Franking Credits.

This discussion follows on from our earlier discussions about dividends.

The Company have previously stated that it is their intention to pay fully franked dividends. Now, we don't know if they will continue that policy into the future. There may come a time where the level of foreign profits are such that it is not practical to continue to limit the dividend to that which can be fully franked. However, just for the moment, maybe we can assume that this policy remains in place. We might even go further out on a limb and project that the Company sees no benefit in accumulating large amounts of franking credits and therefore may well pay a dividend that exactly matches that which can be fully franked.

Given the above, I thought it would be interesting to try to establish exactly what the franking credit situation may be at the moment. It actually turns out to be quite hard to do - not the least because franking credits are accumulated on a cash basis.

A couple of basic facts.

Franked Dividend. A franked dividend is simply a dividend that the company has already paid the Australian Income Tax on. A fully franked dividend will have had tax paid at the 30% Company tax rate. Companies do not have to pay fully franked dividends, they may pay unfranked or partially franked dividends. The Australian Taxation Office (ATO) will give us (the dividend recipient) a credit on our tax for the tax that has already been paid on the dividend. For simplicity, I will restrict this discussion to fully franked dividends. It is easiest to understand by an example. If we receive a $.70c fully franked dividend then we will receive a tax credit of 30c. That is because the company would have needed to earn and pay tax on $1.00 to produce a post tax amount of $.70. In essence, when we do our own tax, we record an income of the dividend plus the franking credit ($1.00) and then subtract 30c from our final tax amount to be paid. Thus, if our marginal tax rate is 30% then we will have effectively no tax to pay on the cash dividend received. If our marginal tax rate is higher than 30% then we end up paying the difference between our tax rate and the 30%. If our marginal tax rate is less than 30% then we end up with a credit that will be offset against any other income tax that we have to pay - or if there is none then we receive a nice cheque from the ATO. The best situation is that when we hold the shares in a Superannuation account that is in pension mode. There is no tax to pay and the entire franking credit (30c) is paid to us by the ATO.

Often, it is easiest to examine our dividends as a "grossed up" amount. In the example above (a fully franked dividend), the grossed up dividend is the cash dividend divided by 7 and multiplied by 10 (therefore a 70c ff dividend grosses up to $1.00). This is convenient as it allows us to compare the yield directly with the yield that we might get from alternate investments (eg Bank Deposit, Bond). It is very common to apply the same methodology to dividend yield %. That is, a dividend yield of 7% ff grosses up to 10%. The current Telstra dividend yield, for example, is 8.5% ff which grosses up to a touch over 12% (hint, hint).

Foreign Tax. For companies that earn some of their income through overseas subsidiaries there is another little complexity. Such subsidiaries will likely have to pay tax in the country in which the subsidiary operates. (Generally) Any tax paid overseas will be allowed as a credit by the ATO against the tax that would be paid in Australia. However, such tax will not provide any franking credits. In a "worst case" situation this means that a company that earns all of its income overseas may not earn any franking credits and will not be able to pay franked dividends. More usually, the Company will pay some tax overseas and some in Australia. This means that not all of the earnings of the company can be paid out as fully franked dividends. Either the company will pay only as much dividend as they have franking credits available to make the dividend fully franked, or they will pay unfranked or partially franked dividends.

Cellestis have expressed a desire to pay fully franked dividends. Whilst most of our sales are made overseas, we are in the fortunate situation of having an essential part of the manufacturing process in Australia. This means that a judicious setting of the price that we charge our overseas subsidiaries for the product enables a respectable amount of the profits to be booked in Australia where they will be taxed by the ATO and thereby attract franking credits. The fact that we have extensive expenses (Sales and Marketing) based overseas helps with this also.

I'm guessing that you knew all that.

Now, to specifics. It would be interesting if we can establish what the tax situation of Cellestis is, particularly how much tax they are paying in Australia to provide franking credits.

As I mentioned above, it is actually quite difficult to reconcile the franking credits account - largely due to the fact that it is run on a cash basis. However, if we look at the 2009 Annual Report we find this.

This tells us that in 2009, 93% of the company earnings were recorded in Australia. Consequently, we would have to presume that the vast majority of the income tax paid has been paid in Australia and will therefore have attracted franking credits. This would imply that there is absolutely no reason that the Company could not pay a very high percentage of earnings as fully franked credits, if the Company so wishes.

