Agilex Biolabs Pty. Ltd. (HLS) Earnings Call Transcript & Summary

Thank you, and good afternoon, everybody. Thank you for making the time in the last few days leading up to Christmas. We apologize for making announcements like this right on the cusp of Christmas, and these sorts of things tend to have their own agenda, so they happen when they happen. So look, I'm sure you're all looking forward to a breakeven if it's affected by the various travel requirements we have in place across the states. As you would appreciate from the current COVID case numbers, particularly in New South Wales, we, here at Healius, are experiencing another new year period of high levels of testing in our laboratories. And on that point, I'd like to take this opportunity to thank our dedicated team, who have done so much and continue to do so much to help the national effort against the COVID-19 pandemic. And so first, an exciting and a relevant moment for us to announce a transaction that will significantly grow and evolve our capabilities and portfolio, especially as a laboratory services provider. Healius has entered into a definitive agreement to acquire Agilex Biolabs, as you will have seen in our announcement today, and Agilex is one of Australia's leading bioanalytical laboratory. This is an important and strategic acquisition for Healius that provides us with an immediate platform for growth in the clinical trials pathology sector. Now clinical trials represent a global market made up of global biotech and pharmaceutical customers, who are required by regulators to investigate new vaccines and drugs for safety and efficacy through human trials. Bioanalytical laboratory services, such as provided by Agilex, are fundamental to the results of these trials. And over the course of this presentation, we'll take you through more detail on why the clinical trial sector is attractive and why Agilex is the right platform asset for Healius to participate in this market. I have with me today our CFO and COO, Maxine Jacquet; and General Manager of Corporate Development, Mark Ellis. And we'll take you through the key transaction details, provide an overview of the business and some key market metrics. We'll also answer any questions you may have at the end of the presentation. Now on the Page 4 of the transaction overview. As mentioned, Healius is acquiring 100% of Agilex Biolabs. This sector is an area of health care that I know well from my time at Sonic Healthcare. Additionally, we have spent considerable time conducting market research and commercial due diligence on the clinical trial sector over the past 12 months. Our findings have been that it's a high-growth adjacency to our core laboratory business and has strong tailwinds and fundamentals. Through research, we found that Agilex is one of the leading and largest bioanalytical laboratories in Australia, and I'll outline shortly what has specifically attracted us to Agilex. But in summary, we view this as a long-term and highly strategic acquisition for Healius. Agilex is a business that is growing fast within a market of clinical trials that is also growing fast both globally and particularly in Australia. We believe it has a strong future earnings growth potential. Central laboratories providing clinical trials pathology services are a natural fit for a general pathology business like Healius. Along with Sonic Healthcare, a number of other laboratory businesses around the world provide these highly specialized central laboratory services, including Quest and LabCorp. In terms of key transactional details, we're acquiring the business for cash at an enterprise value of $301.3 million. We're debt funding the acquisition from existing and new debt facilities provided by our current lender group. And we expect leverage post completion to remain comfortable and less than 2x group EBITDA. We expect to complete the transaction at the end of January 2022, next month, subject to customary conditions precedent being satisfied. Now Page 5, the strategic rationale. The strategic rationale for this acquisition, at least, we are confident that Agilex is a great business and is a great acquisition for Healius for a range of reasons. And it provides an Australian platform for growth into a global clinical trials market. We believe this presents attractive growth opportunities for Healius, as we'll explain in a moment. Agilex has realized impressive growth in the last few years and has built out its capabilities in testing technology, therapeutic areas and business development to continue that growth trajectory. Agilex is a high-margin and capital-light business, which is attractive and provides a good balance with Healius' existing cash-generative and mature businesses. We believe the business offers a strong and exciting platform for growth. Agilex provides some further revenue diversification for Healius and introduces a range of new customers including global biotech, pharmaceutical and clinical research organizations. Our research tells us biotech and pharma R&D is growing and is increasingly being outsourced for speed and cost advantages. Agilex is a beneficiary of these structural trends, and we'll describe this in more detail shortly. We think Agilex brings some important innovation and scientific R&D capabilities for Healius that adds to our existing strengths in genetics and histopathology. We believe this will not only enhance both Healius' pathology and Agilex's service offerings, but it also enhances our employee value proposition, especially for scientific and laboratory