Omrix Biopharmaceuticals IPO Analysis (OMRI)

Bill Simpson submits: Now that they've reported a strong first quarter and stock is up 40% from pricing, thought now might be a good time to post my pre-IPO Omrix Biopharmaceuticals (OMRI) analysis. This was originally published to member's section over a month ago. Yes, I own it as they slashed the range here heavily with a $10 pricing as OMRI was lumped in with the development stage biopharmas and overlooked. From my April 9th analysis:

Omrix Biopharmaceuticals, Inc. (OMRI) plans on offering 3.4 million shares at a range of $15-$17. UBS is lead managing the offering, CIBC is co-managing the deal. Post-offering OMRI will have 14.3 million shares outstanding for a market cap mid-range of $229 million. IPO proceeds will be utilized to partially finance construction of a 2nd manufacturing facility, expand product line, fund entry into Japan, to repay convertibles and for general corporate purposes. CEO Robert Taub will own 24% of OMRI post-offering, MPM BioVentures 22%.

From the S-1:

Omrix is a commercial-stage biopharmaceutical company that develops and markets innovative biological products. We utilize our proprietary protein purification technology and manufacturing know-how to develop biosurgical and passive immunotherapy products.

Two things differentiate OMRI from the usual development stage biopharmaceuticals. First OMRI is an operational stage biopharmaceutical. Yes, OMRI does have a pipeline of development stage candidates, however they've also products in the marketplace. Also for one of those products (Crosseal) they've a distribution and supply agreement with Ethicon, a Johnson & Johnson (NYSE:JNJ) company.

OMRI's products fall into 2 groups: biosurgical and passive immunotherapy. OMRI's biosurgical segment (40% of '05 revenues) focuses on the control of bleeding (hemostasis) during surgery. Passive immunotherapy (55% of '05 revenues) lines are designed as antibody rich products designed to combat immune deficiencies and infectious diseases.

All of OMRI's products are based on their proprietary protein purification technology. The technology contains both chemical and physical processes designed to purify proteins from human plasma or plasma fractions while maintaining their natural structure to preserve their full range of biological activities. Apparently the key to this process is the ability to isolate or remove proteins of interest from raw materials such as human plasma or plasma fractions. This technology is used in the following products/ candidates.

Biosurgical

Crosseal (US)/ Quixil (Europe)
- A liquid fibrin sealant used for hemostasis in surgery. Crosseal uses plasma proteins to form clots to prevent/ control blood flow during surgery. Ethicon (J&J) has been marketing Crosseal/ Quixil in the Europe since 2003 and has recently been approved for general surgical use there. In the US Crosseal is currently approved for use in liver transplants only. OMRI feels Crosseal/ Quixil is an improvement over existing liquid fibrin sealants because 1) it can be prepared for use in the operating room in one minute; 2) naturally occurring proteins allow it to form clots that have better adherence to tissues and; 3) can be refrigerated and does not contain animal proteins.

The market appears to concur as in 2004 Ethicon received an award for product innovation due to carrying OMRI's Crosseal/ Quixil product. Because Crosseal is not yet approved for general surgical use in the US, revenues here are still small. In 2005, OMRI recognized roughly $7 million from sales of Crosseal/ Quixil. OMRI has a very nice deal with Ethicon (J&J), as the exclusive marketer of Crosseal/ Quixil allowing OMRI to keep GSA expenses to a minimum for this product.

Crosseal II/ Quixil II
- Another collaboration with Johnson & Johnson via Ethicon. This version appears to be OMRI's attempt to gain general surgical approval in the US. Currently in 2 separate surgical phase III trials, OMRI believes 'II' can gain FDA general surgical approval in 2nd 1/2 of 2007. My feeling is the odds of approval of 'II' are quite high.

BHD
- Yet another collaboration with Ethicon, BHD stands for biological hemostatic dressing. BHD is the next generation of Crosseal and is designed to manage and rapidly control severe bleeding in surgery. BHD is currently in the preclinical stage.

Note that for Crosseal II/ BHD Ethicon is assisting in the clinical development costs.

All manufacturing of OMRI's products take place in Israel. OMRI currently possesses 84 worldwide patents with 30 more patents pending.

Passive Immunotherapy

VIG
- designed to treat smallpox vaccine-related complications. A small percentage of those given smallpox vaccines develop complications from the vaccine and VIG is than used. This far OMRI has sold VIG to 3 governments. By far the largest was a deal sealed with the United Kingdom in December of 2005 in which OMRI expects to receive $20 million in revenues by the end of 3rd Q 2006. This is especially noteworthy as OMRI booked total revenues for all products in 2005 of $27 million. The UK deal is a big one for OMRI, and is renewable at the discretion of the UK for one additional year.

