Cyberonics Worth Looking Into: A Low-Risk Stock With Decent Upside

Houston, Texas, -based Cyberonics (CYBX), a medical instruments company engaged in the design, development, marketing, and sale of implantable medical devices to hospitals and ambulatory surgery centers, has been witnessing surging demand for its VNS Therapy for the treatment of refractory epilepsy. Moreover, the company has been rewarding its shareholders with attractive share repurchases. I am bullish about the company's potential in VNS Therapy in an under-penetrated epilepsy market, where Cyberonics has strong untapped opportunities.

The company's stock made a 52-week low at $42.31 earlier this year and currently it is hovering around $52. I feel that the stock has the potential to touch $70 within the next twelve to eighteen months due to the company's strong emphasis on product development and international expansion. In this article I will focus on the company's potential growth drivers, while making a bullish case for the stock.

Cyberonics: Company Overview

Cyberonics offers VNS (vagus nerve stimulation) therapeutic systems that provide neuromodulation therapy for the treatment of refractory epilepsy and TRD (treatment-resistant depression). VNS Therapy is delivered through a small pacemaker like generator implanted in the chest that sends preprogrammed, intermittent, mild electrical pulses through the vagus nerve in the neck to the brain. The company is also investigating the use of VNS for other indications, such as CHF (chronic heart failure) and management of epilepsy without implantation.

Why You Need to Take a Closer Look at Cyberonics

The global market for epilepsy is ~80% under-penetrated and offers an incredible investing opportunity. I believe Cyberonics could be an excellent proxy play for investing in the epilepsy market. The primary reason for considering Cyberonics as an investment option is that the company is currently actively focusing on research and development in the field of VNS Therapy for patients with refractory epilepsy, particularly seizure detection, responsive stimulation and associated technologies.

For increasing its market share Cyberonics is emphasizing on developing a robust pipeline. The company is currently developing VNS Therapy Systems utilizing heart and brain-induced seizure detection technology, rechargeable battery technology and wireless communication technology. I feel these new technologies will help the company significantly penetrate the epilepsy market.

According to recent data from the U.S. Centers for Disease Control and the National Epilepsy Foundation, ~2.7 million people in the U.S. suffer from epilepsy, which translates into ~0.4 million potential patients (with drug-resistant epilepsy) for the company's VNS Therapy. Furthermore, a minimum of 125,000 epilepsy patients are detected every year, leading to 15,000-24,000 new patients for Cyberonics on an annual basis.

In the last three years, the company has invested heavily in developing two new VNS Therapy generators, the AspireHC (High Capacity) and the AspireSR (Seizure Response), with the intention of replacing the older models. The AspireHC has been generating strong momentum in the U.S. with an improving ASP. It addresses the need among some patients for a device with a higher capacity battery and also provides a platform for the AspireSR generator. I expect the replacement business model will drive significant growth for the company on a sustainable basis.

Cyberonics' Product Development Activities

For maintaining its leadership position in the VNS Therapy market, the company is focusing on developing some unique products, which are listed below:

AspireSR: For the AspireSR generator, Cyberonics initiated the E-36, EU clinical study to support CE Mark submission. The company completed enrollment in the clinical study in the first quarter of the current fiscal. Cyberonics plans to submit AspireSR for European regulatory approval no later than the end of fiscal 2014. For the E-37 clinical study of AspireSR in the U.S., the company started enrolling patients and expects to complete enrollment of the first phase of the trial in the current fiscal year.ProGuardian: The company's ProGuardian system is its in-home monitoring system that is designed to aid the detection, recording and notification of epileptic seizures accompanied by heart rate variations or movement. The company's aim is to submit the first product of the ProGuardian platform for regulatory approval in Europe by the end of the fiscal year 2014.Relay Generator: The development of Cyberonics' Relay Generator, a wireless-enabled VNS Therapy generator, has continued to progress as the company advances towards regulatory submissions.Programming Tablets: For the programming tablets, the company is transitioning from the handheld PDA programmer to a new tablet computer programmer. Shipments of the new tablets have already begun.

Apart from the products listed above, the company completed enrollment and implant activity in the ANTHEM pilot study for the Neural Autonomic Regulation Therapy for chronic heart failure. Further activities in this area remain contingent on the results from this pilot study.

Positive Catalysts for the Stock

Strong FY14 Guidance: Cyberonics provided strong outlook for fiscal 2014. The company expects revenues in the range of $279 - $283 million. Income from operations is expected in the range of $85 - $88 million resulting in net income of $53 - $56 million and adjusted EPS of $1.93 - $2.01 for fiscal 2014.

International Markets Focus: Cyberonics has a strong international presence and it sells its products directly, as well as through independent distributors in the U.S., Europe, Latin America (including Brazil), Russia and Asia (including Japan, China and India). The company has already made implants in 68,000 patients internationally.

Epilepsy is the second most prevalent neurological disorder in the world. The recent World Health Organization study on epilepsy showed that there are over 3.0 million individuals with epilepsy in Western Europe with over 150,000 new cases diagnosed each year. In Japan, these numbers are 1.0 million and 50,000, respectively. Cyberonics is focused on physician training, fulfilling patient registry requirements and initiatives to secure reimbursement to expand globally. The company seeks to increase top-line from its international operations by deploying senior sales and marketing teams overseas, particularly in Europe and Japan. Cyberonics plans to build a second manufacturing facility in Costa Rica, which the company believes, after being fully operational by fiscal 2015, will provide faster global market access.

Collaborative Initiatives: In September 2012, Cyberonics invested $2 million in Germany-based Cerbomed GmbH. Cerbomed manufactures the Nemos t-VNS Device for the treatment of epilepsy, pain and depression. Cyberonics has plans to invest further in the company up to $5.5 million if it achieves some significant clinical landmarks. The company has the option to conduct a clinical trial in the U.S. to gain the FDA approval.

In June 2012, Cyberonics inked a deal with Magnetic Resonance Imaging ("MRI") electrophysiology tools developer Imricor Medical Systems to develop MRI-safe VNS Therapy System. The company has commenced several clinical studies on VNS therapy for patients with refractory epilepsy.

Valuation and Projected Stock Price

Cyberonics is a cash-rich company with cash and equivalents of $106.32 million on the balance sheet as of quarter ending June 2013, against a debt to equity ratio of zero.

CYBX Cash and Equivalents data by YCharts

However, the company's gross margin being under pressure, the stock witnessed significant correction from its 52-week high at $56.73. Beginning from 2012, the company witnessed its gross margin has contracted on a consistent basis. The margin pressure was primarily due to the expansion of the company's marketing team, higher expenses associated with the E-36 clinical study and costs related to establishing the new facility in Costa Rica. Cyberonics management expects that in FY2014 margin pressure will remain an overhang. The company expects gross margin to hover around 89.5% in FY2014.

CYBX Gross Profit Margin Quarterly data by YCharts

Despite the margin pressure I remain bullish on the stock and consider the correction as an opportunity to buy. I believe that the reasons for margin compression will lead to higher revenues and profitability from the next fiscal. Moreover, an expanding book value per share coupled with a steady ROE around 20% is pretty impressive. Since 2012, the stock traded in a Price/Book range between 5.2x and 7.75x. I expect the company's book value per share to reach $9.50 within the next twelve months. Assigning a Price/Book of 7.5x on that value I get $71.25, the company's projected stock price for FY2015.

CYBX Price / Book Value data by YCharts

Cyberonics is currently trading at a P/E of ~31x on a trailing twelve months basis, slightly above the peer group average of 29x. Among its peers, Techne (TECH) is trading at ~25x, Given Imaging (GIVN) at ~36x and St. Jude Medical (STJ) at ~24x. The company guided that its adjusted EPS will be in the range between $1.93 and $2.01 for FY2014, which I feel has already been factored in the current price of the stock. However, the company's EPS is expected to rise at a CAGR of 20% and for FY2015 I expect the EPS will be in the range between $2.30 and $2.45. On average the FY2015 EPS would be $2.38. Assigning the peer group average P/E of 29x on that EPS, I arrive at my one-year target price of $69 for Cyberonics, which broadly tallies with the projected price based on Price/Book ratio.

CYBX PE Ratio TTM data by YCharts

Summary: Reasons to Buy

The global market for epilepsy is under-penetrated by a huge margin and Cyberonics offers an excellent investing opportunity in this space.Cyberonics is emphasizing on developing a robust pipeline for maintaining its leadership position in the field of epilepsy treatment.The AspireHC has been generating strong momentum in the U.S. with an improving average selling price.The AspireSR is undergoing clinical trials in the EU (E-36), which upon successful completion would lead to commercialization of the product that would boost the company's top- and bottom-line significantly.The company's international focus and collaborative efforts should be EPS accretive on a sustainable basis going ahead.The company is cheaply valued in terms of FY2015 earnings, and therefore has limited downside in corrective phases.

Potential Risks

Cyberonics is currently working hard to obtain coverage for VNS Therapy for treatment-resistant depression. However, its recent request to the Centers for Medicare and Medicaid Services ("CMS") to reconsider the non-coverage decision taken in 2007 has been declined in May this year. It came as a major setback for Cyberonics.Depressing gross margin is a bit worrying in the near term due to higher short-term expenses. However, if the expenses remain at an elevated level for a prolonged time period, the stock could see significant correction.Cyberonics faces stiff competition from players like Medtronic (MDT), St. Jude Medical etc. Medtronic obtained FDA approval for its deep brain stimulation ("DBS") device for controlling the tremor in Parkinson's disease, which is slightly negative for Cyberonics.

The Bottom Line

Cyberonics is a shareholder-friendly company, which consistently returns values to its shareholders through share repurchase programs. In January 2013, the company approved a new share repurchase program with authorization to repurchase up to one million shares of the company's outstanding common stock. This indicates that the company is confident in expanding its horizon, both geographically as well as product wise. The stock is certainly worth considering for a long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Hanger: A Cheap Stock In The O&P Space With Significant Upside

Austin, Texas, -based Hanger (HGR), the nation's leading provider of orthotic and prosthetic (O&P) patient care services, has seen its stock appreciate by more than 65% in the last one year. However, in the last few weeks the stock corrected almost 20% from the top at $37.39, and currently it is hovering around $31. Hanger is currently focusing on expanding its geographical footprint through complementary acquisitions. I believe that the recent correction offers an excellent buying opportunity with ~30% upside in the near-term.