Now, the reason that such a high percentage of the profits were booked in Australia is due to two factors; firstly that a very high part of operating expenses are incurred overseas; and secondly that a large amount of the profit is recorded because of the price that the Australian operation is able to charge its foreign operations for the supply of product. It would follow that, whilst the second factor should remain reasonably constant in the future, the overseas expenses as a proportion of actual sales will reduce. Ultimately it will mean that the 93% will progressively reduce but not by enough to reduce the ability of the company to pay large fully franked dividends.

It is worthwhile noting that retaining franking credits in the Company provides no real benefit to anyone. I do note that it would appear that the 1.5c ff dividend paid for 2010H1 would not have used up all of the franking credits available. I can only guess as to why the Company might have decided to limit the dividend in that case. It may be that it was felt at that point that it was important to assure the stability of the company by retaining cash. That consideration, at that time, may have outweighed the desire to provide a higher immediate cash reward to shareholders. 

Ultimately, the upcoming financial results will go a long way towards clarifying this situation.

Interesting Numbers.

Here are some interesting numbers that I was alerted to today.


Back in 2008 there were 93 biotech companies listed on the ASX that were required to report their cashflow quarterly. 


As of 2010 that number has reduced to 68.


It would be nice to be able to report that the reason for the reduction has been a large number of these companies being released from quarterly cashflow reporting (by stint of reporting positive cashflows for 5 consecutive quarters). Sadly, that is not the case. Most of this reduction in numbers is the result of these companies being delisted or moving to another field of endeavour.


In fact, only a very elite handful (3?) of these companies have reached that measure of success. As we know, Cellestis is one of this group.


It is interesting to further note that of the 68 companies remaining, nearly half have less than 12 months cash burn on hand and will likely require further cash injections to survive.


As I have said before, investing in startup biotechs is a high risk business. I am personally very happy that I decided to invest in Cellestis.

So far so good.

Thank you everyone for your entries in the CST Guessing Competition to date. The competition is still open for those that have been cogitating long and deeply over this.


Summary results so far.

Full Results.

Dividends (a little more).

I note that my previous post regarding the upcoming dividend has stimulated some interesting conversations "around the traps". 


It could be that my post has been misinterpreted by some as a mild complaint about the dividend policy of Cellestis. It is not. I believe that the dividend policy of Cellestis to date has been both reasonable and sensible - it has provided investors with a taste of the rewards to come while ensuring the ongoing strength of the Company balance sheet. 


What I have tried to do is to approach the matter of the dividend policy of Cellestis, "going forward :)", in a dispassionate and logical manner. Hopefully, my logic, accounting and understanding of financial and investing matters is reasonable enough that my conclusions are realistic.


In the end, I guess I am making a statement about what I believe will happen. I believe that the Company will either increase the dividend payout percentage or they will tell us why they haven't done so. Of course I have no more knowledge regarding this than any other pundit, it is just that there is no reason to believe that the Company won't do this. 


Just for interest, if we were to assume a NPAT of $10m for the year and a dividend of 5c for the half then we would have an annualised current PE of around 27 and an annualised dividend return of 3.7% which grosses up to 5.8% - not too bad at all, given the growth prospects of Cellestis.




One other non-consequential little matter. I have received a number of communications from people pointing out that my previous post on dividends has been reposted in another place. That was done with my permission. It was my suggestion that the post not be accredited to me, only because that particular forum has a policy that precludes that. As I have always said, I maintain no copyright over anything that I say - if anybody finds any of it of interest then I am quite happy for it to be reposted anywhere.

Dividends.

The entries so far in my guessing competition (thanks for the entries and comments so far) has started me thinking about the upcoming dividend.


We know that Cellestis had around $20m in cash as at 31st December 2009. The CEO of Cellestis has previously indicated that something around $20m is an adequate cash holding for the company.


Why do companies hold back some of their cash profits into a cash reserve?

• as a buffer against temporary future misfortunes
• to cover the cycle of operating cash requirements (inventory, salaries etc)
• to reinvest cash back into the business (purchase/build physical assets, R&D etc etc)
• to build a war chest for potential corporate action (takeovers)

Let's look at these reasons as they relate to Cellestis.

