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BMRA: Q2’19 Results: Asia Continues to Accelerate, Europe Rebounds, U.S. Still Weak But Could Return to Growth

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By Brian Marckx, CFA



Biomerica’s IgG Antibody Test Used to Significantly Reduce Ulcerative Colitis Symptoms, Improve QoL
Results of an n=97 randomized, investigator-blinded food-exclusion study showed that Biomerica’s (BMRA) first-generation ELISA immunoglobulin G (IgG) antibody assay was able to significantly reduce ulcerative colitis symptoms and improve participants’ quality of life. Results, which were published in the journal Inflammatory Bowel Disease in September 2018, are particularly compelling in our opinion given that the study used the company’s first-generation IgG assay – a test that we believe is less-targeted (i.e. less accurate) than the technology incorporated into their InFoods product. In addition, this study assessed BMRA’s test in individuals with ulcerative colitis (UC) – while InFoods has been developed primarily to determine optimal food exclusion diets for people with irritable bowel syndrome. These results, we think, indicate that Biomerica’s technology may have platform-like potential with possible clinical utility across a variety of gastrointestinal disorders.

While IgG-based food-elimination studies are not new and prior studies have shown a connection between IgG antibody reaction to certain foods and UC symptomology, this study took that association a step further to real-world applicability. Specifically, this study demonstrated that IgG (which, in this case was BMRA’s assay) can be a practical tool to identify and eliminate trigger foods from ones diet and result in a significant reduction in clinically meaningful symptoms (such as number of daily bowel movements and rectal bleeding) and improvement in nutrition and quality of life.

Participants included those in remission (n=31) as well as those with mild (n=37) to moderate (n=29) UC. Of the 97 individuals for which there was final study data, 49 and 48 were randomized to the interventional (i.e. food exclusion) and control group, respectively. While the control group was instructed to continue eating as normal, diets of the interventional group were adjusted based on baseline results of IgG tests. More specifically, IgG antibodies of 14 foods that have been well-established as associated with food intolerance were measured at baseline (among all participants). Of the 97 patients, 68 were food-specific IgG antibody positive, including 54 that were extremely sensitive to food. There was no significant difference at baseline between the two groups as it relates to number of patients positive or severe-positive

Patients in the interventional group eliminated any foods associated with IgG levels high enough to be considered problematic (specifically IgG titers over 100b U/ml). Patients were followed for 6 months and were evaluated on Mayo score, a well-established grading system for ranking severity of UC, as well as on other parameters including extraintestinal manifestations (EIM), nutritional status and quality of life (QoL).

The Mayo score
is calculated across four distinct domains; stool frequency, rectal bleeding, mucosal appearance and physician’s global assessment/rating. At baseline, Mayo scores were equivalent between interventional and control. Results showed significantly lower Mayo scores among the food-exclusion group as compared to control (2.41 ± 0.89 vs 3.52 ± 1.15,P < 0.05). The stool frequency domain contributed the most substantially to the difference in Mayo scores. Mucosal state improved in both groups - while there was no significant difference between them, the investigators noted that the endoscopic score was slightly better among the food-exclusion cohort.

Assessment on EIMs (which can include a number of conditions including anemia, arthropathy and anti-TNF induced skin inflammation as well as a host of others) also favored the food-exclusion group, with the number of EIMs falling from 7 to 2, while the sham group saw EIMs only decrease from 6 to 5.

Nutritive indices, including those measuring BMI, albumin, prealbumin and transferrin were also reported. Both BMI (23.88 ± 3.31 vs 21.50 ± 6.24 kg/m2, P < 0.05) and albumin (48.05 ± 6.39 vs 45.72 ± 5.48 g/L, P < 0.05) were significantly greater (i.e. superior) among the interventional group while prealbumin and transferrin were statistically equivalent between the two cohorts.

View Exhibit I

Quality of life, which was equivalent between the two groups at baseline, also favored the food-exclusion cohort at the end of six months. QoL, assessed by the well-validated Inflammatory Bowel Disease Questionnaire
(IBDQ), was statistically significantly greater in the interventional group on all 4 domains. Notably, the ‘emotional function/health’ sub-item was particularly superior among the food exclusion group. The investigators noted that this could be of substantial importance as any diet that can improve emotional well-being is more likely to be adhered to.

View Exhibit II

Q2 2019: Asia Continues to Accelerate, Europe Rebounds But U.S. Still Weak. Revenue up 18% QoQ But Down 7% yoy…

Biomerica reported financial results for their fiscal 2019 second quarter ending November 30, 2018. Revenue, on both an aggregate basis and per-geography, was just about dead-on with our estimates. And while the topline fell 7% on a yoy basis, it continues to show a nice sequential recovery. On a qoq basis, revenue was up 18% from Q1, which follows 13% sequential growth from Q4’18 to Q1’19.