Company Overview

Hanger is a leading distributor of O&P devices in the U.S. Effective from January 2013, the company has realigned its reporting segments into two groups, which are: 1) Patient Care and 2) Products and Services. Hanger owns and operates O&P patient care clinics. The company proactively partners with suppliers in the design and development of new and proprietary components, clinical processes, tools and products.

As the leading provider of prosthetics, orthopedic supports and braces in the U.S., Hanger serves more than 650,000 people each year. Its nationwide network of over 640 patient care centers spans 45 states and the District of Columbia. A group of more than 1,000 skilled practitioners supports Hanger's entire operation.

Why Hanger Is Worth Looking Into

I feel Hanger is worth considering primarily because of two reasons. First, Hanger accounts for 19% of the estimated $4.3 billion spent each year in the U.S. on O&P products and services. Second, being the leading player in O&P products and services, the company enjoys economies of scale its competitors can't match. To take advantage of the economies of scale, Hanger is looking to expand its geographical footprint outside the U.S. through complementary acquisitions.

Hanger's top-line has been growing on a consistent basis, supported by healthy contributions from both reporting segments of the company. Going ahead, I believe Hanger's top-line and market share will increase further due to the company's policy to build strong patient relationships by offering comprehensive total care packages that physicians can rely upon.

Hanger's Growth Drivers

Hanger's Patient Care segment is its primary growth driver. Hanger's superior offerings coupled with unmatched technology ensure steady revenue generation, which is expected to continue going ahead. Moreover, the company's high-margin Accelerated Care Plus ("ACP") business seems to be turning around as it is delivering increasing returns. Hanger generates revenue primarily from two sources, orthotic care and prosthetic care.

Orthotic Care: Hanger's orthotic care business comprises of designing and fabrication of a range of custom-made braces and other devices, such as spinal, knee, and sports-medicine braces that provide external support to patients suffering from musculoskeletal disorders, including ailments of the back, extremities or joints, and injuries from sports or other activities. Hanger's Insignia laser scanning, a completely noninvasive technology, ensures a precise fit for many orthotic devices. Using a hand-held scanner and a computer, a practitioner can capture and store three-dimensional images of the affected area. Insignia images are perfect within one millimeter and the scanning process is quick, easy and painless.

Hanger's National Orthotics Program is the largest provider of orthotic patient services in the U.S. Under the program Hanger offers some specialty orthotic services with high margins, which are described below:

Diabetic Foot Care: People with diabetes often experience medical issues with their feet and legs. The associated neuropathy, loss of sensation and poor vision present significant challenges to proper care. Diabetic Foot Care is a comprehensive approach to maintain healthy feet.Pediatric Orthotics: Hanger has a special pediatrics orthotics program that includes all types of orthoses for infants and older children as well as cranial helmets and cranial bands for the treatment of plagiocephaly.Burn Treatments: Burns create scars physically and emotionally. Hanger's innovative technology, coupled with advancements in medical procedures, has made it possible to get rid of scars. Hanger's approach to comprehensive wound care, from acute in-patient management to out-patient rehabilitation and reintroduction of the patient to their daily life helps build patient's self esteem.Postmastectomy Services: Mastectomy products and postmastectomy services are Hanger's specialized offerings within its orthotics program. These include mastectomy forms, custom mastectomy prostheses, and mastectomy bras/undergarments. The practitioners who specialize in mastectomy products are sensitive and discreet in providing patient care services.

Prosthetic Care: In prosthetic care, Hanger offers custom-made artificial limbs to patients with loss of limbs due to vascular diseases, diabetes, and cancer or congenital disorders. Traumatic limb injury can also lead to amputation of limbs. Most of these injuries occur due to motor accidents, through on-the-job or recreational injuries, and during military service in combat zones. In all of the above situations, the removal of a limb is usually a life-saving procedure.

There are approximately 1.7 million people in the U.S. living with limb loss. Each year more than 150,000 people face the amputation of a limb, among which about 70% are older adults. Hanger offers specialized programs, such as Upper Extremity Prosthetics Program ("UEPP") and Lower Extremity Prosthetics Program ("LEPP") that are part of its prosthetic care business line.

International Expansion to Fuel Future Growth

As I mentioned above, Hanger is seeking to expand its geographical footprint and international revenues through complementary acquisitions. Smaller companies often approach Hanger to help them grow as Hanger's associates, because they find it difficult to progress alone due to administrative and regulatory obstacles. If Hanger sees synergy with such companies, it acquires them. Hanger made many small tuck-in acquisitions in 2012 worth $60 million, which exceeded the company's previously announced goal to generate revenues of $20 million by year-end.

Although merger and acquisition have some inherent risks, I believe Hanger's case is different, as it is consistent with its merger and acquisition policy. Its acquisitions are based on location, quality of practitioners, and efficient product/service mix. In future Hanger is expected to acquire more companies outside the U.S. for expanding revenues and bottom line. The company's strong cash position will help it penetrate further in the overseas O&P market.

More Positive Catalysts for the Stock

Hanger has a robust pipeline. Its upcoming vacuum solutions used to hold prosthetics in place more securely should help capture market share from rivals going ahead. Furthermore, its virtual reality based therapeutic solutions provided by ACP are expected to boost future revenues and profitability significantly.Janus, Hanger's new clinic management system would considerably enhance patient satisfaction, clinical effectiveness and billing efficiency. Linkia, one of Hanger's subsidiaries, helps the company maintain balance between volume and fair pricing for services offered to customers. Linkia is a network management company in the orthotics and prosthetics industry, which tries to seek contracts with national and regional insurance companies.In 2012, Hanger completed its WalkAide INSTRIDE clinical trial. The company said that it expects to submit the results to the Centers for Medicare and Medicaid ("CMS") for coverage decision in the second half of 2013.Hanger's strong sales trajectory in Patient Care combined with the continued execution on its cost savings and efficiency initiatives will help the company offset a good portion of its recent cost increases. This will enable the company to deliver margin expansion and earnings growth going ahead.

Valuation and Projected Stock Price

Hanger is a cash rich company with cash and equivalents of $5.77 million as of quarter ending June 2013 against a little debt on the balance sheet. Although the cash position has weakened due to the acquisitions the company made in 2012, the debt to equity ratio has also decreased at the same time, which implies the company remains neutral in terms of net cash. What's encouraging is that the company's revenue per share has been rising steadily. The recent acquisitions coupled with an efficient product-mix helped the company register solid revenue growth.

HGR Cash and Equivalents data by YCharts

Hanger is currently trading at a P/E of 17.04x, far below the peer group average of 26x. Among its peers, Integra LifeSciences (IART) is trading at 45.80x, ResMed (RMD) at 23.48x and Hill-Rom Holdings (HRC) at 19.22x. Perhaps Hanger's acquisition related uncertainties are responsible for this discount in valuation. However, I believe that the discount will be narrowed significantly going forward, once the overhang related to the company's recent acquisitions subsides and earnings start beating analysts' estimates.

HGR PE Ratio TTM data by YCharts

Hanger's management guided that its EPS would be in the range of $2.02 to $2.09 (up 11.6% to 15.5%) in 2013. I believe in the company's guidance as I am impressed with Hanger's recent initiatives to boost top- and bottom-line performance. Moreover, its realignment plan to report in two separate segments is also an impressive move. On an average I expect that the company will deliver an EPS of $2.05 in the current fiscal. In the last five years, the company's stock has traded in a P/E range between 9.9x and 21.9x based on trailing twelve month earnings. Assigning a P/E of 20x on the expected EPS of $2.05, I arrive at $41, Hanger's projected stock price for the current fiscal. That's ~30% upside from the current level around $31. I feel it will play out within the next six months.

Summary: Reasons to Buy the Stock

Hanger is expanding its business by investing in complementary tuck-in acquisitions, which I believe is quite encouraging.The company enjoys enormous economies of scale that's beyond the reach of its competitors.I feel Hanger's realignment plan to report in two separate segments on the basis of separate end markets is exciting.The company's efficient product-mix in both orthotic and prosthetic segments will lead to significant revenue growth.Hanger has a robust pipeline containing vacuum solutions and therapeutic solutions provided by ACP.The company's shares are trading at a significant discount relative to the peer group average, and hence deserve buying at the current price.

Potential Downsides

Hanger's financial performance could be negatively impacted due to sequestration, healthcare reform and measures including Medicare and Medicaid reimbursement cuts.Hanger operates in an extremely fragmented industry, which needs to be consolidated. Until that happens, Hanger may have to face fiercely uncompetitive price, especially from small regional players.Hanger's growth predominantly depends on acquisitions with usual uncertainties and risks. In 2012, Hanger acquired some independent O&P companies that made substantial purchases from Hanger's distribution businesses. After acquisition, those purchases became Hanger's internal inter-company sales on a consolidated basis and therefore negatively impacted the external sales figures of the company's distribution businesses.The Recovery Audit Contractor ("RAC") program run by the Centers for Medicare and Medicaid ("CMS") coupled with the 2.3% medical devices excise tax under Obamacare is putting extra pressure on individual O&P customers, which Hanger should try to offset by offering more efficient product-mix and flexible pricing policy.

Conclusion

Hanger's products and services will see robust demand due to an aging population growth, increased incidents of chronic diseases like diabetes due to obesity and other health risk factors, and last but not the least, technological advancements that help live a better life even in difficult situations related to one's health. I would recommend accumulating Hanger's stock at the current price as well as in corrective phases.

