Virax Biolabs: After the U.S. IPO

A Quick Take On Virax Biolabs Group

Virax Biolabs Group Limited (NASDAQ:VRAX) is seeking to commercialize profiling, diagnosis, and prevention products for viral diseases.

Virax is still a tiny firm with substantial execution risk ahead of it as well as regulatory risks and uncertainties in the markets in which it operates.

Virax Biolabs Overview

London, UK-based Virax was founded to develop a range of viral disease prevention, detection, diagnosis, and risk management products.

Management is headed by co-founder, Chairman and CEO James Foster, who has been with the firm since inception and was previously co-founder of Natural Source Group, a nutraceutical precursor firm to Virax.

The company’s primary offerings include:

• Virax Immune - IVD profiling platform for future launch

• ViraxClear - diagnostic test kits

• ViraxCare - Medtech and personal protective equipment

• Sourced Brand products

Virax has booked fair market value investment of $4.4 million as of September 30, 2021 from investors.

Virax - Customer Acquisition

The company seeks to sell its products to healthcare clinics, laboratories, hospitals, pharmacies and related groups internationally.

Management intends to launch its flagship brand, Virax Immune, sometime in 2022.

Sales and Marketing expenses as a percentage of total revenue have varied as revenues have fluctuated, as the figures below indicate:

(Source)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, fell to -3.4x in the most recent reporting period, as shown in the table below:

(Source)

Virax’ Market & Competition

According to a 2021 marketresearch reportby Grand View Research, the global in vitro diagnostics market was an estimated $83.4 billion in 2020 and is forecast to reach $113 billion by 2027.

This represents a forecast CAGR of 4.5% from 2021 to 2027.

The main drivers for this expected growth are a rise in testing demand as a result of the COVID-19 pandemic and the development of automated IVD systems for hospitals and laboratories.

Also, below is a chart showing the historical and projected future growth trajectory of the U.S. in vitro diagnostics market:

U.S. In Vitro Diagnostic Market(Grand View Research)

Major competitive or other industry participants include:

• Qiagen (QGEN)

• Adaptive Biotechnologies (ADPT)

• Roche Holding (OTCQX:RHHBY) (OTCQX:RHHBF)

• Abbott Laboratories (ABT)

Virax Biolabs Group Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• No top line revenue in the most recent six-month reporting period

• Variable gross profit and gross margin

• High operating losses

• Lowered cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

(Source)

As of September 30, 2021, Virax had $11,676 in cash and $1.0 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2021, was negative ($449,413).

Commentary About Virax’ IPO

VRAX is seeking U.S. public capital market investment to fund R&D efforts and its expansion plans in various countries.

The company’s financials have produced zero top line revenue in the most recent six-month reporting period, fluctuating gross profit and gross margin, substantial operating losses but reduced cash used in operations.

Free cash flow for the twelve months ended September 30, 2021, was negative ($449,413).

The firm currently plans to pay no dividends on its shares and anticipates that it will use any future earnings to fund the continued development and growth of its business.

The market opportunity for in vitro diagnostics is quite large and expected to grow at a moderate rate of growth over the coming years.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing and unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Boustead Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 6.3% since their IPO. This is an upper-tier performance for all major underwriters during the period.

Virax is still a tiny firm with substantial execution risk ahead of it as well as regulatory risks and uncertainties in the markets in which it operates, so I'm on Hold for the firm.