[BIOT] Biotage: The Most Interesting Swedish Business You've Never Heard Of

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

Origins

If you want to understand Biotage, you need to understand two numbers: SEK 70 million and SEK 490 million. The first is what Biotage made in revenue in 2003, selling DNA sequencing equipment. The second is what they made in Q3 2024 alone. That's not growth - it's metamorphosis.

In 2003, facing tough competition in DNA sequencing, Biotage (then called Pyrosequencing) made a decision that would reshape the company: they spent SEK 408 million to buy Personal Chemistry, a maker of purification systems. Instead of competing with Illumina in the flashy world of genomics, they decided to sell very expensive filters to pharmaceutical companies.

It turned out to be brilliant. When pharmaceutical companies develop new drugs, they need to purify their compounds thousands of times. Each purification requires specific consumables - columns, filters, reagents. Biotage wasn't just selling lab equipment; they were selling recurring revenue.

The 2005 Argonaut Technologies acquisition doubled down on this strategy. Under Torben Jörgensen's leadership (2006-2020), Biotage transformed from a genomics moonshot into a consumables business with 72% recurring revenue. Their stock went from SEK 6.85 in 2006 to over SEK 140 by 2024.

The DNA sequencing company that once competed with Illumina now finds itself dominating pharmaceutical purification, with a new CEO (Frederic Vanderhaegen) taking over in September 2024 and KKR holding a 17% stake that might soon be up for sale. Not bad for a company that essentially sells very sophisticated filters.

Speaking of which, to understand what Biotage actually does today...

How The Money Works

Biotage isn't really a scientific equipment company - it's a subscription business disguised as one. Here's how it works:

First, they sell the systems - specialized scientific appliances that cost $10,000 to $100,000. But that's just the beginning. Every time a customer uses the system, they need specific columns, reagents, and other consumables. By 2024, these consumables represented 72% of revenue.

The genius part? Once a pharmaceutical company validates a method using Biotage's equipment, switching becomes nearly impossible. The FDA wants to see consistent processes in drug development. Changing suppliers means revalidating everything - months of work and hundreds of thousands in costs.

In 2023, Biotage doubled down on this model by spending SEK 2.4 billion to buy Astrea Bioseparations. While their traditional business focused on small molecule drugs (think aspirin), Astrea specializes in biologics (think antibodies and gene therapies). These newer drugs require even more sophisticated purification processes.

The numbers tell the story: 62% gross margins, selling to sophisticated buyers like Pfizer and Merck. Their revenue is almost perfectly split between Americas (40%), Europe (40%), and Asia (20%) - a map of where drug development happens globally.

In essence, Biotage is selling compliance, validated processes, and peace of mind. The equipment is just how they get in the door.

The Numbers That Actually Matter

Three numbers tell you everything about Biotage, and one number everyone gets wrong.

First, there's 72% - the portion of revenue that comes from consumables and service. That's not just high, it's climbing (from 59% in early 2023). Imagine if Netflix somehow convinced its customers to watch more streaming hours every quarter.

Second is 189.92 - their inventory days. Seems terrible until you realize it's strategic. During the supply chain chaos of 2020-2022, Biotage learned something valuable: pharmaceutical customers will pay a premium for certainty. So they became the scientific equivalent of a convenience store - always stocked, slightly expensive, and impossible to replace.

Third is SEK 2.76 million ($276,000) - revenue per employee. That's higher than Microsoft's. This isn't a manufacturing company; it's an intellectual property business wearing a lab coat.

And the number everyone gets wrong? The 50x P/E ratio. Bears scream "overvalued!" while missing the plot entirely. The real number to watch is their 62% gross margin, maintained while selling to the world's most sophisticated buyers. That's not just profitable - that's pricing power.

But perhaps the most telling number isn't on any financial statement: 351 patents. Each one represents a specific way of separating molecules, and each makes it harder for competitors to replicate what Biotage does. It's like they've patented 351 different ways to be annoying to compete with.

The Moat (if any)

Scientific protocols are like government forms - once they're approved, changing them is theoretically possible but practically insane. When a pharmaceutical company validates a method with the FDA using Biotage's equipment, switching to a competitor means revalidating everything. We're talking months of work, hundreds of thousands in costs, and the ever-present risk that something goes wrong.