Disclosure: I am long IART. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Provectus Pharmaceuticals: Small Cap, Huge Upside

Provectus Pharmaceuticals, Inc. (PVCT.OB): Provectus Pharmaceuticals: Small Cap, Huge Upside - Seeking Alpha (function(_,e,rr,s){_errs=[s];var c=_.onerror;_.onerror=function(){var a=arguments;_errs.push(a); c&&c.apply(this,a)};var b=function(){var c=e.createElement(rr),b=e.getElementsByTagName(rr)[0]; c.src="//beacon.errorception.com/"+s+".js";c.async=!0;b.parentNode.insertBefore(c,b)}; _.addEventListener?_.addEventListener("load",b,!1):_.attachEvent("onload",b)}) (window,document,"script","4ffae9d6f05d1da630000008"); if (SA.Data && SA.Data.Cache) { var adata = SA.Data.Cache.get('campaign_content'); }.market_currents_list li .ticker_date_left .mc_list_tickers a{font-weight: normal} var ms_slug = ''; var article_dashboards = '@investing-ideas@sectors@'; var article_sectors_themes = '@long-ideas@small-cap-insight@us@drug-manufacturers-major@healthcare@article@'; var ratings_hash={}; var ARTICLE_ID = 1677782; var ARTICLE_TYPE = "standard"; var ARTICLE_LOCK = ""; var author_slug = "trust-intelligence"; var pticker_for_ads = "pvct.ob"; var time_left; var lock_comments = false; var machine_cookie = readCookie('machine_cookie'); var middle_version = ABTest.identity%10; try { window.sessionStorage.setItem("/article/"+ARTICLE_ID, '1'); } catch (error) {}var mone_article_tags = "{pvct.ob};;;{healthcare};;;{long-ideas,small-cap-insight,us,drug-manufacturers-major,investing-ideas,sa-exclusive};;;{trust-intelligence}"var ord = Math.floor(Math.random()*1000000000);Seeking Alpha Seeking Alpha Portfolio App for iPad Finance (1) var ipadData; SeekingAlpha.Initializer.AddAfterLoad(function(){ if (SA.Utils.Env.isIPad && !/3/.test(SA.Data.Cookies.get("user_devices"))){ Mone.event("ipad_promotion_top","top_ipad_banner_large","ipad_promotion_displayed"); ipadData = new SA.Data.iPad(); ipadData.instanceName = "ipadData"; var responseHandler = new Object(); responseHandler.handleResponse = function(data){ if (!data.averageUserRating) return; var stars = data.averageUserRating Home | Portfolio | Market Currents | Investing Ideas | Dividends & Income | ETFs | Macro View | ALERTS | PRO   This article was sent to 202 people who get email alerts on  . Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on   » This article was sent to 339,152 people who get the Investing Ideas newsletter. Get the Investing Ideas newsletter » Provectus Pharmaceuticals: Small Cap, Huge Upside Sep 6 2013, 10:25 by: Trust Intelligence  |  about: PVCT.OB BOOKMARKED / READ LATER Bookmarked

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Provectus Pharmaceuticals: Small Cap, Huge Upside

EXECUTIVE SUMMARY

Provectus (PVCT.OB) is a small biotech company whose lead candidate, PV-10 has been granted FDA Orphan Drug Status for the treatment of highly lethal metastatic melanoma and metastatic liver cancer. It has a successful and expanding Compassionate Use program in operation and successfully completed trials on metastatic cancer of the breast, liver and melanoma, with positive results. The data suggest that intralesional injection kills cancer cells and not normal cells, with no debilitating side-effects. As if that is not enough, a single injection acts as immunotherapy, prompting the patient's immune system to attack tumors remote from the one injected. Given that PV-10 has an outstanding safety profile, no debilitating treatment side effects, and has been effective in treating solid tumors that normally have a high mortality rate, the remarkably low market capitalization makes the investment premise obvious.

COMPANY OVERVIEW

Provectus Pharmaceuticals, Inc. (OTC:BB - PVCT) is a small research organization that has started to get some significant recognition for its lead cancer drug candidate, PV-10, recently spurred on by research results and papers by the well-respected Moffitt Cancer Center (see "Single Injection May Revolutionize Melanoma Study", in Practical Dermatology) in addition to the research papers on PV-10 in treatment of melanoma, liver, breast and gastric cancers in scientific articles, the popular press, and other venues, including Twitter and an informative investor blog.

BUSINESS: Plan & Strategy

Provectus' business plan is focused "on establishing paths to licensure, broadening clinical applications and expanding business development". The Chairman and CEO, Dr. Craig Dees, has stressed that Provectus is about research and innovation, not production, marketing and distribution, so their plan is to do joint ventures, license and/or sell the drugs and/or the company to a major marketing power when it can be done in a way advantageous for the PVCT shareholders. Corporate presentations recently have mentioned ongoing licensing discussions, especially for the company's dermatology candidates. Dr. Craig Eagle, Head of Pfizer's Oncology global medical group, is a member of the PVCT Advisory board and a named inventor on a joint Pfizer-Provectus patent. There have been rumors of discussions, in the US and in China, with PFE's Chinese joint venture partner, Zhejiang Hisun Pharmaceuticals, and other Chinese firms where the company estimates it has a $30 billion opportunity.

INTELLECTUAL PROPERTY

Provectus holds Over 25 US patents and 30 international patents. This year it was granted a synthesis patent for PV-10 and about 20 related halogenated xanthenes. Pfizer and Provectus also filed a combination-drug cancer treatment patent in 2013, which included the use of a wide variety of anti-cancer agents in conjunction with PV-10.

FINANCIALS: Burn Rate & Dilution

With only minimal investment revenue and no approved drugs, the company needs to sell or issue between $14 million to $18 million in shares per year, depending upon research pace. This includes pay for their 4 permanent employees, consultants and their single office in Knoxville, TN. This adds up to between 18 million and 24 million shares added each year until Provectus successfully executes their plan to bring in revenue by making a deal to license or sell their drug candidates in the US and/or abroad. In their private placements, they have (and are likely to continue, until there is a deal) issued warrants with exercise prices of $1.05, along with the new shares. Outstanding warrants plus stock options total about 30 million. As they have issued new warrants, old warrants have expired without being exercised because the stock price stayed lower than the warrant exercise price. In calculating company valuation, I have included all these potential warrant-related shares in the fully diluted share count, for valuation purposes. If/when the warrants get exercised at some point, the exercise proceeds will fund almost 2 years of research at the company's current burn rate. In other words, once the share price climbs above $1, additional share dilution will cease for a year or two (excluding via the warrant exercising), depending upon research pace. If the company's plan to monetize their intellectual property is successful, the added warrant exercise cash will just make it easier to run the company for years without further share dilution.

Three Months
Ended
June 30, 2013

Three Months
Ended
June 30, 2012

Six Months
Ended
June 30, 2013

Six Months
Ended
June 30, 2012

Cumulative
Amounts from
January 17, 2002
(Inception)
Through
June 30, 2013

Revenues

OTC product revenue

$

-

$

-

$

-

$

-

$

25,648

Medical device revenue

-

-

-

-

14,109

Total revenues

-

-

-

-

39,757

Cost of sales

-

-

-

-

15,216

Gross profit

-

-

-

-

24,541

Operating expenses

Research and development

778,349

1,657,586

1,518,865

3,223,019

44,617,718

General and administrative

2,340,706

2,459,867

4,679,109

4,931,588

70,864,998

Amortization

167,780

167,780

335,560

335,560

7,125,057

Total operating loss

(3,286,835

)

(4,285,233

)

(6,533,534

)

(8,490,167

)

(122,583,232

)

Gain on sale of fixed assets

-

-

-

-

55,075

Loss on extinguishment of debt

-

-

-

-

(825,867

)

Investment income

256

495

283

1,015

653,500

(Loss) gain on change in fair value of warrant liability

909,206

452,145

(14,304

)

188,981

5,897,897

Net interest expense

-

-

-

-

(8,098,004

)

Net loss

(2,377,373

)

(3,832,593

)

(6,547,555

)

(8,300,171

)

(124,900,631

)

Dividends on preferred stock

(73,024

)

(51,194

)

(1,149,958

)

(101,825

)

(11,988,020

)

Net loss applicable to common shareholders

$

(2,450,397

)

$

(3,833,787

)

$

(7,697,513

)

$

(8,401,996

)

$

(136,888,651

)

Basic and diluted loss per common share

$

(0.02

)

$

(0.03

)

$

(0.06

)

$

(0.08

)

Weighted average number of common shares outstanding - basic and diluted

127,114,868

112,267,336

123,926,235

111,521,253

The above is from the Prospectus Supplement dated April 16. 2013.

Management is confident it can continue to finance current and planned trials with much less cash than is typical in the industry. In their most recent Corporate Presentation, they stated "cash on hand supports planned operations until 2014". To minimize dilution (and Management ownership of 17% of the shares aligns their interest with shareholders on this goal) and to fund operations in 2014 and beyond, the Company is actively exploring a near-term JV, licensing and/or sale of rights for PH-10. They are also open to immediate licensing of foreign rights to PV-10. The CFO is scheduled to be traveling in Asia the week of September 2nd, to speak to Chinese and Indian companies that have expressed serious enough interest to justify the trip.

DRUG CANDIDATE: PH-10

PH-10 is a hydrogel topical-application version (patented by PVCT) of Rose Bengal, a derivative of fluorescein, an agent that has been used safely for over 80 years to stain necrotic tissue in the cornea and as an IV diagnostic of liver impairment. PVCT has successfully completed Phase II trials for the treatment of inflammatory dermatoses, like psoriasis and atopic dermatitis. According to NIH, 2.2% of the population has psoriasis. The National Psoriasis Foundation estimates that 125 million people have the condition, worldwide. GlobalData estimate the number of Atopic Dermatitis patients to hit 40 million by 2016. As already explained, Provectus hopes to license or sell the rights in order to fund work on its lead drug candidate.

LEAD DRUG CANDIDATE: PV-10

PV-10 is Provectus' patented injectible version of purified Rose Bengal. It an immune-chemoablative agent that selectively goes into diseased cells, where it localizes in the lysosomes. It doesn't go into the nucleus so, unlike many treatments, and there is no worry about it being mutagenic or carcinogenic which would instigate a DNA time-bomb that can cause new cancers years after patients go into remission.. The PV-10-infiltrated lysosomes in the cancer cells rupture highly acidic contents. This, in effect, kills the abnormal cell from the inside, chemically "cooking" it like vinegar "cooks" steak tartar. This action makes PV-10 similar in action to antibiotics, killing cells that are causing illness.