HT-VIG - Essentially higher concentration VIG. Still in development.

IVIG - Thus far OMRI's product revenue leader, IVIG is an intravenous form of VIG designed to treat ongoing immune deficiency illnesses. In 2005, OMRI received $10 million in revenues from the sale of IVIG to the government of Israel.

HBIG - Hepatitis B immunoglobulin, used to prevent infection from Hep B in live transplants. Thus far all revenues for HBIG have been to the Israeli government.

WNIG
- West Nile immunoglobulin, in development to treat West Nile virus. OMRI has received 'orphan drug status' for WNIG and is currently conducting phase I/II trials.

Financials

Roughly $4 per share in cash minus debt post-offering.

While building a pipeline, OMRI has been receiving revenues from biosurgical product Crosseal/ Quixil and various immunotherapy products to treat hepatitis B and a potential bio-terrorism related outbreak of smallpox. Revenues are still rather small but growing. In 2003, OMRI booked $15 million in revenue, in '04 they increased top-line 33% to $20 million. For full year 2005 OMRI was able to increase revenues another 37% over 2004 to $27.5 million.

Gross margins have gained strength, from 4% in '03 to 14% in '04 to 24% in 2005.

Thanks to the distribution and marketing deal with Ethicon, operating expenses have been kept well under control for a young biopharmaceutical company. Operating expenses have gone from eating up 44% of revenue in 2003 to 32% in 2005.

OMRI has booked a loss in each year of operations thus far. In 2005, that loss amounted to roughly 15 cents per share.

OMRI is moving in the right direction: revenues are growing nicely, gross margins expanding, with operating expenses as a % of revenues contracting. With these trends and the $20 million UK contract for VIG I believe OMRI will actually turn a profit in 2006. Very difficult to know for certain how much a profit, but the continue revenue growth of Crosseal coupled with the UK deal for VIG should bring top-line revenues into the $40+ million area. I would expect gross margins to continue to improve, possibly hitting 30%+ in 2006. If those two events transpire, I would expect OMRI to earn $0.10-$0.15 per share in 2006. While not earth shattering, if things break right for OMRI that 10-15 cents could be a nice stepping stone to even more profits in 2007 and beyond.

Competition
Baxter (NYSE:BAX) is the only other FDA-approved fibrin sealant, although Crosseal is the only fibrin sealant in the world completely free of bovine/equine particles. For their passive immunotherapy products OMRI's VIG competes with products from Cangene and Dynport. OMRI is not aware of any direct competitors for the remainder of their passive immunotherapy portfolio.

Risks
Big risk here is Ethicon (J&J) pulling the plug on the collaboration. They are able to do so with just 6 months written notice. With 2+ more products in joint OMRI/ Ethicon development, I don't see this as a probability though. Other risk here is one or more candidates in the pipeline being denied by the FDA or The European Union. I think there is less than usual possibility of this occurring with OMRI as most of the pipeline is a version of approved products.

A few things to like here. Foremost is the Ethicon/ Johnson & Johnson relationship. While this deal means that OMRI does not receive 100% of gross sales of Crosseal, it does give them an experienced and proven distribution/marketing partner. It would seem Ethicon/ Johnson & Johnson are satisfied enough with this relationship that they've entered into development collaborations with OMRI for 2-3 other products. I like this partnership. The other thing I like here is the significant ($20 million) UK contract for VIG. The UK contracted for VIG to stockpile in case of a bio-terrorism related smallpox outbreak, it would be reasonable to anticipate more contracts for VIG with other governments. In fact OMRI estimates that the US/ UK will be in need of quite a bit more VIG over the next 2 years to stockpile in case of a bio-terrorism event.

OMRI also shares something in common with recent successful biopharmaceutical IPOs: they aren't banking on 1 or 2 drug candidates, instead they're banking on a specific process/technology which in theory opens the door for many other solutions and products down the line.

Conclusion
Speculative, but I like this deal. I expect OMRI to book a net gain in 2006, although difficult at this point to have a clear idea of how much of a gain. Also with the partnership with Johnson & Johnson, the sizable order from the UK and the pipeline, there appears to be a set-up here for a steady stream of good news for OMRI over the next 1-3 years. I wouldn't pay up much for this offering as these type of deals have tended to struggle on in-range pricings. However I do like this one, and would like it quite a bit if the range is cut -- a good possibility.

OMRI Performance Since IPO