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UK private life science tools company LGC (B3/B/B+) recently reported its annual earnings, underscoring the difficulties in adjusting to a post-Covid world without the tailwind of extra high-margin pandemic testing. The Astorg and Cinven-owned business has no near term maturities, with its loans maturing in 2027. But it will have to contend with a sharp rise in interest costs next year, as interest rate caps struck in 2021 roll off and expose it to current base rate levels.
LGC reported an adjusted LTM EBITDA of ÂŁ274m on a reported FX basis, down 8% YoY, mostly due to a decrease in Covid cases and testing. This level gives 6x total and 5.5x total net leverage, according to buyside sources.
It reported Q4 revenues of ÂŁ184m, down 8% YoY, on the continued dissipation of Covid-19 revenue tailwinds, with YTD revenues of ÂŁ740m only up 1.4%.
The underlying business, consisting of genomics and quality assurance and excluding Covid-related revenues, was down 7.8% in Q4, but up 11.6% LTM.
Genomics revenues of ÂŁ329m is 1.5% down YoY but up 21% LTM. Quality assurance revenues came in at ÂŁ411m LTM, which was 3.9% up YoY. LGC has also seen strong growth in oligos (synthesis & chemistry) and components for PCR / NGS workflows.
The company reported increased liabilities and borrowing, up 14.8% over the past year. This is likely due to currency effects, with the firm reporting in sterling but term loans denominated in euros and dollars.
The company’s main facilities, put in place in January 2020 to fund the Astorg and Cinven buyout, are due in 2027. It raised a further £496m-equivalent deal in 2021 to fund a dividend.
However, as outlined in the FY2022 annual report, the interest rate caps on both euro and dollar denominated loans will be rolling off in April 2024. The caps fix Euribor at 0% and Libor at 1.25%, so following the expiry of these caps, interest costs will shoot up.
Based on current Euribor and Libor rates, the hedges rolling off would almost double annual interest costs.
Operating expenses in the latest results were ÂŁ225m over the last year, which was 5.4% up YoY, reflecting targeted investment as well as the return of travel costs.
Another concern, flagged by both rating agencies, is a large PIK instrument outside the restricted group, totalling nearly $700m. This is non-cash pay, but it creates an additional incentive to keep upstreaming cash from the core business.
LGC’s cash position increased from £84.5m at the end of last year to £131m. However, the agencies also expect LGC to target acquisitions in the years ahead, with Fitch predicting spending of £300m over the next three years.
The Covid pandemic has also highlighted gaps in medical supply chains, which could get worse due to higher inflation and the impact of the Russia-Ukraine conflict on various industries globally. The rising cost of labour could also lead to higher costs for LGC.
The company, previously known as the Laboratory of the Government Chemist, is a leader in proficiency testing schemes, specialty genomics reagents, measurement tools and supply chain assurance.
Established in 1842, LGC has been owned by Bridgepoint, before being passed on to KKR in 2015. In April 2020, it was bought by private equity firms Cinven and Astorg, along with Abu Dhabi Investment Authority, a sovereign wealth fund.
According to Francois de Mitry, managing partner at Astorg, in the press release announcing Astorg’s acquisition of LGC, “ We have been actively monitoring developments in the life sciences tools market, with a particular focus on LGC, for over five years, and have been very impressed by LGC’s scientific capabilities and the resulting continuous organic growth.”