PV-10 also has anti-inflammatory characteristics and characteristics of a vaccine; not only killing the cancer cell at the injection site, like an antibiotic, but stimulating the patient's own T-cells to seek out other cancer cells and kill them. The immunotherapeutic effect is illustrated by a study where T-cells from PV-10-treated cancerous mice acted as a vaccine, leading to death of cancer cells in the recipient, not treated with PV-10, after being injected with the T-cells from mice that were treated.

PVCT research has demonstrated that PV-10 treatment of one tumor can lead to clearing up remote, untreated, even deep, visceral tumors and tumors in the lymph nodes in both animals and humans. All this is accomplished without suppressing the ill person's natural immune system or making them feel sicker than before treatment. A non-debilitating, effective treatment that can kill injection-site and remote cancer cells, and presumably even cancer that has not yet grown large enough to be imaged seems too good to be true. Perhaps that is one of the reasons why the stock price is so inexpensive.

REGULATORY STATUS

Phase II trials have been successfully completed for treatment of Psoriasis, and Atopic Dermatitis with PH-10. Provectus is looking for a partner to buy the rights or JV the Phase III trials for these treatments because PV-10's treatment for cancer is a higher priority.

Orphan Drug Status: granted PV-10 for treatment of Metastatic Melanoma and Metastatic Liver Cancer, which conveys 7 years of competition-free marketing.Melanoma: Phase II trials have been completed and Phase 3 is expected to take 30 months once there is a Special Protocol Assessment in place, if via Breakthrough Therapy Designation doesn't come through first. Currently Recruiting: Detection of Immune Cell Infiltration Into Melanomas Treated by PV-10, a Feasibility Study.Liver: Initial Phase 1 trials have been completed and expanded. Currently Recruiting: A Study to Assess PV-10 Chemoablation of Cancer of the LiverBreast: Phase I trials have been completed.Some initial work has been done to use PV-10 for cancers of the prostate, gall bladder, lung, colon, pancreas, and kidney where it has potential to tackle solid tumors and metastases.

Progress on the ongoing trials for PV-10 will likely be accelerated if PV-10 is granted Breakthrough Therapy Designation or if cash becomes available because of the sale or licensing of PH-10 or of PV-10 in Asia. Following initial clinical trials, when researchers saw the obvious beneficial effect of PV-10, they requested permission to use it for their patients. Based upon the long historical safety record of the drug, the FDA approved what has become an expanding Compassionate Use program in America and in Australia, which has the highest per capita Melanoma incidence.

CLINICAL VALUE PROPOSITION & MARKET

There are four significant aspects to Provectus' market opportunity for PV-10:

It is effective for indications for which there are no adequate treatments and short survival times.It has a competitive advantage to other therapies because treating a solid tumor can reduce metastatic tumor load at remote and untreated (and otherwise inaccessible) sites.Treatment is not debilitating to the patient and does not damage normal tissue, unlike most chemotherapy or radiation.The same drug is effective in a wide variety of solid tumors and their remote metastases, and studies have shown enhanced effectiveness in combination with more traditional chemotherapy and radiation.

Metastatic Liver Cancer. Metastatic disease accounts for 95% of all hepatic malignancies. Worldwide estimates of new liver cancers in 2008 were 750,000. Based upon expected population growth alone, in 2017 or 2018, when PVCT could have PV-10 approved for liver cancer, worldwide new cases are likely to be over 850 thousand. Global Industry Analysts indicate 600,000 new cases of primary liver (Hepatocellular) carcinoma, the 3rd leading cause of cancer death in the world. They project the market for therapeutics to be $1.1 billion by 2015.

Metastatic Melanoma. There were approximately 200 thousand cases of Melanoma worldwide in 2008. An American has a 1 in 50 chance of getting it in his/her lifetime and it is the fastest growing cancer worldwide, especially in places where light-skinned people live, probably because of the destruction of the ozone layer of the atmosphere. Cases are most common in places like North America, Europe and Australia, with well developed insurance coverage. About 13% of melanoma cases spread and are lethal despite current treatment.

Breast Cancer. In 2008 there were over 1.4 million cases of breast cancer in the world. It is estimated that between 20% and 30% of breast cancers become metastatic.

The quickest path to approval of PV-10 is via the FDA Breakthrough Program. Provectus has made clear their intention to file for this. If it has not been filed already, I expect them to file soon. The next factor that affects the timeline is if/when the non-cancer skin disorder use of PH-10 can be monetized. When it has, I think Provectus will use up-front and milestone payment to increase the pace of research on PV-10, because this will allow them get to market faster without further share dilution.

Breakthrough Fast Track Application/Approval at any timePH-10 dermatology JV or sale at any timeCurrently Available and being expanded (not just for Melanoma): Expanded Access Protocol for PV-10 for Cutaneous or Subcutaneous TumorsFDA SPA agreement expected Q3'13 for Phase III Metastatic MelanomaPV-10 Metastatic Melanoma Phase III begins enrollment Q4'13PV-10 Liver: continues with the expanded Phase I trial and meeting with FDA about starting a combined Phase II/III trial by the end of the year.Initial Data on PV1- Melanoma Phase III trials Q4, 2014FDA approval for Malignant Melanoma, if not fast-tracked, midyear 2016. With Breakthrough designation, it could come more than a year earlier. Breakthrough designation could also speed up the timeline of the use of PV-10 for other indications.

STOCK MARKET

Stock performance has not been strong and therein lies the opportunity. Inside ownership has been increasing and, as of March 2013, it was up to 17.5% of the 129 million common shares currently outstanding. There are also about 5 million preferred shares and 30 million warrants and stock options out for a total of about 164 million shares, fully diluted. There is insignificant institutional ownership, which I believe is a plus for individual investors.

In 2012 the company adjusted the makeup of the Board of Directors in order to bring in enough outside Directors to be eligible for a NASDAQ listing (if/when the share price gets high enough to qualify) in obvious recognition that trading in the OTC market deters a lot of investors and institutions from owning shares, no matter how likely PV-10 research suggests it will become a significant breakthrough in the war on cancer. When the Market views PVCT more favourably, the company will apply for a NASDAQ listing.

VALUATION

The recent failure of Vical's Allovectin and GlaxoSmithKline's cancer immunotherapy MAGE-A3 in Phase III melanoma trials improves Provectus' prospects for eventually capturing the market, although the Market has yet to recognize that. Current treatment of metastatic melanoma is still about survival time, not elimination of the tumors. For example, Bristol-Myers Squibb's Yervoy not only has annoying side-effects affecting quality of life, its benefit is only the extension of life to a median 10 month period with 10 injections costing $60,000.

An analyst from Rodman & Renshaw, with a Buy rating on the stock and a $3.50 price target is the only one (I know of) who has published a Provectus valuation. To account for the risks inherent in research and getting Regulatory approval, and before Phase II trials were successfully completed, he used a Net Present Value discount of 40% per year. His $3.50 price target is based upon PV-10 obtaining 13% of the melanoma market and assumed a cost of $20,000 per patient. While metastatic and regional (lymph node involvement) melanoma makes up about 13% of melanoma cases, the official metastatic-only incidence is 4%. I am going to use the 13% because, if you take the fatalities per year and divide by the total new cases of melanoma, you get about 13%. And the cases with disease spread to remote areas, being the most likely to be fatal, are the cases most likely to need PV-10. It is also likely that some people with non-metastatic Melanoma may choose PV-10 over chemotherapy or radiation to avoid possible side effects or because they may prefer a one-shot treatment. I have not included this Market in my assumptions.

I have estimated the approximate date that PV-10 will get approved and enter the market for Melanoma, Liver and Breast cancer, and ignored all other targets without completed Phase I trials. I have also estimated the number of cases of each cancer and the percentage that could be treated by PV-10.

PV-10 Market Shares of Metastatic cases during period: Scenario A

Cancer Type

cases/yr (1000s)

% Metastatic

2017

2018

2019

2020-2026

2027-2031

Melanoma: 30% NPV discount

225

13%

20%

35%

40%

45%

30%

Liver: 40% NPV discount

830

95%

0%

0%

5%

12%

10%

Breast: 40% NPV discount

1550

25%

0%

0%

2%

12%

10%

Given that PV-10, in addition to its prospects in melanoma, also has Orphan Status for metastatic liver cancer and has produced successful results with breast cancer, and has successfully completed Phase II trials, I have recalculated the Net Present Value of the stock using a 30% discount factor for Melanoma and retaining the 40% discount for breast and liver cancer to adjust for risk. I have assumed a constant PV-10 cost of $20,000 per patient and that the numbers of new patients yearly do not increase, despite population growth, ozone destruction, or radiation or toxic chemical loads in the environment.

In Scenario B, the model is the same as in Scenario A, except that the FDA grants Breakthrough Status to PV-10, which leads to Regulatory approvals 1 year earlier. Scenario B is also a model for the increased pace of research possible if Provectus monetizes PH-10 and has enough money to fund research at a significantly faster pace. Note that, for both Scenarios, I have calculated the Net Present Value with and without added dilution, which is also a function of whether and when PVCT monetizes PH-10.

NET PRESENT VALUE of PROJECTED PV-10 REVENUES/SHARE

Cancer Type

Scenario A NPV/share w/PH-10 revenue

Scenario A NPV/share w/o PH-10 revenue

Scenario B NPV/share w/PH-10 revenue

Scenario B NPV/share w/o PH-10 revenue

Melanoma

$ 1.90

$ 1.51

$ 2.47

$ 2.19

Liver Cancer

$ 8.47

$ 6.74

$ 11.01

$ 9.76

Breast Cancer

$ 3.94

$ 3.14

$ 5.13

$ 4.55

Total NPV/share

$ 14.31

$ 11.39

$ 18.60

$ 16.49

Diluted shares (1000)s

164000

206000

164000

185000

treatment cost assumed at a constant

$20,000

per patient

disease incidence held constant

diluted =+21 million shares/year when the company has no revenue

Scenario B is PV-10 coming to market 1 year earlier than in Scenario A

Share price as of close Sept. 4, 2013

$ 0.75

Debt outstanding as of June 30, 2013

none

Cash per share at June 30, 2013

$ 0.03

This Table shows the heavily discounted net present value of the modeled revenue from future PV-10 sales is in double digits no matter which Scenario you prefer. At minimum, NPV is more than 15 times the PVCT share price on September 4th. With the low production cost of PV-10, and given that Orphan Drug designation means that there are no other adequate treatments as competition (for two of the indications), gross profit and EBITDA should be high before G, S & A expenses. An acquiring drug company can be expected to value the company on the basis of drug EBITDA, which I would guess would be at least 75% of revenue. If you think production, marketing, and distribution expenses will be higher, or that the market penetration is too optimistic, cut the total NPV in half and you still get a price that is significantly higher than today's market price. On the other hand, treatment charges may start out higher than $20,000 given the current Yervoy cost of $60,000, and increase yearly. Over time, successful trial results would logically reduce the substantial 30% and 40% yearly NPV discount in valuation calculations.