staff. In a domestic market where such labor is scarce, we don't underestimate this benefit. We also know that our doctor referrers and patients value a diagnostic service provider that is participating in cutting-edge clinical research. We see a future of precision medicine that is founded on clinical research, genomics and diagnostics. And with this acquisition, we are excited that Healius is on a path to build that future in Australia. We see Agilex is offering very complementary capabilities alongside our existing core pathology business. Healius can also offer Agilex a wide pool of scientific staff, laboratory operational excellence and support services. And we see it aligned with our vision to be a best-in-class health care laboratory and diagnostics player across multiple verticals. Now I'd like to give you a better sense of Agilex as a business, and if you'd turn to Page 7. The first thing to say is that it's a large and at-scale player in a fragmented market. It is one of the leading bioanalytical labs in Australia with over 100 scientific professionals. Agilex primarily supports biotech and pharma clients in preclinical Phase I and Phase II trials across both small molecule and large molecule work. Agilex's capabilities span a broad range of therapeutic areas and has a particularly strong experience and exposure to oncology, which is the largest therapeutic area globally. The business has an extensive library of assays and a wealth of experience. There are returning clients, demonstrating high customer satisfaction with the laboratory services provider. The business is primarily based in Adelaide with additional operations in Brisbane. Importantly and as a function of growth momentum in the business, Agilex is undertaking a facility expansion with additional floor space secured adjacent to its existing Adelaide facility. It is well run by an experienced management team with strong scientific credentials. And we are pleased that the management team will be remaining with the business and welcome the CEO, Jason Valentine, and his experienced team into the Healius Group. Now turning to Page 8. Agilex is experiencing strong growth momentum in its business, as you can see from the planned work chart. Planned work includes contracted and uncontracted but verbally awarded work that Agilex is yet to deliver. Total planned work has grown substantially over the last period, highlighted by the growth from $23 million in June this year to $36 million at the end of November. Revenues have been increasing over time as this planned work is performed. On Page 10, the global market for bioanalytical laboratory services is found within the R&D spend for pharmaceutical and biotech sponsors who are developing new therapeutic drugs and vaccines. Those sponsors increasingly are outsourcing the project management of clinical trials to contract research organizations, or CROs, and the associated bioanalytical laboratory testing to service providers like Agilex. To give you a sense of the magnitude of this market, our research indicates that global pharma R&D was over $200 billion in 2021, with around 25% of this being outsourced to CROs and clinical research labs. This outsourced component has been growing at around 7% a year, as sponsors continue to pursue faster and more reliable clinical trial outcomes. Speed to regulatory approval and market is obviously key to the economics of drug development. There is growth from many therapeutic areas with oncology as the largest segment. As you saw from the earlier page, oncology is also Agilex's largest therapeutic area, accounting for about 1/3 of its work. And we're particularly excited about this given the global market characteristics, and we believe that Agilex is the leading Australian biolab for oncology. Australia is an attractive destination for clinical trials with some unique advantages. So this is on Page 11. Most importantly, that is speed and quality, Australia's TGA has one of the fastest regulatory processes in the world for clinical trials, 4 to 6 weeks start-up times for Phase I trials versus up to 6 months in the U.S., which is a significant advantage for drug sponsors, who are very focused on speed to market for drug development work. Additionally, Australia is fortunate to have a very high-quality medical research sector and internationally recognized accreditations that are accepted by all major international regulators. There are some cost advantages, including tax incentives, although these are a primary driver. It is really about speed, quality and trust, and that trust can take a long time to achieve, and Agilex has been on this journey for 25 years. All this is expected to translate into continued high growth over coming years for Phase I and Phase II Australian trial -- drug trial starts. So in summary, we feel strongly that the acquisition of Agilex is a compelling strategic and operational fit for Healius. It provides Healius with a high-growth platform in the clinical trial sector, a sector that we have spent considerable time researching and that we consider to be attractive and growing. It adds to Healius' innovation and scientific capabilities and provides a global orientation to the Healius network in terms of future pathology partnerships and customer markets. We consider it to be financially compelling given its high-margin and capital-light business model, offering additional revenue diversification and complementary capabilities. So thank you for listening to that, and we're now happy to take any questions that you might have.

