https://www.investsmart.com.au/investment-news/investsmart-austra...

https://www.investsmart.com.au/inve...-small-companies-fund-update-june-2018/142845



Sensing value in UBI

The final opportunity this month is less familiar but, if anything, more attractive than 3P or Hansen.
That opportunity is Universal Biosensors (UBI), an owner of specialised intellectual property (IP) used in diagnostic tests. It’s only a small company worth around $40m, but that hasn’t stopped it from commercialising its IP with big pharma.

	{caption}Table 2: Top five holdings at 30 June 2018{/caption}
1	Company name
2	ALE Property
3	MSL Solutions
4	RPMGlobal
5	Thorn Group
6	Trade Me
7	Note: holdings in alphabetical order
8	Number of holdings: 23
9	Top 5: 27%
10	Cash: 23%

UBI’s IP is currently used in two applications - the first a royalty for every blood glucose testing strip sold by Johnson & Johnson, the second a similar arrangement with Siemens for blood coagulation testing. But its IP has far more potential than that, with new ventures with Siemens and a self-testing device in the pipeline.
This gives it plenty of upside if things work out, but what attracts us is its downside protection. UBI's contract with Johnson & Johnson allows a lump sum to be paid to UBI in lieu of future royalties which was recently estimated to be worth $40-45m, but there's a chance it could be much more than that.
Johnson & Johnson had every incentive to pay the lump sum as soon as possible - as long as royalties continue the greater the eventual sum paid - but now that they're selling their blood glucose division their incentives have changed. Investing for the long term is out, sprucing the business up for sale is in, and that means delaying capital expenditure like the lump sum to UBI.
This could work out even better for UBI shareholders, as if sale completion is delayed until next year, UBI will be entitled to another $20m or so of royalties.
Heads I win, tails I don't lose much, if at all. Plus, recent board changes, and insider buying, also suggest the company is likely to behave in a shareholder-friendly manner with its big cash pile.