RISKS COME ALONG WITH OPPORTUNITY

With all drug development programs, there is the risk that the treatment will not work. Effective drugs may not be approved by the FDA or other regulatory agencies and approval may be delayed for unpredictable reasons. It is also possible, although unlikely, that there are as-yet-undiscovered side effects (after over 100 years of human use of Rose Bengal) that restrict the size of the market or lead to FDA rejection. Another company may find more effective or safer treatments for the diseases and conditions that Provectus' drugs target. It is also possible that Provectus will not be able to find a partner to market and fund research on PH-10 or PV-10 and that, at some time in the future, the company finds it impossible to raise money to continue their research, as they have been doing for over 10 years. It seems to me that it is worth incurring these risks, given the promise of PV-10 and the rewards for success.

Source: Provectus Pharmaceuticals: Small Cap, Huge Upside

Disclosure: I am long PVCT.OB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Theravance Is Splitting Into Two Very Appealing Companies With Medium-Term Upside Of At Least 50%

There have been several healthcare spinoffs recently that have enjoyed much fanfare and success. These are the Abbott Labs (ABT) and Abbvie (ABBV), Elan (ELN) and Prothena (PRTA) and the Covidien (COV) and Mallinkrodt (MNK), to be specific. But the latest spinoff announced, Theravance Biopharma, is smaller than the other healthcare spins and has remained largely unnoticed by the investment community. Historically, after a spin, the parent and spun company have higher probabilities of being bought out relative to the rest of the market. This happened with ELN, whereas the ABBV/ABT and PFE/ZTS spins were of such a size that no other company would bother a takeover of them. Because Theravance(NYSE:THRX) has a market cap of around $4B, as well as significant ties to GlaxoSmithKline (NYSE:GSK), I feel that Theravance will be targeted for a buyout soon after it is split in two.

Theravance is a biopharmaceutical research company with both approved and pipeline drugs. On April 25th of this year Theravance announced that it was going to spin off its drug research unit under the name Theravance Biopharma. From the language used in the 10-12b, it looks as though THRX is planning to complete the spin before Q1 2014, however the company has given itself leeway to delay or cancel the spin. I'm generally not one for healthcare stocks, and do not profess any special knowledge of drug companies, but a corporate restructuring could squeeze out some value that the market will notice.

Theravance Biopharma:

Theravance Biopharma will hold the rights to VIBATIV, a treatment for serious bacterial skin infections that has won FDA approval. VIBATIV is scheduled for sale in Europe by Clinigen Group plc, and in the Middle East by Hikma Pharmaceuticals. Theravance Biopharma will receive royalty payments on 20-30% of VIBATIV's net sales for at least 15 years, and will hold about a dozen VIBATIV patents. This spin will have $300M cash backing and a 2% equity interest in Theravance.

Moreover, Theravance Biopharma will start off with a bunch of Phase I and Phase II drugs in the pipeline. Long-Acting Muscarinic Antagonist (LAMA)-TD-4208 is currently in Phase 2b study with completion anticipated before January 2014. TD-1792, a treatment for hospital-acquired pneumonia, is about to begin Phase II studies in Russia. Theravance Biopharma will also receive economic interests in UMEC/VI/FF and the MABA programs from a previous partnership between Theravance and GSK. Theravance Biopharma is partnering with Alfa Wassermann società per azioni (S.p.A.) on a Phase II trial for Velusetrag, with potential royalties of up to 20% of future sales. Theravance Biopharma is also working with Merck (NYSE:MRK) on preclinical research programs initiated with Theravance, but with all proceeds assigned to Theravance Biopharma.

Now, assuming for argument's sake that each and every one of the Phase II and Phase I drugs are worthless, a conservative valuation for Theravance Biopharma can be based off of VIBATIV's commercialization, Theravance Biopharma's stake in Theravance, and the MABA program partnership with GSK.

The commercialization for VIBATIV should net Theravance about $50M per year for at least 15 years. Assuming a healthy 15% discount on the cash flows, 0% growth in royalties, and a market penetration of only about $500M in sales per year, that would equate to ~$336M in today's cash. Theravance's Biopharma's equity 2% stake in Theravance at current prices would equate to $80M in value. Since Elan recently bought 21% of Theravance's RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA, MABA and vilanterol monotherapy programs for $1 Billion, it can be assumed that the public market would value the relatively new MABA programs attributable to Theravance Biopharma for at least $100M. This results in a valuation floor of at least $516M, which along with the $300M cash infusion, totals to $816M.

(click to enlarge)

Theravance:

Theravance itself will retain full interests in RELVAR, ELLIPTA/BREO, ELLIPTA, ANORO ELLIPTA and vilanterol monotherapy programs, which are all partnered with GSK.

It's well known that the market can give a conglomerate discount to companies with multiple divisions and complicated business relationships. Splitting a company's mature products from its longer-term research pipeline decreases operational costs for the mature products while increasing the amount of attention and fundraising capabilities for the pipeline. Because GSK has been a partner with Theravance for every project that will remain with the parent post-spin, it's possible that GSK will just want to take over Theravance after the spin.

Why would GSK attempt a buyout, and not buyout all of Theravance now? First, a regulatory decision for Theravance's Anoro drug is due on December 18th 2013, which will be a large factor in Theravance's valuation. Since GSK has continued to increase the number of shares it owns, GSK is most likely waiting until Anoro is approved before proceeding on determining a buyout price. Piper Jaffray alluded to this possibility in a memo several months back, with a target buyout price of $51. I'm guessing that GSK is holding back because it wants to pay the least amount of money possible for a portfolio of drugs that are currently sellable to consumers. GSK is currently hurting on the drug markets, with very little annualized growth in earnings, book value, and sales over the past five years. GSK is also issuing dividends that are taking up a larger and larger percent of earnings each year. GSK also does not have any new drugs that have been developed in-house lately. Thus, GSK is a bit strapped for cash and future earnings, so it will need to buy new drugs for its portfolio. This puts Theravance in a convenient position. GSK's biggest product currently is Advair (20% of GSK's sales, or around $8 Billion per year), which has dominated the asthma and COPD treatment markets. But Advair has recently come off patent, and there is competition from similar products by AstraZeneca and Pfizer, along with new drug developments from Pfizer, Novartis, and Forest Laboratories in the pipeline. While Advair has been difficult for generics to replicate so far, sales for Advair are dropping and GSK needs a successor quickly in order to stave off competition. Theravance arguably has a better drug called BREO in its portfolio that is only taken once daily. BREO can succeed Advair and allow GSK to stay ahead of the competition for asthma and COPD treatments. So ideally the catalyst of Theravance's buyout price will be if Anoro is approved. Assuming approval on Dec. 18th, (which should increase the value of THRX beyond what its current price assumes, along with my current valuation of THRX) GSK will have interests in another drug with patent protection for the asthma and COPD markets, and it will most likely move to keep all future profits for itself. If Anoro turns out to be worthless, GSK can lower its buyout price for Theravance and get BREO. The last thing GSK needs right now is a cash-draining pipeline that GSK did not have much interest in the first place, hence the creation of Theravance Biopharma. If GSK had attempted to buy out Theravance before the spin-off, it would undervalue Theravance Biopharma's pipeline and increase its own future R&D costs in an nonstrategic manner, with added risk of Anoro possibly failing approval only a few months later. This would be a lose-lose situation for both investors and GSK.

The other reason that GSK is biding its time is that GSK will most likely be the only company bidding for Theravance, since GSK already owns over 26% of Theravance's equity. Although another major company could step in for a takeover, the purchase would require a significant premium to justify GSK releasing its interest in all of THRX's projects. Because the market has known about GSK's position for years, I don't see how GSK could buy out THRX from current shareholders without a large premium from current prices. However, if Theravance's drugs are appealing to competitors, GSK does not own enough of Theravance to block another takeover if it initially cuts a raw deal.

Result:

I estimate the total market value of both Theravance and Theravance Biopharma within the next twelve months to be at least $6.1 Billion, which is a 50% premium to THRX's current price. After Theravance spins off its drug pipeline, the parent will probably sell itself to GSK for at least a 30% premium within 2 years, assuming that the healthcare sector and macro environment continue to be stable enough for takeovers. Also, if GSK and other institutions immediately sell their stakes in Theravance Biopharma out of disinterest, individual investors can pick up shares for cheap. Theravance Biopharma will most likely attract enough interest by institutions and other drug companies to warrant a decent market capitalization soon after the spin, thereby resulting in a nice profit for those investors who might not want to stick around long enough to see the pipeline to completion. A small position in THRX for around $33-$36 per share would make a good medium-term investment, based on an increased likelihood of a buyout and an extra bit of value created by the spin.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in THRX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Theravance Is Splitting Into Two Very Appealing Companies With Medium-Term Upside Of At Least 50%

There have been several healthcare spinoffs recently that have enjoyed much fanfare and success. These are the Abbott Labs (ABT) and Abbvie (ABBV), Elan (ELN) and Prothena (PRTA) and the Covidien (COV) and Mallinkrodt (MNK), to be specific. But the latest spinoff announced, Theravance Biopharma, is smaller than the other healthcare spins and has remained largely unnoticed by the investment community. Historically, after a spin, the parent and spun company have higher probabilities of being bought out relative to the rest of the market. This happened with ELN, whereas the ABBV/ABT and PFE/ZTS spins were of such a size that no other company would bother a takeover of them. Because Theravance(NYSE:THRX) has a market cap of around $4B, as well as significant ties to GlaxoSmithKline (NYSE:GSK), I feel that Theravance will be targeted for a buyout soon after it is split in two.