It is fairly unlikely that there is any severe future misfortune that a cash reserve could solve. Let's think of the worst possible misfortune. How about if somebody released a competing diagnostic that is better, cheaper and faster? (it's not going to happen). In reality, no practical amount of cash on hand would save Cellestis in that situation.

It seems that the $20m cash on hand is more than adequate to cover the cycle of operating cash requirements - even if massively increased sales demand an increase in inventory purchases. A modest increase in cash over time, in proportion to sales growth, to maintain this cover may well be justified.

Cellestis' R&D is a relatively low cost item that can easily be financed from ongoing cash flows. It is unlikely that Cellestis is about to build a factory, buy a chrome and glass edifice to somebody's ego or anything similar. The management have demonstrated a commitment to modest and sensible use of capital - there is no reason to expect that this will not continue.

Takeover. There is nothing that we know of on the horizon. It is simply not sensible to hold back large amounts of cash profits on the "off-chance" that a suitable takeover may appear. Cellestis does not really need to get involved in a takeover at this point. Maybe at some future time it will become a useful action - at that time a takeover can be financed by the cashflow at that time and debt. There is no need to husband cash for that eventuality.

We could expand on all of those points quite extensively. However, the basic point is clearly evident - Cellestis would need a justification for increasing its cash holdings. Now, there may be some great justifications. If there are, then we would expect and be entitled to have those justifications explained to us in the upcoming accounts.

Looking at it the other way round - I can see no reason why the Company would NOT increase it's dividend payout ratio significantly from the current 45%.

Now, I don't know what the NPAT figure for 2010 FY will be. Just for this exercise, let's guess that it is $10m. Given that we have already received 1.5c dividend this year then I can see no reason why the dividend for the second half should not be 5c or 6c - giving a dividend payout ratio of 65% or 75% (annualised) or 71% to 85% (on a current half basis).

We can look at this from another angle. In general, the Cellestis share registry is predominately populated with investors, rather than traders. In a pure sense, investors achieve a return on their investment through the receipt of their fair share of the profits that are made by their company - not by selling their shares. The investors in Cellestis have been wise (or lucky) - we have invested in a startup biotech that has succeeded in reaching profitability. It is only reasonable that we, the investors, should now start receiving a return on our investment (without selling the investment that we have made).

Anybody else have thoughts on this?

Your Guess is as good as Mine.

G'day,


Have you missed me? I've been away on a short break. Back now and all revived ready for the Cellestis 2010 FY figures.


I've had a few emails asking "Where is the guessing competition this year?". Okay, here it is.


Cellestis 2010 FY Guessing Competition.


As usual, there is no entry fee and no prize - other than the abundance of accolades from your peers.


Check the results here.

$AU7.95 Investment.

Following on from my post on AFR Smart Investor and its mention of Cellestis as one of 25 small cap bargains, I made the $7.95 investment in purchasing the magazine.


The actual mention of each company (including Cellestis) is relatively small. 


It seems that the reason that they got the description of the Cellestis business slightly incorrect (treatment instead of diagnosis) is that the article was produced in conjunction with Lincoln Indicators. We all know that Lincoln Indicators have Cellestis listed as a "Star Stock" but also that they have the same error in their business description.


The text of the article itself is quite interesting in that it describes the things that we should be looking for in an investment like this. Cellestis ticks all their boxes very nicely. It's certainly a worthwhile read.

The Very First Senior Moment.

I promise not to fill my blog with internet jokes. After all we all have friends that send us more than enough jokes - don't we? However, as I gently age, this one struck my funny bone.

How Dinosaurs became extinct 

 The very first "senior moment"

   

AFR Smart Investor

Long term Cellestis holder, "Martin" posts the following.

Hello,

Financial Review Smart Investor magazine has Cellestis as a
'Small Cap Bargain' in the current issue, they list 25 companies which
have a financial health rating "strong"

The article headlines with "If you get in early on some of these
small-cap bargains you could hitch a ride to the corporate penthouse"

There is a fairly long description on what to look for in smaller
companies and brief specific coverage of each company.

Cellestis

"This biotechnology firm produces new blood test technology for
treatment of TB...Its Quantiferon products are in use worldwide...
It turned its first profit in 2008 and recorded strong growth in the first
half."

