Sales and gross margin

The H2 sales came in at SEK26.3m (SEK21.8m), where SEK13.8m were organic, and SEK12.5m came from acquired sales. The sales aligned with our sales estimate of SEK26.5m, and the sales growth resulted mainly from GARD orders and a strong Q4 by SenzaGen’s subsidiary VitroScreen.

Moreover, the gross margin came in at 71% (67%), better than our gross margin estimate of 67%. We expect the gross margin to be in the same region in the coming years and estimate a gross margin of 70% in 2024e. We believe that the increased focus on distribution sales may decrease the gross margin; however, with larger order volumes, the gross margin for GARD should rise. Overall, we endorse the company’s solid gross margin.

OPEX and EBIT

Operating expenses amounted to SEK-28.6m (SEK-26.1m), where we estimated a total OPEX of SEK-29.9m (including D&A). OPEX consisted mainly of selling expenses and administrative costs but also acquisition-related costs of SEK3.8m. EBIT came in at SEK-10.0m (SEK-11.4m), slightly better than our estimate of SEK-12.1m. The main reason for the difference is the higher reported gross margin. Individual OPEX line items were in line with our estimates.

Cash and Cash flow

Cash flow from operating activities was SEK-3.0m (SEK3.0m), and by the end of the reporting period, the cash and cash equivalents amounted to SEK17.6m. However, SenzaGen secured an overdraft facility that amounted to SEK7.5m from SEB at the end of the year, which is not included in the reported cash position. In our view, there is no imminent capital need for SenzaGen, which we believe is positive during a turbulent stock market, where equity issues often result in high discounts and dilution. However, capital will probably be raised if SenzaGen focuses on acquisitions during 2024. Such a scenario could result in an equity issue but, at the same time, add value to the company.

The report aligned with our expectations, and we argue the results were solid. The customer base has increased by 32 new customers during 2023, compared to 18 new customers during 2022. Returning customers accounted for 73% of total sales, and the average order value for year 2 was around SEK0.5m. VitroScreen’s strong Q4 was driven by a high demand for tests in pharmaceuticals and cosmetics. During 2023, we learned that VitroScreen sales had been affected by the deferred start of the new MDR. During SenzaGen’s conference call, CEO Peter Nählstedt said that he expects the demand within the medical device segment to increase as the MDR deadline (2027/2028) approaches. Overall, the CEO message and conference call gave positive signals for the future and that the company expects continued growth and become closer to profitability during 2024.

In July, we learned that SenzaGen had entered into agreements with CRO (Contract Research Organization) firms GV Research Platform (GVRP) in India and Oroxcell in France to distribute its non-animal test product, GARD. These partnerships are aimed at expanding the distribution of GARD in response to growing demand for alternative testing methods, driven by both regulatory requirements and industry needs.

In India, SenzaGen has noticed a rising interest in GARD and has already received orders from Indian customers. The collaboration with GVRP, a prominent CRO and distributor in India's Life Science sector, provides SenzaGen with a strong foothold in the Indian market.

SenzaGen's partnership with Oroxcell, a well-established CRO, enhances the company's presence in a key market in France. As part of the EU, France has a ban on animal testing for cosmetics and focuses on innovative, animal-free testing methods. Oroxcell's expertise and connections in this area will benefit SenzaGen's efforts to expand its network and knowledge base.

In September, we learned that SenzaGen continued its collaboration with the American Research Institute for Fragrance Materials (RIFM), focusing on in vitro photosensitization testing and fragrance safety. A new grant from RIFM marked another milestone in the partnership, adding SEK1.6m to SenzaGen’s sales. The testing was performed at SenzaGen’s GLP-certified laboratory in Lund throughout 2023.

In December, SenzaGen announced it received an order worth SEK1.7m from a new global biotech industry leader focusing on various chemical areas. We learned that the order involved GARDskin and that the customer aimed to investigate whether its new product candidates could cause allergic reactions on the skin. Moreover, the tests will be conducted at SenzaGen’s GLP-certified laboratories in Lund and at its subsidiary, VitroScreen, in Milan during Q4 2023 and Q1 2024.

