Both the top and bottom lines of Biomerica’s (NASDAQ:BMRA) income statement were largely flat through the first six months of fiscal 2020 (ending October 31, 2019) as compared to the year-earlier period. While 1H 2020 saw sales in both Europe (which accounts for ~26% of BMRA’s total revenue) and the U.S. (~8% of total) slide by about 20%, this was offset by 10% revenue growth in Asia (50+% of total) and a nearly 140% gain in sales from the Middle East (10% of total sales).
Total revenue was $1.2M in Q1’20 (ending 8/31/19) and $1.6M in Q2’20, representing a yoy decrease and increase of 6% and 6%, respectively. Revenue through the first half of fiscal 2020 was $2.8M, or flat from $2.8M in the comparable prior-year period. Revenue increased sequentially by 15% (from $2.4M in 2H’19), which is consistent with the historical trend whereby BMRA’s sales have skewed in favor of the second half of the year.
More importantly, we continue to anticipate that financial performance will significantly improve as a result of what appears to be consistent (although, perhaps, more measured than expected) progress in development and validation of both InFoods and the company’s proprietary H. Pylori diagnostic. Some of the most recent product development highlights include patient enrollment for InFoods’ endpoint study commencing at Houston Methodist (which joins Beth Israel and University of Michigan as the third renowned medical center conducting this study). As it relates to recent highlights of the H. Pylori program, validation studies continue and, per management’s most recent guidance, the company hopes to be in a position to file for FDA clearance in the very near-term and for sales of the diagnostic to begin by the end of 2020.
Additionally, EZ Detect, the company’s flagship colorectal cancer screening test, could represent a supplemental growth opportunity, particularly now that substantive distribution in China has been secured. In June BMRA entered into an exclusive distribution agreement with MaxHealth, which (for context of their distribution reach and capabilities) is also the exclusive regional distributor for Olympus’ GI endoscopy products. Terms include a minimum purchase requirement of $17M (in aggregate) over the initial seven years in order for MaxHeath to maintain exclusivity in that country. Of this, $100k was required to be paid at close of the contract and another $900k upon clearance through China’s customs. As we had discussed in the past, we view China as a potentially significant opportunity for EZ Detect given not only the massive population of the country but also certain unique characteristics of that market which could prove particularly receptive to BMRA’s simple, non-invasive, rapid and inexpensive colorectal cancer test.
Gross Margin, Operating Expenses
Gross margin averaged 30.0% through the first six months of fiscal 2020, up more than 300 basis points from 26.7% in the comparable prior-year period and nearly 750 bps better than the second half of fiscal 2019. While still well-below historical highs, we continue to forecast substantial margin improvement upon the market entry of new products. H. Pylori, which could potentially launch in the U.S. by year-end, likely represents the most significant near-term new product margin enhancer. In addition, while it is unclear what, if any, influence meaningful sales of EZ Detect in China would have on GM, it will be something we will be keeping an eye on.
Operating expenses were $1.8M, or 66% of total revenue through the first six months of fiscal 2020, compared to $1.7M, or 61% in the prior-year period. For additional historical context, OpEx averaged 58% in fiscal 2018 and 71% in 2019. 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 $1.7M in 2019. Through the first six months of 2020, R&D is running at an annualized rate of just $1.6M. 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 $358k and $366k ($356k and $761k, ex-changes in working capital) in cash for operations in the three and six months ending November 31,2019, compared to $244k and $1.0M ($386k and $776k, ex-changes in working capital) in the comparable prior-year periods.
Cash balance was $851k at most recent quarter-end. Subsequent to then, ~$47k of cash was raised via the sale of registered shares and options exercises. Additional capital could come from MaxHealth, from minimum product purchase orders and/or under an explicit stock purchase option covering up to 500k common shares (that option, initially set to expire on 12/31/2019 was recently extended).
Value BMRA at $2.50/share (base business) + $7.00/share (InFoods) = $9.50/share
We use sum of the parts to value BMRA; the base business (everything except InFoods) plus InFoods. We note that we are only modeling assumed U.S. InFoods sales and we do not yet model the novel h. pylori test that recently commenced clinical studies. All of our modeling and valuation-related assumptions will be updated if and when appropriate.
We continue to value the base business using a comparable cohort of five companies of various market capitalizations in the medical diagnostics space with products/services that target the POC and/or clinical lab markets to value BMRA. Based on several metrics, BMRA’s base business is valued at approximately $2.50/share.
Value InFoods at ~$68M (~$7.00/share):
We value InFoods separately from that of the base business given the former’s significantly greater growth potential. As we outlined above, we think our InFoods assumptions and related outlook/forecast are reasonable. Given the rapid growth rate and steepening revenue inflection that we estimate at approximately years 2023/2024 we think a 11x sales multiple is reasonable, particularly when looking at the ~11x trailing sales multiple Valeant paid for Salix (i.e. Xifaxin) in 2015. Applying 11x to our $8.4M 2024 forecasted InFoods revenue and discounting back to the present at 14%/year, results in InFoods present value of approximately $68M, or $7.00/share. If and when there is attrition of some of the substantive unknowns, our risk discount will similarly reduce and likely result in higher calculated InFoods value.
Our sum of the parts values BMRA at approximately $9.50/share.
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