Martin

It's just a little bit nice to see that we are not alone in recognising the value in Cellestis. 
(Even if they have got what Cellestis does slightly wrong)

Cellestis One Page Summary (OPS)

Those of you who have been reading my scribblings for some time may remember that a few years back I published a document entitled "CST One Page Summary (OPS)". 


I have now attempted to bring that document up to date and present it here.


This document is not intended to be the be all and end all of an analysis of the Cellestis investment. It is really just intended as an introduction to the essence of this investment. Clearly nobody would make an investment decision based upon this but it may provide a good starting point for somebody that has not previously been aware of this company.


As always, feel free to copy, repost, distribute or bin as you see fit.


One Page Summary

Telstra (ASX:TLS) A Good Investment?

Now, I'm no Telecommunications analyst but that hasn't stopped me from thinking a lot about Telstra. 


I must admit that there have been times when I have thought "Why am I invested in this Company that is so much at the behest of Political events". However with some sort of resolution of the political situation the stress of that thought is largely removed for me. Either the NBN is going ahead with a re-elected Labor Government under a deal that Telstra has negotiated or the NBN will be cancelled/modified under a newly elected Liberal Government. Neither of those outcomes will provide any further negativity for Telstra. I'm going to assume the first outcome (the second outcome may be marginally "better" for Telstra).


If we dissociate from our personal views on whether the NBN is a good or bad thing and, furthermore put aside our own personal views as customers of Telstra ("I hate Telstra because they took 3 days to fix my phone") then we might have a chance of seeing through to Telstra as an investment.


Let's cut to the chase. Telstra is currently paying an annual dividend of 28c. On a share price of $3.20, that is a dividend yield of 8.75%. That is a fully franked dividend so it grosses up to a yield of 12.5%. Nobody can argue that that is not a great return on our investment. 


Clearly, the question is "How long can it keep this dividend up?".  Purely the fact that the yield is so high (ie the Share Price is so low) could be read as the Market feeling that this dividend stream will not last for long. I think that the market has it wrong.


Under the NBN Telstra eventually decommissions its copper network and utilizes the NBN to provide services to its customers. Clearly Telstra loses the income that it was making on those copper lines but receives compensation for that from the Government. I can only assume that after the long and hard bargaining that was conducted (and the political imperative of the Government to lock in a deal at a particular point in time), Telstra achieved a deal that they felt would be reasonable for their future (otherwise they would not have done the deal). So, in many ways, Telstra becomes one of many Telecommunications providers in the Australian market. As is always the case in this type of situation their job will be to achieve and hold a significant market share by differentiating themselves. I firmly believe that the pie will grow over coming years.


The NBN is going to take several (eight?) years to fully implement. Over that time Telstra will continue to generate (reducing) revenue from their copper infrastructure. Furthermore, their capital costs of upgrading and maintaining the copper will reduce. I would imagine that much new infrastructure that perhaps would have been built will now not be built (why build something that is going to be superseded in a few short years). The capital that would have been spent on this can now be redirected to other longer term profit generating projects. It's an interesting formula but it seems to me that Telstra have several years of the continuation of huge cash flows ahead, during which time they can reshape the Company for the long term.


The removal of the Universal Service Obligation (USO) from Telstra is significant. It happens essentially immediately and removes one of the significant imposts upon Telstra. I believe that that was a very important part of the deal that was done with the Government. There should be a significant expense saving here that takes place virtually immediately.


Telstra have the best wireless network in Australia. Under the deal they will now be able to bid for 4G spectrum to maintain their leadership here. The world is changing. We are now at the point of simply expecting that we can access our internet anywhere, anytime on any device that we choose - the iPad and similar devices will add enormously to this growth. Furthermore, we have become quite accepting of the fact that we pay a premium (over fixed services) for this service. I believe that this will be a big driver of future profits for Telstra. This will no doubt be an area of large capital investment by Telstra.


Under the deal Telstra now get to keep their Foxtel.


The weak horse in the stable is probably Sensis.


In the end, I believe that the reshaped Telstra has every chance of reshaping itself into a leaner and cleaner organization that will continue to generate great profits long into the future. I don't see the dividends being cut. I'm happy with a grossed up yield of 12.5% (who wouldn't be?).


Of course I could be wrong. Telstra could stumble, they might cut their dividend and their share price might fall. That could happen to any company. Our job as investors is to make our own decisions about where we risk our money (there is always risk). 


A yield of 12.5% gives me a big moat.


