IDT Australia - Showing signs of life?
After well over a decade in the wilderness, IDT Australia may just be beginning to show signs of life.
The GFC sent a wrecking ball through IDT’s business at around the same time that company management failed to see the shifting sands of globalization driving production of their core products offshore.
Humble beginnings
Although IDT is virtually unknown to Australian investors, the company’s story stretches back to at least 1975, when it was spun out of the Victorian College of Pharmacy. Back then, the company was called the Institute of Drug Technology.
Despite remaining relatively obscure to investors, the company flourished under the guidance of Dr Graeme Blackman, carving a profitable niche, mostly manufacturing API’s (Active pharmaceutical ingredients) on a contract basis.
The GFC
The years either side of GFC were feast and famine. On one hand, IDT had a remarkable win, picking up Australia’s best clinical trials business, CMAX, from the struggling Mayne group for the bargain price of $1M, while the rest of the group stumbled.
Around that time the global behemoth, Pfizer, funded the construction/fit out of a state of the art, 4000L API facility at IDT’s site in the Melbourne suburb of Boronia. This facility was to be used to produce an antibiotic API which Pfizer intended to use in a major clinical trial.
At a time when IDT had seen its revenues slashed due to the GFC, Pfizer abandoned the project, eventually handing the title of the plant and equipment back to IDT for no cost. The fit out of the facility had cost Pfizer over $20M.
Globalization
Globalization, as well as a strong Aussie dollar, had seen API manufacturing move offshore to low-cost countries, such as India, which saw the margins on this business evaporate. IDT eventually saw the writing on the wall, deciding to pivot the business to a seemingly higher margin business of generic drugs.
This pivot occurred at around the time that the global generics market was also beginning the globalization shift to low-cost countries. The ill-timed, poorly executed move proved to be an expensive mistake.
CMAX
During this period, it was arguably IDT’s CMAX clinical trial business that kept the company afloat. Principally situated at the Royal Adelaide Hospital, CMAX was at the time, the crown jewels of IDT.
Due to the financial damage wrought by the foray into generics, CMAX was eventually sold to IDT’s major Japanese investor, I’rom. Arguably, the company should have kept this business and attempted to sell off the rest.
Changing winds
Back in the 1990’s and early 2000’s, IDT was a wonderful investment. Relatively fat profits and returns on equity delivered as handsomely for shareholders as the regular dividend stream.
Since the GFC the wheels have started to wobble. Gone is the rock-solid balance sheet, replaced with what some may argue as accounting smoke and mirrors, such as capitalizing R&D.
At times IDT has had ridiculously high “intangible assets”, much of which was eventually written off, and I have personally brought the subject up and company AGM’s. In the words of journalist Trevor Sykes, “if an asset doesn’t produce profits this year or next year, it isn’t an asset. Tangible or intangible”.
All that said, never has there been any doubting the quality of IDT’s state-of the art facilities, with a replacement value well north of a market cap seemingly stuck in the doldrums
IDT reborn?
Recent years have seen IDT pivot once again, attempting to jump on board the global boom in medicinal cannabis. Though success appears some way off, IDT as a long running, FDA approved pharmaceutical manufacturer, lends much needed credibility to an industry that some may say was somewhat shady.
The emergence of COVID-19 pandemic has smashed the global economy, just as hard as it’s hit our communities. Many will notice that the pandemic’s impact has impacted some companies, while assisting others.
Early in the pandemic IDT “assisted” the Australian government by making submissions on a number of fronts, including critical dependencies of Australia’s pharmaceutical supply chain, and later details of IDT’s future potential capacity to manufacture COVID-19 vaccines.
Company making?
With Australia’s vaccine rollout well behind schedule, due to lack of supply, the Australian government recently re-initiated discussions with IDT, asking the company to undertake a feasibility assessment to assess the possibility of IDT manufacturing a COVID-19 vaccine at its Boronia plant.
Needless to say, when this news was released to the ASX, IDT’s share price soared to highs not seen for several years. The previously obscure company has since attracted interest from day traders and Credit Suisse, a company well known for short selling.
Despite the activities of stock rampers and short sellers, the immediate fortunes of the IDT share price are likely to be driven by announcements regarding the success/failure of the company’s pitch to the Australian government.
Conclusion
Though it’s fair to argue that the prospect of COVID-19 vaccine production for a company the size of IDT is the equivalent of a moon shot, recent job advertisements for key staff indicate the company is throwing everything at this effort.
At this stage CSL remains the only company able to produce C19 vaccines in this country. If IDT manage to somehow join CSL in this vital niche, expect a rocketing re-rating.
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