By Brian Marckx, CFA
READ THE FULL BMRA RESEARCH REPORT
Q3 2019: Revenue Slows Although Potential Growth Catalysts on the Horizon. Further Pipeline Progress…
Biomerica (BMRA) reported financial results for their fiscal 2019 third quarter ending February 28, 2019. Revenue was a relative disappointment, coming in well below our estimate on both a total basis as well as from each itemized geography. It was also down 8% from Q2’19, down 16% yoy and the second-lowest level of the past 13 quarters. Revenue has decreased each of the first three quarters of 2019 as compared to the respective prior-year periods and through the first nine months, is down 9% from 2018.
Revenue through the first nine months from each of three most significant territories is down from last year. Sales from Europe, the U.S. and Asia, which account for approximately 33%, 11% and 49% of total revenue, respectively, have fallen 15%, 21% and 7% YTD. But, despite the disappointing topline results through the first nine months of 2019, there are reasons to be optimistic that sales growth will materialize.
For one, while Asian sales are down YTD, they were up modestly (~4%) on a quarterly basis in Q3. And given that Asia posted relatively weak sales in Q4’18, it is reasonably possible that that territory, which accounts for about 50% of total revenue, could still eke out positive growth for the full year. Additionally, Biomerica recently contracted with outside consultants to help with accelerating sales of EZ Detect, the company’s flagship colorectal cancer screening test. This includes for China – which we continue to think could represent a very receptive and lucrative market for the product – and for Vietnam, the UAE and Russia. Also, while U.S. sales have been on a several years-long decline, we are hopeful that they will return to growth given the potential catalysts represented by the Medline distribution agreement (as of November 2018) as well as eventual commercialization of BMRA’s novel h. pylori test.
- Total revenue of $1.26M fell 8% yoy, was down 16% from Q2’19 and missed our estimate by nearly 24%. Through the first nine months, revenue was $4.03M, down 9% from the same period in fiscal 2018. Despite the yoy weakness, YTD revenue is relatively robust as compared to much of BMRA’s prior recent history. In fact, revenue through the first nine months of 2019 is higher than that of the comparable periods of 2014 by 17%, 2015 by 16% and 2016 by 6%.
- Asia sales, at $653k, were down 3% from Q2, up 4% from the prior year and about 17% lower than our $784k estimate. Our estimate had assumed initial (clearly too early) benefits from the December 2018 agreement with a company to facilitate sales of EZ Detect in China. Through the first nine months Asia sales were $2.0M. While down single digits from 2018, it is higher than the first nine-month periods in each of the four prior years (i.e. from 2014 through 2017). The $653k generated in Q3’19 is also slightly better than the $628k that Asian sales averaged throughout fiscal 2018. While we had 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 Asia sales in 2019 have included any meaningful contribution from that product.
While 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 in our opinion. And, as Asia has grown to account for a larger proportion of total revenue, 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.
- European sales, at $416k, were down 14% yoy, down 20% qoq and about 21% lower than our $527k estimate. European sales were $1.3M YTD, down 15% from 2018 and the lowest level through the first nine months since at least fiscal 2010 (i.e the furthest we looked back).
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 in Europe (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.
- U.S. revenue, at $141k, was down 32% yoy, flat sequentially and about 35% lower than our $218k estimate. This is also well below the U.S. quarterly high of $446k (Q3’14) as well as its historical average of about $250k.
Through the first nine months U.S. sales are down 21%. Similar to Europe, U.S. revenue is at the lowest level through the first nine months since at least fiscal 2010. U.S now accounts for just 11% 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 return to growth. The agreement, signed in November 2018, 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.
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.
Gross Margin, Operating Expenses
Q3 gross margin, at 29%, is down from 34% in the year-earlier period but up from 27% in Q2’19. In fact, Q3 saw the widest gross margin in the last four consecutive quarters. Through the first nine months of the year GM has averaged approximately 28%, down about 600 basis points from 34% in the prior-year period. But, with higher production volumes – hopefully in part spurred by an increase in sales of EZ Detect (both domestically and in areas such as China, Vietnam and Russia), we hope to see GM begin to again strengthen.