Theravance is a biopharmaceutical research company with both approved and pipeline drugs. On April 25th of this year Theravance announced that it was going to spin off its drug research unit under the name Theravance Biopharma. From the language used in the 10-12b, it looks as though THRX is planning to complete the spin before Q1 2014, however the company has given itself leeway to delay or cancel the spin. I'm generally not one for healthcare stocks, and do not profess any special knowledge of drug companies, but a corporate restructuring could squeeze out some value that the market will notice.

Theravance Biopharma:

Theravance Biopharma will hold the rights to VIBATIV, a treatment for serious bacterial skin infections that has won FDA approval. VIBATIV is scheduled for sale in Europe by Clinigen Group plc, and in the Middle East by Hikma Pharmaceuticals. Theravance Biopharma will receive royalty payments on 20-30% of VIBATIV's net sales for at least 15 years, and will hold about a dozen VIBATIV patents. This spin will have $300M cash backing and a 2% equity interest in Theravance.

Moreover, Theravance Biopharma will start off with a bunch of Phase I and Phase II drugs in the pipeline. Long-Acting Muscarinic Antagonist (LAMA)-TD-4208 is currently in Phase 2b study with completion anticipated before January 2014. TD-1792, a treatment for hospital-acquired pneumonia, is about to begin Phase II studies in Russia. Theravance Biopharma will also receive economic interests in UMEC/VI/FF and the MABA programs from a previous partnership between Theravance and GSK. Theravance Biopharma is partnering with Alfa Wassermann società per azioni (S.p.A.) on a Phase II trial for Velusetrag, with potential royalties of up to 20% of future sales. Theravance Biopharma is also working with Merck (NYSE:MRK) on preclinical research programs initiated with Theravance, but with all proceeds assigned to Theravance Biopharma.

Now, assuming for argument's sake that each and every one of the Phase II and Phase I drugs are worthless, a conservative valuation for Theravance Biopharma can be based off of VIBATIV's commercialization, Theravance Biopharma's stake in Theravance, and the MABA program partnership with GSK.

The commercialization for VIBATIV should net Theravance about $50M per year for at least 15 years. Assuming a healthy 15% discount on the cash flows, 0% growth in royalties, and a market penetration of only about $500M in sales per year, that would equate to ~$336M in today's cash. Theravance's Biopharma's equity 2% stake in Theravance at current prices would equate to $80M in value. Since Elan recently bought 21% of Theravance's RELVAR ELLIPTA/BREO ELLIPTA, ANORO ELLIPTA, MABA and vilanterol monotherapy programs for $1 Billion, it can be assumed that the public market would value the relatively new MABA programs attributable to Theravance Biopharma for at least $100M. This results in a valuation floor of at least $516M, which along with the $300M cash infusion, totals to $816M.

(click to enlarge)

Theravance:

Theravance itself will retain full interests in RELVAR, ELLIPTA/BREO, ELLIPTA, ANORO ELLIPTA and vilanterol monotherapy programs, which are all partnered with GSK.

It's well known that the market can give a conglomerate discount to companies with multiple divisions and complicated business relationships. Splitting a company's mature products from its longer-term research pipeline decreases operational costs for the mature products while increasing the amount of attention and fundraising capabilities for the pipeline. Because GSK has been a partner with Theravance for every project that will remain with the parent post-spin, it's possible that GSK will just want to take over Theravance after the spin.

Why would GSK attempt a buyout, and not buyout all of Theravance now? First, a regulatory decision for Theravance's Anoro drug is due on December 18th 2013, which will be a large factor in Theravance's valuation. Since GSK has continued to increase the number of shares it owns, GSK is most likely waiting until Anoro is approved before proceeding on determining a buyout price. Piper Jaffray alluded to this possibility in a memo several months back, with a target buyout price of $51. I'm guessing that GSK is holding back because it wants to pay the least amount of money possible for a portfolio of drugs that are currently sellable to consumers. GSK is currently hurting on the drug markets, with very little annualized growth in earnings, book value, and sales over the past five years. GSK is also issuing dividends that are taking up a larger and larger percent of earnings each year. GSK also does not have any new drugs that have been developed in-house lately. Thus, GSK is a bit strapped for cash and future earnings, so it will need to buy new drugs for its portfolio. This puts Theravance in a convenient position. GSK's biggest product currently is Advair (20% of GSK's sales, or around $8 Billion per year), which has dominated the asthma and COPD treatment markets. But Advair has recently come off patent, and there is competition from similar products by AstraZeneca and Pfizer, along with new drug developments from Pfizer, Novartis, and Forest Laboratories in the pipeline. While Advair has been difficult for generics to replicate so far, sales for Advair are dropping and GSK needs a successor quickly in order to stave off competition. Theravance arguably has a better drug called BREO in its portfolio that is only taken once daily. BREO can succeed Advair and allow GSK to stay ahead of the competition for asthma and COPD treatments. So ideally the catalyst of Theravance's buyout price will be if Anoro is approved. Assuming approval on Dec. 18th, (which should increase the value of THRX beyond what its current price assumes, along with my current valuation of THRX) GSK will have interests in another drug with patent protection for the asthma and COPD markets, and it will most likely move to keep all future profits for itself. If Anoro turns out to be worthless, GSK can lower its buyout price for Theravance and get BREO. The last thing GSK needs right now is a cash-draining pipeline that GSK did not have much interest in the first place, hence the creation of Theravance Biopharma. If GSK had attempted to buy out Theravance before the spin-off, it would undervalue Theravance Biopharma's pipeline and increase its own future R&D costs in an nonstrategic manner, with added risk of Anoro possibly failing approval only a few months later. This would be a lose-lose situation for both investors and GSK.

The other reason that GSK is biding its time is that GSK will most likely be the only company bidding for Theravance, since GSK already owns over 26% of Theravance's equity. Although another major company could step in for a takeover, the purchase would require a significant premium to justify GSK releasing its interest in all of THRX's projects. Because the market has known about GSK's position for years, I don't see how GSK could buy out THRX from current shareholders without a large premium from current prices. However, if Theravance's drugs are appealing to competitors, GSK does not own enough of Theravance to block another takeover if it initially cuts a raw deal.

Result:

I estimate the total market value of both Theravance and Theravance Biopharma within the next twelve months to be at least $6.1 Billion, which is a 50% premium to THRX's current price. After Theravance spins off its drug pipeline, the parent will probably sell itself to GSK for at least a 30% premium within 2 years, assuming that the healthcare sector and macro environment continue to be stable enough for takeovers. Also, if GSK and other institutions immediately sell their stakes in Theravance Biopharma out of disinterest, individual investors can pick up shares for cheap. Theravance Biopharma will most likely attract enough interest by institutions and other drug companies to warrant a decent market capitalization soon after the spin, thereby resulting in a nice profit for those investors who might not want to stick around long enough to see the pipeline to completion. A small position in THRX for around $33-$36 per share would make a good medium-term investment, based on an increased likelihood of a buyout and an extra bit of value created by the spin.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in THRX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Potential Upside From UnitedHealth's Optum Business

While traditional health insurance services like Private Health Insurance and Medicare And Retirement businesses have been UnitedHealth Group’s (UNH) main source of income accounting for nearly 77% of 2012 revenues, it is the Optum division which has shown the most promising signs of growth this year. The division, which consists of OptumHealth, OptumInsight and OptumRx, accounted for 23% of the company’s operating earnings through the first six months of 2013, with the figure surging 80% over the prior year.

OptumHealth reported a 110% increase in EBIT for the first half of 2013, accounting for more than 40% of the Optum division’s earnings while OptumInsight and Optum RX reported a 66% and 58% increase, respectively. The contribution to EBIT from these divisions was roughly 30% each. Growth in the division will be driven by expansion in the insurance market, but margin expansion from the business alignment could provide an upside.

Our $76 price estimate for UnitedHealth’s stock is in line with the current market price.

What Is Optum?

Optum provides health services to individuals, employers, government as well as life sciences companies. The division can be further subdivided into three subdivisions:

OptumHealth, which primarily provides health and wellness services such as behavioral solutions, care solutions, financial services, collaborative care and logistics health. The division covers over 61 million individuals across the U.S.

Behavioral solutions include disability solutions, mental health and substance abuse solutions, which include risk identification, targeted programs and therapy. Care solutions include providing personalized health management services such as benefit and claims support education for employees, cost estimates and analysis for health plans, specialized programs for conditions such as asthma and diabetes, women’s health services, and wellness programs such as fitness reimbursements and health discount programs. The behavioral solutions and care solutions divisions serve around 50 million and 40 million individuals each.

The company also allows employees and employers to deposit part of pre-tax income and get tax advantages and health savings in the future through the financial services subdivision. Collaborative care allows physicians to connect to each other and logistics health provides mobile care delivery. OptumHealth’s products are offered on a risk basis, wherein the company assumes responsibility for health care costs and in turn earns fixed monthly premiums from policyholders. For financial services, the company also earns investment income on managed funds.

OptumInsight, which provides software and information products and services as well as advisory and outsourcing services to clients. The division primarily caters to hospitals and physicians as Medicaid and Medicare administrators. State and Federal government bodies as well as biotechnology, pharmaceutical and medical device companies also avail OptumInsight services.

OptumRx, is responsible for processing and paying prescription drug claims of its clients. It offers pharmacy benefits management (PBM)) services serving more than 14 million people nationwide by processing over 300 million retail, mail and specialty drug prescriptions annually. The division reported 8 million new customers through the first six months of 2013, driving the aforementioned growth in earnings. The company primarily provides pharmacies a good number of customers and negotiates prescription costs and processes these prescriptions for its customers.

