Source: George S. Mack of The Life Sciences Report (4/4/13)
When it comes to picking biotech stocks, does a buyside perspective matter more than a sellside? Not according to Zacks Investment Research Analyst Grant Zeng, who has straddled the divide. What really matters is research of uncompromised quality. In this interview with The Life Sciences Report, Zeng offers a primer on what he looks for in a biotech investment, and names companies with the potential for big returns.
The Life Sciences Report: Grant, you've been on both the buyside and the sellside. Today you're an analyst at Zacks, a noninvestment bank firm that does not have to solicit business from the companies on which it performs due diligence and research. Is there an advantage for investors in this research model?
Grant Zeng: Zacks Investment Research is an independent equity research firm. We don't provide investment banking and other related services to companies we cover. Investors can benefit from this kind of research model because we conduct independent due diligence and research.
But just because research is independent doesn't mean it's good. We conduct significant due diligence to maintain the highest quality small-cap universe. Events that may trigger publishing a research report or note include earnings, U.S. Securities and Exchange Commission filings and material events.
TLSR: Is your perspective altered by your experience as an equity analyst on the buyside, where you know your decisions will affect buy-and-sell decisions involving large-dollar and yuan amounts? Has your experience on the buyside been helpful in your process as an analyst?
GZ: This is a good question. At first glance, most people only see the difference between sellside analysts and buyside analysts. A buyside analyst performs research and analysis for his or her own company, and a sellside analyst performs research and analysis for outside investors.
"Just because research is independent doesn't mean it's good."
But, in essence, both buyside and sellside analysts are the same. What I mean is that, as an analyst, either buyside or sellside, the most important part of the job is to conduct your own research and analysis, and come up with your own conclusion-or valuation, in the case of company research. Whether you are responsible for your own company or outside investors, the quality of the research should not be compromised, although the format and the research method may be different for a sellside analyst versus a buyside analyst (and in most cases, they are).
My experience as a buyside analyst has been helpful in my process as an independent sellside analyst. Having worked for both buyside and sellside helps me look at research from different perspectives. Both experiences are great.
TLSR: You have a lot of micro- and small-cap companies, mostly under $200 million ($200M) in market cap, in your coverage. Since your firm does not make markets in stocks, and does not advise companies or provide investment banking services for them, how do you choose which names to follow? My impression is that you and your firm have a lot of latitude as to which stocks you chose. Is that true?
GZ: Yes. This actually boils down to our mission. Zacks Small-Cap Research coverage specifically focuses on small and micro-cap companies that are underfollowed or undervalued by Wall Street. As an analyst, I seek to identify and report on these companies, bringing to investors unique opportunities to gain insight on small-cap investments that are well positioned for future growth. My goal is to produce high-quality institutional-caliber research for the small-cap portfolio.
As an analyst at Zacks, I have a lot of latitude to choose what I think are underfollowed or undervalued biotech companies.
TLSR: How do you choose a new company to follow? Do you look for companies with high visibility to upcoming catalysts?
GZ: When I choose to cover a biotech company, I usually look at three things. First, I look at whether the company has a platform technology. If the company has a platform technology, it is easy to build a diversified pipeline. Second, I look at whether the company has that diversified pipeline. Usually platform and pipeline are highly related. Third, I look at balance sheet of the company. Financing is always a problem for small, development-stage biotechs.
Near-term catalysts are also important for biotech companies.
TLSR: I understand the Zacks philosophy of investing in small companies for the potential huge gain, well beyond 100%. Given that so many stocks in this class are driven by binary events, how do you mitigate the risk, especially given the fact that they are lower-liquidity shares? Let me ask another way: Can you mitigate the risk?
GZ: When it comes to investing in the biotech industry, especially in small-cap biotech companies, I remind investors to control or mitigate risks. The best way to mitigate risks is through diversification.
There are a few diversification possibilities for biotech investors. For example, you can invest in companies in different stages of development. You can also invest in different subgroups of biotech companies, such as therapeutics, diagnostics and medical devices. Even if you only invest in therapeutic biotech companies, you can choose different therapeutic areas, such as cardiovascular, cancer, diabetes, etc. Through diversification, risks will be mitigated greatly.
