Investments in the biotechnology space typically differ greatly from the brick and mortar operations an investor might normally see in another industry realm. After all, such companies often deal with novel technologies that require vast amounts of time and money for research and development. Yet as these technologies are commercialized, they also tend to enjoy extended periods of profitability having developed a unique edge in a niche space.
As these companies often go public prior to developing consistent income streams, value is best derived out of the prospect of future earnings. For this reason, stock momentum is usually determined on the basis of progressive developments that dictate the outlook of the company. The following three companies have all found themselves in unique circumstances that suggest their progress remains promising.
Pacific Biosciences of California, Inc. (PACB)
As a developer and manufacturer of integrated platforms for genetic analysis, Pacific Biosciences is on the cutting edge of research technology. The company competes against the likes of Illumina Inc (ILMN) and Life Technologies Corp (LIFE). With its main sequencing platform product, the PacBio RS, customers of Pacific Biosciences are able to incorporate single molecule, real time analysis. They are also able to perform longer readlengths which is a unique aspect of the system. As noted in an article published by UCSD found here, the University believes that such a feature "will allow insights into biology that are not possible with existing technologies." As sequencing organisms becomes more complicated and detailed, the PacBio RS provides one of the leading solutions when it comes to capabilities. Longer readlengths allow a more comprehensive view of the genome and sequencing results can be reduced to less than a day.
With a market capitalization of $92 million, Pacific Biosciences supplies genome centers, agricultural companies, government offices, and academic institutions with platforms that provide the unique detection of biological processes. The company has performed very poorly in recent years as it unveiled the PacBio RS but struck a rather upbeat note in its latest quarterly conference call found here. Having finally worked out its primary product's bugs and increased its backlog orders, management cites that the company's clients are beginning to turn to the PacBio RS in light of its advantages in a very niche market. The backing of academia and the renewed praise from clientele suggest that the company has begun to turn around after fixing its prior issues.
What makes all of this a little more interesting is a recent filing submitted by the company. As listed in the filed Form 8-K found here, the CEO along with the CFO both agreed to a pay reduction down to a base salary of $1. In a most atypical commitment to the company, these officers apparently express their confidence in the company's future by dropping their own pay. In my previous article found here, I noted that the company's CEO had also been conducting numerous insider purchases. It would appear as if both of these actions strongly express the confidence of upper management in the company's product line. It takes a very bold person to reduce pay and wager one's compensation on the back of stock performance. The recent insider purchases by the CEO suggest a strong outlook that investors should be sure to take note.
Opko Health (OPK)
Opko Health is currently one of the more heavily shorted companies trading with 23.20% of the float shares being listed as short as of November 30, 2012. The $1.39 billion pharmaceutical and diagnostics company is rapidly burning through its cash and has yet to be profitable. Yet what turns this negative implication upside down is the fact that the CEO, Dr. Phillip Frost, has very steadily been buying large tracts of shares in the company for months on end.
As one of the richest men in America with a net worth of $2.4 billion, Dr Frost's extensive purchasing power alone lines the company up for a possible short squeeze. He currently owns nearly half of the 298 million shares outstanding. In another interesting dynamic, Dr. Frost currently serves as the Chairman of the Board of Directors for Teva Pharmaceuticals (TEVA). He made his fortune when Teva acquired his company Ivax Corp. in 2006. It remains a possibility that Opko could be acquired in a similar fashion.
Yet apart from this, the company itself has a very impressive portfolio of technologies coming to market. As a demonstration of just one of its many products, fellow contributor Josh Ford notes here that Opko's promising diagnostic tool named 4KScore has the ability to generate over $1.8 billion annually. The next generation prostate cancer test could play a pivotal role in reducing unnecessary biopsies by 50%. 4KScore was recently launched in Europe, and investors can expect the product to ramp up globally in 2013.
With an addressable market potential that exceeds all of the previously mentioned companies combined, leading renewable oils and bioproducts company Solazyme appears well positioned for an extensive growth period. Yet the company's stock has fared poorly in light of distant profitability, distrust over the new technology, and a general misunderstanding of the company's capabilities. Despite having met all of its stated goals since its IPO in 2011, the company now trades at 52% discount to its IPO price of $18.
However, Solazyme recently announced that its heterotrophic algae fermentation process has achieved linear scale-up in 500,000-liter tanks. This significant accomplishment marks the breaking down of a previous "ferment wall" when it comes to scaling fermentation-based conversion technologies.
This success also reaches a meaningful level at which commercial viability for lower margin products (such as fuel) becomes an attractive proposition. But having said this, investors should not expect these lower margin markets to be Solazyme's bread and butter for some time. The company is committed to pursuing profitable high-margin markets found in renewable alternatives to chemicals, nutrition, and personal care products as it seeks to bring online additional manufacturing capacity.
In a practical way, the recent news carries a more immediate impact for this industry leader. Having demonstrated its large scale viability, the company is capable of introducing additional partnerships which could serve as catalysts for investors. Solazyme has already pulled in large agribusiness upstream partners such as Bunge (BG) and Archer Daniel Midlands (ADM). It's also entered into an upstream joint venture with private starch leader Roquette Freres.
Yet there are a number of companies that are theorized to be sitting on the sidelines as discussed in the company's latest conference call found here. The belief is that in light of the novel technology, these companies have been holding back their willingness to partner with Solazyme until they had proof that the company was able to break the ferment wall to truly be scalable. Such proof was originally expected to be seen in the testing of the fermentation facility now under construction in Moema, Brazil. That plant isn't expected to be finished until late 2013, and yet such proof has now been demonstrated at the ADM facility.
What makes partnerships of considerable interest for Solazyme is the needed resources they bring into the equation. After all, apart from its cosmetic line Solazyme as a company is inherently focused on the technology platform. The company has been leveraging partners for their capital, feedstock inputs, distribution networks, and general market know-how. Its for this reason that every new partnership expands the capabilities of Solazyme and the ability for the company to deliver future earnings for its investors.