OpEx was $1.1M, or 85% of revenue in Q3 and $2.8M, or 68% of revenue in the first nine months of 2019. This compares to 57% and 52% in the comparable prior year periods. OpEx averaged 58% in all of 2018. Despite the clinical activity related to InFoods and the h.pylori test, R&D expense has increased only relatively modestly. R&D expense increased from $1.1M in 2017 to $1.4M in 2018 and to an annualized run-rate of $1.7M through the first nine months of the current year. We do, however, continue to model opex to increase at a higher rate than that of revenue growth over the near term as a result of increasing development activity related to InFoods, and to a lesser extent, the h.pylori program.
BMRA used $257k and $1.3M ($531k and $1.3M, ex-changes in working capital) in cash for operations in the three and nine months ending February 28, 2019, compared to $489k and $852k ($274k and $631k, ex-changes in working capital) in the comparable prior-year periods.
The company raised nearly $1.1M through the sale of common stock (via the ATM program) and the exercise of warrants so far this fiscal year. They exited Q3 with $917k in cash on the balance sheet and, subsequent to period-end, raised an additional $800k (net) via the exercise of options and through the sale of common shares.
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.
Recent highlights on the operational front include Notice of Allowance from the U.S. Patent and Trademark Office for BMRA’s first U.S. patent related to its InFoods products and progress-related activities associated with both the InFoods and h.pylori clinical programs.
As it relates to InFoods, earlier this month BMRA announced that the USPTO issued a Notice of Allowance for their “InFoods family of products that allow for revolutionary new treatment options for patients suffering from Irritable Bowel Syndrome (“IBS”) and other gastrointestinal diseases. Specifically, this allowed application (#15/526,240) contains numerous claims that broadly cover a product that enables physicians to identify patient specific foods (e.g. pork, milk, shrimp, broccoli, chickpeas, etc.), that when removed, may alleviate or improve an individual's IBS symptoms, including but not limited to constipation, diarrhea, bloating, pain and indigestion.” The accompanying 8-K notes that “the process resulting in final issuance of a patent involves several administrative steps that are typically completed within a year.”
Biomerica also noted that they have additional U.S. patent application in process that cover other claims related to their InFoods IBS product and that they are developing and have filed patents for other diseases “in the InFoods family of products, which include: Functional Dyspepsia, Crohn's Disease, Ulcerative Colitis and Gastroesophageal reflux disease (GERD).” As such, we expect that we could hear ongoing updates of additional allowance notices from USPTO as it relates to what could be a growing IP portfolio around InFoods – which now clearly encompasses more than just one product (i.e. IBS) candidate.
As a reminder, a food-exclusion study showing Biomerica’s first-generation ELISA immunoglobulin G (IgG) antibody assay was able to significantly reduce ulcerative colitis symptoms and improve participants’ quality of life was published in September 2018 in the journal Inflammatory Bowel Disease (see link to our full report for our related discussion). As we noted at the time, we feel that the results are particularly compelling 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.
This may also mean that the eventual target market for their guided food-elimination diagnostic could be significantly expanded beyond what we have characterized as the ‘reachable IBS population’ (see our valuation section for specifics) – our assumptions will be updated if and when we think it is warranted.
Also, as it relates to InFoods, BMRA disclosed in their Q3 10-Q that on March 12th they entered a contract with a third-party institution to conduct an “Endpoint Determination Study” on their InFoods diagnostic. As a reminder, in late-June 2018 Biomerica announced that the first patient had enrolled in their Endpoint Determination study. It is not clear what the role is of the institution that is the subject of this most recent announcement nor if this may indicate that the study’s enrollment had stalled since the first patient enrolled last summer.
As it relates to recent progress of BMRA’s h.pylori program, the company announced in early February that, based on discussions with the FDA, they need less than 40 additional clinical samples to complete their ongoing clinical study. These 40, which are expected to be collected over “the next few months”, are in addition to 210 patient samples that have already been aggregated. Following collection and completion of the study, BMRA expects to make a 510(k) filing seeking FDA clearance of their novel h.pylori test.
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