumstances. Accordingly, it is not a recommendation that a particular course of action is suitable for you. You should obtain your own independent professional advice before making any decision about Cellestis.