Instem has announced the acquisition, for up to $4.6m, of a US-based provider of software for safety assessments. Leadscope’s software provides computer models that predict toxicity of chemical compounds – the systems are so advanced that the FDA allows them to replace animal testing in certain limited situations. A strong fit with Instem’s existing safety assessment business and its KnowledgeScan offering, this deal appears a well-considered and useful extension to the group’s position.
Deal structure Instem has acquired Leadscope, a safety assessment software provider in Columbus, Ohio. The consideration is $3.35m initially, $0.75m deferred but not contingent, and $0.5m contingent on performance. This equates to around 2.3x sales and 11.5x EBITDA on a trailing twelve-month basis.
Leadscope The acquired business offers subscription-based access to advanced AI or machine-learning algorithms which can predict any potential safety issues for specific chemicals that are being considered as part of a drug development process. The platforms are so effective that the FDA has approved them to replace certain animal-based testing.
Potential for growth Currently, the FDA has approved just one of a possible two or three dozen use cases for this “in silico” testing…clearly, as the testing software improves, and as the FDA widens the applicability of this approach, there is dramatic scope for material revenue upside, all at very high margin and on a recurring-revenue basis.
Accretive deal; forecasts increased With the acquisition completing towards the end of FY 2019E, we expect a minimal contribution from Leadscope to current- year financials. For FY 2020E, we upgrade revenue, EBITDA and adjusted EPS by 5.2%, 6.5% and 8.1% respectively. FY 2021E, the same metrics increase by 5.2%, 6.4% and 7.8%.
Overall, we see Leadscope as an exceptionally good fit with Instem – the acquired business will benefit from Instem’s global sales muscle, and Instem will add a useful and high-end software offering to its already-fast-growing informatics business.