TLSR: Grant, could you discuss some of your ideas for investors?
GZ: Galena Biopharma Inc. (GALE:NASDAQ) is a biopharmaceutical company focused on the research and development of innovative immunotherapy for cancers. The company's lead cancer vaccine candidate is NeuVax (nelipepimut-S; E75 peptide plus granulocyte-macrophage colony-stimulating factor [GM-CSF]), which is in a phase 3 clinical trial in HER2 1+ and 2+ breast cancer patients in the adjuvant setting to prevent recurrence. The PRESENT study is a randomized, multicenter, multinational clinical trial that will enroll approximately 700 breast cancer patients. The trial design has been updated to include current National Comprehensive Cancer Network guidelines and recently received special protocol assessment concurrence from the U.S. Food and Drug Administration (FDA).
The PRESENT trial is based on the phase 1/2 SN-33 HER2-negative booster results. A total of 45 HER2-negative patients in the SN-33 trial received boosters including NeuVax (n=18) and a control (n=27). At landmarks of 24, 36 and 60 months, the NeuVax group achieved statistically significant disease-free survival (NYSE:DFS) of 100%, 100% and 94.4%, respectively, versus 77.8%, 77.8% and 74.1% for control group.
The NeuVax phase 3 trial will be conducted in patients who are node-positive, have an HLA (human leukocyte antigen) status of A2/A3+, and have low or intermediate HER2 expression (sometimes referred to as HER2 negative). These patients are not eligible to receive Herceptin therapy, which is currently approved only for patients with high HER2, or 3+, expression.
Recently, Galena acquired U.S. rights to Abstral from Orexo AB. Abstral is a novel, rapidly disintegrating, sublingual (under the tongue), fast-acting formulation of fentanyl, a well-established opioid, and is indicated for the management of breakthrough cancer pain.
"Having worked for both buyside and sellside helps me look at research from different perspectives."
We think the Abstral acquisition is an important milestone in the development and growth course of the company. This acquisition has transformed Galena from a development biotech company into a commercial organization. Abstral diversifies and strengthens the pipeline, providing Galena with an FDA-approved product that will become a cornerstone of its commercial strategy and bring revenues in 2014. Those revenues will support the development of the company's pipeline.
The breakthrough pain market in the U.S. reached $400M in 2012 and is expected to grow at 3%. Market research has documented a substantial patient need for improved treatment of breakthrough cancer pain across oncology centers in the United States.
Abstral will be launched in Q4/13. Galena has identified its commercialization management team and expects to bring key personnel onboard shortly. The launch of Abstral will build relationships with future prescribers of NeuVax. Medical oncologists who manage tumor- and treatment-related pain predominantly prescribe TIRFs (transmucosal immediate-release fentanyl) for advanced breast cancer and other solid tumor patients, who represent the majority of those receiving prescriptions.
The launch of Abstral will accelerate revenue initiation to 2013, reaching cash-flow positive in 18-24 months, and reduce overall company cash burn through the launch of NeuVax. The acquisition of Abstral diversifies and deepens the breadth, depth and pace of the company pipeline, moving Galena toward becoming a mid-cap oncology company, not just a cancer immunotherapy company.
TLSR: What is the next milestone?
GZ: We are looking for two major milestones in the next 12 months. The first is the launch of Abstral in Q4/13, and the Q4/13 and Q1/14 sales numbers. Another important milestone is the update on the phase 3 trial for NeuVax. The interim analysis could happen in 2014.
TLSR: If NeuVax becomes a reality as a routine follow-up immunization, how much could this company be worth ultimately, provided it does not get taken out?
GZ: NeuVax represents a new class of breast cancer therapy: immunotherapy. Galena intends to develop NeuVax for the treatment of node-positive breast cancer. To differentiate NeuVax from Herceptin, we consider the following:
- NeuVax has a different mechanism of action compared to Herceptin. Herceptin is a HER2 monoclonal antibody, while NeuVax is a vaccine targeting HER2.