[Operator Instructions] Your first question comes from Lyanne Harrison of Bank of America.

Let me start with revenue and the revenue profile for Agilex. And on Page 8, obviously, some very good growth there in terms of planned work. But can you give us some color in terms of what Agilex has achieved in terms of year-on-year revenue growth? And more particularly, obviously, the 55% growth in the last 5 months, obviously, but prior to that, it was very much impacted by COVID with clinical trials all but coming to a halt. Can you give us some color on that and also what your expectations are for the next 6 to 12 months, particularly as Australia goes through more COVID cases?

Thanks, Lyanne. Look, I'll take it, and Malcolm may add. So look, I mean, I think the best way to look at it, we look at the current win rate of work that is occurring currently, which is around about $5 million a month. And then we're looking at the -- if you just took the market growth and set that somewhere between 14% to 17%, and that gives you the best guide. So we think just in terms of basic market growth, we certainly got a strong revenue trajectory, and that's without even growing into some of the areas that we will be building capacity in. And look, it's also instructive to look at the pre-COVID growth rates for this sector, which were mid-teens as well. So if you look at the '15 to '19 numbers, they're also sitting at around the 15% growth rate. So look, that's -- I think that's the best guide in terms of looking at revenue growth.

Okay. And so just to clarify, when you talk about this transaction being EPS accretive in its first year, you're assuming that it will continue to grow at that 14% to 17% rate of growth over calendar year '22?

Yes, that's right.

Okay. And then can you also talk to us about the pipeline? So obviously, some -- a very good pipeline in there in terms of current levels of planned work. What else is in the pipeline? And can you talk about probability of success when you work with some of these, whether it's existing or new customers?

Yes. The really strong thing about this business is the catalog of biomarkers and tests that they've already done. It's not -- I mean, many of the tests that they do with new compound testing where they take on these requires the development of a completely new bioassay to do that. And that's not easy to find that kind of skill. And Agilex has one of the largest at least libraries of those kinds of things in Australia. So when a biotech or a pharma company is looking to set up an assay for a particular compound, then it's the speed at which you can get that up that drives the volume that you can do. And the library is critical to driving that outcome. And so the speed to market from the biotech perspective is critically important as well. And it's those things together that keeps the work rolling in. I mean, the trials tend to be -- they can be relatively short, but there are a very large number of them, and it's been growing strongly for quite a long time. And all of the research that we've done around this, looking at this globally, is that the Australian market will continue to grow, will continue to drive this business forward.

And a lot of the pipeline work is also underpinned by repeat customers as well, which makes up a fairly sustaining proportion of the work as well. So there's a good confidence in delivery in the business as well. So when we look at that pipeline, we have quite a degree of confidence around that.

Okay. And before I leave it to the other analysts, can I [indiscernible]. There was no mention of synergies. Can you provide some color in terms of whether it be cost or revenue synergies?

Yes. Look, we -- the synergies between this business and a general pathology business are not -- it's not the sort of business that you can merge with a general laboratory. So you don't tend to get cost synergies from that perspective in that it is a highly specialized service that's very different from anything that we've offered before. Having said that, there's a whole lot of expertise that exists in both businesses that can provide benefits both ways in terms of specialized pathologists, in terms of their knowledge, science, scientific staff within our labs, genomics, in terms of some of the larger molecule bioassays that are done. So there's a whole lot of cross-pollination that occurs between these 2 businesses that we believe will drive revenue going forward. And there's a pretty decent track record worldwide of general laboratory businesses and the clinical trial businesses doing exactly that. There are many general pathology businesses that also operate a clinical trials business around the world.

Your next question comes from Bosco Feng of Goldman Sachs.

Can you hear me?

Yes.

Perfect. I just had 2 questions today. Can I ask, firstly, what is the market share for Agilex in the bioanalytics market currently in Australia? I'm just trying to assess the scope for inorganic growth, both domestically and internationally, if there are any advantages in building out a global business in this particular industry.

Okay. Sorry, we're just discussing what the market share was. What was the second part of that question, Bosco?

I'm mostly asking for the market share in order to understand the amount of inorganic growth in this particular market.

Yes. Look, our analysis suggests that the market share that Agilex has is about 33% of the clinical trials pathology market in Australia. But a lot of that work is not just trials that are being done here. A lot of that work is coming out of Asia, out of China, out of the whole Asia Pac region and get -- and being shipped into Australia as part of that. So it's not just research that's being done here.

Okay. Got it. That's helpful. And finally, if I take the 14% CAGR and the volume of drug trials done in Australia and compare that to the 17% CAGR that you've disclosed for the business, I know it's of slightly different time frames but, I mean, in roughly like 3% pricing growth due to mix or otherwise. Is that a fair characterization of this business perhaps both historically and then going forward?

So look, going forward, it's quite possible that we could see an acceleration of that beyond the 14%. Look, it's just what we're using as a bit of guidance around what we think it could be, and we're hoping that it will be higher than that. And look, it will be mainly in volume, not price.

Your next question comes from Andrew Goodsall of MST Marquee.

Just following on to the last question. I just didn't get -- it wasn't clear to me what the geographic split of the revenue is. So if you could just give us a sense, Australia versus rest of world or U.S.A. as well.

Yes, sure, Andrew. So if you took so Asia, excluding China, it's about 14%; China is about 30%; U.S., about 30%; ANZ, 17%; and Europe, 10%.

