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BMRA: Base Business Bouncing Back With Three Quarters of Sequential Growth

04/18/2017
By Brian Marckx, CFA

NASDAQ:BMRA

Biomerica (NASDAQ:BMRA) reported financial results for their fiscal 2017 third quarter ending February 28.  This marked the third straight quarter that revenue surprised on the high-side.  While both fiscal Q1 and Q2 beat our respective estimates by 12%, which was largely due to better than expected performance in Asia, the most recent quarter’s top-line came in about 8% better than our number from relative outperformance in Europe and the U.S.  But, despite the encouraging revenue trends – which includes sequential growth over the last three consecutive quarters and Q3 reaching the highest revenue since fiscal Q4 2014 (ending May 2014) – this did not translate into improved operating loss as a result of moderate narrowing of gross margin and relatively higher OpEx.  

Q3 revenue of $1.5M was up 10% yoy, up 5% sequentially and about 8% better than our $1.4M estimate.  While revenue in the U.S., at $345k, was down 7% yoy, it was at the highest level since Q3 2016 and the third highest level since Q3 2010.  The single-digit contraction in U.S. revenue was more than offset by 20%+ yoy growth in both Europe and Asia which, BMRA notes in the 10-Q, benefitted from an increase in clinical laboratory product sales.  

Revenue from Asia was $448k, up 22% from $367k in Q3 2016 (i.e. yoy) but down 37% from $716k in Q2 2017 (i.e. sequentially).  While Asia has been a territory which has historically experienced relatively high short-term sales volatility – which was again evident with the large q-to-q drop from Q2 – sales in this part of the world have recently shown an encouraging upward trend.  This is evident in the ninth-month results – through the first three quarters of fiscal 2017 sales in Asia were $1.7M, up 43% from the comparable year-earlier period and higher than in all of fiscal 2016.  In fact, the current 9-month annualized run-rate implies Asia sales could almost match their second highest fiscal year level ever.  Given that Asia accounts for 40%+ of total revenue, even incremental growth from current levels in this territory will have a meaningfully positive effect.  We continue to model low double-digit annual growth in Asia sales over the next several years.  

Europe has not been nearly as positive which saw sales fall 20% in fiscal 2016 and shed another 7% through the first half of fiscal 2017.  But while one quarter does not make a trend, the most recent period bucked the prior 18-months of disappointing sales.  Q3 ’17 European revenue of $654k was 20% better than the prior year number, up 41% from Q2 and the highest since Q4 2015.  While Biomerica has never provided much in the way of detailed trends effecting revenue, they do note in the Q3 10-Q that an increase in sales of clinical laboratory products benefitted both their Asian and European segments.  As we noted in previous updates, we viewed recent signs of European revenue stabilizing around ~$500k/quarter as encouraging relative to the potential for this territory to return to positive growth in the coming (i.e. current) year.  The Q3 number, which pushed European revenue through the first nine months of 2017 up to $1.672M, or 2% higher than the comparable prior-year period, further reinforces our hopefulness towards that end.      

Meanwhile, the U.S. continues to struggle to gain much traction towards growing revenue.  Q3 revenue at $345k, while better than our estimated $241k and about twice that of the $172k posted in Q2, was down 7% yoy.  Through the first nine months of 2017, U.S. sales are down 4% from the comparable period in 2016.  While we continue to model roughly flattish U.S. sales from the company’s currently commercialized product portfolio, that would almost certainly change if and when InFoods, the company’s novel IBS product, gains FDA regulatory clearance and launches.  

As we detail below, the deleteriousness of IBS and significant prevalence of the disease has spawned a number of new entrants to the IBS drug market.  But all of these drugs, which target only the symptoms and not the underlying cause, provide relief to only a relatively small portion (~15% - 20%, based on clinical study data) of sufferers.  And ‘relief’, for those that do show a treatment response from these drugs, is often only partial and temporary.  As such, an alternative that can effectively address the underlying cause of IBS, such as what InFoods is being developed to do, would likely garner significant appeal and demand.    
 
Financials
Q3 revenue of $1.50M was up 10% yoy, up 5% sequentially and about 8% better than our $1.39M estimate.  European and U.S. sales beat our numbers by 23% and 44%, respectively, while sales in Asia were 19% below our estimate.  Revenue from the other geographic territories, which combined account for about 4% of total revenue, was about 20% shy of our estimate ($53k A vs. $66k E).  

Q3 gross margin was 30.0% - which is well below both our estimate (37.5%) as well as the 39.9% average in the first six months of 2017.  However, it is up significantly from 25.3% in Q3 2016.  While we have no particular insight into the change in gross margin, we do note that it can bounce around q-to-q.  Through the first nine months of 2017 gross margin was 36.5% which compares favorably to the prior-year period (30.9%).  Additionally, despite the relative softness in the current quarter, both gross margin and gross profit have been trending up – in fact the $1.58M in gross profit through the first nine months of 2017 is the highest over any consecutive three-quarter period since the $1.70M generated through fiscal Q2 – Q4 2013.  

Q3 OpEx were $767k, or 51% of revenue, compared to our $756k, or 54% of revenue estimate.  SG&A in Q3, on both an aggregate dollar spend basis as well as a percentage of revenue basis looks to be the highest in recent history (at least as far back as fiscal 2010) – the previous high (on both measures) was Q2 2017.  BMRA notes in the 10-Q that an increase in reserves for bad debts related to two foreign accounts is reflected in the increase in SG&A.  We note, however, that based on the company’s financial statements and footnotes, that there does not appear to be an opinion regarding significant risk of uncollectable A/R (i.e. we do not have meaningful concern relative to collectability).      

Meanwhile, R&D expense was $257k and $782k in the three and nine months ending Feb 2017 – which compares to $185k and $574k in the comparable year-earlier periods – which we think largely reflects additional activity on new products under development, including InFoods. 

We note that while our model reflects an expectation of incremental InFoods-related development and regulatory expenses, we continue to refrain from modeling any potential revenue for the product due to significant uncertainties related to the regulatory pathway (and related specifics), requisite clinical trial programs (including scope, size, design and outcome measures) and additional validation of the performance, replicability and clinical utility of the product.  We will, however, continue to revisit this assumption on a regular and ongoing basis and consider updates to our model (potentially including InFoods-related revenue contribution) with additional and substantive development and/or regulatory progress.  

Cash
BMRA exited Q3 with $1.5M in cash and equivalents.  Cash used in operating activities was $82k and $389k ($202k and $340k ex-changes in working capital) in the three and nine months ending Feb 28, 2017.  BMRA first noted in their fiscal Q2 2017 10-Q (and reiterated in the most current 10-Q) that the Board has authorized the filing of an S-3 registration statement, although also notes that the company does not intend to immediately sell securities.  Additional, non-dilutive funds, could come from BMRA’s agreement with Celtis Pharm Co. of S. Korea which calls for that company to pay Biomerica up to $1.25M in exclusivity fees based on "certain milestones including Biomerica’s starting clinical trials in the United States, receipt of US FDA clearance and Celtis’ first sales of IBS Products in Korea".    

See below for access to our updated report on BMRA in which, based on our analysis of the drawbacks of IBS drugs including low efficacy, we detail why we think Biomerica’s InFoods product is ripe to be well-received by physicians and the $1B U.S. IBS market.  
    
READ THE FULL RESEARCH REPORT HERE

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