Asia contributed to both the yoy weakness and the qoq strength – and while revenue from this territory dropped 23% from fiscal Q2’18, that was an anomalistically tough comp. Importantly, Asia has now expanded the last two quarters, including 4% from Q1 to Q2. Meanwhile, Europe, which had been a laggard of late and dipped 3% yoy, showed a very solid recovery from Q1 and accounted for the majority of the total topline sequential growth. Revenue from the U.S. remained flattish as compared to both periods and while weak on a historical basis, that could soon change now with Medline under a three-year domestic distribution contract for EZ Detect.

- Asia sales, at $672k, were single-digit better than Q1 but down by more than $200k from the prior year. That yoy decrease should not be taken at full face value, however, as Q2’18’s $873k was the highest revenue from that territory since Q2’13 (i.e. five years). Asia sales were largely inline with our $698k and are averaging an annual run-rate of better than $2.6M, which would put them at second-best in company history – key will be if Asia sales can remain at or better than these recent levels. While the U.S. and European markets have softened over the years, Asia, the company’s most important territory, has done the opposite. Revenue from Asia grew at a CAGR of 35% from 2015 to 2018. The $672k generated in Q2 ‘19 is also the fourth highest since 2014 and slightly better than the $628k average during fiscal 2018. The seeming return to strength in Asia is encouraging as the late-2018 softness in that territory was somewhat confounding given that revenue growth had been on a fairly steep trajectory since late-fiscal 2015, which was shortly after BMRA restructured their distribution channel in China. We had also anticipated incremental revenue growth from the launch of EZ Detect, which received China FDA (CFDA) approval in January 2018 (i.e. late-fiscal Q2’18). It is not clear if revenue through 1H’19 includes any meaningful contribution from that product.

- European sales, at $522k, were inline with our $513k estimate. While down 3% yoy, they jumped 33% from Q1. As BMRA had cited order timing as negatively affecting Q1 sales, we think some of the sequential strength in Q2 may be reflective of the offset of that timing. Through the first half of fiscal 2019, revenue from Europe was $914k, down 15% and reflecting the 26% drop in Q1. Europe accounts for ~34% of total revenue.

- U.S. revenue has remained stable, albeit weak, over the last three quarters. At just $140k, U.S. revenue was flat from Q1’19 and from Q2’18. This is well below its quarterly high of $446k (Q3’14) as well as its historical average of about $250k. U.S now accounts for just 9% of total revenue, down from 20% - 25% just a few years back. As we have noted in prior updates, the longer trending decline in U.S. sales has been attributed to lower purchasing (of BMRA’s flagship EZ Detect colon disease test) from a certain drug store customer that, unlike some years, decided not to conduct a colorectal cancer screening program during fiscal 2018. But, as BMRA brought on Medline, the largest privately-held U.S. distributor of medical supplies, to distribute EZ Detect, we are hopeful that U.S. sales will steepen. The agreement, signed in November, is for an initial three-year term. We also think that incremental U.S. sales growth could come from the new h. pylori test candidate which recently entered clinical studies

Total revenue of $1.50M fell 7% but was up 18% from Q1 and was just slightly ahead of our $1.47M estimate. And while it did drop on a yoy basis, the prior year comp was a tough one to beat. In fact, the $1.50M of revenue in Q2 is the second highest in the last four and one-half years, bested over that period only by Q2’18’s $1.61M. Total revenue has now grown sequentially for two consecutive quarters and is up 33% from Q4’18.

U.S. revenue, at $140k was up 1% yoy, down 2% qoq and the second lowest in nearly a decade (or more). U.S. sales have trended relatively soft since 2015 when they fell 17% to $1.0M in that year. They then dipped another 4% in 2016, 12% in 2017 and finished 2018 at $685k, down another 22%, and the lowest level since at least 2010 (i.e. the furthest back that we looked). U.S. sales are down 13% through the first half of fiscal 2019.

While difficult to predict, we had modeled U.S. sales to stabilize - unfortunately with the continued slide, ‘stabilized’ level has been notched lower. We do think it is unlikely that U.S. sales will fall much lower, however, and hope, given the company’s current product portfolio, that there is opportunity for growth over the near-term. A possible catalyst to U.S. sales growth could come from a new h. pylori test, clinical trials for which recently commenced enrollment (and which we discuss in more detail below). The other potential catalyst, as noted, is the distribution agreement with Medline Industries for EZ Detect – which we believe to be one of the company’s best-selling product.

And with the recent disclosure and announcement of initial clinical trial design and collaboration to conduct clinical trials with two major U.S. university research centers, we recently began modeling InFoods. As we discuss in more detail below, we are modeling initial contribution from InFoods in 2022. We continue to believe that eventual FDA clearance of this novel IBS product would result in a significant increase in Biomerica’s U.S. sales and provide the majority of total revenue growth from that point into the foreseeable future.

Meanwhile, Q2 revenue from Asia was $672k – down 23% yoy and up 4% from Q1. Asia revenue through 1H’19 is at a run-rate of about 5% better than 2018 annual sales. And while as we have noted in the past, Asia has been a territory which has historically experienced relatively high short-term sales volatility, longer-term trends continue to point towards regular revenue growth.