Okay. Just getting that down quickly, but sorry, just Europe, sorry, I missed that.

10%. So China, about 30%; U.S., about 30%; ANZ, about 15% to 17%; and Europe, 10%.

Okay. Got it. And I guess just on depreciation, obviously, it's capital light. But just the split, if you could just help us understand the split of assets versus intangible mix within the $300 million and then perhaps whatever small impact there is on depreciation and right of use.

Yes, sure.

Just modeling plug-ins, if you could.

Andrew, it's Malcolm. There's about $10 million of tangible assets in the business.

Right. Okay. So rest is intangible. And then so pretty minor impacted the...

Yes.

Any sense just around the A, what that's going to look like?

Around, sorry, the what?

The amortization.

It will be negligible.

Yes, correct.

Yes. Okay. And just in terms of -- I noted management is staying on. Sometime back, we covered Mayne Pharma when they acquired a business that was involved in clinical trials. And there seemed to be a lot of work tethered to some key personnel who, I guess, were just very, very well regarded in their industry. Would you describe this business as having characteristics like that, where the reputation of some of the individuals is a key part of the marketing or the business wins?

Yes. The business has been in place for 25 years, right? So -- and the personnel have evolved and changed over time. But yes, there are key people within that business that keep it going. But they have been able to evolve over time and for those people, as they move to other careers to kind of rotate that through. I mean Adelaide has really developed some expertise around the whole clinical trials market in terms of research and has become quite a center for that. And so it's -- the business has shown an ability to recruit the right people and to stay stable over quite a long period of time through other ownership structures, indeed.

And one of our areas -- yes, look, one of that was sort of supported by one of the areas of commercial due diligence around surveying by the biotechs and also pharma companies and the reputation of Agilex, which was very, very good. So we're really pleased with that research.

Is there any earnout or any other sort of lock-in for the retention of those key personnel?

Yes. Part of the consideration for the CEO is deferred over 3 years.

Okay. So that's a payout that's measured on any particular targets? Or...

It's only [ target ].

He has equity in the business that's being sold, so part of that is retained.

Your next question comes from Gretel Janu of Credit Suisse.

Just firstly, you've given the pre-AASB 16 EBITDA estimate. Do you have it on a post-AASB 16 estimate? Or have I missed it somewhere in the release?

No, you haven't -- we haven't given it, but it will be -- we don't think it's going to be materially different, Gretel. I mean, we'll get to it, but it's -- we're not thinking of it being materially different.

Perfect. And then just in terms of the customers, just can you give a little bit more detail about kind of the number of customers repeat versus new customers? Are you exposed to a handful of customers? Does the handful make up a large portion of the work? Just trying to understand a little bit more about that customer base.

Look, it's geographically diverse. There is a good number of repeat customers. It's nicely spread. There isn't a sort of core risk in terms of revenue profile. And importantly, in terms of therapeutic areas, as we mentioned, quite a substantial presence in oncology, a smaller but growing presence in infectious diseases. And in derma and gastro are sort of smaller parts of the business. So a really good mix in terms of those therapeutic areas and a good diverse geographic profile.

Excellent. And then in terms of the key areas of growth, is it just to expand more into the individual therapeutic areas? Are you planning to expand into new areas? Yes, where should we think about the growth areas for you?

The business has had a focus on small molecules up until now, and the vast majority of its work has been there. It's done -- it has recently acquired a toxicology business, which those skill sets will be able to be utilized across the whole of the Agilex business, and then a growing interest in large molecule research and so -- and starting to work more in there. And we see that as definitely a growth area going forward. But one of the big areas of growth in terms of research is in the oncology space, which is its real focus. And if you look internationally, all of the indicators are that, that will continue to be an area of research going forward. It isn't a business that's benefited enormously from vaccine development, for example, for COVID. So the revenue that it currently has, that is not the sort of major contributor to where it is. It's much more a more diverse kind of pattern of diseases and quite broad in terms of the services that it provides.

Your next question comes John Deakin-Bell of Citigroup.

I was just interested if you could give us a little color on the process. Is this a competitive process? Or are you -- I know this was in the newspapers a month ago or so, but just give us a sense because -- and then I'll get to the next question, which will be about the returns. But maybe we can just start with that.

Yes. Well, look, certainly it was a competitive process that was -- that went down to the wire. I mean, we're not really privy to exactly who else was there or what was offered, but it was certainly competitive.

I mean, we've seen other -- I mean, you saw the 360biolabs business, which we obviously participated in that process. It was competitive. Nucleus Network, although not related but not exactly the same business, again, quite a competitive business, a competitive process for that business, so -- and yes.