- NeuVax targets early-stage cancer patients with low to intermediate HER2 expression, while Herceptin targets breast cancer patients with high HER2 expression;
- Low to intermediate HER2 expression is a significant medical need not addressed by current therapies.
We believe NeuVax could be a meaningful alternative for the treatment of breast cancer. According to the Centers for Disease Control and Prevention, in the U.S. alone, approximately 202,964 individuals are diagnosed with breast cancer each year. Of these patients, approximately 20,000 (about 10%) will be eligible for NeuVax treatment. This is a huge market for NeuVax, which can reach a blockbuster status easily.
TLSR: Is there another company you like?
GZ: I cover NeoGenomics Laboratories (NEO:NASDAQ), because I like the diagnostics business. NeoGenomics is a laboratory testing services provider specifically focused on high-revenue, high-complexity cancer genetics testing services. The company operates a network of cancer-focused laboratories whose mission is to improve patient care through exceptional diagnostic, prognostic and predictive genetic testing services.
The company's network currently offers five types of testing services: cytogenetics, fluorescence in-situ hybridization (FISH), flow cytometry, immunohistochemistry, and molecular testing.
NeoGenomics is targeting the large clinical lab-testing market, which has been growing quickly in recent years due to advancements in genomics and proteomics (protein) research. The market continues to grow dramatically due to the rapid growth of personalized medicine.
This small but focused diagnostic company holds numerous competitive advantages over its competitors. We are especially impressed by its industry-leading turnaround times, unique tech-only business model, state-of-the-art lab information system and extensive client education programs, all of which are key to attracting clients.
Financial performance has been solid in the last five years, and the outlook is very strong for the next five. Top-line will grow from $43.5M in 2011 to $110M in 2015, a compound average growth rate (OTCPK:CAGR) of 36%. At the same time, the company has achieved operating leverage with reduced selling, general and administrative (SG&A) expenses as a percentage of total revenue. The company will turn profitable in Q1/13 and earnings per share (NYSEARCA:EPS) will grow to $0.18 in 2015.
NeoGenomics' growth strategy has been well executed in the past, and we have a high confidence in management's ability to lead the company to the next level of growth in the next five years.
TLSR: This small company has smallish revenues. The Medicare technical component grandfather clause expired last summer. Would you briefly explain what that means and what affect it has had on the company? Has management been able to contain the damage?
GZ: The Medicare technical component (TC) grandfather clause expired on June 30, 2012. NeoGenomics is now required to bill hospitals for the technical component of certain tests performed on behalf of Medicare inpatients and outpatients, whereas previously the company was allowed to bill Medicare directly for such services if they were provided to hospitals that were "grandfathered" under the regulations. About 80% of NeoGenomics' lab tests are billed off the physician fee schedule, with the remainder billed off the clinical lab fee schedule. Lab tests billed off the physician fee schedule usually have two separable billing components: the technical component, consisting of sample treatment and testing, and the professional component, for interpretation of the test results.
We think company management has done a great job of minimizing the negative impact of the TC grandfather clause expiration. This has been evidenced by the strong financial achievements made in Q3/12 and Q4/12, after the TC clause expiration.
"My goal is to produce high-quality institutional-caliber research for the small-cap portfolio."
As a result of the expiration, average price per test in Q3/12 and Q4/12 declined 12% and 15% respectively, compared to Q3/11 and Q4/11. However, despite the negative impact, total revenue in Q3/12 and Q4/12 still increased 26% and 16% year over year, respectively. These gains were achieved by 42% and 35% increases in test volume in Q3/12 and Q4/12, respectively. Both revenue and test volume growth were achieved when the company redirected the focus of its sales force to prepare clients for the expiration of the clause, rather than on acquiring new clients.
NeoGenomics also continued to make substantial improvements in lab productivity and operating efficiency in the last quarter of 2012, and came very close to returning to quarterly profitability. Lab productivity increased by 15%, and adjusted earnings before interest, tax, depreciation and amortization deductions (EBITDA) grew by 36% in Q4/12, over last year's fourth quarter. The improvements were also significant compared with Q3/12, as the company reduced its net loss by $800,000 ($800K), with only a $700K increase in revenue.
