For over 40 years, Biomerica, Inc. (OTCQB:BMRA) has been involved in the development, manufacturing and marketing of medical diagnostics products for the early detection and monitoring of chronic diseases and medical conditions.
The company's product line encompasses various diseases and conditions, including tests for gastrointestinal (GI)/foodborne diseases, infectious diseases, diabetes, women's health, hormone levels and even some esoteric diseases. Its particular focus is on gastrointestinal/foodborne diseases and diabetes.
In late 2014, the company announced initiation of a development program for a new GI test, which was later identified as a test for irritable bowel syndrome (IBS). The market for IBS is significant, including over $10B related to diagnosis of the disease in the U.S. alone. IBS is difficult to diagnose and at least as difficult to treat, and BMRA believes its test can effectively add significant value in both areas.
Biomerica is a relatively tiny company, trading at a market capitalization of only $12 million and with annual revenue of approximately $5 million. As such, garnering just a small fraction of the IBS market could be significant for the company.
In July 2015, BMRA held a conference call, providing some details about its IBS test candidate. It has also brought on experts in the field of IBS to guide development strategy, including Dr. Doug Drossman, an expert in IBS who has authored several articles and publications on the disorder. Dr. Drossman is also the president of the Rome Foundation, a non-profit organization on the leading edge of GI disorder research and developer of the Rome III Questionnaire, which is a widely used clinical diagnostic for IBS. More recently, Dr. Charles Carter came onboard as a senior advisor.
While BMRA has yet to announce a formal strategy or timeline for development of its IBS candidate, we view the appointments of Drs. Drossman and Carter as a significant vote of confidence in the potential of the test.
And with its revenue continuing to grow, coupled with a solid balance sheet, we think BMRA should be on investors' screens.
Q3 Results: Revenue Slightly Lower Than Our Estimate, But Continues to Show Growth...
Biomerica reported financial results for its fiscal third quarter ending February 2016. Revenue came in moderately less than what we were looking for, gross margin was very narrow relative to recent history as well as our estimate, and operating expenses were just about on the nose with our number. The net result was operating loss coming in at $269k, well below our $63k (loss) estimate.
But despite the revenue miss from our estimate ($1.49M versus $1.36M), the top line has trended higher every quarter this fiscal year as compared to the last. Q3 revenue was up 5% from the same period in fiscal 2015, and through the first nine months of the year, revenue has grown 10%. And despite the relatively weak gross margin in Q3, profitability is also up (albeit slightly) from the prior year - its net loss improved from $610k to $555k in the first three quarters of each respective year.
And BMRA has made meaningful operational progress during fiscal 2016, most notably with its IBS test product candidate ("InFoods"), including further development activities, assemblage of an expert scientific advisory board to help guide strategy, and with intellectual property protection. So, while fiscal 2016 has not exactly been a blowout year relative to the financials, it is slightly improved in that regard relative to the previous year, and importantly, BMRA continues to move down the road with what could potentially and eventually be the company's most significant product to-date.
On a year-over-year basis, Europe continues to experience sliding sales - falling 8% in Q3 and 20% through the first nine months. But that territory was by far the best performing in 2015, making the comps particularly challenging. On a positive note as it relates to Europe, sales increased by 15% from Q2 (i.e., sequentially). But we continue to model a double-digit slide in European revenue for the full year. The reason for the continued weakness is not completely clear, although BMRA had previously noted that order timing may have been a contributor, which could be related to integration issues from the recent merger of the company's European distributor with another company. Falling revenue in Europe has had a disproportionate impact on total company revenue, given that revenue from the region accounted for 55% of the entire top line in 2015, which has fallen to 43% YTD. Had European revenue just remained flat from 2015, total revenue growth would have been 21% instead of the actual 10% through the first nine months. So, if Europe rebounds, that could have a significant positive impact on the company's financials. Management had previously mentioned that they hope to expand distribution to other countries in Europe, which could be one possible catalyst to making that happen.