Yes. Okay. And just trying to get down to an EBIT number here. I mean, let's -- you're saying that depreciation, amortization is negligible. So let's just say, for argument's sake, it's the same. But -- so you've paid 20x, so your EBIT return on invested capital is 5%, which on our assessment is less than the cost of capital. Can you just give us your thinking behind kind of how you justify paying that price for an asset?

Yes. Look, it's because, look, the growth. I mean, well, it's 2 things actually. It's the margin and the growth that we see in that business and where we see it going. We're obviously not buying it for a single -- at a single point in time. And we've taken a view on what market growth is, what the current capacity in the business is to deliver on that growth and looked at the current performance around pipeline and conversion and concluded where we think that business is going to get to over the -- even over the near term will be a very attractive asset for us to own and will produce good returns.

Okay. And is there any CapEx? Like what would an ongoing CapEx be in the business? Not very much, I'm assuming.

It's not, actually. Yes.

Yes, it would be minimal. I mean, you could say probably $2 million per annum.

$2 million. Okay. That's all I have.

Your next question comes from David Low of JPMorgan.

Malcolm, at the beginning, you said that you had a good understanding of this business from your time at Sonic. Can you talk a little bit about how it compares to their operations? Just are they a player in the market as well?

Yes, they are, David. Look, Sonic was the Australian agent for, I think it was Covance way back in terms of providing central laboratory services. And when Covance set up a Singapore laboratory, Sonic set up Sonic Clinical Trials here in Sydney and developed a clinical trials business from scratch, and it took quite a long time. And look, by -- it was profitable by the time I left there. I had responsibilities that I don't really know what's happened to it since then. But Sonic does have this capability in other locations as well, including London and perhaps the U.S. as well. So this -- Agilex is significantly bigger than any of those businesses that Sonic had, albeit I'm talking 4 years out of date here in terms of where it was back then. So these businesses, despite the fact that they have low capital requirements to set up, take a very long time to actually win the trust of the biotech and pharma companies that are entrusting their trial to your laboratory in terms of where it is. And it can take a long time to actually win customers over because at the end of the day, price is not the big issue here. The speed to market is a much bigger factor when it comes to clinical trials pathology, which is why the margins are so much better in this space than they are elsewhere in that it's not that competitive when it's all said and done. If you've got a library like Agilex has, it's very difficult for any other central laboratory to compete with that, given the speed to market, the cost of setup, how quickly you can get the trial done and get these things set up in the space of 3, 4, 5, 6 weeks and have the trial operating in that sort of period of time. That's the critical factor that drives this. And it's why it's attractive for us. It's an area that's growing much more strongly than general pathology does. It's got much better margins than general pathology does, and it's an area which is less competitive.

All right. No, that was very useful. I mean, I would like to test on that Covance experience. I mean, so I was going to ask about CROs and then doing their own lab work. I mean, do you worry at all about increasingly that the trial work gets outsourced to CROs, so they can have their own capacity?

It's actually not easy for CROs to do that. And it's not easy for CROs to have their own lab because they generally don't -- unless they're huge, like IQVIA or Covance, they don't generate enough work of their own to be able to operate a lab like this and to have the kind of skill set and command the personnel that you need to actually do it. You need referrals from multiple CROs and Phase I research units to actually do it. And if you do own your own CRO, you tend to end up with a channel conflict in that space that has other CROs not willing to use you. So where this is -- where Agilex thrives is that it is nimble and can do all these small trials, whereas the IQVIAs and the Covances are signed up to large multicenter Phase II and III clinical trials that are run sort of all around the world. They specialize in that. That doesn't mean that we couldn't get into Phase II if we had labs in other jurisdictions. But right at this point in time, Agilex is pretty much focused on Phase I. So -- and Australia has become quite a destination for that. And certainly, the quality of the work that's done here is what's attracting work into a nimble and, as the name -- as the business suggests, agile laboratories that can do those smaller trials and do lots of them that are coming through from biotech. The other part that's happening in the market is that the amount of capital that's available for biotech to take their products deeper into the product development range. 20 years ago, it tended to be that biotechs would need to -- or institutions where the product would need to seek out a pharma company to take their product forward and to take the risk with it. Well, these days, raising capital is a lot easier for many of these organizations, and they tend to run their own Phase I trials, and they look for a CRO and then, separately, a laboratory to provide these services to their Phase I and often their Phase II as well in terms of these products. So it is an area that we think will continue to grow. And certainly, all of the research that we've done supports that.

All right. Can I change topics completely? We saw MYEFO come out yesterday. We saw a release from the government on COVID funding a week or 2 back before then. Can I just get you to talk a little bit to the implications of any funding changes, please?

