- Emergent BioSolutions sports a trailing P/E of 30, yet analysts see 46% EPS growth this year.
- Medicare and Medicaid issues for Luminex are temporary and not company specific.
- Biotech behemoths are now expressing interest in Pressure BioSciences' new HT design.
(Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
The biotechnology sector arguably had its finest year to date in 2013, surpassing the S&P 500 by 36%. With all the excitement and growth surrounding the sector, it's easy for investors to overreact to poor financial results or to overlook smaller companies in the space and instead favor the businesses with more noticeable (i.e. more talked about) momentum. That said, here are three biotech plays I believe are being underrated in 2014:
Emergent BioSolutions, Inc. (NYSE:EBS) - NYSE
Emergent offers specialized products to healthcare providers and governments to address medical needs and expanding health threats. Emergent had quite a nice year in 2013 with revenues coming in at $312.7 million (compared to $281.9 million in 2012), while net income on a GAAP basis came in at $31.1 million (compared to $23.5 million in 2012). And per Emergent's management team, the company's balance sheet also looks to be in order, with little debt and accounts receivable of around $240 million.
Their predictions for 2014 especially caught my eye, as Emergent is targeting between $415 million to $445 million in top line revenue and net income between $30 million and $40 million. EBS trended upwards throughout 2013, reaching a high of $22.99 at the end of December and recently climbing up to $26.71
With analysts expecting a 46% rise in EPS this year from .80 to $1.17 while the stock sports a trailing P/E of only 30, investors should look into jumping aboard EBS as the company has several key factors driving its growth, namely its Bio-Defense Division (which is directed to government-sponsored development) and its serums for dealing with bio and chemical warfare. To give you an idea of the amount of money bio-defense calls for, The National Center for Biotechnology Information reports that the FY2013 Federal Budget allocated for bio-defense was $5.53 billion, which includes monies for basic research for vaccines and advanced research for detection. In February, Congress announced a $1.1 trillion spending bill that raises the Center for Disease Control and Prevention's budget to $6.9 billion, or $567 million more than it got last year-with $255 million going toward bio-defense efforts.
With this backdrop in mind, let's take a look at some encouraging, recent news items regarding Emergent's Bio-Defense Division. Recently, the company completed a $250 million convertible senior notes offering, wherein Emergent plans to use a majority of the net proceeds to finance its December 2013 acquisition of Cangene Corporation. Through this deal, Emergent has acquired several bio-defense products, including Bat (botulinum neurotoxin serotypes A, B, C, D, E, F or G), Vigiv (complications due to smallpox vaccination including eczema vaccinatum, progressive vaccinia, severe generalized vaccinia and vaccinia infections), Episil (pain) and Aigiv (toxemia associated with symptomatic inhalational anthrax). In FY 2013, Cangene realized sales of approximately $50 million from its bio-defense segment and ultimately, Emergent projects that the Cangene acquisition will provide $90 to $100 million to Emergent's top line in 2014.
I'm not quite sure what caused the recent sell-off in EBS shares. Maybe Philip Fischer was right, "The stock market is filled with individuals who know the price of everything, but the value of nothing." Emergent had a solid year in 2013 and its forecasts look even better for 2014. The acquisition of Cangene should improve Emergent's sales going forward, while also adding diversity to Emergent's bio-defense portfolio. All the while, the government is still spending money on bio-defense. Given these developments, now looks like an opportune time to invest in EBS.
Luminex Corporation (NASDAQ:LMNX) - NasdaqGS
Luminex develops, manufactures and markets novel biological testing technologies with applications in the diagnostic and life science industries. Looking at the company's 5-year chart, one might consider LMNX dead money. The company's most recent quarterly results (Q3 2013) seemingly offered little encouragement either. When compared to the same period last year, Luminex's systems and royalty revenues shrank, while its consumable and assay sales remained basically flat. Additionally, one of Luminex's specialty lab customers - Natural Molecular Testing Corporation - filed for Chapter 11 bankruptcy late in October 2013. Despite these red flags, there are reasons to be optimistic about the company's outlook in 2014 and beyond.
First we must consider the environment surrounding Luminex's recent financial results. The Centers for Medicare and Medicaid Services' (CMS) reforms regarding molecular diagnostic-related reimbursement have been negatively impacting the entire industry. These changes led to Luminex delivering a late order to one of its biggest assay customers at the end of Q3 2013. The company believes that these reimbursement issues are temporary however, and will be resolved once new reimbursement rates are set. If Luminex is indeed correct in its supposition here, LMNX shareholders could see substantial improvement in the company's results down the road thanks to Luminex's strong pipeline.
Foremost is Project Aries, a product slated to come out sometime in 2014 that Luminex believes will set a new standard in sample-to-answer testing. Essentially, Project Aries is a cartridge-based, sample-to-answer molecular diagnostics platform that also allows users to create laboratory-developed tests utilizing their own analyte-specific reagents or ones sold by Luminex. With the launch of Project Aries, Luminex will be the only company that presents both multiplexed and real-time, sample-to-answer menu of assays. Moreover, Project Aries can be combined with Luminex's xTAG multiplex panels, which enable simple optimization, development and expansion of molecular diagnostic assays. All in all, Project Aries and its in vitro diagnostic menu is a huge factor to think about, as the platform will boost Luminex's offerings to present customers as well as open up new market opportunities.