Meanwhile, U.S. and Asian sales have fared much better. U.S. revenue increased 20% in Q3 and was just about flat over the first three quarters. We see this as encouraging, given that U.S. sales, which account for approximately 20% of total revenue, fell 17% in fiscal 2015 - with one recent issue cited as a certain chain store delayed its screening program using EZ Detect. Asia revenue, which accounts for 30%+ of total sales, fell 2% in Q3, but increased by almost 2.5x YTD - the latter includes the benefit of an easy comp in 1H 2016 due to the switch in distributors, which caused a sales disruption in the prior-year period.
On the operational front, BMRA is moving further towards the possibility of bringing its IBS test to market. In early calendar 2015, the company filed the first set of patents related to the product. Last month (March), BMRA announced that its international method and composition patent claims were reviewed by the International Search Authority (ISA), which found them to be novel and non-obvious (i.e., the claims are valid). Locking down the IP is an important initial step. Currently, 8 patents are pending.
BMRA also recently brought on a scientific advisory board to help further guide its strategy related to the pipeline candidate. The board includes Dr. Doug Drossman, an expert in IBS who has authored several articles and publications on the disorder. The company held a conference call in July 2015, where it released additional details about the test. Then, later in 2015, the company announced that it had initial discussions with FDA regarding the regulatory pathway and requisite supporting clinical studies. BMRA indicated last September that it expects (assuming FDA acceptance) to pursue the de novo pathway, and that the FDA has indicated that the risk profile of the test would likely not require a Class III (i.e., "high risk") device designation. The de novo pathway allows manufacturers of novel low-risk (Class I and II) products for which there is no predicate to avoid the much costlier and time-consuming PMA route. BMRA will need to apply to the FDA requesting the de novo route - the application will include information about the product, such as its intended use, evidence of safety and effectiveness, benefits, etc. The FDA has 120 days to make a determination. We expect to hear more about the plan for clinical studies and the regulatory pathway in the near future.
More compelling news came in January 2016, when BMRA announced that Charles Carter, PharmD, was appointed as a senior advisor. Clearly, the appointment of Dr. Carter was made to help guide the company on the development of its IBS product. Carter was Salix Pharmaceuticals' (NASDAQ:SLXP) director of Medical Affairs and was instrumental in getting that company's IBS-D (irritable bowel syndrome with diarrhea) candidate, Xifaxan, through FDA regulatory approval. Salix's product portfolio, which is mostly focused on gastrointestinal disorders, spans 10+ GI drugs, screening preps and other treatments. Xifaxan, which is also approved for over hepatic encephalopathy, was its largest-selling product when the company was acquired by Valeant Pharmaceuticals (NYSE: VRX) in April 2015. Valeant ponied up over $11B to acquire Salix, which represented an almost 44% equity premium. Valeant cited the strong market for GI products as an impetus for the acquisition.
So, while there are still only some details on exactly what BMRA's IBS product entails, we view the appointments of Drs. Drossman and Carter as additional early validation of what the potential of the product may hold. And clearly, a growing interest in GI products, as evidenced by Valeant's acquisition of Salix, is a promising sign for potential market demand.
In a (perhaps less than subtle) show of confidence in the future of InFoods and BMRA in general, earlier this month, the company press-released that all of its board members plan to make open-market purchases of BMRA stock up to $500k in aggregate over the next 12 months.
Q3 revenue of $1.4 million was up 5% yoy, up 17% sequentially and 8% lower than our $1.5 million estimate. U.S. sales beat our estimate by about 33%, while Asia and Europe came in lower by 31% and 12%, respectively.
OpEx were $614k, mostly in line with our $600k estimate and the $622k expensed in Q2. OpEx could increase considerably if and when BMRA pursues further development of the IBS test - we currently only model incidental expenses (i.e., no clinical trial expenses have yet to be modeled) related to the test, as it is still in the feasibility stage - although we will update our model accordingly, if and when appropriate. In July 2015, BMRA disclosed that its board of directors approved an agreement with an investment banker to raise up to $3M via the sale of restricted common stock. While not stated in the filing, this could potentially relate to initial funding of clinical studies in support of the IBS test development. We expect we'll hear more about the company's plans in this regard in the near future.
