An Interview with ThermoGenesis Chairman, CEO Mr. J. Melville Engle
Tech, Biotech, Growth At A Reasonable Price
Seeking Alpha Analyst Since 2010
Hi Mel, Thank you for taking the time to talk to us today. I have been following KOOL for a long time and I am very interested in hearing your views on the opportunities for the company and the stem cell industry in general going forward. It is also very important to me to give readers as much information as possible about their investment choices so they can make the best and most informed decisions. This is really a great opportunity and forum for me to get greater detail on companies in the Bulwa Tech Report portfolio and for the company to provide investors with some further clarity on business prospects and developments. So let’s get to it.
Q. It has been almost 2 years since you were named CEO of Thermo. How is the company different now than it was when you came on board?
A. The Company is much stronger than it was two years ago. We have made substantial progress in a number of key areas, but I believe the biggest differences in the Company today include a clear strategic focus on the regenerative medicine market, our expanded and improved management team and our marked turn toward quality and profitability in the base business.
More specifically, we upgraded the management team in the areas of Sales, Marketing, Regulatory and Quality, and we now have stronger, broader relationships with our distributors, customers and suppliers. Our worldwide partnership network has been expanded in China, India, Europe and the Middle East.
We launched Res-Q™60 BMC, our semi-automated, point of care solution for rapid and easy bone marrow processing. The product has been well received in the marketplace. We are looking forward to regulatory approvals in the major countries of China and India and we continue to evaluate new opportunities where we see strategic growth.
Just recently, we raised $4.5 million through a registered direct common stock transaction. We expect to use the net proceeds from this offering for general working capital purposes and to accelerate our growth strategy. These purposes include new product development initiatives, support of our Asian channel development efforts and acceleration of our product cost reduction initiatives.
Finally, our financial performance has improved during this time. We stemmed the chronic quarter-to-quarter multi-million dollar operating loss trend the Company had endured. For example, fourth quarter FY 2009 operating losses were $3.1 million. Over the last three quarters our operating losses have averaged $240,000. Due to improved gross margins, operating efficiencies and cost reductions, we believe we have reduced our break-even point to between $6.3 and $6.6 million/quarter in sales.
We will continue to manage the organic core of the Company towards profitability. The new capital will be utilized over the next two years in a systematic and opportunity-based manner. As these investment monies are spent by the Company there will be a commensurate, short term impact on earnings. We will invest in areas we believe will create a much stronger long term financial result for the Company, which should generate significant shareholder value.
Q. I believe KOOL has suffered through a scenario I encounter often in the markets, where a company is public before the market it addresses is mature enough to support the growth necessary to keep investors attention. This causes the stock to languish in spite of relatively positive performance. It seems times may be changing. KOOL is now close to profitability and activity in the stem cell industry is accelerating. What is your take on this assessment of history and the current industry environment?
A. ThermoGenesis has certainly been a pioneer in the regenerative medicine arena and in doing so has brought innovative new technologies to an emerging market. As you have pointed out, this has positioned us very well within today’s industry environment.
We believe the current environment is very favorable for an enabling-technology company like ours. We are well positioned to capitalize on the expected explosion in the use of stem cells in routine clinical procedures and believe we will be a primary beneficiary from this revolution in medical practice. Regenerative medicine therapies offered today, and those active in clinical trials, require the tools we provide to process stem cells from various different sources, including bone marrow, peripheral blood, cord blood and eventually adipose tissue. We believe we are in the right place at the right time to provide clinicians and regenerative medicine companies the full suite of enabling technologies needed to scale their businesses. These include proprietary devices and disposables for the automation of repeatable and high quality processing methods necessary to ensure maximum-purity stem cell concentrations.
Q. The company is expected to generate revenues of close to $30 million next year and somewhere around breakeven results. In the most recent earnings released you discussed the company’s efforts to grow its presence internationally, specifically in China. You indicated that the market opportunity in China could be 2-3x the size of the U.S. Then there is India and other regions. Could you give us an idea of what you believe to be the size of the addressable U.S. market and then extrapolate an estimate of the international opportunity? From my perspective it seems that your current market capitalization of around $40 million is quite conservative in the context of the size of the global market opportunity.
A. We indicated in our last quarterly conference call, we expect year-over-year sales growth of approximately 10%.
We believe our market opportunity is large and growing.
We estimate today’s US/EU cord blood market to be $500 million. Independent analyst estimates of today’s bone marrow stem cell market is approximately $200 million. Our combined addressable market is about 15-20 percent of these overall markets, or in this case, between $100 and $140 million.
