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BMRA Looking To Capitalize On Strong OUS Growth With Expanded Distribution

By Brian Marckx, CFA


Q4 2017 Results:  Looking To Capitalize On Strong OUS Growth With Expanded Distribution.. 

Biomerica (BMRA) reported financial results for their fiscal fourth quarter and year ending May 31, 2017.  While their streak of sequential revenue growth ended with three consecutive quarters, the Q4 topline was nonetheless fairly solid, inline with our estimate, up 9% on a yoy basis and better than six of the prior seven quarters.  And had U.S. sales, which were relatively weak, maintained their recent historical average (~$250k), Q4 revenue would have been the highest of any period in the last three years.  

Importantly, certain positive trends that have recently materialized - including European sales firming up and returning to growth and Asia maintaining very robust double-digit growth, continued in the most recent quarter.  So, assuming growth from international markets persists and U.S. sales at least stabilize (if not return to growth), 2018 will be another year of positive topline growth.  And there are additional reasons to believe OUS sales will continue to grow.  This includes BMRA's focus on growing the international business via expansion of their distribution footprint.  In August they announced an agreement with a "multinational pharmaceutical company" (with annual revenue of $1.4B and 11k+ employees) to distribute one of Biomerica's POC products in Mexico and also indicated that they continue to look for additional distribution partnerships.        

Q4 revenue of $1.45M was up 9% yoy (from $1.33M), down 3% sequentially (from $1.50M) and largely inline with our $1.47M estimate.  U.S. revenue, at just $131k was down 41% yoy and 62% from Q3 2017 - it was also the lowest level since at least Q1 2010 (i.e. the furthest back that we looked).  The U.S. business, as we explain in more detail below, has experienced fairly consistent softening over the last three years including revenue falling 12% in 2017.  Fortunately, OUS strength - particularly in Asia but also in Europe, offset the domestic weakness which benefitted Q4 results and was the catalyst in driving 13% total revenue growth for the full year.  

Revenue from Asia was $673k in Q4, representing yoy growth of 31%.  And while Asia has been a territory which has historically experienced relatively high short-term sales volatility – which was again evident as sales jumped 50% from Q3 ($448k) to Q4, the annual numbers illustrate the significance of the upward trend in revenue from this geography over the last couple of years.  BMRA generated just $1.0M in sales (~21% of total revenue) from Asia in 2015 - this grew 71% to $1.7M in 2016 and another 39% to $2.4M in 2017.  In fact, Asia was effectively the only reason why total revenue posted positive growth in 2016 and is credited with almost 90% of the topline growth in 2017.  Given the outsized contribution from Asia (which now accounts for 42% of total revenue) even incremental growth from current levels in this territory will have a meaningfully positive effect.  We continue to model low double-digit annual growth in Asia sales over the next couple of years. 

Europe also experienced revenue growth in Q4 and for the full year, although not nearly at the rate of Asia.  While revenue from Europe fell 20% in 2016 and another 7% in 1H 2017, sales then strengthened with the second half of 2017 posting 14% yoy growth (and 20% sequential growth), including 7% (to $566k) in Q4.  The net result was 3% growth in all of 2017.  While Biomerica has never provided much in the way of detailed trends effecting revenue, they have recently disclosed that an increase in sales of clinical laboratory products have benefitted both their Asian and European segments. 

Relative to the U.S., as noted, domestic sales have struggled to gain traction for some time now.  U.S.-related revenue peaked in 2014 at $1.26M and have slid ever since - falling 17% in 2015, 4% in 2016 and were down another 12% in 2017, with Q4 exceptionally weak.  While we had hoped to see Q4 U.S. sales of $268k (which would have represented modest yoy growth and a 22% sequential decline), the $131k actual result was less than half of that.  While we continue to model roughly flattish U.S. sales from the company’s currently commercialized product portfolio, that would almost certainly change if and when InFoods, the company’s novel IBS product, gains FDA regulatory clearance and launches. 

As we detail below, the deleteriousness of IBS and significant prevalence of the disease has spawned a number of new entrants to the IBS drug market.  But all of these drugs, which target only the symptoms and not the underlying cause, provide relief to only a relatively small portion (~15% - 20%, based on clinical study data) of sufferers.  And ‘relief’, for those that do show a treatment response from these drugs, is often only partial and temporary.  As such, an alternative that can effectively address the underlying cause of IBS, such as what InFoods is being developed to do, would likely garner significant appeal and demand.   

Gross Margin, Operating Expenses

Gross margin was 30.3% in Q4 and 34.9% for the full year.  Gross margin widened fairly substantially in 1H 2017, averaging 39.3%, but dove 920 basis points to a 30.1% average in the second half of the year.  This netted to a 34.9% gross margin for the full year - while that was slightly lower than our 36.6% forecast, it is still significantly improved from 29.7% in 2016.  While we have no particular insight into the change in gross margin, we do note that it can bounce around.  Additionally, despite the relative softness from 1H to 2H 2017, both gross margin and gross profit in the full year 2017 were at the highest levels of any year since 2013. 

Q4 and full year 2017 OpEx were $791k, or 55% of revenue, and $2.98M, or 51% of revenue, respectively.  Q4 operating expenses were slightly higher than our $750k estimate - with all of the difference related to an increase in R&D expense.  Both SG&A and R&D expenses have been trending higher on an aggregate as well as on a percentage of sales basis.  Some incremental headcount additions as well as activities related to InFoods development likely account for most of the expense growth.  But, given management's history of diligence on cost control coupled with expectations of continued topline growth, we continue to look for improved operating scale in future years - particularly if and when InFoods is commercialized.     

We reiterate, however, that while our model reflects an expectation of incremental InFoods-related development and regulatory expenses, we continue to refrain from modeling any potential revenue for the product due to significant uncertainties related to development outcomes and regulatory deliverables including requisite clinical trial programs (including scope, size, design and outcome measures) and additional validation of the performance, replicability and clinical utility of the product.  We will, however, continue to revisit this assumption on a regular and ongoing basis and consider updates to our model (potentially including InFoods-related revenue contribution) with additional and substantive development and/or regulatory progress.  

Cash balance at the close of fiscal 2017 was $1.2M, down from $1.5M at the end of Q3.  Cash used in operating activities was $333k and $723k ($294k and $634k, ex-changes in working capital) in Q4 and 2017, respectively.  On June 30, 2017 Biomerica filed an S-3 registration statement with the SEC, registering for sale (up to) $45M in common stock.  While the shelf/prelim prospectus includes the typical generic language of "for working capital and general corporate purposes" as it relates to the use of proceeds, if BMRA does conduct a secondary offering we think proceeds would almost certainly be mostly targeted towards advancement and further development, including clinical validation, of InFoods.

Additional, non-dilutive funds, could come from BMRA’s agreement with Celtis Pharm Co. of S. Korea which calls for that company to pay Biomerica up to $1.25M in exclusivity fees based on "certain milestones including Biomerica’s starting clinical trials in the United States, receipt of US FDA clearance and Celtis’ first sales of IBS Products in Korea".      
We currently value BMRA at $3.75/share but additional progress in development and regulatory activities of InFoods would likely push our target price higher.  See below for free access to our updated report which includes our operational update, financial model and valuation methodology.      


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