But here's what makes Biotage's moat fascinating: They've turned regulatory compliance into a business model. Their competitors are stuck arguing about whose chromatography column is 2% more efficient, while Biotage has effectively become part of their customers' regulatory documentation.

The numbers tell the story:

- 62% gross margins selling to sophisticated buyers

- No customer over 5% of revenue (meaning hundreds of separate validations)

- 351 patents (not just on equipment, but on specific validation methods)

- 72% recurring revenue from consumables that are specified in FDA filings

Their main competitors - Waters Corporation (bigger but unfocused), Gilson (private, more general), and Teledyne ISCO (part of a conglomerate) - all make great equipment. But they're playing a different game. They're selling scientific instruments; Biotage is selling regulatory certainty.

The Astrea acquisition makes this strategy even clearer. Traditional drug companies (think aspirin) have dozens of suppliers they can work with. But biologics manufacturers (think gene therapy) have fewer options because the purification processes are so complex. By spending SEK 2.4 billion on Astrea, Biotage basically bought a toll booth on the highway to next-generation drugs.

Could someone replicate what Biotage does? Sure, but they'd have to convince hundreds of pharmaceutical companies to revalidate their FDA-approved processes just to save a few kronor on consumables.

That's not a traditional moat - it's better. Traditional moats keep competitors out. Biotage's moat keeps customers in.

The World vs. Biotage

There's something delightfully absurd about how global macro forces affect a Swedish company selling fancy filters to scientists. But here we are, and the story is fascinating.

Let's start with the biologics revolution. Remember how everyone got excited about mRNA vaccines during COVID? That was just the appetizer. The entire pharmaceutical industry is shifting from traditional small molecule drugs (think pills) to biologics (think vaccines and cell therapies). This isn't just a trend - it's an industry-wide migration. And biologics need something traditional drugs don't: constant, sophisticated purification.

This explains Biotage's SEK 2.4 billion Astrea acquisition. It wasn't just buying revenue - it was securing a strategic checkpoint in the biologics supply chain. Their biologics revenue is already 24% of total sales, up from essentially zero three years ago. The COVID era taught pharmaceutical companies something valuable: having reliable suppliers matters more than having cheap ones.

Then there's the PFAS crisis.

The PFAS crisis has quietly become Biotage's unexpected growth engine. These "forever chemicals" aren't just an environmental headline – they're reshaping the environmental testing industry. When the EPA lowered its health advisory levels for PFAS to parts per quadrillion in 2022, they essentially mandated Biotage's technology without naming it. Standard testing equipment simply can't detect such minute concentrations. What started as a side business in environmental analysis has evolved into a strategic hedge: every new PFAS regulation effectively expands Biotage's addressable market. The company's flash purification systems, originally designed for drug development, turn out to be perfectly suited for concentrating and analyzing these persistent pollutants. It's a classic case of preparation meeting opportunity – Biotage didn't set out to solve the PFAS crisis, but their technology positioned them to profit from it.

China presents the plot twist. In 2024, Biotage had to restructure their entire Asian operation because China decided it wanted domestic suppliers for scientific equipment. But here's the delicious irony: Chinese pharmaceutical companies still need Western-validated equipment to sell drugs to Europe and America. Biotage responded by shifting resources to Singapore and India, essentially turning China's nationalist procurement into a regional expansion opportunity.

The final piece? Currency markets. Biotage reports in Swedish kronor but has managed to split revenue almost perfectly between dollars (40%) and euros (40%). When the dollar is strong, their American business shines. When it's weak, Europe picks up the slack. It's like they accidentally built a currency hedge into their business model.

In the end, Biotage keeps benefiting from global forces that should hurt them. Supply chain anxiety? Customers value their huge inventory more. Stricter regulations? More demand for validated processes. Deglobalization? They're already local everywhere that matters.

It's not that Biotage is immune to global trends - it's that they've built a business model that gets stronger when the world gets more complicated. And lately, the world seems determined to keep getting more complicated.

