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PBIO: Strong Revenue Growth Expected for the remainder of 2014, bullish outlook

By Grant Zeng, CFA

Record product revenue reported for 1Q14;
Continued revenue growth expected for the remainder of fiscal 2014;
One new product already launched, another one will be launched in June 2014;
We continue to be bullish on PBIO shares;

PBIO Reports Strong Financial Performance for 1Q14

On May 15, Pressure BioSciences (PBIO) reported strong financial results for the first quarter ended March 31, 2014.

Product and service revenue for 1Q14 was $404,147, compared to $221,569 for 1Q13, an increase of 82%.  This was the record quarterly revenue in the Company’s history. It also exceeded our estimate of $300,000.

There was no grant revenue in 1Q14, compared to grant revenue of $149,168 for 1Q13.

Sales of consumables in 1Q14 were $54,612, compared to $27,224 for 1Q13, an increase of 101%.

Total revenue for the first quarter of 2014 was $404,147, compared to $370,737 for the first quarter of 2013, a 9% increase.

Due to the lack of grant revenue in 1Q14, operating loss for 1Q14 increased to $782,366 from $725,024 for 1Q13.  Therefore, gross margin decreased to 56.1% for 1Q14 from 71.8% for 1Q13.  

GAAP net loss was $3.1 million ($0.25 per share) for 1Q14, compared to net loss of $1.4 million ($0.11 per share) for 1Q13. The increase in net loss was due primarily to the change in the fair value of derivative instruments in 1Q14, and a deemed dividend on the Company’s convertible preferred stock.

Excluding the non-cash charge for the change in the fair value of derivative instruments, net loss for 1Q14 was $2.4 million ($0.19 per share), compared to net loss of $1.4 million ($0.11 per share) for 1Q13.

As of March 31, 2014, PBIO had cash and cash equivalents of $428,537, compared to $31,417 at December 31, 2013. During the first quarter of 2014, the Company closed $1.8M of Series K PIPE.

We think PBIO is getting off to a good start. Product and service revenue increased 82.4% year over year, and 34.4% sequentially. Even without grant revenue, total revenue still increased 9% in 1Q14 year over year.

We are especially impressed by the strong sales of consumables in 1Q14. Sales of consumables in 1Q14 were $54,612, compared to $27,224 for 1Q13, an increase of 101%. This is important for the long term revenue growth. As we discussed before, consumables are recurring revenue, which should increase when more and more instruments are installed. This revenue may account for a large portion of total revenue in the future.

It should be appreciated that PBIO achieved the revenue growth in 1Q14 while keeping operating expenses close to 2013 levels ($782,366 vs $725,024).

We Expect Continued Revenue Growth In The Remainder of 2014

Based on the strong financial performance for 1Q14, as well as the two new products launch and continued marketing efforts by management, we estimate that revenue will continue to grow in the remainder of 2014.

Specifically, we model product sales will reach $1.65 million in fiscal 2014, an increase of 58% over $1.05 million product sales for fiscal 2013. 

We think revenue ramp in 2014 will be driven by sales from both existing and new products (instruments and consumables), from the Company’s expanding distribution network, and from grants currently being reviewed.

PBIO plans to release the new High Throughput (HT) PCT-based Platform next month, which will help foster discussions with large, multi-national sales, marketing, and distribution partners. Management indicated that these discussions will lead to at least one major strategic partnership before years' end.

The HUB880 Launched

PBIO released the Barocycler HUB880 in March 2014, the newest addition to the Company's growing line of high-pressure instrument systems. The Company also announced the sale (and shipment) of its first HUB880 system to Dr. Wayne Hubbell of the University of California Los Angeles (UCLA).  PBIO plans to showcase the HUB880 at the upcoming U.S. Human Proteome Organization's 10th Annual Conference to be held at the Westin-Seattle (WA), April 6-9, 2014.

The HUB880 is a first-in-kind instrument.  It is an automated, computer-controlled, bench-top, ultra-high pressure instrument.  The HUB880 can generate pressures up to 100,000 psi.  This is the type of pressure that will be very helpful to scientists making vaccines, to researchers in the food industry (pathogen inactivation studies), material science applications (quality control of petroleum, hydraulic fluid, plastics, valves, etc.). And it will play an important role in life sciences research, as these pressures will unravel the secrets of many biological substances that are not extracted/inactivated/recovered/etc. at “lower” pressures.

PBIO’s HUB880 targets the large market of vaccines, food industry and material science. The HUB880 costs about $75,000 per unit.

