Net Sales came in at SEK9.1m, 115% y/y, well ahead of our estimated SEK6.8m (deviation 34%). Sales were broad-based, with both sensors and instruments contributing to the strong results. EBITDA came in at SEK2.7m, corresponding to an EBITDA margin of 30%. Gasporox’s seasonality is decreasing, and has now had three consecutive EBITDA-positive quarters.

Gasporox had an order backlog worth at least cSEK8.5m set for delivery during H1’23. While the report was strong, we think some of the strong results were due to a large part of the order backlog delivered in Q1’23 rather than Q2’23. Thus, we are cautious about extrapolating the results.

When assessing the growth potential of a small company, one of the critical aspects naturally becomes the size of the addressable market. According to FMI, the Global Sterile Parenteral Containers Headspace Gas Analyzers market was valued at cUSD66m in 2021. Given Gasporox’s revenue of SEK21.5m in 2022, this would imply a market share of c3%. Although we are positive that an entrant is unlikely to be profitable with a c3% market share, we believe the market is more significant than FMI’s estimates as increasingly strict regulatory requirements shift from at-line to in-line solutions.

Previously, CCIT (Container Closure Integrity Testing) has built on probabilistic tests, where a sample of containers is tested, and the sample results determine whether the whole batch of products is considered safe. This method is only sufficiently reliable for some applications for several reasons, including variations in the technique, sample preparation, and operator variability. It is important to note that there is no way of guaranteeing that the untested part of a batch is safe. With the help of new guidelines - USP1207 and EU GMP Annex 1 in particular - the industry is moving towards deterministic solutions. These solutions test all manufactured products, making it possible to claim with certainty that all delivered products were in the proper condition when they left the production facilities. One example of how regulation drives the market is the current EU Annex 1 guidelines, which stipulate 100% integrity testing for containers closed by fusion, such as glass or plastic ampoules, and for any parenteral products. Suppose companies are to test 100% of the manufactured products. In that case, testing capacity will have to be increased by a factor directly dependent on the share of currently tested products. For example, if 1% of products are currently being tested to generate a sufficient sample size, testing 100% would require a 100x increase in testing capacity. As the at-line testing involves manual labor, this is not practical except for incredibly low-volume, high-value products.

As a result, the shift to deterministic testing methods will require companies to utilize in-line solutions. These generally require more testing units than at-line solutions simply because an at-line solution can serve several product lines simultaneously. Assuming that one at-line instrument can do two to six lines, solely moving to in-line would increase the market by two to six times. Moreover, the number of sensors per line could also increase depending on what the customer wants to measure.

The estimates from FMI build upon at-line solutions being the standard, and as the market is forced in the direction of in-line testing, these figures would be increased by two to six times, resulting in a TAM for Gasporox of cSEK1.3bn-cSEK4.0bn. Suppose we combine this figure with the potential increase in the number of sensors and Gasporox’s higher price point compared to the destructive blue dye tests, which are currently the industry standard. The in-line pharma market could be worth between SEK6.5bn-SEK19.5bn in that case. 

Gasporox employs distributors for instrument sales. Based on discussions with management, we understand that Gasporox usually tests new by distributors letting them rent or purchase products from Gasporox. Should their performance fail to meet expectations within the initial six to twelve months, Gasporox promptly terminates the partnership.

According to the 2022 annual report, the Company now boasts over 50 resellers, although the precise number and list remain undisclosed. Gasporox introduced three new resellers throughout the quarter and announced an additional one on their LinkedIn page after the quarter’s conclusion. Most of these resellers are situated in the United States, a foreseeable outcome following Gasporox’s engagement of a local consultant to facilitate their entry into the US market. While we acknowledge the potential benefits of new distributors, it is essential to note that most of these distributors are small and have limited or no online presence. Consequently, we do not anticipate a significant immediate impact on Gasporox’s sales from these new partnerships.

In the quarter, Gasporox achieved an impressive gross margin of 80%, which peaked at 84% during the fourth quarter of 2021. Furthermore, the Company’s gross profit to asset ratio has consistently risen, reaching 54% in Q1’23 TTM. These figures suggest that Gasporox operates an asset-light business model, with the potential for high returns on capital once profitability is attained.