A large chunk of the Optum’s revenues come from intersegment transactions, through sales of pharmacy benefit products and services to customers enrolled in private health insurance or Medicare plans. Three-fourths of the Optum division’s revenues through the first six months of the current year were through intersegment transactions. Therefore, we expect a high correlation between the growth in Optum revenues and enrollments in the insurance divisions. As highlighted in our article "A Look At UnitedHealth’s Private Health Insurance Business," we expect employment and individual policyholders to grow from 27 million at the end of 2012 to around 30 million by the end of the decade. This increase will be driven by the Patient Protection and Affordable Care Act (PPACA) as well as the organic population growth in the U.S. and will also allow UnitedHealth to expand its Optum division.

However, the main upside to the Optum division comes from margin expansion. After eliminating intersegment transactions, the pre-tax (EBIT) margin for Optum went up from 16% in the first six months of 2012 to 25% in the same period in 2013. Margins for OptumHealth went from 16% in 2012 to 27% in 2013, while those for OptumInsight and OptumRx went up from 22% and 13%, to 31% and 18% respectively. The company attributed this margin expansion to productivity gain from disciplined focus on 10 product families. Our current forecast accounts for a marginal near term decline in margins due to increased competition arising from the implementation of the PPACA, as well as increasing medical costs. However, our estimate for UnitedHealth’s EBITDA could increase by 10%, should the company maintain the current year margins through the decade. There is a 10% upside to our price estimate in the scenario.

Disclosure: No positions.

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BioLife Solutions' Second Half Could Hold Surprise Upside

BioLife Solutions, Inc. (BLFS.OB): BioLife Solutions' Second Half Could Hold Surprise Upside - Seeking Alpha (function(_,e,rr,s){_errs=[s];var c=_.onerror;_.onerror=function(){var a=arguments;_errs.push(a); c&&c.apply(this,a)};var b=function(){var c=e.createElement(rr),b=e.getElementsByTagName(rr)[0]; c.src="//beacon.errorception.com/"+s+".js";c.async=!0;b.parentNode.insertBefore(c,b)}; _.addEventListener?_.addEventListener("load",b,!1):_.attachEvent("onload",b)}) (window,document,"script","4ffae9d6f05d1da630000008"); if (SA.Data && SA.Data.Cache) { var adata = SA.Data.Cache.get('campaign_content'); }.market_currents_list li .ticker_date_left .mc_list_tickers a{font-weight: normal} var ms_slug = ''; var article_dashboards = '@investing-ideas@sectors@'; var article_sectors_themes = '@long-ideas@us@medical-appliances-equipment@editors-picks@healthcare@article@'; var ratings_hash={}; var ARTICLE_ID = 1661192; var ARTICLE_TYPE = "standard"; var ARTICLE_LOCK = ""; var author_slug = "propthink"; var pticker_for_ads = "blfs.ob"; var time_left; var lock_comments = false; var machine_cookie = readCookie('machine_cookie'); var middle_version = ABTest.identity%10; try { window.sessionStorage.setItem("/article/"+ARTICLE_ID, '1'); } catch (error) {}var mone_article_tags = "{blfs.ob};;;{healthcare};;;{long-ideas,us,medical-appliances-equipment,editors-picks,investing-ideas};;;{propthink}"var ord = Math.floor(Math.random()*1000000000);Seeking Alpha Seeking Alpha Portfolio App for iPad Finance (1) var ipadData; SeekingAlpha.Initializer.AddAfterLoad(function(){ if (SA.Utils.Env.isIPad && !/3/.test(SA.Data.Cookies.get("user_devices"))){ Mone.event("ipad_promotion_top","top_ipad_banner_large","ipad_promotion_displayed"); ipadData = new SA.Data.iPad(); ipadData.instanceName = "ipadData"; var responseHandler = new Object(); responseHandler.handleResponse = function(data){ if (!data.averageUserRating) return; var stars = data.averageUserRating Home | Portfolio | Market Currents | Investing Ideas | Dividends & Income | ETFs | Macro View | ALERTS | PRO   This article was sent to 88 people who get email alerts on  . Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on   » This article was sent to 336,243 people who get the Investing Ideas newsletter. Get the Investing Ideas newsletter » BioLife Solutions' Second Half Could Hold Surprise Upside Aug 28 2013, 06:59 by: PropThink  |  about: BLFS.OB BOOKMARKED / READ LATER Bookmarked

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Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

By Ivan Deryugin

BioLife Solutions (BLFS.OB), the Bothell, WA based supplier of biopreservation media products and contract manufacturer, has climbed over 100% since our April report on the company. As we've noted in prior coverage, the fundamental story here is a long-term one. As the company's 2nd quarter results and recent strategic developments demonstrate, BioLife is continuing to execute on its growth plan, and we believe based on the potential for raised guidance and an up-listing from the OTC markets, BLFS' second half may hold some unexpected surprises. While owning BLFS, as a penny stock and micro-cap, takes risk-tolerance, we continue to believe the fundamentals support share price appreciation. It's worth iterating that BLFS, with anemic volume, isn't a vehicle for the active trader.

2nd Quarter Results: Continuing Growth, and Moving Closer to Profitability

BioLife's 2nd quarter results highlight the company's continued financial progress, both in growing overall revenues and narrowing the company's operating losses.

In Q2 2013, total revenues (product and contract manufacturing revenue) grew year-over-year by more than 110% to $2.33 million. This was the company's 12th consecutive quarter of record revenues, highlighting BioLife's continued growth on both a year-over-year and sequential basis, which we break down below:

BioLife Q2 2013 Revenue Growth

Q2 2013

Q1 2013

Q2 2012

Sequential Change

Y/Y Change

Direct Product Sales

$811,167

$610,023

$497,255

+32.97%

+63.13%

Indirect Product Sales

$130,401

$160,110

$253,872

-18.56%

-48.64%

Total Product Sales

$941,568

$770,133

$751,127

+22.26%

+25.35%

Contract Manufacturing Services

$1,388,450

$780,712

$341,282

+77.84%

+306.83%

Licensing Revenue

$0

$609,167

$5,000

-100%

-100%

Total Revenue

$2,330,018

$2,160,012

$1,097,409

+7.87%

+112.32%

Even with the loss of over $600,000 in licensing revenue [tied to the licensing of several BioLife patents to Janssen, a unit of Johnson & Johnson (JNJ)], BioLife was still able to grow revenues sequentially by almost 8%. Although indirect sales fell on both a sequential and year-over-year basis, BioLife has taken steps to remedy this specific weakness, and we note that overall product sales continue to show healthy growth, rising by over 20% on a sequential and year-over-year basis. The surge in manufacturing revenues has put pressure on BioLife's gross margins, which fell in Q2 2013 to 35.56%, versus 41.52% a year ago. However, core margins rose on a sequential basis; BioLife's gross margin in Q1 2013 was 33.29%, when adjusted for the impact of the company's licensing revenue.

Furthermore, BioLife has been narrowing its operating losses. Operating losses slowed to less than $83,000 in Q2 2013, versus a year-ago operating loss of over $306,000 (although BioLife posted an operating profit in Q1 2013 it was due to the one-time surge in licensing revenue). We note that BioLife's net losses are higher than its operating losses due to the recognition of non-cash interest expense tied to the company's debt (more on this a bit later). A core pillar of the BioLife thesis is the company's improving operating leverage, a trend that continued in its most recent quarter.

BioLife Operating Results & Leverage

Q2 2013

Q1 2013

Q2 2012

Sequential Change

Y/Y Change

Revenue

$2,330,018

$2,160,012

$1,097,409

+7.87%

+112.32%

Revenue ex-Licensing

$2,330,018

$1,550,845

$1,092,409

+50.24%

+113.29%

Research & Development

$94,908

$105,968

$126,627

-10.44%

-25.05%

Sales & Marketing

$214,762

$202,758

$160,658

+5.92%

+33.68%

General & Administrative

$601,617

$624,427

$475,006

-3.65%

+26.65%

Total Operating Expenses

$911,287

$933,153

$762,291

-2.34%

+19.55%

Operating Income

($82,844)

$192,331

($306,630)

N/A

+72.98%

Operating Income ex-Licensing

($82,844)

($416,836)

($311,630)

+80.13%

+73.42%

Q2 2013

Q1 2013

Q2 2012

Research & Development as a % of Revenue (ex-Licensing)

4.07% (4.07%)

4.91% (6.83%)

11.54% (11.59%)

Sales & Marketing as a % of Revenue (ex-Licensing)

9.22% (9.22%)

9.39% (13.07%)

14.64% (14.71%)

General & Administrative as a % of Revenue (ex-Licensing)

25.82% (25.82%)

28.91% (20.26%)

43.28% (43.48%)

Total Operating Expenses as a % of Revenue (ex-Licensing)

39.11% (39.11%)

43.2% (60.17%)

69.46% (69.78%)

As the table above shows, BioLife's operating leverage continues to increase. Notably, consolidated operating expenses fell sequentially, an unusual development for a growing company, and something we believe serves as a testament to the potential of BioLife's operating model as it continues to expand market reach. Adjusted for the effects of licensing revenue, BioLife's operating expenses fell from over 60% of revenue in Q1 2013 to less than 40% and are down over 30 percentage points from a year ago; we expect further improvements in operating leverage in the 2nd half of the year.

Guidance & Financials: Likely Conservatism

BioLife reiterated at the end of the quarter its full-year guidance for 2013, which calls for sales of $6.75 million at the mid-point, gross margins of 39.5%, and a 15% year-over-year increase in operating expenses. Increasingly, we believe that BioLife's revenue guidance is conservative. BioLife generated over $4.49 million in consolidated revenue in the first half of the year, meaning that under present revenue guidance, the company is suggesting that sales in the 2nd half of 2013 will be less than $2.26 million, or less than the company's revenue in its latest quarter alone. Given that the company managed to generate more revenue than this during Q2 2013, despite losing licensing revenue, BioLife is set to beat its revenue guidance for 2013 even with flat revenue growth in 2013. Even when stripping out the effects of licensing revenue generated from Janssen, BioLife's sales in the first half of 2013 account for over 57% of its current revenue guidance. In our view, BioLife's management team is being conservative, just as they were in 2012, when they maintained their full-year guidance even when reporting Q3 results; full-year revenues for 2012 ended up being 36% above the company's initial full-year guidance. Based on the company's current trends, we believe that a similar outcome is likely in 2012, and look to the company's Q3 results, due in November, as a potential catalyst for BioLife shares, given the possibility for a raise in full-year guidance.