What thinks you?

Inmates Legal Action - Brunswick, NC

It is interesting to note that another set of legal cases are about to be launched by inmates in the US (Brunswick County, NC).


Article here.


We would all be aware that the threat of legal liability can be a driver of change. However, the following paragraph started me thinking about this from a slightly different angle.

"The health department required those who tested positive, either with contagious or non-contagious forms of the disease, to take medication for several months to keep the potentially deadly illness under control and from spreading in the community."

That requirement is quite a big burden in a jail. It means that resources must be used to provide and monitor the daily treatment of any inmate that has been diagnosed with Latent TB (as well as Active TB). In a jail, I would imagine that this would be a significant cost - perhaps more than the equivalent in the wider community. This cost could be reduced by treating only those that truly have TB - not those that are reported as false positives by the TST. That (and all the other advantages of QuantiFERON-TB Gold over the TST) should be a further driver towards the adoption of QTF in this setting.

It's all about .....

.... Marketing.


As I said a week or two back, with the opening of the gate by the CDC, the challenge for Cellestis is to grab the bull by the horns and use all of its resources to market, market, market.


As I also indicated, Cellestis know this and have now demonstrated their intentions.

Radford: Now is the Time for Heightened Focus on the TB Threat

RADFORD, TB, TUBERCULOSIS, TB IN THE US, CDC AND TB, TB THREAT, GUEST BLOG, GUEST, CNBC, CELLESTIS LIMITED

| 28 Jun 2010 | 01:50 PM ET

While most people living in the United States might think tuberculosis (TB) is a disease that no longer affects this country, in reality, between nine and 14 million Americans are infected with the bacteria that cause TB.

Consider the number of people you come in contact with every day – at the office, home, airports, trains, buses, restaurants, schools, hospitals, and shopping centers – it takes just one person with TB disease in any of these settings to pose a risk to all those around them.

A contagious disease, TB is spread through the air when a person with TB disease of the lungs or throat coughs, sneezes, speaks, or sings, which may cause people in close proximity to become infected. TB usually attacks the lungs, but it often affects other organs, and if not treated properly, it can be fatal. Around one in every 10 TB-infected people will, without treatment, go on to develop potentially deadly TB disease.

So why is TB still prevalent in the U.S.?

A key reason has to do with the very things that are supposed to help protect us from TB: theBacille Calmette-Guérin (BCG) vaccine and the main method of TB testing traditionally used, the 110+-year-old tuberculin skin test (TST). The BCG vaccine is widely-adopted globally and its use engrained in TB control policies around the world. However, it is recognized by many around the world that the BCG vaccine confounds the TST and leads to false-positive test results.

This means that for the many foreign-born Americans who have been BCG-vaccinated, the usual method of TB testing will often indicate that they are positive for TB infection. With migration to the US (approximately one million per year, many from countries where TB is endemic), TB rates have been steadily growing in foreign-born individuals - in 2009 immigrants were nearly 11 times more likely than U.S.-born citizens to have TB.

Certain communities are also at higher risk: people with autoimmune conditions and those taking immunosuppressive therapies, the elderly, the homeless, and corrections facility inmates. As a consequence of frequent contact with high-risk individuals, doctors, nurses, and staff at hospitals and other group facilities are all at significant risk of TB.

The major challenge for the U.S. is to modernize TB control.

The first hurdle will be for the nation to adopt new strategies for TB control and diagnosis. TheU.S. Centers for Disease Control and Prevention (CDC) is taking steps to pave the way for change.

In a landmark Public Health release issued last week, CDC is now championing the use of modern TB testing strategies. The CDC advises that IGRAs, simple blood tests known as interferon-gamma release assays, are now preferred over the TST for diagnosing TB infection in many groups of individuals. Further, the CDC in conjunction with the U.S. Department of Health and Human Services (Division of Global Migration and Quarantine) recently published new instructions for immigrant TB testing, which allow the blood tests to be used instead of the TST in certain immigration populations.

Using these tests for immigration TB screening will prevent the large number of false-positive TST results in BCG-vaccinated immigrants and stem unnecessary (and expensive) evaluation and treatment.

The distinct advantages of these blood tests, such as QuantiFERON®-TB Gold (QFT®), are greater accuracy over TST and not being confounded by BCG vaccination.