Yes. So the MYEFO statement, I don't think it was actually in the statement, but our understanding is that the fee for a COVID PCR will drop from $100 for the full fee to $85 for the full fee. Of course, we get paid 85% of that. And then there's an episode fee at above billing incentive that sits on top of that, that lifted by about another $10 or $11 above that amount. So look, over time, the cost of doing the test has come down a bit, I think, for most providers. And certainly with the volumes that we've been seeing, as we've reported on previously, suggests that you get -- labs get a fair bit of efficiency with those kinds of numbers of tests coming through. And as you might imagine with where we are now, the pressure is starting to come on again in terms of volumes and growing volumes across pathology. I'm sure all providers are experiencing that right at this point in time. So look, I think the margin in terms of testing will still be pretty strong at that level, given that costs come back a bit as well.

Malcolm, I'll just stretch out to one more, and I'm just interested in your crystal ball. I mean, so we are seeing [indiscernible] driving rather rapidly. Do you worry that a lower virulent on the constraint, such that it may or may not be, could lead us to the point where we just don't care anymore and that, frankly, getting tested is -- I mean, so many cases out there that we stop requiring the need to test?

So the only thing I'd say to that is that you kind of -- if you want to look at what happens in terms of behavior and where it goes in terms of the virus, we've got examples in the Northern Hemisphere of exactly where that goes. So testing rates in the U.K. despite rapid antigen testing being freely available, with free kits handed out at train stations and available in pharmacies and everywhere else, the COVID PCR testing is still very strong in the U.K. and still running at just below peak levels. And I haven't seen the numbers actually in the last sort of 2 or 3 weeks, if the numbers really skyrocketing there again, but my guess is it's probably gone up again there. So look, I think PCR testing remains -- will remain a diagnostic test. I think rapid antigen can be used for screening. But as came out on the Service New South Wales today, rapid antigen test -- a rapid antigen test is not a diagnostic test. If it's symptomatic, it's almost pointless having a rapid antigen test. If the rapid antigen test is negative, you don't know that you don't have COVID because there are plenty of cases where it's been negative where people actually do have it. And secondly, if it is positive, you then need to go and have a PCR to have it confirmed. So you may as well have a PCR in the first place as the advice from the New South Wales government today says. So I think PCR testing remains central. I don't see a situation where doctors stop looking for it. There will still be vulnerable people in the community. Omicron and whatever the next 10 variants that turn up over the next 2 or 3 years will all have their pluses and minuses to them. It may be that we get to the point where psychologically, we've moved on to the point where as individuals, we start worrying less about the virus. And I hope that is the case, to be honest. But I don't see a world where doctors stop looking for COVID.

Your next question comes from Saul Hadassin of Barrenjoey Capital.

I'll keep it to 2 questions. Malcolm, I'm just wondering how scalable the current Agilex lab is. I noticed there's some build-out of capacity in Adelaide. In terms of increasing that revenue base, how materially -- how much higher can that revenue grow based on the current facility assets that you have in Adelaide and the Brisbane lab, too?

Look, they have taken on -- as we've said in the presentation, they've taken on a considerable amount of additional space in Adelaide, more than -- which will more than double the space that they've currently got. And they have acquired, I think it's TetraQ, the toxicology business in Queensland, as well. So they do need to recruit more people to get there, but they have a track record of having done that over the last 12 months and been able to deliver on the professional people that they need. So we think its ability to continue to grow at double-digit percentages each year is absolutely there. And we've convinced ourselves looking at that business and what's planned down there and the pipeline that's coming and the market that sits there that, that will happen. That's where we've got to, and that's where the valuation comes from. It's not really about its EBITDA in calendar year '22, albeit that, that's important. It's where it goes after that, that drives the prices being paid.

And just one other. In terms of the -- you mentioned some inorganic opportunity as well for growth. Is that referencing potential acquisitions within Australia? Would you see this as a potential platform to grow in terms of your physical presence into labs outside of the Australian region?

Well, we're just buying into Australia now, so we're not in no rush to kind of go out and buy internationally. But the reality is there is an opportunity, just as BioAgilytix has done quite recently, to get into the Phase II clinical trials market, where you have one of these labs in Europe or the U.K. and one of these labs in the U.S. And those labs are then, instead of harmonized, which means they have -- the equipment is quality tuned to producing the same result, to have identical labs on the same laboratory information system in each of those locations lead together that can provide identical results in each of those locations. And then to go after the Phase II work, which are bigger trials, and allow you to sort of take on work that is significantly greater value in terms of the kind of volume that comes through with that. So yes, there is an opportunity -- absolutely, there is an opportunity to do that. And we have done quite a bit of work around -- in looking at this as a platform for growth, to look at that international market in terms of what might be available in terms of potential targets at some point down the track. But right at this point, our focus is on getting the growth out of Agilex and getting it to where we know it can go.

