The Cellestis Story. Part Four.

(see, I haven't forgotten).


By now I hope you have read The Cellestis Story Part One, The Cellestis Story Part Two and The Cellestis Story Part Three. In those posts I have tried to explain what it is that Cellestis are selling - basically a really cool diagnostic method and specifically, initially, a diagnostic for Tuberculosis. Furthermore, unlike so many other "great ideas on the laboratory bench", we have seen that this technology is scientifically proven by totally independent research.


However, from our point of view as investors, having a great product is only a very small part of the real story of building a successful business. After all, you and I are most likely not invested in CST to further our knowledge of immunology (as interesting as that may be). We are here to make money - at least I am and I assume that the same applies to you. Somewhere, there is a garbage dump full of the carcasses of biotech startups that had seemingly great ideas or products but, in the end, did not reward the investors for their faith (and cash). There are many reasons for their failure. One is the fact that the old saying "Invent a better mousetrap and the world will beat a path to your door" very rarely stands up in reality. I will be discussing how Cellestis have avoided this and the other perils of being a biotech startup in this post.


One (among many) of the reasons that I was impressed with this company right from the beginning was the very clear and incontrovertible statement that they made - "Our intention is to build a worldwide diagnostic business". I suspect that many other biotechs, knowing of the multi year path to commercialization actually have quite a different intent. Their intent is to bring their product to the attention of a multi-national pharmaceutical (or similar) company and then sell out or joint venture for a quick profit. Now that may be all well and good and may indeed turn a good profit but it is a one time, short term approach. As an investor, I see myself as part owner of the companies that I invest in. If I invest in a small startup like Cellestis then I have done so because I believe that, one day, I will be owner of a slice of a large, successful business. 


To date, Cellestis have stuck to their guns. They have taken what appears to be the hard road of independently moving their product from the laboratory bench all the way through to commercialization. Somewhat miraculously, they have done this on a total budget of around $20m. Doing it independently and on a realistic budget means an enormous amount to us, the investors. Had they climbed into bed with a "big pharma", you can bet your bottom dollar that your share of the company would now be only a fraction of what it is today. Had they spent their budget unwisely (huge salaries for themselves, a huge chrome and glass edifice to their egos ...) then we would have seen multiple capital raisings over the years that, again, would have diluted our share of the significant profits that are, now, just over the next rise. As it is, the modest capital raising that the company undertook diluted our holdings by less than 10%. The total number of shares and options on issue today are less than 100m. With early profits now happening there is no reason to suspect that our slice of the company will be diluted in the future.


In comparison, there are many startups that have tripled the number of shares on issue before they reach commercialization - if they ever do. 


So, what have they achieved in nine years with $20m?


In my post To Market, To Market I discussed a good part of this achievement from the perspective of actually getting their product into the market. 


But even that is not enough to "make" a successful company. In fact, the way I look at it, a "company" is only a structure around something that is far more important - a business. It is relatively easy to fashion a company - that means nothing without a viable business that operates within that company to actually generate the ultimate aim - profits. This may seem an extraordinarily obvious point but one that seems to be sometimes overlooked by participants in the stock market. A great announcement may well move the share price of a company but it is only business profits that will make a "real" company (the sort that I want to own).


So, let's look at the concrete, real things that Cellestis have put together to make a business.


Cellestis have established a worldwide presence, with Cellestis offices in Australia, Germany, USA, Japan and now Singapore. This strategic network supports both direct sales by Cellestis and sales through appointed distributors in most developed (and some less developed) countries. The value of this network cannot be underestimated. It, alone, actually has real value. A global network such as this, with people in place, good local contacts and distribution logistics may even generate standalone income should Cellestis so wish. (I'm not suggesting that this is in their plans but it is certainly an option).


In conjunction with the above global network, Cellestis have established worldwide 24 hr per day technical support services ("follow the sun") for users of the QuantiFERON products anywhere in the world. A particular dictum that I have always taken to heart is that "the best customer is the one you already have". That is, keeping your existing customers is the best path to ultimate success. Understanding and meeting the needs of your existing customers is the way to achieve that. Support, support, support.


A complete manufacturing process is in place. The required raw peptides are manufactured to CST specifications in the USA, and shipped to CST Australia for processing into antigens. The antigens are then shipped to Austria where, under contract, they are coated into the tubes and dispatched to Cellestis for distribution. It is a well controlled process and, we are informed, can easily scale to meet future demand growth.


Cellestis have over 65 employees throughout their worldwide operations. I have been fortunate enough to have met a number of them and am pleased to say that they are not only highly motivated but also express their absolute enjoyment in working in such an exciting and dynamic company. 


Obviously, Cellestis also have in place the necessary administrative structures to actually run the business on a day to day and year to year basis. This may seem like a mundane part of a business but without effective ordering, invoicing, and payment systems, no business survives. 


A good business is always looking to the future as well as dealing with the present. Cellestis have a dedicated Research and Development team that are continually working on improvements to existing products and the development of future products. Fortunately, the two founding Directors of Cellestis come from scientific research backgrounds - they are unlikely to strangle these operations with constraining budgets.


As you can very clearly see, Cellestis is more than just a great idea. It is a carefully crafted business that is well placed to capitalize on all of the opportunities that will be coming its way. Being already operational (manufacturing, selling, delivering, supporting) at the current modest levels will, no doubt, have enabled this entire business structure to be fine tuned and ready to "take on the world".


I say again that all of the above may seem very obvious and even trite. However, think about it clearly - here is a shiny new business that has been able to put in place everything possible to ensure its future success. This has been quietly and carefully built over nine years on a very modest budget. It is proven. It is sensible. It has the best possible chance of succeeding. Compare this with other small startups listed on the ASX. I'm betting that most of them have not even thought about everything that will need to be put in place to make their business a success. Or if they have they have thought "Well, we'll worry about that later". 


Stay Tuned. There is much more of this story to come.