What is really exciting for us are the new opportunities in the markets outside of the US and EU such as China, India and countries in the Middle East. Due to their substantially greater populations and, specifically, the healthcare reform initiatives in China and India, we expect these markets to become a multiple of the US market over the next several years as they come on line and mature. Industry analysts expect the overall regenerative medicine market to reach several billion dollars in the next five to seven years.
Specific to the cord blood market, let me put the scale of the China opportunity into perspective. Total reported births in China in 2008 were 16 million, which is four times the birth rate of the US.
With respect to births which result in umbilical cords being processed and saved, we believe the current US rate to be approximately 4%, with China at approximately 1%. The “one-child-per-family” policy in China puts a premium on offspring and, as a result, we expect the Chinese cord blood processing/storage rate to increase along with the US rate, perhaps as high as 20% over time. Additionally, it is our understanding that nearly all collections in China today are processed through manual methods. With such great volumes being processed, we see a tremendous opportunity for conversion to our automated systems due to the economies of scale that can be achieved.
Q. When we are discussing the market opportunity in the previous section I believe that is limited to the stem cell industry and cord bank activity. These are not the only growth opportunities for KOOL. Can you discuss some other potential growth markets for the company’s products and technology like its partnership on Platelet Rich Plasma (PRP) partnership with Bioparadox?
A. That is right, our cell processing technologies extend to many cell types, not just stem cells. As you highlighted, PRP is an area we believe we can successfully leverage our existing Res-Q product platform. We intend to produce PRP at the point of care, in an automated, closed system. We have submitted a 510(k) application to the FDA for approval to market the device for use in orthopedic procedures. BioParadox is using the Res-Q exclusively in their studies for the use of PRP in the treatment of damaged cardiac tissue. We look forward to the early results of these studies.
Q. The market was a little surprised by the company’s recent announcement of a shelf registration. It doesn’t appear like the company has an immediate need for cash. Can you discuss the reasons for the company’s desire to raise money at current levels?
A. As I mentioned earlier, we view these funds primarily as growth capital. In terms of the expected use of the proceeds, we are evaluating and prioritizing product line extensions and enhancements as well as novel product designs according to their potential for near term, high margin, revenue generation. These opportunities include, but are not limited to, the development of new disposable collection, processing and storage technologies for stem cells sourced from cord blood, bone marrow and adipose tissues. Additionally, we believe there are near term opportunities to achieve lower manufacturing costs for certain of our key disposable products while maintaining high product quality and our proprietary ownership through new contract manufacturing relationships in certain Asian and Far East countries. We believe these new, lower cost bases will allow us to expand our business profitably into more price sensitive markets and to improve our margins on products in existing markets.
We believe by putting this money to work in the near term in this way will further accelerate our top line growth through the most profitable means.
Q. When the deal was priced, the company only elected to issue a small fraction of the $20 million registration which leads me to believe that there is a near term use for the funds raised like an acquisition. I know you can’t comment specifically but in general do you see opportunities in the current environment to grow through acquisition as well as organically?
A. As we evaluate our new business development opportunities, we will be certain to evaluate all of our options on how best to achieve our growth objectives. This includes leveraging our own engineering and intellectual property capabilities as well as evaluating the potential acquisition of complementary technologies either in our areas of focus or in adjacent spaces.
Mel, thank you for taking the time to talk with us today. I look forward to continuing to follow Thermogenesis progress. All the best to you and the company and don’t hesitate to contact us to discuss developments in the future.
I appreciate the opportunity to share the ThermoGenesis story with you and your readers. Thank you.
Conclusion
I own shares of Thermogenesis (KOOL) and believe the company is undervalued at current levels. Mr. Engle indicates the company can achieve breakeven results on roughly $26 million in revenues which is very close to what the company is expected to deliver this year. Given the opportunities he outlines in this interview it seems feasible the company could double revenues over the next 2-3 years in the global cord blood market alone. With strong long term growth projected for the cord blood market as stem cell therapies proliferate, the company should be able to parlay market share into long term growth and recurring revenues from product disposables.
Opportunities for KOOL’s products in other markets like Platelet Rich Plasma (PRP) offer additional opportunities for the company. I believe the company is a key tool supplier to the growing stem cell therapy market and that is not currently reflected in its market valuation, which is currently under $40 million. Should the company be able to achieve $50-60 million in revenues and profitability, a biotechnology tool sector multiple of 2.5 x revenues make shares of KOOL potentially worth between $8-10. Add other market opportunities like PRP and my price target for KOOL in 24-36 months is $12. Given expectation of near term breakeven results and a clean balance sheet with cash on hand of approximately $14 million I see negligible downside making this appear to be a tremendous risk reward situation. Obviously this is my opinion and I have chosen to invest my money in shares of KOOL but please exercise your own judgment before making any personal investment decisions.
Disclosure: I am long KOOL.
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