As a typical contrarian, I like to look for undervalued stocks and buy them up. As such, I have a long-term investment in Geron (NASDAQ:GERN), which played out well with the recent news of an exclusive deal for Imetelstat inked with Johnson & Johnson (NYSE:JNJ). As a holder of GERN, I have been bestowed with multiple warrants for BioTime (NYSEMKT:BTX) that are buyable at $5 each. Basically, I could own a minor share in a company invested in stem cell research that I invested in when I bought GERN and lost when the company sold it. I am sure that the value of my distribution is far less than the payout GERN received for selling its stake, but nonetheless, I would like to see this stock climb so I can make some additional cash. Does it have what it takes?
First, let's look at GERN. It is clear now that GERN's purpose in selling off its stem cell assets was to provide capital for continuing operations long enough for its key drug Imetelstat to find a financial backer. With that new backer, its stock has seen a share spike, and will hopefully lead to a revitalization of the stock. Most biotech companies, by and large, use investors for the cash they need to perform highly risky experimental testing; this means that most of the money lost in GERN over the past several years is to be expected. I expected it, and I expected increases to occur from time to time, such as the increase that occurred between lows of around $4 in 2008 and highs of around $9, in which I sold my position in the company, and then bought it back when it sank back down to $4 a share again. I continued to buy as it continued to fall, and now I'm waiting for my second bankroll. The idea behind this contrarian view is a hope that a big blockbuster is just around the corner. Most likely, it isn't. But recent news that JNJ is purchasing the exclusive rights to GERN's Imetelstat, after the FDA lifted its clinical hold on GERN's last gasp for salvation, means that GERN will not be troubled for cash for a little while, dramatically raising investor interest and squeezing the shorts. To keep the momentum going, GERN needs to invest in another pipeline of drugs, but potentials for this pipeline most likely won't be announced until next year. In the mean time, I wait for the right price and sell big.
BioTime; Example of the new strategy in Biotech
Meanwhile, there is BTX, a company focused on regenerative medicine, with near-term strategic commercial opportunities in cell transplantation and blood-based cancer screening, as well as an eclectic mix of cell culture medias and stem-cell lines used for research purposes. It is clear that GERN's stem cell assets, now owned by BTX, were considered valuable to the GERN company executive board even when they sold them, judging by the founder of GERN, Michael West, leaving the company and buying the stem cell assets with his new company, BTX.
GERN sold its stem cell rights to save itself from non-existence, while it developed something that it knew was going to work. The company's stem cell portfolio is as good now as it was when I followed the news into buying GERN many years ago, but the time window was just too long.
That is why Michael West PhD, the founder of Geron, and former CEO, president, and CSO of Advanced Cell Technology Inc., is the current chair of BTX. He seems to be committed to these types of ventures, and has a knack for surviving in the space. Dr. West purports to follow a newer business strategy which acts to curtail some of the risks involved with running a biotech. First, he doesn't believe in the old model - that biotech investing is "a long journey without water" though a desert, as he once said in an interview in 2013. Instead, with BTX he claims to have developed a model that incorporated short-term profit generators such as Renevia and HyStem, and also has had the company invest in long-term prospects by leveraging capital raises and corporate partnerships, such as those formed with TEVA with its Cell Cure subsidiary, as well as with GERN's stem cell assets in Asterias Biotherapeutics (NYSEMKT:AST).
Business Risk and Financing
The BTX subsidiary, AST, set to develop the stem cell-based therapies acquired from GERN is the most telling. It is working to re-initiate clinical trials of drugs previously tested under GERN's product line AST-OPC1 (OPC1), which was the first embryonic stem cell-derived product to enter human clinical trials. The California Institute for Regenerative Medicine (CIRM) awarded Asterias $14.3 million for four years on October 16th for the clinical development of OPC1, which is now being considered for spinal cord injury and neurodegenerative diseases, and AST-OPC1 was named one of the top therapy projects to watch by Elsevier Business Intelligence, greatly elevating investor opinion of the therapy.
In another long-term venture, the BTX subsidiary Cell Cure, looking into Age-Related Macular Degeneration [AMD], is backed by money from Teva Pharmaceutical (NYSE:TEVA), a long-lasting Israeli pharma company known mostly for its distribution of generic drugs. I also own shares of TEVA Pharmaceutical, and think its backing of BTX suggests a strong success potential. TEVA has managed to prepare itself for the eventual patent cliffs that most biotech companies normally face, by investing in an array of companies, including BTX.
But West's vision was not to slog long and hard through a desert to get to success. So, in addition to these long-term, well-financed investments, BTX bought up several smaller companies, including the assets of Cell Targeting Inc. in 2011, which had technology based around painting cells to adhere to tissues. In another case, BTX bought up Glycosan and its leadership, including current BTX CCO William Tew, to produce HyStem, a hydrogel system which solves delivery problems encountered in the area of tissue engineering and could be adapted for many clinical trials. In essence, this is an "epoxy glue where you can make the two critical components of the matrix for the cells to live in," said West in last year's interview. Because this technology requires only autologous transfer of the fat cells, it required only device approval, which the company already has. This should give investors something to rest assured on, especially with its long patent life, out to 2027 according to West. These ventures are already bringing in profits, and suggest a multifaceted company focused on acquiring both therapeutic agents and investing in long-term technology; its pipeline for future innovations. In the process, the company is making corporate partnerships with other biotechs by taking risk off their shoulders. i.e. BioTime is buying time for itself with short-term profit generators, and for other biotechs by acquiring their long-game assets.
