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No. of Recommendations: 3
I don't think much has changed with BioSyent; it has faced the same problems last quarter (and the current quarter) as it has faced over the past few years. The difference is that these shortcomings affected results negatively the past few quarters.

1) Legacy business - the insecticide business had a strong 2017 and a weak 2018. There is no investment being made in this business at all; indeed, no investment or effort has been put into this business for more than six years at least.

It isn't worth very much although it provides some decent cash flow.

2) FeraMax sales in Canada continue to grow modestly. It's less susceptible to swings than Feramax International sales but there still noisy quarters due to inventory de-stocking or re-stocking actions by distributors.

3) FeraMax International has been the growth engine for the past few years. There is a strong business in the Middle East which is now facing some import regulation disruption. To me the question is not "Why now?" but rather "Why has it taken so long for something like this to happen?"

Hey, BioSyent is selling expensive iron deficiency pills in the freaking MIDDLE EAST.

The good news is that businesses in that neck of the woods are experts at dealing with disruptions, government red tape, and even violent conflicts.

4) Cysview is challenged but honestly if you were surprised that BioSyent downgraded Cysview then that's the real issue. Photocure's product has underperformed in many markets. It requires upgrades to machinery; it requires adding another step to prepping patients (which nurses hate); it requires additional reimbursement from insurance companies or government health care agencies.

Not the easiest sell into over-worked hospitals with stressed budgets. I believe management wrongly assumed that Canada's supposedly holistic approach to budgeting would see the advantages in Cysview. This may have been a naive assumption and in-hospital resistance was stronger than imagined.

5) As I see it BioSyent was once priced as having two moats: a legacy moat surrounding FeraMax and a reinvestment moat (putting new capital to work through in-licensing deals). This combination made for a high priced stock.

The legacy FeraMax moat has outperformed expectations. The re-investment moat hypothesis has disappointed terribly. Finding new deals at a reasonable price has been a problem for not only BioSyent but also Knight. The players in Canada who have made deals (Cipher, Pediapharm, Nuvo) have paid a significant price and have not seen their stock respond in a positive manner. "Winners Curse."

It is possible that the conditions that propelled Paladin to success no longer exist and will never exist again. Capitalism, after all, does not give certain companies or industries "Freebies" forever. Why should in-licensing firms in Canada earn outrageous returns without taking on the risk of product development? It's an open question, I think.

All the while cash has piled up, lowering the ROE at BioSyent. Management is not inclined to pay a dividend or buy back stocks at these prices; management would rather keep cash for an opportunity that may or may not come.

That being said, the multiple has compressed so the future being priced into the stock is not as rosy.

ET
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