A deep dive into how a small Swedish lab equipment maker transformed into a regulatory infrastructure play, and what it tells us about value creation in regulated markets
Interesting write up. Why do you think they have not raised prices to raise gross margin over time? Are they afraid of regulatory intervention in that case? Or that it will discourage drug developers from choosing their filters for new developments?
Also, just a note on writing style - I personally thought this was a bit too full of analogies for things that didn’t really need analogising. I also prefer when a write up gives a bit more of a balanced view, including where it could go wrong, rather than sounding like Leo DiCaprio selling me something on the phone in the Wolf of Wall Street. Finally, there was quite a lot of repetition of key figures and concepts, which I thought was mostly unnecessary.
Those are all just my subjective views so feel free to ignore them!
Based on the information I have, Biotage's decision not to aggressively raise prices appears to be a deliberate strategic choice rather than a response to external constraints.
Here's why:
1. They successfully maintain 60-63% gross margins and have "strength to defend those margins" (direct quote)
2. They can and do raise prices selectively (evidenced by Astrea contract renegotiations)
3. 76% of revenue is recurring, suggesting some pricing power
4. They actively invest in growth (8.3% of sales in R&D)
"Getting a lot more new customers at very attractive pricing and delivering margins"
- Andrew Kellett, CFO
In scientific instruments, customer switching costs tend to increase over time as methods become validated and embedded in workflows. By focusing on customer acquisition now rather than margin maximization, they're potentially building switching costs that could provide pricing power later. Which is a strategy I would agree with.
I'm not sure those 4 points directly explain why they wouldn't raise prices - they seem just to be tangentially related facts to me. I think the last paragraph probably hits the nail on the head - it's to avoid deterring new customers, rather than because existing customers would leave.
Wondering also if there are any regulatory risks with regards to pricing here?
Exactly, it seems like a conscious trade-off between short-term margin optimization and long-term value creation.
I don't have more details to share on regulation, but I cannot think a good reason why filtering consumables would have pricing regulation. Since anyone can make them, in theory at least, pricing should be not regulated.
From everything I have read so far, regulation exists around manufacturing standards.
Do you have any reasons to believe regulatory risks exist on pricing specifically?
Not really. It's obviously a business that relies heavily on regulation locking customers in to allow them to earn the excellent returns on capital they do, so I thought it's possible there would also be some regulation or body that says "okay but you can't charge INSANE prices". It's not an industry I know much about, so if you weren't aware of anything, there probably isn't anything. (If that was a risk it would definitely be mentioned in the risk factors on their annual report)
One unorthodox way to dive deeper would be to talk to someone that uses them.
( e.g. suggestion : Reddit -> search for "Biotage" -> read comments -> send message )
As part of my research I spotted some comments on Biotage's columns and in general they are considered good quality. That tells me that they also sell a product that customers appreciate.
Yep, love a good bit of scuttlebutt. Employees, suppliers, competitors too.
Would be interested to know how you're thinking about growth as it stands - obviously, to buy something at 50x earnings you've got to believe those earnings are going to grow very substantially. What sort of clip do you think they can achieve over the next 5 or 10 years?
Interesting write up. Why do you think they have not raised prices to raise gross margin over time? Are they afraid of regulatory intervention in that case? Or that it will discourage drug developers from choosing their filters for new developments?
Also, just a note on writing style - I personally thought this was a bit too full of analogies for things that didn’t really need analogising. I also prefer when a write up gives a bit more of a balanced view, including where it could go wrong, rather than sounding like Leo DiCaprio selling me something on the phone in the Wolf of Wall Street. Finally, there was quite a lot of repetition of key figures and concepts, which I thought was mostly unnecessary.
Those are all just my subjective views so feel free to ignore them!
Based on the information I have, Biotage's decision not to aggressively raise prices appears to be a deliberate strategic choice rather than a response to external constraints.
Here's why:
1. They successfully maintain 60-63% gross margins and have "strength to defend those margins" (direct quote)
2. They can and do raise prices selectively (evidenced by Astrea contract renegotiations)
3. 76% of revenue is recurring, suggesting some pricing power
4. They actively invest in growth (8.3% of sales in R&D)
"Getting a lot more new customers at very attractive pricing and delivering margins"
- Andrew Kellett, CFO
In scientific instruments, customer switching costs tend to increase over time as methods become validated and embedded in workflows. By focusing on customer acquisition now rather than margin maximization, they're potentially building switching costs that could provide pricing power later. Which is a strategy I would agree with.
And in combination with latest developments,
https://substack.com/@silbadeepdives/note/c-86032669
for me this is a very interesting company to look at.
I'm not sure those 4 points directly explain why they wouldn't raise prices - they seem just to be tangentially related facts to me. I think the last paragraph probably hits the nail on the head - it's to avoid deterring new customers, rather than because existing customers would leave.
Wondering also if there are any regulatory risks with regards to pricing here?
Fair enough.
Exactly, it seems like a conscious trade-off between short-term margin optimization and long-term value creation.
I don't have more details to share on regulation, but I cannot think a good reason why filtering consumables would have pricing regulation. Since anyone can make them, in theory at least, pricing should be not regulated.
From everything I have read so far, regulation exists around manufacturing standards.
Do you have any reasons to believe regulatory risks exist on pricing specifically?
Not really. It's obviously a business that relies heavily on regulation locking customers in to allow them to earn the excellent returns on capital they do, so I thought it's possible there would also be some regulation or body that says "okay but you can't charge INSANE prices". It's not an industry I know much about, so if you weren't aware of anything, there probably isn't anything. (If that was a risk it would definitely be mentioned in the risk factors on their annual report)
One unorthodox way to dive deeper would be to talk to someone that uses them.
( e.g. suggestion : Reddit -> search for "Biotage" -> read comments -> send message )
As part of my research I spotted some comments on Biotage's columns and in general they are considered good quality. That tells me that they also sell a product that customers appreciate.
Yep, love a good bit of scuttlebutt. Employees, suppliers, competitors too.
Would be interested to know how you're thinking about growth as it stands - obviously, to buy something at 50x earnings you've got to believe those earnings are going to grow very substantially. What sort of clip do you think they can achieve over the next 5 or 10 years?