While these quantitative metrics do not guarantee an asset-light structure or high returns, they appear reasonable when considering the levers available to Gasporox that either lock customers in, reduce the friction to sell additional machines or make the offering more comprehensive.

First, only a small portion of the at-line equipment requires modification to accommodate new form factors. As a result, once customers have implemented the core technology (e.g., bought an initial instrument), Gasporox can sell a small extension that allows for the measurement of additional products. The marginal cost for customers to add new testing capabilities remains low, and Gasporox is likely to maintain strong pricing power in this relationship.

Second, Gasporox can add after-market services such as calibration tests and warranties. The pharmaceutical industry mandates annual calibrations for quality assurance. Thus, Gasporox can supply vials or ampules containing a known gas composition. This allows customers to verify the calibration of their installed machines. The tests incur minimal production costs, yet customers have little choice but to purchase them, granting Gasporox considerable bargaining power in determining prices.

Finally, complementary software presents another potential revenue stream. The software offers opportunities for high-margin incremental sales and encourages customer loyalty to Gasporox’s products. By incorporating software into its product offerings, Gasporox enhances product appeal, streamlines machine sales, and delivers a more comprehensive package. This could enable Gasporox to raise prices over time as customers become accustomed to the software and their data is “locked in” or charge a recurring subscription fee, reflecting its ongoing value to customers.

Each of these levers depends on Gasporox achieving a large install base. Therefore, we believe the best way forward for long-term value creation is for Gasporox to grow its install base as large as possible.

Gasporox tends to develop new products based on customer requests. On March 20, 2023, Gasporox introduced its HMI software which came to be due to customer demand. At the most fundamental level, HMI, or human-machine interface, refers to the part of a machine that handles the interaction with the human user. Gasporox’s software enables the user to operate the Company’s instruments in a way that complies with Good Manufacturing Practice (GMP) and Good Automated Manufacturing Practice (GAMP) guidelines. The software requires no external add-ons and stores the data in an SQL database that has full traceability of the datasets, according to what is prescribed by the CFR21 Part 11 guidelines. Previously, Gasporox had an Excel-based report generator, but the HMI system works as a complement with improved batch handling, audit trail functionality, and recipe management. The software works for all the Company’s instruments.

The inclusion of software offers the potential for incremental sales with high margins and creates an additional opportunity for customers to become committed to Gasporox’s products. We believe the HMI software is free for customers. Thus, we believe its primary advantage lies in enhancing the comprehensiveness of the product offering and reducing the friction associated with selling machines. Senior Application and Sales Manager Roland Koch corroborated this perspective, stating that Gasporox has experienced increased industry demand for a more holistic offering. Moreover, as customers get used to the software, there will be additional friction in shifting suppliers. Over time, this software can likely add further value by simplifying the analysis and data interpretation. Thus, creating value by reducing the time spent on these activities.

We have observed a noticeable increase in competition. For instance, Bonfiglioli Engineering has introduced the Laser-Pro Headspace Gas Analyzer, which utilizes the same Tunable Laser Diode Absorption Spectroscopy (TLDAS) technology as Gasporox. Furthermore, Bonfiglioli Engineering’s press release states that the device requires less calibration, is easy to configure, and includes a user-friendly interface. It comes with advanced HMI Software that facilitates simple data analysis and interpretation. We believe it is too early to tell how this will affect Gasporox. Although our channel checks indicate many more factors contribute to customers’ selection of equipment than just the technology, such as product availability, responsiveness, and price, it is reasonable that it will increase competition and potentially harm Gasporox’s long-term prospects.

In the quarter, Gasporox had an order backlog worth at least cSEK8.5m set for delivery during H1’23. We believe most of this order backlog was delivered during Q1’23. Thus, we expect Q2’23 to be weaker. Accordingly, we have lowered our Q2’23 net sales estimate by cSEK1.3m. Otherwise, our estimates are unchanged.

On the back of three different scenarios, using a DCF valuation, we reiterate our fair value range of SEK12-SEK45 with a base case of SEK25.

Compared to peers selected due to their financial outlook and similar business characteristics, Gasporox is trading at an EV/EBITDA discount on 2024e-2025e while on a premium for 2023e. Our base case implies an EV/EBITDA multiple of 13x on 2025e which aligns with peers.