Your next question from John Copley of Evans & Partners.

Malcolm and Maxine, I know there's already been a question on the multiple paid, but I was just hoping you could help us out a little with the growth prospects, so specifically, whether you expect that you'll be able to grow this business ahead of the market. And if so, why? And what the drivers might be there? And maybe if you haven't already just touched on the revenue and cost synergies, I know they weren't really called out, but are they going to be expected to be material?

Look, I think in terms of where the market goes, there's a few things that are driving that. It's not just the growth in the biotech and clinical trials market. It's the fact that the pathology services have been increasingly outsourced as well that drives the laboratory component of it to grow faster than the market is growing. And I think in the graph that we've shown there, you'll see the percentage that's outsourced sort of progressively growing over time. And that has quite a significant impact on where it goes. And I think, I mean, Agilex is ideally placed to grow at a faster rate, given its library of work.

Well, look, we haven't -- look, we've factored in, in our view that it will grow at market. And we're obviously looking at specific therapeutic areas of what the growth is in those, which is certainly higher than that sort of 14% to sort of 15%, which positions Agilex in a good -- in a very good place. But I think in terms of setting expectations, I think we kept it at that sort of rate, then that would be a sensible assumption to use in what the forward revenue would be.

Okay, and noted. So they're the therapeutic areas on Slide 10, right?

I'm sorry, what was that?

The therapeutic areas on Slide 10 of the presentation.

Yes, yes. Oncology, obviously, is one of the highest growth areas where Agilex is very strong, also infectious diseases. Look, they do have a presence, but vaccine development is also something that will be a focus for calendar year '22 and growing our presence in that. And certainly a lot of work has come to Australia, so Australia certainly has benefited, given COVID as a destination. And Agilex hasn't been a significant beneficiary of that to date, but we believe that will be a growing area for the next at least year.

Okay. And if I could just sneak in one more, Virtus announced today that they'll be terminating their agreement to acquire Adora Fertility. Can you give us a little more information on why that was terminated? Specifically under the share sale agreement, what particular terms allow Virtus to exit that agreement, noting that it was originally stated to be binding and not conditional upon regulatory approval?

Yes. Look, we don't know a lot more than you do about sort of the real reasons for failing on the deal ahead of the ACCC announcement. So Virtus has obviously got a few things going on right at this point in time, so I'm not sure what amongst all of those things that would be. But we went through a variation of the deal about a month ago that given the length of time that the ACCC process was likely to take, if it did go to the Federal Court, it was going to be -- it would get -- it could well take several months to get through that process before you got an outcome for that. And there was an exit for Virtus related to a material adverse event clause that we didn't want to continue to participate in the sale process if that was still there, given the length of time that it was running for. And so this mutual exit component for a short period of time before that took effect was in there. And then obviously, the bid for Virtus came along, and they've made a decision of their own. I'm not sure. You'll need to ask them why that is, but we have other options in this space. So rather than sitting here for months doing that, we'll pursue those.

Okay. Sorry, and just I recognize I'm extending my welcome here with too many questions. But you mentioned it was mutual, the termination?

No. Sorry, the termination, no. The termination was Virtus' decision to do that. They made that decision and notified us last night.

Okay. All right. But I take it then that you're not under -- or you're not aware of any allegations they've made about what might have been sort of told them about the business, then they've just decided to be able to terminate this under their own -- or under the share sale agreement based upon the term of that agreement because it just seemed as though when it was originally put out, that it was not conditional upon regulatory approval is all.

I mean, that's correct. It wasn't conditional upon regulatory approval. But in the face of an injunction from the ACCC, I mean, that binding commitment falls away effectively. So we still deal with that, as Malcolm has said, by the sort of mutual ability to walk away, but it was Virtus who exercised the ability to walk away, and that we believe it was primarily ACCC-driven, no other reason.

Your next question comes from Shane Ponraj of Morningstar.

Yes. Based on the estimates for next year, you've got a 40% EBITDA margin on a fairly small top line for Agilex. I guess based on your experience at Sonic, just wondering if you see much operating leverage from here. And if so, what costs do you think scale?

Yes. So look, we -- I think with -- we are -- whilst there is capacity in some of the assets that we've outlined today, there will be people that will be required to be added. So there, no doubt, will be some leverage, but we're assuming around that same EBITDA margin going forward. And look, until we own the business, I think we're focused on the growth at this point in time and making sure that we execute on that growth. That will be our primary driver, and we're not seeking to look for any operational efficiencies at this point in time. But no doubt, we'll be certainly a business that will scale. I mean, it's pretty capital-light, the facilities there. So we just have to see how those margins play out for the next couple of years.