With this distraction now behind it, the company has returned its full focus to growth and performance in 2013. NeoGenomics expects to overcome the impact from this regulatory change within a few quarters through aggressive cost savings, productivity improvements, new product introductions and continued growth in each of its core laboratories.
TLSR: Grant, would you mention some other companies that you like?
GZ: Atossa Genetics Inc. (ATOS:NASDAQ) is a medical diagnostics company focused on the prevention of breast cancer through the development and commercialization of diagnostic tests that can detect precursors to breast cancer, and through the research, development and ultimate commercialization of treatments for precancerous lesions.
Atossa's diagnostic tests consist of patented medical devices cleared by the FDA that can collect fluid samples (nipple aspirate fluid; NAF) from the breast milk ducts, where more than 85% of breast cancers arise. These samples are processed at the company's wholly owned National Reference Laboratory for Breast Health, which has been certified pursuant to the Clinical Laboratory Improvement Amendments (CLIA). CLIA certification is legally required for laboratories to receive reimbursement from federal or state medical benefit programs, like Medicare and Medicaid, and is a practical requirement for most third-party insurance benefit programs.
Atossa's lab examines the specimens by microscopy for the presence of normal, premalignant or malignant changes as determined by cytopathology and biomarkers that distinguish "usual" ductal hyperplasia, a benign condition, from atypical ductal hyperplasia (ADH), which may lead to cancer. These cytopathological results provide patients and physicians with information about the care path that should be followed, depending on the individual risk of future cancer as determined by the results.
Additionally, Atossa is conducting research on the treatment of precancerous cells by using its patented and FDA-cleared microcatheters to deliver, directly into the milk ducts, pharmaceutical formulations to treat these lesions. By using this localized delivery method, patients receive high concentrations of the drugs at the site of the lesions, promoting efficacy while limiting systemic exposure, which has the potential to lower the overall toxicity of treatment.
Atossa is currently marketing two diagnostic tests and plans to offer two additional tests in 2013. The company launched the ForeCYTE and ArgusCYTE tests in December 2011. The ForeCYTE Test provides personalized information about the 10-year and lifetime risk of breast cancer for women between ages 18 and 65. The test involves collecting a specimen of NAF using the company's patented, FDA-cleared Mammary Aspirate Specimen Cytology Test (MASCT) System, which received 510(k) clearance from the FDA in 2003.
"If a company has a platform technology, it is easy to build a diversified pipeline."
The ArgusCYTE Test provides information to help inform breast cancer treatment options and to monitor potential recurrence. It involves collecting a blood specimen from a patient using the company's patented, 510(k)-exempt blood collection tube and submitting it to Atossa's laboratory. The test can monitor breast cancer distant recurrence by analyzing the blood sample for the presence of circulating tumor cells, which can then be analyzed to determine the expression of estrogen receptor/progesterone receptor and human epidermal growth factor receptor 2 (HER2) in those cells, a predictor of the cancer's sensitivity to existing treatment options.
Atossa intends to launch two additional breast health tests in 2013. The FullCYTE Test is designed to assess individual breast ducts for precancerous changes in women previously identified to be at high risk for breast cancer. The NextCYTE Test is in the prevalidation phase and is designed to profile breast cancer specimens for prediction of treatment outcomes and distant recurrence in women newly diagnosed with breast cancer.
Like NeoGenomics, Atossa also holds numerous patents, approved or pending, and has built a strong portfolio that provides long-term growth potential. Atossa has an appropriate growth strategy in place. Recent developments within the company have made us believe this strategy will be well executed, and we have a high confidence in management's ability to lead Atossa to the next level of growth in the next five years.
We think revenue growth will accelerate in the coming years thanks to the company's focused marketing strategy and continued offerings of new products and services. We model the top line growing from $2.94M in 2013 to $53.5M in 2018, an impressive CAGR of 79%. We think Atossa will become profitable in 2016, with EPS of $0.05 that will grow to $0.62 in 2018.
Based on the company's strong fundamentals, we think its shares are undervalued. The downside risk is low at this point and upside potential is high.