There are approximately 500,000 scientists worldwide working with biological samples, such as animal, plant, microbial, and human cells.  These cells, and the biomolecules that constitute them (e.g., proteins, lipids, DNA) have historically been controlled using temperature and chemicals. However, studies have shown that cells/biomolecules also respond to specific levels of pressure in unique and reproducible ways.  Thus, with its ability to reach ultra-high pressure levels significantly beyond any automated bench-top pressure instrument commercially available today, the Barocycler HUB880 can potentially offer scientists the unique ability to control certain cells and biomolecules in ways never before achievable.

High Throughput Barocycler Will be Launched in June    

The High Throughput (HT) Barocycler uses the disposable microwell strips that are universally used by labs worldwide. PBIO’s ability to perform PCT with these strips will allow the Company to directly integrate its PCT instruments with the current automated robotically-driven microwell templates used by thousands of labs worldwide.

PBIO remains on target to release this new PCT System as planned at the annual meeting of the American Society for Mass Spectrometry in mid-June 2014.

The high throughput system is a breakthrough technology for PBIO. PBIO announced in June 2013 that they have achieved and passed proof-of-principle objectives in their multi-year investment into the development of a high throughput (HT) system for their patented pressure cycling technology (PCT) platform. The new HT design will allow their PCT platform to integrate with the automated, universally accepted HT sample preparation and analytical system formats installed in tens of thousands of biological research laboratories worldwide.

This breakthrough also has the potential to significantly accelerate its growth in existing and new PCT-based applications and products, and its ability to attract and form new strategic partnerships.

Many research laboratories working with biological samples worldwide use automated, HT sample preparation and analytical systems in their studies. HT systems generally use sample handling robotics and “multiwell” test plates in standardized formats (e.g., 24, 96, or 384 wells per plate) for processing and testing large numbers of samples simultaneously. The multiwell plate is often processed in an automated fashion, allowing scientists to perform other important tasks while samples are being processed unattended.

Although a number of studies have shown significant advantages of the PCT platform in preparing biomolecules (e.g., DNA, proteins, and lipids) for analysis, the PCT platform continues to be used primarily in small but important research studies. Unlike today’s popular HT multiwell plates that use an automated, unattended approach, the PCT Platform uses individual test tubes that require a lot of manual sample handling. These manual sample handling requirements have prevented the PCT platform from being better accepted by the research community. To that end, PBIO’s new HT multiwell format will substantially enhance and accelerate the acceptance of the PCT platform in the life sciences R&D marketplace. This technology breakthrough is a game-changer for PBIO in our view

We Continue to be Bullish On PBIO shares 

We maintain our Outperform rating on PBIO shares and reiterate our twelve-month price target of $2.00 per share.

Below are the reasons for our call.

PBIO reported record product sales for the first quarter of 2014, and we expect continued revenue growth in the remainder of 2014 and beyond due to two new products launch and continued marketing efforts from management.

In terms of valuation, we think PBIO shares are undervalued based on the Company’s fundaments. Currently, the Company trades around $0.47 per share with a market cap of $6.1 million based on 13 million outstanding shares. We believe this deeply undervalues the Company based on the current fundamentals we discussed above. We understand that market discounts the value of the Company because the Company has only limited revenue base and has been losing money since its inception. We also understand that the Company has a relatively weak balance sheet, and further financing will be needed. However, when we look at the Company and the industry in which it operates in detail, we realize that PBIO is a company with huge opportunity and one that can grow its revenue and earnings at a tremendous rate in the next few years.

PBIO operates in the rather large, but underserved research services market. The Company has developed a unique and superior pressure cycling technology (PCT) for the preparation of biological laboratory samples. The Company’s PCT platform holds competitive advantages over incumbent technologies in many important aspects related to sample preparation.

Currently, the Company is in the early stage of commercialization of its platform technology. We have realized that sales have not been stellar so far, but this is understandable. Pressure cycling technology is quite new to most customers in the sample preparation market, and the costs for PCT are also higher than those for most existing technologies. Therefore, rollout of the PCT platform will take time. However, once customers become familiar with the new PCT platform, and realize its advantages over existing technologies, uptake of PCT and its consumable products by the industry will increase dramatically in our view.

We are now optimistic about the Company’s prospect. With a rapidly growing market worldwide, combined with its unique technology and broad range of product offering, the Company is well positioned to boost its top line and bottom line in the coming years. According to our long term financial model, the Company’s revenue will grow at a compound annual growth rate (CAGR) of 66% in the next six fiscal years from 2014 to 2019. PBIO will become profitable in fiscal 2018 with an EPS of $0.02.

We think PBIO is more like a development stage biotech company. Our price target of $2.00 per share values the company at 26 million in market cap based on 13 million outstanding shares. This valuation is still very conservative in our view. As long as the Company can execute its growth strategy correctly, we believe this goal is achievable. Patient investors will get rewarded.


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