These blood tests frequently show that fewer than a third of those previously thought TST-positive truly have TB and can provide more valuable information for physicians to diagnose TB infection. Economic studies show that, when staff time and evaluation of TST false-positives are included in cost comparisons, QFT reduces testing program costs by seven percent while providing superior medical outcomes.

Public health and TB control programs across the U.S. are also successfully beginning to implement change.

At the forefront is the San Francisco Department of Public Health’s TB Control Health Program. The program’s switch from TST to QFT resulted in a more than 60 percent decline in the number of people testing positive for TB last year and, thus, a reduced number of follow-up visit costs. Despite this lower number of positive results, no cases of TB have been reported as missed in more than 45,000 people screened for TB in San Francisco since QFT was adopted.

Switching for healthcare worker screening alone saved the program $101,648 in the course of one year.

The CDC’s announcement is a great move in the direction of tackling how TB is tested. Success will eventually be measured by local government and other groups’ adoption of these guidelines. Although TB is not on most Americans’ radar, it remains a significant public health threat in the U.S., with still much more to be done.

_________________________
Dr Tony Radford is the founding CEO of Cellestis Limited, a biotechnology company formed in 2000 in Melbourne, Australia, and listed on the Australian Stock Exchange (ASX). Dr. Radford was a senior member of Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO) team that invented the patented QuantiFERON® technology, which is used world-wide for testing for diseases such as tuberculosis. Cellestis develops and manufactures the QuantiFERON®-TB Gold (QFT) test, a breakthrough blood test for the detection and control of tuberculosis.

URL: http://www.cnbc.com/id/37979037/

Game On.

It seems that Cellestis are doing as we expected - that is, launching a major marketing push subsequent to the release of the CDC Guidelines.


Part of this seems to be the provision of a portal to essential QuantiFERON TB Gold information. It's an excellent resource that seems to directed at all levels of the TB chain from professional TB controllers right through to patients.


Currently, this should be accessible from the Cellestis web page. A link is provided towards the bottom right of the home page labelled new "US CDC TB testing Guidelines". I actually found that this was not directly available for me until I cleared my browser cache. If you have the same problem then you may need to clear your browser cache or just go directly to http://www.tackletb.com.  


And while you are at it, have a look at a sample of the Cellestis Marketing for HCW testing.

Okay.

CDC Guidelines released.

Press Release from Cellestis.


Announcement from Cellestis.


As Joolia would say - "Game On".

Diel or No Diel

(I really just wanted to use that Title)


The American Association for Clinical Chemistry (AACC) has published a summary of the Diel findings in their June Newsletter


I think we all know now that the Diel meta-analysis is the most important research result driving the progression of QuantiFERON TB Gold into the market. The addition of the imminent release of the CDC Guidelines should give Cellestis the opportunity that it has been waiting for to be able to aggressively market the product.


(Please also read the note below)

June 2010: Volume 36, Number 6 Interferon-g Release Assays Out-Perform Tuberculin Skin Tests in Detecting Active TB A new meta-analysis comparing interferon-g release assays (IGRAs) for detecting active tuberculosis (TB) found that in comparison to the tuberculin skin test (TST), the newest commercial IGRAs are superior for detecting the disease, particularly in developed countries (Chest 2010; 137:952–68). According to the authors, the findings support the primary use of IGRAs, especially in high-risk groups such as immunosuppressed individuals with high potential for TB reactivation. Due to the poor accuracy of TST among patients with TB, two-step screening strategies with TST as a first test and IGRA as a second should be considered for contact tracing. The authors conducted the study in response to a plethora of recent research about IGRAs, which followed an earlier meta-analysis that summarized studies involving a second-generation Quanti-FERON Gold whole blood ELISA test with a variety of ELISpot assays using different cutoffs and preparations. With Food and Drug Administration approval of both the T-Spot.TB ELISpot, and a new QuantiFERON-Gold In-Tube assay incorporating a third RD-11 antigen, TB 7.7, the authors sought to establish performance benchmarks that laboratorians can expect when using the products. From an initial 679 potentially relevant studies, the authors included 124 in their final analysis. Overall, the pooled sensitivity of TST was 70% versus 81% for Quanti-FERON-Gold In-Tube and 88% for T-Spot.TB. Sensitivities for the latter two increased to 84% and 89%, respectively, when results were restricted to developed countries. Pooled specificity was 99% and 86% for the QuantiFERON-Gold In-Tube and T-Spot.TB, respectively. The researchers also found that there was a lower frequency of indeterminate results among individuals tested with QuantiFERON-Gold In-Tube in comparison to T-Spot.TB, regardless of whether the patient was immunocompetent or immunocompromised.