TLSR: Grant, it's interesting that you follow several RNA interference (RNAi)/antisense companies. I tend to think of any technology that prevents or modifies protein synthesis as an antisense platform, but from your perspective, are there meaningful differences between RNAi and antisense?
GZ: Both antisense and RNAi are RNA therapeutics, but there are some differences between the two.
RNAi (including small interfering [siRNA] and microRNA) are short, double-stranded nucleic acid molecules that mediate RNAi and interfere with the process of producing proteins inside cells. Antisense RNAs are small, chemically modified single strands of DNA that interfere with messenger RNA (mRNA). These drugs (oligonucleotides) are engineered in a sequence that is exactly opposite (hence, anti) to the coding (sense) sequence of mRNA. Upon binding with the mRNA, a duplex is formed. This duplex inhibits the production of the intended protein.
The Nobel Prize-winning discovery of RNA interference marked a revolution in biology, a breakthrough in understanding how genes are turned on and off in cells, a completely new way to approach drug discovery and development. RNAi is a natural process of gene silencing. By harnessing the natural biological process of RNAi in human cells, the creation of a major new class of medicines, known as RNAi therapeutics, is on the horizon. RNAi therapeutics target the "root" genetic cause of diseases by potently silencing specific messenger RNA, thereby preventing the disease-causing proteins from being made.
TLSR: Would you discuss a company in this space?
GZ: I like Tekmira Pharmaceuticals Inc. (TKMR:NASDAQ; TKM:TSX). Tekmira is one of the pioneers and leaders in the field of RNAi therapeutics. We are optimistic about the company's lipid nanoparticle (LNP) RNAi delivery technology, which enables systemic delivery of RNAi drug candidates. RNAi is promising, but is challenged by systemic delivery and distribution into diseased areas in humans. Tekmira's LNP platform technology has great potential to achieve this goal.
Tekmira's pipeline targets multiple indications including cancer, infection, alcohol dependence and other indications that hold great market potential. The company has advanced its lead cancer drug candidate, TKM-PLK1, into a phase 1 clinical trial using its LNP delivery technology. A phase 2 study is expected to begin in H2/13.
The company's TKM-Ebola product is sponsored by U.S. government under the FDA-accelerated "Animal Rule" development plan, which enables a company to get FDA marketing approval based on animal studies provided the studies show a product will likely be efficacious in humans. This will shorten the development timeline greatly. A phase 1 safety trial will be initiated in H2/13. TKM-Ebola could provide significant cash flow to the company in the next one or two years.
Two other candidates, TKM-ALDH2 and Wee1/CSN5, target alcohol dependence and oncology, respectively. Tekmira is conducting preclinical work to further evaluate these earlier-stage programs, and could bring them into clinic soon.
"The best way to mitigate risks is through diversification."
Partnership is integral to Tekmira's growth strategy. The company has established partnerships both with the U.S. government and biotech/pharmaceutical companies. Major partners include Merck & Co. Inc. (MRK:NYSE), Bristol-Myers Squibb Co. (BMY:NYSE),Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ) and Talon Therapeutics Inc. (TLON:OTCBB) These partnerships not only provide nondilutive funding for the company, but also validate its LNP technology and management's commitment to advancing RNAi therapeutics.
Significant clinical advances enabled by Tekmira's LNP technology have been made in Alnylam's pipeline. Alnylam already reported positive phase 1 data for ALN-TTR02 (for treatment of transthyretin amyloidosis), will report phase 2 data this year, and plans to initiate a phase 3 trial in late 2013. Alnylam also reported positive phase 1 data from ALN-VSP (for treatment of liver cancer) and ALN-PCS (for treatment of high cholesterol). All these data further validate the LNP technology.
Tekmira has a very strong balance sheet. The company's current cash balance should run through at least 2016. Investors don't need to worry about the dilution of their ownerships in the next few years. With this strong balance sheet, Tekmira will be focused on its long-term growth strategy, not worrying about financing. Future license fees, milestone payments and royalties from Marqibo (the Talon Therapeutics partnership; vincristine sulfate liposome injection for treatment of adult relapsed leukemia) will provide further nondilutive financing.