There are other substantial, positive indicators to consider when projecting Luminex's trajectory in 2014. One is the company's solid cash position. As of Q3 2013, Luminex had cash and cash equivalents of $57.2 million against long-term debt of $0.8 million. Another is Luminex's products target several high growth areas. Take for instance the company's xTAG Gastrointestinal Pathogen Panel, which is the first test that can detect-from a single stool sample-eleven viral, bacterial and parasitic causes of infectious gastroenteritis. According to UBS analyst, Daniel Arias, the worldwide market for this product is $150m, with $75-$100m of this demand coming from the U.S. alone. Lastly, the company still has significant relationships with Merck (MRK) and Abbott's (ABT) Molecular division.
So despite the unfavorable environment caused by reimbursement reforms, this is still a biotech company that has a wad of cash on hand, a huge product launch upcoming, partnerships with Abbott's Molecular division and Merck ongoing and products targeting high growth areas. Moreover, despite a down 2013, Luminex's financial performance the last five years has been quite good, as revenues have gone up 20+%, gross profit has improved 25+% and operating profits have risen 200+%. In view of all this, LMNX, which can be had at just over $18.00 a share today, could prove to be a savvy pickup for investors willing to bet that the recent reimbursement reforms have been the main root of LMNX's current problems and not so much the company's fundamentals.
Pressure BioSciences, Inc. (OTCQB:PBIO) - OTC
Pressure BioSciences is focused on the development, marketing and sale of its proprietary laboratory instrumentation-Pressure Cycling Technology ("PCT")-and related consumables. PCT utilizes cycles of hydrostatic pressure between ambient and ultra-high levels to control bio-molecular interactions. More generally speaking, PCT is a patented, enabling technology platform with multiple applications within the estimated $6 billion life sciences sample preparation market. PCT has proven advantages over competitors in the sample prep market as several studies have shown PCT to be faster, more versatile, more efficient with smaller samples and better at preventing cross contamination.
Pressure Biosciences started as the wildly successful Boston Biomedica, Inc. (BBI) in its early decades, including its IPO in 1996. The sale of other divisions of BBI (that ultimately achieved a $1B market cap) provided $40M of funding for BBI renamed as Pressure Biosciences to invest in development of its exciting new in-licensed pressure cycling technology. The company's R&D successes translated into an impressive slew of market-changing new sample prep capabilities and 100+ published application papers from a pantheon of key opinion leaders.
As the company approached its planned commercial organization and sales expansion phase, the 2008-2009 downturn intervened and kicked off a progression of capital access constraints. PBIO weathered that stormy pinch with a down-listing to OTC and a series of above-market smaller capital raises. With sales performance now ramping-up strongly, recent fund-raising repositioning the company's finances and two important new product launches rolling out, PBIO appears to have nicely turned the corner back onto course to achieve its growth vision and potential. I anticipate that the company may pursue an up-listing from OTC before long.
If you're wondering why Pressure BioSciences is languishing in the OTC market, we have to go back a couple of years ago when the company was once an up-and-coming biotech listed on NASDAQ.
Since Pressure BioSciences' inception, the company has had a heck of a time scaling its technology, mainly because PCT required individual test tubes and handling samples manually. In view of that, it is understandable why many labs, despite PCT's advantages, have been more inclined to go with high throughput (NYSE:HT) multi-well plates that are automated and can be left unattended. This has been the biggest drawback with PCT until now. Pressure BioSciences recently announced a breakthrough technology for use in its pressure cycling platform that uses an HT system.
With this new HT design, Pressure BioSciences' unique technology will now be compatible with HT sample prep and analytical system formats currently present in thousands of research labs across the globe. Biotech behemoths like Amgen (AMGN) and Merck (NYSE:MRK) and notable schools such as UCLA, Harvard and Stanford, who are already customers of PBIO, are also expressing interest in Pressure BioSciences' latest HT innovation. If that's not enough to get you excited about this little biotech, check out some of the company's other recent corporate developments and latest financial results.
This past December, Pressure BioSciences closed the first tranche ($1 million) of a $1.5 million Convertible Preferred Stock and Common Warrant transaction, via an exemption to Regulation D PIPE, followed by a second $1.2 million tranche on January 28th. Earlier in November, the company reported strong Q3 2013 financial results, including record quarterly total revenue, record quarterly products and services revenue, record quarterly consumable sales and record quarterly Shredder Systems sales. Pressure BioSciences' Shredder Systems are low shear mechanical devices for gentle, rapid and safe disruption of tissues and organisms that can provide effective extraction of DNA, RNA, proteins, mitochondria, lipids and small molecules from tissues and organisms. Notably, these Systems can boost extraction efficiency when combined with PCT and can even be sold as "stand-alone" sample prep devices to the many thousands of labs that do not need the benefits of PCY, but need better sample prep than they currently get.
Lets go back even further to last August when Pressure BioSciences reported its financial results for Q2 2013. Total revenue increased 10% over Q2 2012, consumables sales increased 17% over Q2 2012 and gross profit margin on products increased to 57%. Earlier that month, scientists from UCLA presented data at an international scientific symposium on an advanced pressure-based instrument system for biomarker discovery and rational drug design that could offer new insights into protein structure and function. These data are key because they uphold Pressure BioSciences' decision to focus its marketing and sales efforts the area of spectroscopy, which is the study of the interaction between matter and radiated energy.
With Q over Q improvements, breakthrough technology on the way, blue chip companies expressing interest and a tight share structure (less than 13 million outstanding shares), it amazes me that PBIO has not garnered more attention recently. I understand that its tough for some of us to take an OTC stock seriously, but there are so many positive indicators here that I would be amiss to not include Pressure BioSciences in this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: (Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)