.


I should take the time to point out that the editing of this item from the original Diel text has resulted in a slightly changed (and incorrect) meaning in one area.


Compare the text.


Diel:

Considering sensitivity for diagnosing active TB as a surrogate parameter for LTBI, TST- based two step screening strategies (TST first, IGRA second) for contact tracing should be critically reconsidered due to the poor TST accuracy among TB patients.

AACC:

Due to the poor accuracy of TST among patients with TB, two-step screening strategies with TST as a first test and IGRA as a second should be considered for contact tracing.

Quite a significant difference in meaning!

Finally!

It looks like June 25th is the big day.

Challenges, Challenges, Challenges.

Just following on from yesterday's blog entry it seems to me that in each of those "Company stages" there are different challenges that the Company will be addressing. 


Note that my comments below are by no means trying to tell the Company what they should be doing. They are just the things that we should be watching for about our Company to measure how successfully they are progressing.


SHORT TERM


In the Short Term we are looking for QuantiFERON-TB to be progressing towards becoming the most widely used latent TB diagnostic in the developed world. To date we have achieved a high recognition in the market and modest sales. A major trigger for the increase in penetration is the imminent release of the CDC guidelines. We should be looking for the company to use these guidelines in conjunction with the available scientific proof to push hard into the market. I'm not personally sure what the best approach is here (but I'm sure the company is). Maybe it involves marketing to different levels of the TB chain - ie moving down from the top through the decision makers, coal face practitioners and even patients. It may even require the expending of some of our carefully husbanded cash. It will be interesting to watch events unfold and see how they fit into the puzzle of how this progression is going to be driven.


MEDIUM TERM


In the medium term the Company will need to push new products through the development and marketing pipeline. No doubt the existing network and product recognition will assist in this. Additionally, the Company itself will have learnt a lot about this from its experience with QTF-TB. Experience is a massive asset - one that we have perhaps not previously valued. 


We would hope that all of these factors will make additional product stories shorter than has been for QTF-TB. 


LONG TERM.


This is all about one of my favourite topics - vision. Any Company that has a long term, successful future must have a vision about where it is going. It is never good enough to just "go with the flow". You can only drive future success if you have some idea of the form that success will take. It is never too early to have a vision. Furthermore, it is never wrong to change that vision as the future unfolds. 


Whereas the short and medium term drivers of success are the current business, the future vision is all about the company. To me, these are quite different things. A business generates profits, a company manages those profits (as assets) for the best possible commercial returns.






One final thing. Poster "malta" has written an excellent post over here. Worth reading in my opinion. Cheers malta.

The Short, Medium and Long of it.

Just when you thought it was safe to plunge back into the Internet, here I am again. I've been quiet for a week or two - not much to say and busy with other things (painting the house).


I did warn you when I started this blog that I wouldn't guarantee regularity - hence my recommendation that you sign up to my email, RSS or twitter alerts. (over there to the right).


Anyway....


I've been thinking about Cellestis (surprise, surprise!). More specifically, I've been thinking about the future of Cellestis. When I start thinking about things like this I am only too aware that I can only provide my perspectives, based on my own situations, views and guesses. Everybody else will have different factors that impact their own perspectives and will likely therefore come to different conclusions.


I've been thinking about Cellestis in terms of the Short (near), Medium and Long Terms. It's tempting to attach some "real" timings to those classifications but such a specification may create a misleading prophesy. I guess, if pushed, I would consider short term to be 12 to 36 months, medium term to be 3 to 10 years and long term to be ten years plus. Just to put that in perspective, I have been invested in Cellestis for almost ten years now. My perspective is as somebody that considers himself a part owner of this business. As such, I am less interested in the vagaries of the Share price than I am in the progress of the actual business that is contained within the company. I have no real plan to ever sell that share in the business, though there may be a point at which I sell down some of my holding - more on that later - much later. I fully accept that others may judge the success or failure of their investment decisions on the movements of the Share Price. That's fine - it just doesn't work for me. 