We have noticed the recent run of RNAi companies such as Alnylam, as well as Isis Pharmaceuticals Inc. (ISIS:NASDAQ), and Sarepta Therapeutics (SRPT:NASDAQ), which indicates investors are optimistic about the prospect of RNAi therapeutics. We think Tekmira's shares are undervalued at the current market price, based on the company's strong fundamentals and compared to its peers-especially when we consider the recent great runs for other RNAi companies.
TLSR: Protein synthesis is the central dogma of biology, and you've mentioned RNAi/antisense companies that address that phenomenon. I realize that most disease is polygenic, meaning involvement of more than one gene, but since any single gene can be neutralized, doesn't that make RNAi/antisense potentially the most powerful technology medicine has ever known? Wouldn't these platforms be the Holy Grail if there ever was one?
GZ: Antisense and siRNA may offer some advantages over conventional therapies. The antisense complex can be synthesized chemically in a lab and then introduced into the cell. Once introduced, antisense can target virtually any protein synthesized by the body. This is a significant advantage over small molecule or antibody drug candidates that target only specific classes of proteins. With knowledge of the sequenced human genome, scientists should be able to develop antisense compounds for each and every gene and mRNA.
Additionally, the antisense identification and subsequent production process is more straightforward than for the traditional small molecule or antibody drug discovery platform. Scientists only need to identify the specific gene worth testing, and then synthesize the antisense oligonucleotide. This offers a significant time and cost-of-discovery advantage.
Although RNAi therapeutics is newer to the pharmaceutical industry than antisense, the structures are similar, with siRNA being a double-stranded nucleic acid complex compared to the single-stranded antisense oligonucleotide. As a result, the above-mentioned advantages of antisense over conventional therapies are also expected to apply to siRNA.
Antisense and siRNA are two of the most promising fields of targeted therapy. Development of antisense and RNAi therapeutics, however, has been limited by the lack of a suitable method to deliver these drugs to diseased cells, with high uptake and without causing toxicity. But great progress in RNA delivery has been made recently by companies including Tekmira and Bio-Path Holdings.
TLSR: Are there any other companies you'd like to talk about?
GZ: Northwest Biotherapeutics Inc. (NWBO:OTC) is a clinical-stage biotechnology company focused on discovery, development and commercialization of immunotherapy products to treat cancers. The company holds two technology platforms: dendritic cell (DC)-based cancer vaccines (DCVax), and monoclonal antibodies for cancer therapeutics. The company's current focus is on DCVax programs.
Northwest's DCVax platform technology makes use of the same immune cells as Dendreon Corp.'s (DNDN:NASDAQ) prostate cancer vaccine Provenge (sipuleucel-T). DCVax uses a patient's own dendritic cells. The DCs are extracted and loaded with tumor antigens, thereby creating a personalized therapeutic vaccine. Injection of these cells back into the patient initiates a potent immune response against cancer cells, resulting in delayed time to disease progression and prolonged survival.
The company's DCVax technology holds competitive advantages over its competitors, including the low cost of manufacturing, ease of administration, a high concentration of activated dendritic cells and fewer side effects.
The key value of Northwest Biotherapeutics relies on its late-stage cancer vaccine candidate, DCVax-L, for glioblastoma multiforme (GBM) patients. DCVax-L for brain cancer is currently in a 312-patient global phase 3 trial. The U.S. arm of the trial is enrolling patients now, and the Europe arm will start to enroll soon. The company anticipates completing enrollment by Q1 or early Q2 of next year. This is faster or more efficient than relevant comparison trials with immune therapies for the same brain cancer.
Currently, two chemotherapeutic agents (including one targeted therapy) approved by the FDA are frequently used for the treatment of glioblastoma, in combination with radiation therapy. They are Temodar (temozolomide) from Merck for newly diagnosed GBM and Avastin (bevacizumab) from Roche/Genentech for recurred GBM.
There are unmet medical needs for the treatment of glioblastoma that DCVax-L may be able to address in a unique way. DCVax-L is specifically designed to target glioblastoma cells by activating the patient's own immune system. So far, data from DCVax-L are encouraging compared to marketed products and products under development.