Why The Smart Money Worries

Let's talk about the thing that actually keeps sophisticated Biotage investors up at night: What if they bet on the wrong kind of complexity?

The SEK 2.4 billion Astrea acquisition tells the story. Biotage essentially placed a massive bet that pharmaceutical manufacturing is moving from chemistry (small molecules) to biology (proteins and gene therapies). That's probably right in the long run - but "long run" is doing a lot of work in that sentence. Traditional small molecule drugs still represent about 75% of all drug development. It's like a streaming service spending billions on 4K content while most of their subscribers are still watching in HD. The future is clear, but the transition timeline - and who pays for it - is anything but.

This explains a number that should worry you more than their 50x P/E ratio: 189.92 days of inventory. That's how long their products sit around before being sold, up from 115.64 days in 2017. The company calls this "strategic inventory management." Maybe. Or maybe they're stockpiling because order patterns are becoming less predictable as customers straddle both chemical and biological drug development.

Then there's the China situation, which isn't just about market access. Chinese companies aren't trying to replicate Biotage's systems - they're going straight for the consumables business. Why bother competing on the razor when you can undercut on the blades? Their Q3 Asian restructuring wasn't just about "optimizing costs" - it was an admission that the consumables game is changing.

But the really clever bear case isn't about competition or inventory - it's about customer concentration by type. Biotage isn't overly dependent on any single customer (none over 5% of revenue), but they're increasingly dependent on pharmaceutical companies doing drug development. In a world of higher interest rates and lower biotech funding, that could be a problem. Their -1.4% organic growth in Q1 2024 might have been a warning sign, even if they recovered in Q2 and Q3.

The final worry? The shift to 72% recurring revenue might actually be making them more vulnerable, not less. As their consumables business grows, they're effectively concentrating their risk in the exact part of their business that's easiest for competitors to attack. You don't need to convince a customer to buy a new system; you just need to convince them your columns work just as well at a lower price.

Think of it this way: Biotage has built a perfect castle with modern utilities, sophisticated security, and reliable supplies. The bears aren't worried about someone storming the gates. They're worried about what happens when someone figures out how to turn off the water.

Why The Smart Money Buys

Let's talk about the bull case for Biotage that's so obvious that everyone misses it: They're not actually a scientific equipment company - they're a regulatory compliance company in disguise.

Here's what I mean: When a pharmaceutical company validates a method with the FDA using Biotage's equipment, they're not just buying columns and reagents - they're buying compliance. Every time they run an experiment, they need to prove they followed the exact same procedure that got approved. Guess what's the easiest way to do that? Keep using Biotage's products.

But here's where it gets interesting. That 72% recurring revenue figure, impressive as it is, merely hints at the underlying dynamic: Biotage's consumables revenue is actually growing faster than their systems revenue. In Q3 2024, consumables grew 12.4% organically while system sales were flat. That means their installed base isn't just stable - it's becoming more valuable over time.

Think about Netflix raising prices because subscribers are too lazy to cancel. Biotage's customers aren't lazy - they're legally required to keep using the products unless they want to revalidate their entire workflow with regulators.

Now, let's talk about the number that makes sophisticated investors salivate: Their SEK 1.15 billion in gross profit on SEK 1.86 billion in revenue in 2023. That 62% gross margin isn't just high - it's suspiciously stable. Over a decade where they grew revenue by 280%, their gross margin barely budged. You know what that tells you? They're not competing on price. At all.

Here's the contrarian take, that makes this really interesting. Everyone's worried about China developing competing products. But they're missing something crucial. The more China develops its own pharmaceutical industry, the more it needs Western compliance. When a Chinese pharmaceutical company wants to sell drugs to Europe or America, guess whose equipment they need to use to prove their processes meet Western standards?

The Astrea acquisition looks expensive until you realize what they actually bought: monopoly position in specific types of biologics purification. That toll booth, as it turns out, stands at the intersection of current pharmaceutical manufacturing and its future. The traffic may be light now, but the road crews are already at work.