And, as Asia has grown to account for a larger proportion of total revenue, the recent strength from this territory has been the most significant catalyst to driving BMRA’s topline. For historical context, Asia generated just $1.0M in sales (~21% of total revenue) 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. Despite a weak Q4 (down 42% yoy), Asia still managed 4% growth in 2018, accounting for 45% of total revenue. And among the territories which did post positive revenue growth, Asia contributed 40% for the full-year in 2018. Asia accounted for 48% of total revenue through 1H’19. Given the outsized contribution from Asia even incremental growth from current levels in this territory will have a meaningfully positive effect – but even incremental contraction will have the opposite effect.

As noted, we had hoped EZ Detect (over-the-counter fecal occult blood (FOB) test for colorectal cancer) would have been a positive catalyst – although it’s possible we were a little too optimistic relative to timing. We continue to like the fundamentals in China as it relates to BMRA’s flagship product. While Biomerica has never publicly disclosed product-specific sales numbers, we believe EZ Detect is one of the (if not the #1) best-selling products for the company. We also think Asia could be particularly receptive to the product given certain cultural principles in many parts of Asia related to hygiene which may discourage use of FOB tests which require fecal handling.

Recent initiatives aimed at increasing colorectal cancer screening – by any modality – also support fundamentals for EZ Detect. Many parts of Asia, including in China, have relatively low rates of compliance to recommended colorectal cancer screening guidelines. For context, while ~65% of Americans adhere to CRC screening guidelines, studies indicate that compliance is only ~40% in Shanghai, China. Studies have shown that one of the most effective ways to increase CRC compliance is through providing more testing options. So, for all of these reasons, we think Asia could represent a substantial growth opportunity for BMRA’s EZ Detect product.

Relative to Europe – sales from this territory showed recent signs of growth, inching up 3% in 2017 following a 20% slide the prior year. While the mid-single digit growth through the first six months of 2018 was promising and an encouraging signal that European sales growth might be accelerating, that was more than offset by weakness in the second half of the year which saw sales drop more than 22%. For the full year, European revenue was down 10% to $2.0M, the lowest level since at least 2010.

While Q1 ’19 European revenue of $392k was down 26% yoy and 15% qoq, it experienced a significant turnaround in Q2, jumping 33% to $522k Europe accounts for ~30% - 35% of total sales, making it the company’s second most important market and causing any meaningful variability to have a significant influence on overall financial performance. And while the not-so-long-ago indications that sales in that territory might be gaining traction were encouraging, the lack of sustained growth, which significantly affected BMRA’s topline performance over the last three years, had us questioning whether there is much upside in this area of the world with BMRA’s current product portfolio. While the most recent quarter’s performance is encouraging, we think it may have been positively affected by order timing.

We continue to model flat to slightly negative sales in Europe (related to BMRA’s current product portfolio) and think opportunity for sustainable growth may mostly hinge on new product launches. While we have yet to model any assumed contribution from InFoods (or any other new products), that could soon change - depending on BMRA’s future strategic objectives as well as if we feel there is enough information to make (comfortably) informed projections about certain commercializability-related gating factors. At this point we have no information or insight into if or when BMRA might consider targeting markets outside of the U.S. or if they do, which areas of the world they would focus on next. Europe, however, would be our best-guess as a potential front-runner if management does eventually look to expand OUS with InFoods given not only the economic similarities of most of the highly developed European countries with that of the U.S. but, perhaps more importantly, diets that are (generally) similar to that of most Americans.

Gross Margin, Operating Expenses
Q2 gross margin was flattish from Q1 and while weak, not record-level weak. At 27.2% it nudged up from Q1 (26.5%) but is still lower than all but one quarter in 2018 (Q4 23.7%). It’s also better than a handful of other quarters over the last 8 or 9 years. With higher production volumes – hopefully in part spurred by an increase in domestic sales of EZ Detect, we hope to see GM begin to again strengthen.

OpEx was $894k, or 60% of revenue. This compares to an average of 58% throughout 2018 including 49% in Q2. OpEx was slightly below our $959k estimate. Interestingly (given the clinical activity related to InFoods and h.pylori), R&D expense has remained fairly moderate. At $381k, or 25% of revenue, R&D expense is up only about $100k from the prior year. We do, however, continue to model opex to increase at a higher rate than that of revenue growth through at least the end of the current fiscal year (ending May 2019) as a result of increasing development activity related to InFoods, and to a lesser extent, the h.pylori program.

BMRA raised $757k during Q2 ‘19 from the sale of common shares via their ATM program. Cash balance at the close of Q2 was $1.1M. Excluding changes in working capital, BMRA used $387k of cash for operating activities (and another $24k for PP&E).

Additional, non-dilutive funds, could come from BMRA’s agreement with Telcon Pharmaceuticals (fka 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". The agreement was initially cancellable if BMRA had not obtained FDA clearance/approval of InFoods by December 31, 2017 but that deadline was subsequently extended until December 31, 2019.

We cover BMRA with a $7.00/share price target. See link for free access to our most recent report.

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