"The creation of a major new class of medicines, known as RNAi therapeutics, is on the horizon."
The glioblastoma market is a multibillion-dollar business. Worldwide sales of Temodar reached $1 billion ($1B) in 2009. If DCVax-L ultimately reaches the market, it will command a huge market share of the GBM market in our view. Peak sales could reach $1B. This market potential means a lot to a small biotech company like Northwest, even if it turns out to be a few hundred million dollars in sales. DCVax-L for brain cancer could be the second cancer vaccine to reach the market after Provenge.
Great progress has been made in the past few months in terms of clinical trials, business development and balance-sheet strengthening. Current valuation is attractive and upside potential is high at current price level in our view.
The last company I will discuss is Pressure BioSciences Inc. (PBIO:NASDAQ), a research products and services provider. The company operates in a rather large but underserved market, with a current focus on sample preparation. The research products and services market is rapidly growing, with a large and immediate need for better technology. We expect this will create a huge opportunity for Pressure BioSciences to grow its business in the coming years.
We are impressed and optimistic with the company's patented, novel, enabling platform technology: pressure cycling technology (PCT). The PCT Sample Preparation System (PCT SPS) has competitive advantages over existing technologies in the sample preparation market. Based upon the PCT platform, Pressure BioSciences has established a broad product portfolio. The instruments and consumables that form its PCT Sample Preparation System are now recognized by many research labs due to the company's focused marketing efforts. We believe uptake of the PCT SPS will accelerate in the coming years.
However, Pressure BioSciences is one of the most undervalued biotech companies in our view. Our call is based on two major factors: Financial results and business development are improving, and valuation is very attractive.
Pressure BioSciences recently reported record product sales for Q3/12. Revenue from sales was $297,867, compared to $217,734 for the same period in 2011-a 37% increase. We are especially happy to see increased sales of consumables for the quarter. Sales of PCT-based consumables generated revenue of approximately $28K for the three months ended Sept. 30, 2012, compared to approximately $21K for the same period in 2011, an increase of 33%. We expect the sales of consumables will continue to grow in the coming quarters. We think this growth is very important to the company's long-term sustainable growth. Consumables are a recurring revenue source for the company, with higher margins, and are associated with the installation of PCT equipment. When more equipment is installed, more consumables will be used. The growth of installed equipment will eventually stabilize, but the use of consumables will increase each quarter as the equipment base becomes larger. Although revenue from consumables currently accounts for only a small portion of PCT product sales (about 10%), this number will become larger and make a meaningful contribution to the top line.
In terms of valuation, we think Pressure BioSciences' shares are deeply undervalued based on the company's fundamentals. Currently, the company trades around $0.30 per share, with a market cap of about $3M. We understand that the market discounts the value of the company because it has a limited revenue base and has been losing money since its inception. We also understand that the company has a relatively weak balance sheet, and further financing will be needed soon.
However, when we look at the industry in detail, we recognize that this is a company with huge opportunities. We are optimistic about its prospects. With a rapidly growing market worldwide, combined with its unique technology and broad range of product offerings, Pressure BioSciences is well positioned to boost its top line and bottom line in the coming years.
TLSR: Grant, thanks for your time and insight.
GZ: It was a pleasure.
Grant Zeng has more than 10 years professional experience in equity research and analysis. He is currently a senior biotech analyst with Zacks Investment Research Inc., and has been with Zacks since March 2006. Before joining Zacks, Zeng worked for TheStreet.com as a biotech analyst from 2005-2006. From September 2001 to December 2003, Zeng worked for China Pacific Insurance Co. as an equity/fund analyst. Zeng was a healthcare equity analyst with Young & Partners LLC from August 2000 to September 2001. Zeng also has teaching and research experience in pharmaceutical science. Zeng obtained his master's of business administration with a major in finance in 2000 from McMaster University, Canada. He also holds a master's degree in biochemistry from the University of Western Ontario, Canada, and earned a master's degree in pharmacology and bachelor's degree in medicine from Second Military Medical University in China. Zeng is a Chartered Financial Analyst (NASDAQ:CFA).
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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Isis Pharmaceuticals.
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