Business description

The founder-managed MedTech company Genomtec (www.genomtec.com) was established in 2016 by scientists from the Wroclaw Medical University. It has developed a molecular diagnostic device, which compared to standard PCR devices costs 6 times less, is mobile, much faster and energy efficient. We believe that given its already announced distribution contract in Greece, Genomtec will likely generate first revenues of PLN >1m in 2022 upon receipt of CE/IVD certification in the EU for its molecular diagnostic device Genomtec ID within the next two months. The global PoC Molecular Diagnostics Market, which the company targets, is worth USD 2.8bn and growing at a CAGR of 8.2% (Source: MarketsandMarkets)

Genomtec, which already has international shareholders, is listed in the NewConnect segment of the Warsaw Stock Exchange but can also be traded in Frankfurt. Its founders own >33% of the total shares outstanding, while its largest shareholder is the major Polish VC fund Leonarto VC (www.leonarto.vc). The team includes Polish scientists, but also foreign experts incl. Charudutt Shah (Chief Business Officer), who previously worked in Business Development at the major global MedTech company biomerieux; and Jason Reece (Chief Technology Officer), who has previously been in charge of several IVD (In-Vitro Diagnostics) systems e.g. at Novartis and Perkin Elmer. In its UK-based facility, Genomtec employs several experienced production engineers.

Genomtec’s products

Genomtec ID is GMT’s flagship molecular diagnostic device for the analysis of DNA. Compared to stationary PCR devices, it is small, much more energy efficient and faster (it only needs 30-40 min to deliver results), but also offers 10-100 times higher reaction efficiency. It can be used everywhere and does not need to be handled by skilled personnel with laboratory training.

Genomtec ID includes an analyzer and a reaction card with integrated genetic tests and provides multiplexing capability of simultaneously up to five genetic targets. One of the diagnostic panels, which is supposed to cost c. EUR 45 and will generate recurring revenues for Genomtec in the future, is for respiratory diseases and includes SARS-CoV-2. Others, which are however still under development, cover e.g. Sexually-transmitted infections and SEPSIS.

Apart from Genomtec ID, the company also offers rapid genetic tests, including two-gene SARS-CoV-2 tests. In the future, it also plans to develop Genomtec Tumor, another SNAAT-based device that could be used to quickly identify neoplastic mutations.

Financials

We estimate Genomtec current cash position at c. PLN 5m. This should allow the company to launch production of the Genomtec ID device after certification in Q3/22. However, in order to grow its sales team and ramp up production it will likely have to conduct another capital increase soon. We estimate Genomtec’s current monthly cash burn at c. PLN 1m.

Valuation

We have strong faith in Genomtec’s management and its technology, which in our view offers significant advantages compared to the current PCR standard. In particular, we believe that the track record of Charudutt Shah and Jason Reece significantly increases the probability of a successful commercialization of Genomtec ID.

Given the sales potential of its Genomtec ID device, the company is currently very attractively valued, in our view. Its current market capitalization equals USD 12.8m, while similar companies have been sold for at least 15 times higher valuations in the last years. For example, in 2014 Swiss Roche acquired US-based company iQuum (provided the Liat Analyzer and the Liat Influenza A/B Assay) for USD 450m including milestone payments. In another M&A deal in 2018, German Qiagen bought Spanish STAT-Dx (offered the DiagCORE system, an easy-to-use platform that consolidates molecular and immunoassay techniques in a single PCR device) for in total USD 191m.

Disclaimer: The author of this blog post may own shares of Genomtec

Something, of which Polish politicians have been warning since at least 2008, became reality on February 24: on this day, Russia launched its attack on Ukraine. After it had initially tried to conquer the capital Kiev, since recently the Russian army has focused its activity on the Eastern part of Ukraine, with the apparent objective to create a land corridor between the Crimean Peninsula and Russia. There are speculations that Putin wants to end the “Special Military Operation” against Ukraine until the annual Russian Victory Day on May 9. However, despite the superiority of its army, Russia has not made any significant military advances in Eastern Ukraine yet. 

Several scenarios are possible for Ukraine after the fighting stops, which will happen sooner or later. In our view, the country will most likely be forced into a kind of neutrality but will not become a member of EU and NATO. On the other hand, due to the current conflict NATO will probably further strengthen its eastern border including a significant presence of the US army in countries such as Poland and the Baltics. In our view, given the experience from Germany during the Cold War, this could positively impact the GDP in regions, where these troops are/will be located. In 1985, >240,000 US soldiers served in military bases in Western Germany and this created 16,500 jobs for Germans. Also, it is estimated that they spent 40% of their salaries in local German shops or restaurants and not just on American products  https://www.sueddeutsche.de/politik/amerikanische-streitkraefte-welche-bedeutung-us-truppen-in-deutschland-haben-1.4035390

The above shows that military bases can indeed be a significant economic factor, especially in regions with a weak industrial base. In Poland, there are currently c. 9,000 US soldiers, which are mainly based in relatively poor parts of the country e.g. the South-East. https://forsal.pl/swiat/bezpieczenstwo/artykuly/8386335,wojska-usa-w-polsce-obecnie-nad-wisla-przebywa-ok-9-tys-amerykanskich-zolnierzy.html In the Baltic countries, where between 6% and 27% of the population are Russians, there are in total >3,000 NATO troops. We expect that in the whole CEE region the number of NATO soldiers will significantly increase in the next three years. Apart from Poland and the Baltic countries, Romania will particularly benefit from this, in our view.