We are positive about the news and highlight the order value of SEK1.7m and that the order results from the combined product portfolio with VitroScreen. In an interview released during Q4 2023, the CEO, Peter Nählstedt, told us that the average initial order from a customer is around SEK250,000 and that returning orders a year after tends to be around SEK500,000 (on average). Because of the relatively low order values, we highlight the importance of a growing customer base and argue this order is positive as it is a new customer that is a global leader in its industry and that the initial order value is higher than usual.

In January, Senzagen announced it had received a follow-up order worth SEK1.5m. The customer operates in the chemical industry and evaluated GARDskin in 2022-2023. The order investigates whether the customer’s new product candidates could cause skin allergies.

Firstly, we highlight the order value. As mentioned, the average follow-up order value is often around SEK500,000; therefore, this order value should be considered high. Secondly, we highlight the returning customer. As mentioned, the customer has evaluated GARDskin during the past couple of years, and this order confirms the satisfaction of SenzaGen’s offering. GARDskin can handle complex mixtures that could be challenging in traditional testing; therefore, we are not surprised that the order comes from the chemical industry.

The report aligned with our expectations from a sales perspective. However, during 2023, we lowered our sales estimate several times and left our long-term estimates unchanged. We believe our future sales estimates could be a bit too optimistic. We estimate sales will rise significantly during 2024e; however, we decrease our full-year estimate from SEK86.0m to SEK73.1m. From 2025e-2030e, we lower our sales estimates between 8-15%. We argue our updated sales forecast is more realistic and still shows that investors should have high expectations of SenzaGen.

Moreover, SenzaGen has shown during 2023 that it can increase sales and, at the same time, keep costs at reasonable levels. In the report and conference call, we learned that OPEX is not expected to rise significantly during 2024. We have chosen to decrease our OPEX estimates for 2024e-2026e, mainly expecting lower R&D and administrative expenses than previously anticipated.

We also learned that SenzaGen will start releasing quarterly reports from Q1 2024. We argue this is positive as investors will gain more information during the year than previously. Overall, we expect full-year 2024e sales of SEK73.1m. Even if sales are rising, we do not expect SenzaGen to become profitable during the year; however, a positive adjusted EBITDA in Q4 2024e and relatively close to break even for the full year (adjusted EBITDA of SEK-2.7m). We continue to highlight the importance of a growing customer base and that the customers' quality is high, increasing the likelihood of follow-up and high-value orders.

We expect sales of SEK14.6m in Q1 2024e and an adjusted EBITDA of SEK-1.9m. Moreover, we expect strong sales in Q2 and Q4 2024e (SEK18.3m and SEK24.1m, respectively). The third quarter has historically been a bit weaker than other quarters, mainly because of VitroScreen sales affected by the summer holiday. Overall, we expect SenzaGen’s customer base to continue to increase and that most of its 2024e sales are from returning customers.

We have also chosen to decrease our bull and bear sales estimates for the same reason for the changes in our base case sales estimates. Our bull case sales estimates are decreased by around 5%, and our bear case sales estimates are lowered by around 3-20% between 2024e-2030e (20% decrease in 2024e). Furthermore, we have decreased our OPEX estimates in these scenarios as well (same as base case).

However, our estimate changes do not significantly impact our fair value range. Our base case remains at SEK20, followed by a slightly decreased bear and bull case of SEK6.5 (7) and SEK29 (31), respectively. The SenzaGen share is currently traded close to our bear case. We argue that the past year’s negative share price development does not reflect the company’s performance and that current share price levels should be considered attractive.

In addition to our DCF valuation, we offer a peer group analysis that compares SenzaGen to other medtech companies in the Nordic region. These 15 companies have an enterprise value similar to SenzaGen. We argue that the best measurement is EV/sales because SenzaGen is not currently profitable.

Our peer valuation shows that SenzaGen is undervalued when observing the EV/Sales multiple for 2023. For 2024e and 2025e, the SenzaGen multiple is in line with the selected peers. However, an EV/Sales multiple of around 2x should be considered low, especially when observing the whole medtech market. In our view, SenzaGen is currently valued low because of the expectations of solid future growth, relatively close to profitability, and no capital need. Therefore, we argue the current share price levels should be seen as attractive for long-term investors.

Additionally, we provide a graph illustrating how SenzaGen is valued compared to all medtech companies in Sweden, using an NTM EV/Sales multiple. As one can notice, SenzaGen has, during the whole of 2023, been valued lower than the whole sector and is currently more than twice as low.