And just checking the EBITDA margin, is that post-AASB 16?

It's not, but we don't think that's going to be a material difference.

Okay. And just back on testing, at the full year results, you said you were averaging 40,000 tests a day. Just wondering what you think your capacity is.

Well, look, we've been progressively scaling up capacity. And as Malcolm, I think, may have mentioned, we are doing a bit more pooling than what we were doing before. So -- and we've lifted our capacity materially above that and are looking at probably lifting it again. In the near future, our view is that current testing is probably going to prevail certainly for the next year.

And I missed it, but with the reimbursement rate, 85% of $85 per test, how long is that set to be in place for?

30th of June.

Okay. And lastly, regarding Adora and the 3-day hospitals coming back, just wondering how profitability of that business has progressed and if it's meaningful at all.

Look, it's actually been trading -- I mean, everything has obviously been impacted by COVID, but it's actually been trading reasonably well. I mean, when there are lockdown months, it obviously gets impacted. It is a community-based business and a referral-based business, so it does get knocked around at times. But look, it's been trading pretty well.

Your next question comes from Andrew Perks of Accordius.

Yes. Just quickly, who is the vendor of Agilex?

The single largest shareholder was Glenn...

Haifer.

Yes, Dr. Glenn Haifer.

Okay. And was there any private equity involved? Or is it just a collection of individuals that have been founders?

Genesis Capital had a very, very small stake, less than 5%.

Okay. All right. And just for clarification, so a big pharma want to run a clinical trial. They outsource to a clinical research organization, which is CRO, who then outsourced to laboratories like Agilex. Is that correct?

Yes. That's one of the ways it goes. I mean, sometimes large pharma companies have worldwide contracts with the likes of IQVIA. But the ones -- if they're looking for Phase I, particularly Phase I clinical trials, then that's one way it would go. Sometimes the biotech will independently select both pathology provider and the CRO. So the CROs don't necessarily get to control all of that. The pathology provider is going to be.

Okay. And then given that you're an outsourcer and you're dependent upon that work either coming direct from the pharma or from the CRO and you're maintaining a fixed bench effectively, but what volatility in earnings should we expect from this business, given the fixed cost base and your oscillating contract award?

It actually doesn't vary a lot because there's such a large number of these, right? They're not lumpy trials where you're getting sort of large dollar value for each trial that comes along and the lab is up and down. Because of the number of trials coming through, that tends to keep it pretty smooth.

Okay. That's great. And then just lastly on price, and it was touched on earlier. Malcolm, when we bought Montserrat, that was -- wasn't making any money, and it was like trust me, the growth is coming. And now we've got this acquisition, which is pretty much sort of the same. The price does seem a bit -- I mean, at EPS when it's virtually not going to add much, I mean is it really even worth doing to have another challenge on your hand?

Well, actually, right at this point in time, what challenges that we have, that's as a business. The reality is we're generating cash. You saw at that sort of 30th of September result, we made [ $210 million ] in space of 3 months. The -- we've got the process running pretty well around our Imaging business in terms of where that goes. Yes, the hospital and the Medical Centres segment gets knocked around in COVID, but it comes back in terms of where that is. We managed to sell our Medical Centres business, which was our biggest challenge in terms of where that goes. Montserrat has been performing well in terms of where it goes. This is a natural business and natural adjacency for pathology in terms of where it sits. It's part of our pathology business. The rest of our pathology business is doing very well, generating lots of cash in terms of where it is. But this is exactly the time to take on challenge.

Yes. I suppose you are generating lots of cash, which is awesome. It just would have been nice, again, not to have paid 20x, I suppose. I mean, it's like most -- some of the -- most companies making acquisitions now at sort of like 10% or 15% accretive, and you do one that's sort of flat, you sort of think could you screw them for a better price?

No, because it's a competitive process. I mean, you've seen what these are. And BioAgilytix sold for 41x last 12 months EBITDA quite reasonably. This is a good price. It's the market we're in, unfortunately. And in FY '23, if it's sort of 12x, and then 8x, and then 6x as you go on with years, and we've made that investment, given the cash flow that we have, it's exactly the time to be doing this.

There are no further questions at this time. I'll now hand back to Dr. Parmenter for closing remarks.

So look, thanks, everybody, for listening. All the best for -- to all of you for Christmas and the festive season coming up. Stay safe. Go to Healius Pathology if you need a PCR test. Talk soon. Bye.