Speaking of biologics, here's a number that matters: 24% of revenue now comes from biologics and advanced therapeutics, up from basically zero a few years ago. That's not just growth - that's optionality. If traditional pharma slows down, they've got biologics. If biologics slow down, they've got traditional pharma. If both slow down, they've got environmental testing (that PFAS thing isn't going away).

But perhaps the most interesting bull case is actually in their inventory management. Yes, they're carrying 189.92 days of inventory, which looks terrible until you realize something: In a world of deglobalization and supply chain anxiety, being the supplier who definitely has stock just became a competitive advantage. It's like they accidentally figured out how to monetize geopolitical anxiety.

The smart money isn't buying Biotage because they think it's cheap (it isn't) or because they think it'll grow fast (though it might). They're buying because this is one of those rare businesses that gets stronger as the world gets more complicated. More regulation? Better for Biotage. More supply chain issues? Better for Biotage. More complex drugs? Better for Biotage.

Think of it this way: Biotage isn't selling scientific equipment any more than American Express is selling pieces of plastic. They're selling permission - permission to keep your pharmaceutical processes running without having to explain yourself to regulators. And in a world that's getting more regulated, not less, that's a pretty good business to be in.

In the end, the bull case for Biotage isn't about what they're doing right - it's about what everyone else has to do wrong for them to fail. Their customers would have to decide that regulatory compliance isn't worth the premium. Their competitors would have to spend years and millions developing alternatives. And regulators would have to decide that maybe pharmaceutical companies don't need to be so careful about their processes after all.

What are the odds of all that happening? That's why the smart money buys.

What The Market Thinks (And Why It Might Be Wrong)

The stock market's view of Biotage can be understood through several key numbers, each telling part of the story:

Price Journey: Look at the chart from 2012 to 2021 - this was a remarkable run where investors who bought at SEK 5 could have sold at over SEK 200. But then something changed. In the past year alone, the stock has swung between SEK 122.2 and SEK 202.2 (the "52-week range" - think of it as the boundaries of what investors recently thought the company was worth).

Current Valuation: At today's price of SEK 160.8, investors are paying 48.9 times the company's earnings to own the stock (the P/E ratio). To put this in perspective: you're paying SEK 48.9 for every SEK 1 of profit the company makes. This is either expensive (if you see Biotage as a manufacturing company) or reasonable (if you view it as a high-margin consumables business).

Trading Patterns: An average of 99,107 shares change hands each day. More telling is that short interest - essentially bets that the stock will fall - increased 18.4% in December 2024. Some investors are clearly skeptical of the valuation.

The Key Tension: Biotage maintains 62% gross margins (meaning they keep 62 cents of every krona of sales after direct costs), which is remarkably high for a manufacturing company. Yet the market seems uncertain whether to value them as a premium manufacturer or a healthcare infrastructure business.

A potential catalyst looms: KKR, which owns 17% of the company through Gamma Biosciences, is considering selling their stake. Large shareholders selling can often pressure stock prices in the short term, but can also remove uncertainty once completed.

The Final Word

Every decade or so, a company comes along that makes you rethink how value is created. Biotage might be one of those companies - not because of what they make, but because of what they reveal about our world.

We typically think of innovation as simplification: faster computers, cleaner engines, smarter phones. But Biotage's rise suggests an uncomfortable truth: in highly regulated industries, the real money isn't in simplifying complexity - it's in making it manageable. They didn't set out to make drug development simpler; they just made its inherent complexity navigable. At a price.

The market's struggle with Biotage's valuation reflects a broader confusion about value in an increasingly regulated world. We know how to price better products. We know how to value better processes. But how do you value a company that thrives precisely because things aren't getting better - they're getting more complex?

That's the paradox at the heart of Biotage. In a world obsessed with disruption, they've built a billion-dollar business on the assumption that some things - like drug development protocols, regulatory compliance, and scientific validation - actually resist disruption. The more someone tries to disrupt these processes, the more valuable Biotage's stability becomes.

Perhaps that's why the market can't settle on a proper multiple. Our traditional valuation frameworks were built for a world where progress meant simplification. Biotage operates in a world where progress often means adding layers of complexity - and selling the maps to navigate them.

That's not just a business model. It's a thesis about how the world works.

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