The first thing that I believe is very important to understand is that Cellestis has now moved from being a purely speculative stock to a real business. It is now making increasing sales and, most importantly, profits. There is little danger now of this business "going broke". We do all have to admit that it has taken longer than any of us anticipated to reach this stage and, further, that it has not yet achieved all that we hope for the company. It is not unreasonable to continually review the current situation and our beliefs about the future. For some, such a review may well determine a decision to sell their CST holdings. For others it may well drive a decision to buy a CST holding. Whilst the facts about the company are incontrovertible, our own personal situations are likely to be wildly different and thereby drive different decisions. 


I think that looking at CST over the three future stages that I have outlined may well help us in solidifying how we feel about the company.


SHORT TERM. 



In the short term, Cellestis is essentially a one product company - QuantiFERON-TB Gold. After ten years of work this product is starting to hit its straps and will most certainly be the "Company maker". All of our profits are currently being generated by this one product. That would often be something of some concern. However, we all know that there is an absolute minimal (if any) danger of this product not continuing to enjoy it's ever growing acceptance. As researchers we know of the competitive situation and the possibility of any future competition arising. Personally, I am totally confident that this product truly will be the base on which the future of this Company is built.


The next two half year results will probably be those that confirm our faith in this one product.


Clearly, the event that we await is the release of the CDC Guidelines in the United States. Unlike many, I don't look to these as a driver of the share price but as a driver of sales. I really don't know what immediate impact the CDC Guidelines will have on the Share Price. To me it's not important. What is important to me is how the Company are able to capitalize on the guidelines to increase the uptake of QuantiFERON-TB Gold. In context of the short term this is the important job of the management of Cellestis. With the conjunction of peer reviewed papers (most importantly the Diel meta study) and the CDC Guidelines it just doesn't get any better. It is the trigger that the company must (and no doubt, will) use to make QuantiFERON-TB Gold the standard for latent TB testing. The Company has available all the resources that it can utilize in this task - a worldwide network, ample cash, dedicated staff and management will. With all this in it's favour, if it doesn't achieve an ongoing appreciable and increasing market penetration then we all have got it terribly wrong. I really don't see how it can't happen .


MEDIUM TERM.


When we look at the medium term for Cellestis it gets even more interesting. I see the driver of medium term success being the implementation of additional diagnostics based on the QuantiFERON platform. We know that there are currently some of these new diagnostics in the development and sales pipeline - CMV and Lyme Disease. Whilst these will be nice additions to the diagnostic portfolio, neither of these will generate the income that TB will. We have also been led to believe that there are other diagnostics currently in the pipeline that have the potential to generate income of the scale that TB will. At this stage the company has not revealed what these new diagnostics might be. I am personally hoping that they will have progressed enough that we will hear more about them this year.


We would hope that the business that has been built with QuantiFERON-TB will make the development and implementation of new diagnostics easier and quicker than TB. The existing network and ample cash should add to the experience that has been built and the general acceptance of the QuantiFERON platform and brand to make the uptake of any new diagnostics a little less difficult than QTF-TB has been.


When we look at what I have termed Short and Medium term above, it is likely that Cellestis is going to maintain a speculative premium in its Share Price for some time to come.


LONG TERM


This is where it gets really interesting. If the company has gotten to this point then it will be generating large amounts of free cash flow. In my opinion it is not unlikely that the Company could find itself generating several hundreds of millions of dollars cash profit each year. Coinciding with that I would expect that we would see a convergence of Share Price to Profits - that is, a move towards a PE of 10. 


Once the Company has arrived at that point it becomes no different from any other blue chip share investment. Depending upon what the Company paints as it's future from that situation, I would be making my decision as to whether I sell some of my shares in Cellestis and spread my investment portfolio wider.


So, what can the Company do with all that cash? As I have said many times before, there is no real point in the Company sitting on hundreds of millions of dollars of cash. Obviously I would want to see them paying me a huge dividend for my perseverance. However, I would also have no problem in listening to other uses of some of the cash within the company. That may be the purchasing of other similar companies or it may even be the moving into other industries. After all, there is really no reason that the Company could not succeed in other fields of endeavour. As unlikely as it may seem, I am willing to entertain any suggestions that the Company may make for the future. The important thing is that the Company must use it's assets to continue to grow. It is never too soon to think about how that growth is to be achieved.