How is West's vision working out? BTX is spending a lot of money, and not making a lot of money, i.e. expenses are higher than revenue in the time period between June and September of 2014. While profits were slightly higher in this time period from Renevia, HyStem and others - 961 thousand versus 855 thousand - overall income was still greatly in the hole; (12.1 million) versus (13 million) in the same period. Indeed, continuing operations are heavily in the red, with net income from continuing operations at (8.2 million) in September. So despite West's sage words from last year's interview, the company still seems to be walking through a desert to reach profitability.
|Net Operating Cash Flow||(6.42M)||(8.63M)||(10.36M)||(10.78M)||(8.61M)|
|Net Investing Cash Flow||(1.22M)||(1.66M)||(527,618)||(179,277)||
|Net Financing Cash Flow||(165)||9.13M||12.13M||20.06M||458,344|
Between June and September, it went from around 15.7 million in cash and equivalents down to 7.4 million. How does this look when we separate it into the three fundamental areas of cash flow?
So far, operations, i.e. production, has not been bringing money in. A look at operating cash suggests that the company is running a deficit of ($8.61 million) at last quarter, which is $2 million less than the period before; however, it is on par with the operating deficit for December of last year at ($8.63 million). BTX is paying for a lot, but not making a lot from sales. This is traditionally seen in biotechs, and so one must look at both the investing and financing activities to assess the company's direction.
Investing cash flows for BTX are also negative in the past 5 quarters, but are trending toward zero, which means that the company has both slowed the purchase of debt instruments and/or increased the receipt of loans from subsidiaries. So BTX has invested well, and one can see this from the number of subsidiary companies on its webpage, many of which are beginning to pay back their loans to the parent company, and within a year or two, with a continuation of this trend, this should lead to positive cash flow and an increase in profit for BTX.
Finally, BTX has seen its most income, not surprisingly, in the area of financing, through the sale of shares; though in the last quarter, a precipitous drop in financing was seen. This indicates that the company chose not to sell additional shares to finance its continued operations. If this trend continues, it means that with an increase in lucrative investing activities, shares of the company will not be diluted further.
This company has survived since 1990 by leveraging investment capital and buying out or buying into companies with strong growth potential. Though, without the speculative funding by venture capitalist and public trading, this company would cease in short order unless it also sees a dramatic climb in the return from investment and/or operation cash flow. It, therefore, must still be considered a highly speculative investment.
As a contrarian investor, I am considering buying long in BTX, as it seems to have its fingers in all the right jars at this time. I think its investments are strong and its current operations set to grow as individualized medicine and the anti-aging market continues to grow. However, I would strongly advise that only those willing to wait it out play this card. The company is building a lot of long-term debt that will require some significant wins to recover from. Those wins, however, are the very promising subsidiaries, such as Cell Cure and AST.
BTX is a biotech company for biotech companies. Between the lines, one can see that several bigger biotech companies divest assets with BTX that they don't want to keep in-house because of slow paydays. BTX, in turn, buys up companies that have failed to thrive independently, or buys up assets of companies that need a new lifeline, so to speak. GERN used them to provide just such a lifeline when it sold out of its stem cell technology to focus on the more near-term Imetelstat. GERN's stem cell technologies were not a bad set of technologies, just an asset with a slower payday, which BTX has now segued into AST. This was lucky for GERN, because it allowed it to survive long enough to get the recent JNJ deal.
Let's look at the points presented in this article. First, we have the founder of GERN, Michael West, who divests himself from GERN and forms a new company, BTX, which he leverages in the form of stock (which was passed on to GERN shareholders in the form of a warrant only worth anything if the shares rise above $5), to buy the stem cell technology that GERN was founded on. West could have completely divested himself from this technology if he had so desired, of if he either wanted to save GERN or saw a significant value in the stem cell assets, or both. What we can assume is that the stem cell assets must have some value to West, since he has a strong relationship with the technology; he also knows their value very well. He has been shown to wage smartly on biotechnology in the past.
Second, we have West's own message about the way that a biotech company should be run, presented to us a year ago and setting the stage for the financials that have followed in 2014. Namely, a biotech company should build value from both short-term and long-term investments. West is certainly building his company with this in mind.
Third, we can look at the cash flow analysis for the majority of 2014 and see a trend emerging. The trend is toward self-sustainability as a company. We see that financing has dramatically decreased in the last quarter, perhaps suggesting a company that no longer intends to dilute its value with additional sale of equity securities. This following a gradual increase in the value of investments quarterly, i.e. an increase in repayment for loans to subsidiaries. We do not see an increase in operational cash flow. This is the picture you would like to see for a company that is intending to make its investments pay for its future.
BTX is not a real contender for a company of the year. It may always be a sideline company meant to offload debt from other companies until such a time as it is needed elsewhere. What this means, however, is that BTX may also have a clearinghouse of cheap technologies in its portfolio that could one day make a bundle for those who hold its shares. Specifically, when its long-term positions finally find water in the desert.
Disclosure: The author is long GERN, TEVA.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.