While the stronger permanent presence of NATO troops in CEE will likely positively impact the demand for local goods and services, the economies of the respective countries should also benefit from joint (R&D) projects with NATO partners. In addition, as all NATO countries will grow their military spending to at least 2% of GDP in the short term, there will be higher demand for military equipment and technology. Thus, we expect that such listed companies as e.g. VIGO Photonics S.A. www.vigo.com.pl (Market cap EUR 104.5m), Protektor S.A. www.protektorsa.pl (EUR 13m) and Lubawa S.A. www.lubawa.com.pl (EUR 81.6m) will be among the biggest winners. Moreover, we believe that especially the public sector and the armed forces will invest much more in IT security as cyber attacks will become a growing threat. This should be positive for e.g. Comp S.A. www.comp.com.pl (Market cap EUR 61.6m), Asseco Poland S.A. www.asseco.pl (EUR 1.4bn) and Passus S.A. www.passus.com (EUR 17.3m). Additionally, retailers such as Pepco Group NV www.pepcogroup.eu (EUR 5.2bn) and Jeronimo Martins SGPS, S.A. www.jeronimomartins.com (EUR 12.5bn) could benefit from increased purchasing power in regions with military bases.

Since the global financial crisis, the world’s major central banks have pumped USD >25tr into the financial system Global QE Tracker – Atlantic Council. Because of record-low interest rates the only asset classes, which have provided attractive returns in the last years, have been stocks, real estate and startups. Nowadays, Western VC funds have significant capital to invest, but according to our experience only c. 5% of them are allowed to invest locally in countries such as Poland or Romania. While especially Poland has a vivid startup scene – according to PFR, the value of VC transactions in Poland reached a record of PLN 3.6bn/EUR 798m in 2021 after PLN 2.1bn/EUR 466m one year earlier and only PLN 156m/EUR 34m in 2018 Transakcje na polskim rynku VC w 2021 (pfrventures.pl) – CEE-based startups usually have to look for money among local business angels and VC funds, which often use EU funds.

Lack of “smart money” is the main reason, why there are still not many unicorns in CEE

The main problem, which startups in CEE are facing, is that these investors usually do not have experience how to scale up businesses on international markets and have relatively small tickets of EUR <1m, which corresponds to pre-seed or seed phase of startup funding. Thus, CEE-based startups are able to finance product development, but often have problems with raising financing for the market roll-out.

While many startups choose to conduct a capital increase and list their shares in the alternative NewConnect segment instead, during the next funding round they often realize that they are in a “death trap”, meaning that most institutional investors are not allowed to invest in them as they are too small in terms of market capitalization and still do not generate revenues. We believe that all this is a major reason, why in CEE and in Poland in particular there are still almost no unicorns, which is a description of startups with a market value of at least USD 1bn.

Solution: Establishing a holding company in Western Europe

In our view, a solution may be establishing a holding company in Western Europe. This would become an owner of the local operating company, which usually benefits from still 4-5x lower salaries in CEE and EU R&D grants. In our view, the Western holding company could raise “smart money” from Western business angels or VC funds much easier. In addition, it could ultimately be listed on one of the Western European stock exchanges such as Deutsche Börse, Stockholm or Euronext. Especially the Swedish and Amsterdam stock exchanges are considered the best ones in Europe for innovative Tech and Biotech companies.

The process of establishing a holding company in Western Europe is relatively easy. For example, in Germany there are two kinds of limited companies, which require EUR 25,000 (GmbH) and EUR 1 (UG) of initial capital respectively GmbH und UG (haftungsbeschränkt) – IHK Rhein-Neckar (ihk24.de). Set up costs equal max. EUR 900 and yearly costs of accountants and tax advisors c. EUR 2,000. A Dutch BV requires at least EUR 0.01 7 Things you need to know about the Dutch BV – FIRM24 initially, with likely similar founding and yearly costs as in Germany.

We at East Value Research have gained significant experience with consulting for startups over the last years and have built a strong network of brokers, consultants and investors. We stand ready to assist CEE-based startups with the establishment of a holding company in Western Europe and fundraising.