EBITDA-positive in fiscal 2020

Yourgene Health (YGEN) is an international molecular diagnostics group that uses the latest advances in DNA sequencing technology for non-invasive prenatal screening tests (NIPT). Its flagship IONA test uses complex statistical analyses to determine the likelihood that a fetus is carrying a genetic disorder, such as Down’s syndrome. YGEN has been held back by a patent infringement case and a complicated balance sheet. However, settlement of the patent case with Illumina and repayment of debt to Thermo Fisher (TMO) have transformed YGEN, allowing it to focus entirely on the enormous global growth opportunity for prenatal screening tests.

• Strategy: YGEN is focused on the global commercialisation of NIPT, which use the latest DNA analysis technology to predict certain fetal abnormalities. With two brands, the company is well positioned to expand the use of this technology into other aspects of reproductive health and into oncology.
• Reduced operating costs: Total operating costs are a combination of R&D and SG&A spend. Investment in R&D was lower than predicted in fiscal 2018, which has a knock-on effect on forecasts. Also, SG&A has been streamlined to generate £1m of annualised savings. YGEN is now set to be EBITDA-positive in fiscal 2020.
• Financing flexibility: Clearance of the TMO debt has strengthened the balance sheet and provided management with the capacity to establish more normal banking facilities and/or seek asset finance. While this may not obviate the need for more capital, it does provide greater flexibility regarding its timing.
• Risks: Both of the uncertainties that have caused the stock to severely underperform have been removed over the last six months, and the company can now focus on the global growth opportunity. Further capital may be required at some point in the future, but this will be raised from a position of strength.
• Investment summary: Despite two years of patent uncertainty, YGEN has continued to expand the availability of its NIPT tests and services. With the handcuffs removed, management can now focus on making these tests available on the two largest sequencing platforms in the world. YGEN looks set to become EBITDA-positive in 2020 and profitable in 2021. The stock should command prospective EV/sales of 5x-10x, suggesting an EV of £60m-£120m.