BioLife's financial profile is showing slow but steady improvement, particularly as it relates to operating cash flow. As we noted in our previous report on BioLife, the company's balance sheet appears weak on the surface. BioLife ended its latest quarter with less than $100,000 in cash and over $13.7 million in debt, suggesting looming insolvency. However, as we have outlined before, BioLife's debt is not due until 2016, and the company's creditors also happen to be the company's largest investors, controlling over 40% of the company's total shares. Their stake in BioLife's equity is, at current prices, far larger than their holdings of BioLife debt, meaning that they have little incentive to dictate onerous terms to BioLife when it comes to the company's liabilities, given that doing so would jeopardize the value of their equity stakes. And, BioLife's operating cash flow has been improving over the last several quarters, a trend that continued in Q2 2013 (note that figures for the first half of 2013 include Janssen licensing revenue, and that figures for the first half of 2012 include significant adjustments related to lease improvements).

BioLife Operating Cash Flow

Q2 2013

Q1 2013

1H 2013

1H 2012

Net Loss

($282,506)

($7,176)

($289,682)

($795,770)

Cash Flow ex-Changes in Working Capital

($51,509)

$119,522

$68,013

$188,141

Net Change in Working Capital

$257,977

($245,998)

$11,979

$497,866

Operating Cash Flow

$206,468

($126,476)

$79,992

$686,007

BioLife's overall operating cash flow was positive in its most recent quarter, and even when excluding the effects of changes in working capital, cash outflows slowed to less than $52,000, far below the pro forma cash outlook BioLife saw in Q1 2013 when adjusting for the impact of Janssen licensing revenue.

To date, BioLife has been investing its operating cash flows almost entirely into its business, and the results of these investments are beginning to show. BioLife's management has once again stated in its latest 10-Q that they expect that "cash generated from customer collections will provide sufficient funds to operate our business." With a current ratio of 1.28, BioLife's liabilities are more than covered over the next 12 months, and as the company's operating losses continue to narrow, cash flow is likely to improve, allowing BioLife to begin addressing its longer-term liabilities.

Zacks, which we believe is the only firm to cover BioLife, has noted that BioLife may issue new equity to wipe away its debt, a proposition that grows more appealing with the rise in BioLife's share price. At a price of $0.34 (where it was trading at when our April report was published), it would take over 40 million shares to wipe out existing debt (there are currently just over 70 million outstanding shares). But at its current price of $0.69, it would take around 19.9 million new shares to do so. Although dilutive, an equity offering would allow BioLife to not only clean up its balance sheet (which could have the effect of increasing confidence in the company's financial strength, potentially offsetting some share price weakness from an equity offering), but also remove the last hurdle of moving from the OTC to the NASDAQ.

BioLife's latest investor presentation outlined several corporate goals, namely the elimination of its debt, as well as a move to the NASDAQ, both of which can be accomplished with an equity offering. Currently, BioLife meets almost all of the requirements for listing on the NASDAQ Capital market under 2 of the NASDAQ's 3 listing standards (a company needs to meet at least one of the standards to qualify for a NASDAQ listing)

BioLife NASDAQ Listing Requirements

Requirement

Equity Standard

Market Value of Securities Standard

Current BioLife Figure

Stockholder's Equity

$5,000,000

$4,000,000

($12,662,694)

Market Value of Public Shares

$15,000,000

$15,000,000

$14,759,977*

Operating History

2 Years

N/A

Incorporated in 1987, reorganized as BioLife in 2002

Market Value of Listed Securities

N/A

$50,000,000

$48,670,000*

Publicly Held Shares

1,000,000

1,000,000

21,391,272

Shareholders

300

300

3,000

Bid Price/Closing Price

$4/$3

$4/$2

$0.69*

*As of August 23, 2013

With the exception of the stockholder's equity requirement and the bid/closing price requirement (the market value of public shares requirement will likely be met with a further medium-term rise in BioLife's share price, and can also be satisfied via an equity offering, boosting the quantity and value of publicly held shares), BioLife has met every standard required to list on the NASDAQ. And these two deficiencies can be remedied with an equity offering and reverse stock split; a 3:1 reverse split would place BioLife's share price well above the $2 closing price needed to satisfy the market value standard, all while keeping the number of publicly held shares above the 1 million mark. With BioLife having explicitly stated that it is considering ways to eliminate debt from its balance sheet, as well as move to the NASDAQ, an equity offering of some sort is a likely outcome, given that it will allow BioLife to fulfill all NASDAQ listing requirements, as well as solidify its balance sheet.

Strategic Progress: Expanding Distribution & Highlighting Clinical Trial Involvement

Despite its size, BioLife's list of partners, customers, and distributors covers some of the life science industry's largest players, including Sigma-Aldrich (SIAL), Fisher Scientific, and Life Technologies (LIFE). And since our last report on BioLife, the company has expanded its roster of partners by inking a new distribution agreement with HemaCare (HEMA.OB) in June. HemaCare, based in Los Angeles, generated just under $18 million in total sales during 2012 via the sale of apheresis platelets and other blood products, as well as the performance of therapeutic services, such as stem cell collection and end-patient blood treatments. Under the terms of their agreement, HemaCare will market BioLife's biopreservation products to its customers in the research and clinical communities, as well as use it in the shipping of its own products, where BioLife's HypoThermosol storage medium will eliminate the need for HemaCare to conduct cryopreservation on multiple product shipments. And in August, BioLife expanded its distribution agreement with STEMCELL Technologies, which has been in place since 2009. Under the new agreement, STEMCELL will utilize BioLife's CryoStor freeze media in approximately 50 new primary cell products, which BioLife notes covers bone marrow, blood, and umbilical cords. STEMCELL, based in Vancouver, does business in over 70 countries, and is reported to have generated over $54 million in sales during 2011 (STEMCELL is a privately held company). We expect BioLife's Q3 results, due in November, to shed light on these new agreements and believe that the company's product revenue growth will begin to highlight the increase in BioLife's addressable market.

In addition to these agreements, we believe that there is another possible revenue source for BioLife: FDA-approved therapies. As of the end of Q2 2013, BioLife's various products are being used in over 50 different clinical trials at all stages of development, from manufacturing to clinical delivery. Clinical trial customers include Sangamo BioSciences (SGMO) (covering the experimental HIV therapy SB-728), Centocor, (a subsidiary of Johnson & Johnson), covering its AMD treatment CNTO-2476), Aastrom (ASTM), covering its clinical limb ischemia and dilated cardiomyopathy programs. Other notable customers include Opexa Therapeutics (OPXA) and Intrexon (XON). BioLife estimates that FDA approval of any of these therapies now in clinical trials could lead to annualized revenues of at least $1 million, possibly as high as $2 million, as BioLife's products become ingrained in the manufacturing and delivery of these therapies. Assuming that the approximate 10% approval success rate holds (covering drugs from Phase I through FDA approval), BioLife has the potential to generate up to $20 million in additional annual revenue, which is a meaningful sum for a company with projected 2013 sales of well below $10 million.

Valuing BioLife

With shares of BioLife up over 100% since our April report, the question is how much further can share climb? In our view, there's long-term upside remaining, as evidenced by BioLife's favorable valuation ratings relative to peers on a price-to-sales basis (given that consensus forward estimates for BioLife are essentially unavailable, a P/E based valuation is unrealistic). BioLife's latest 10-K specifically cites Thermo Fisher (as well as soon to be acquired Life) and Sigma-Aldrich as competitors, but notes that the bulk of its competition comes from preservation solutions that its potential customers might develop in-house. Therefore, our peer comparison covers BioLife's named competitors, other companies within the life science industry that sell a significant array of products, and select regenerative medicine companies, a valid inclusion given BioLife's exposure to the regenerative medicine market (multiple BioLife products are currently in use within the industry, which accounted for 20% of BioLife's revenue in 2012. Estimates call for the addressable market for biopreservation within the regenerative medicine industry to reach $500 million by 2018).

BioLife & Peer Valuation

BioLife

Thermo Fisher

Sigma-Aldrich

PerkinElmer

Qiagen

International Stem Cell

StemCells

Cytori Therapeutics

Closing Price

$0.69

$90.85

$83.93

$36.77

$20.97

$0.15

$1.69

$2.41

Market Cap

$48.67M

$32.75B

$10.09B

$4.12B

$4.91B

$17M

$67.03M

$162.04M

2013 Sales

$6.75M

$12.91B

$2.69B

$2.17B

$1.3B

$7.6M

$980,000

$15.11M

Price/Sales

7.21x

2.54x

3.75x

1.9x

3.77x

2.23x

68.4x

10.72x

Based on current sales estimates for 7 of BioLife's life science and regenerative medicine peers, the mean price-sales-multiple for the sector stands at 13.33x, or 12.67x when BioLife itself is included. Assuming that these estimates hold for the year, it implies that BioLife remains undervalued relative to this peer group. And although BioLife trades at a higher price/sales multiple than "established" peers such as Thermo Fisher and PerkinElmer, the company's sales are growing at a materially faster rate than those of leading life science companies.

Conclusions

Despite that the stock has doubled since our April report, we believe that shares of BioLife remain attractive for long-term investors. The company continues to see solid revenue growth, and full-year guidance is likely conservative. Operating losses are narrowing, and BioLife continues to realize increasing operating leverage; if these trends continue, positive pro forma operating income is possible in either late 2013 or early 2014. Furthermore, BioLife has fulfilled virtually all of the requirements needed to list itself on the NASDAQ, and the remaining requirements can be satisfied with an equity offering, which, while dilutive, would wipe away BioLife's debt, strengthen its balance sheet, and clear the way for a listing on the NASDAQ. With a stronger set of strategic partners established over the past several months, a business nearing operating profitability, and potential upside from the FDA approval of any of the 50 experimental therapies BioLife's products are associated with, we believe that BioLife is well-positioned to deliver for small-cap healthcare investors.

Source: BioLife Solutions' Second Half Could Hold Surprise Upside

Disclosure: I am long BLFS.OB, SGMO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Ivan Deryugin. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.

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