Meanwhile, gross margin (GM) came in relatively weak at 25.3%% - this compares to 32.7% in Q1 and 35.4% in Q2. BMRA cites product mix and higher-than-normal regulatory costs as the reason for dip in GM in Q3. But GM jumps around quite a bit from quarter to quarter. We model GM to widen with growth in revenue, which has the effect of diluting fixed costs. We also think GM will benefit if and when U.S. sales begin to show a more determined turnaround.
Q3 net loss and EPS were $135k and ($0.02), compared to our $63k loss and ($0.01) estimates. Net loss benefitted from $125k income tax benefit in the quarter as a result of a recent FASB accounting update.
The balance sheet remains solid. BMRA exited Q3 2016 with $859k in cash. Excluding changes in working capital, the company used $178k for operating activities in Q3. The balance sheet remains debt-free. Book value at the end of Q3 stood at $5.4 million, or approximately $0.71/share. We continue to believe that book value should put a floor on valuation of the company.
InFoods IBS Test Could Be a Big Winner for BMRA
BMRA has provided some limited details about its IBS product, including that it is a diagnostic for food allergens (i.e., diet) which may be responsible for onset or aggravation of IBS. Additional details include:
- It will identify certain trigger foods that may cause or exacerbate IBS symptoms.
- It will help physicians in guiding treatment protocol, including putting the patient on a specific dietary regimen. This is different from other IBS tests, which only focus on diagnosing the presence of the disease. BMRA's test would be the first to both help diagnose IBS and to help guide treatment decisions.
- The test will be available for use in both the clinical lab and physician office settings. Lab product is the first which the company will pursue (the regulatory hurdle is likely lower), and POC will follow.
- It would be reimbursed under existing CPT codes. As reimbursement is critical for maximizing early adoption, availability of payment under existing CPT codes is a significant benefit.
- 8 patents are currently pending. In March 2016, BMRA announced the International Search Authority reviewed its international method and composition patent claims and found them to be novel and non-obvious (i.e., the claims are valid).
- The FDA has indicated that the risk profile of the test would likely not require a Class III (i.e., "high risk") device designation. BMRA expects to apply for the de novo route, which allows manufacturers of novel low-risk (Class I and II) products for which there is no predicate to avoid the much costlier and time-consuming PMA route.
Market opportunity for the test
- The diagnostic cost of IBS in the U.S. is approximately $10.5B in annual direct costs and over $30B when including indirect costs.
- IBS afflicts as much as 20% of the U.S. population, 25% of Japan, and 22%+ each of China and the U.K.
- IBS is a top 10 reason for primary care doctor visits.
- It is difficult to diagnose and difficult to treat.
- Current diagnosis is more of ruling out other conditions than it is of a specific diagnosis for IBS.
- A new blood-based test, recently highlighted on CBS nightly news in a segment titled "New tests offer hope for millions of patients with IBS," has a false-negative rate of 56%. We think this highlights how elusive it has been to develop a reliable and effective IBS diagnostic. In addition, these new tests only aim to diagnose the disease, but do not guide treatment decisions like BMRA's test is expected to do.
We expect management will be providing updates, including more about the plan for clinical studies and the regulatory pathway. The company recently noted that it is working with the FDA on the design of clinical trial(s).
As BMRA trades at a market capitalization of just $12 million with very thin daily volume, the stock is inherently risky, as a position can be difficult to exit. That said, the company continues to grow revenues with its legacy portfolio, has a solid balance sheet, and has been in business for over forty years. Those factors should mitigate some risk. And there could be significant upside with the IBS diagnostic. For those reasons, we think investors with a risk appetite for micro-cap investments should put BMRA on their radar.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I work as a Consultant Analyst for Zacks Investment Research. The article is written by me and is 100% my opinion. I receive compensation from Zacks for writing equity research reports and providing valuation analysis on this company’s stock and expect to do so in the future. Zacks receives compensation from the company. Please see the Zacks Disclaimer for further information: http://scr.zacks.com/Disclaimer/default.aspx
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