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BMRA: Legacy Biz Slows in Q4. Operational Highlights Include InFoods Enrolling, Ex-Walgreens CMO Joins SAB (and we’re intrigued)

09/07/2018
By Brian Marckx, CFA

NASDAQ:BMRA

READ THE FULL BMRA RESEARCH REPORT

Q4 2018: Legacy Biz Slows in Q4.Operational Highlights Include InFoods Enrolling, Ex-Walgreens CMO Joins SAB (and we’re intrigued)

Biomerica (NASDAQ:BMRA) reported financial results for their fiscal 2018 fourth quarter ending May 31, 2018. What looked like the front end of a recovery in the top-line through the first nine months ended with a whimper, with revenue in the final quarter of fiscal 2018 dropping 22% yoy and 18% sequentially. While our model had revenue inching up 6% for the full-year reflecting an expectation that rebounding sales in Asia would more than offset ongoing softness in both Europe and the U.S., that was far from the case. Instead, the nearly across-the-board (Latin America was the sole bright spot) weakness in Q4, which most notably included a 42% yoy contraction in Asia, resulted in annual sales falling almost 4%.

- U.S. revenue has been weak and disappointing as of late. As we noted in our update in April, fiscal Q3 has historically been a relatively strong quarter for BMRA’s U.S. business – and while that again proved to be true, the $208k in U.S. revenue generated in Q3’18 was the lowest Q3 U.S. number since at least 2010. U.S. revenue in Q4’18 was $152k – while up 16% yoy, it’s the second lowest Q4 U.S. revenue number since at least 2010. BMRA indicated that the decline in U.S. sales relates to lower purchasing (of their flagship EZ Detect colon disease test) from a certain drug store customer that, unlike some years, decided not to conduct a colorectal cancer screening program during fiscal 2018. We remain optimistic, however, that U.S. activity will come back and believe a possible catalyst to U.S. sales growth could come from the new h. pylori test candidate which just enter clinical studies

- Europe has similarly been weak and softer than what we had anticipated. We noted in our Q3 update that weakness in Europe could continue and put a damper on BMRA’s full-year results – but also noted that we thought European FY’18 revenue would not contract by more than single digits. While we were prescient relative to ongoing weakness - with Europe revenue down 19% yoy and 5% sequentially in Q4, we slightly underestimated the degree as full-year revenue, down 10%, did manage to eke out a double-digit decline. Lower private label sales were cited as a contributor to the relative weakness in Europe.

- Asia rounded out the disappointment in Q4 with revenue down 42% yoy, down 37% sequentially and, at $394k, the weakest showing from that territory since Q3’16. Fortunately, relatively robust activity through the first nine months of the year, pushing revenue up 22% YTD through Q3, help mute the Q4 weakness. Asia revenue, which accounts for ~45% of BMRA’s total, was up 4% for the full year. The softness in Asia in Q4 is somewhat confounding as revenue growth had been on a fairly steep trajectory since late-fiscal 2015, which was shortly after BMRA restructured their distribution channel in China. We had also anticipated incremental revenue growth from the launch of EZ Detect, which received China FDA (CFDA) approval in January of this year (i.e. late-fiscal Q2’18).

Total revenue fell 22% yoy and 18% qoq to $1.13M in Q4 – which is the lowest quarterly revenue since fiscal Q1’15. For the full-year, revenue was $5.56M – while down 4% from FY2017, it is up from 2014 ($5.12M), 2015 ($4.96M) and 2016 ($5.14M). We also note that revenue through the first nine months of fiscal 2018 was the highest of any prior year since 2013. Our point being that, if Q4 was an outlier and fundamentals have not materially changed, revenue growth from BMRA’s current products is likely to reemerge in the near-term.

U.S. revenue, at $152k was up 16% yoy – although that overstates the implied strength as the prior-year comp was the lowest quarterly revenue from the U.S. since at least fiscal 2010. U.S. sales have trended relatively soft since 2015 when they fell 17% to $1.0M in that year. They then dipped another 4% in 2016, 12% in 2017 and finished 2018 at $685k, down another 22%, and the lowest level since at least 2010 (i.e. the furthest back that we looked).

While difficult to predict, we model U.S. sales to stabilize at or around recent levels (related to the company’s current product portfolio) over the near-term. A possible catalyst to U.S. sales growth could come from a new h. pylori test, clinical trials for which recently commenced enrollment (and which we discuss in more detail below).

And with the recent disclosure and announcement of initial clinical trial design and collaboration to conduct clinical trials with two major U.S. university research centers, we recently began modeling InFoods. As we discuss in more detail below, we are modeling initial contribution from InFoods in 2022. We continue to believe that eventual FDA clearance of this novel IBS product would result in a significant increase in Biomerica’s U.S. sales and provide the majority of total revenue growth from that point into the foreseeable future.

Meanwhile, Q4 revenue from Asia was $394k – down 42% yoy and down 37% from Q3 of this year. Q4 revenue represented just 55% of the average through the first nine months of fiscal 2018, which was up 22% from the comparable period in 2017. The about-face in Q4 is surprising – and we have no insight for the weakness. But, as we have noted in the past, while Asia has been a territory which has historically experienced relatively high short-term sales volatility, longer-term trends have pointed towards regular revenue growth.

And, as Asia has grown to account for a larger proportion of total revenue, the recent strength from this territory has been the most significant catalyst to driving BMRA’s topline. For historical context, Asia generated just $1.0M in sales (~21% of total revenue) in 2015 - this grew 71% to $1.7M in 2016 and another 39% to $2.4M in 2017. In fact, Asia was effectively the only reason why total revenue posted positive growth in 2016 and is credited with almost 90% of the topline growth in 2017.

In the most recent year, Asia sales grew 22% through the first nine months and despite the cliff-dive in Q4, still managed to eke out 4% growth in FY2018. And among the territories which did post positive revenue growth, Asia contributed 86% through the first nine months and 40% for the full-year in 2018. Given the outsized contribution from Asia (which now accounts for 45% of total revenue) even incremental growth from current levels in this territory will have a meaningfully positive effect – but even incremental contraction will have the opposite effect.

As noted, we had hoped EZ Detect (over-the-counter fecal occult blood (FOB) test for colorectal cancer) would have been a positive catalyst – although it’s possible we were a little too optimistic relative to timing. We continue to like the fundamentals in China as it relates to BMRA’s flagship product. While Biomerica has never publicly disclosed product-specific sales numbers, we believe EZ Detect is one of the (if not the #1) best-selling products for the company. We also think Asia could be particularly receptive to the product given certain cultural principles in many parts of Asia related to hygiene which may discourage use of FOB tests which require fecal handling.

Recent initiatives aimed at increasing colorectal cancer screening – by any modality – also support fundamentals for EZ Detect. Many parts of Asia, including in China, have relatively low rates of compliance to recommended colorectal cancer screening guidelines. For context, while ~65% of Americans adhere to CRC screening guidelines, studies indicate that compliance is only ~40% in Shanghai, China. Studies have shown that one of the most effective ways to increase CRC compliance is through providing more testing options. So, for all of these reasons, we think Asia could represent a substantial growth opportunity for BMRA’s EZ Detect product.

Relative to Europe – sales from this territory showed recent signs of growth, inching up 3% in 2017 following a 20% slide the prior year. While the mid-single digit growth through the first six months of 2018 was promising and an encouraging signal that European sales growth might be accelerating, that was more than offset by weakness in the second half of the year which saw sales drop more than 22%. For the full year, European revenue was down 10% to $2.0M, the lowest level since at least 2010.

Europe accounts for about 36% of total sales, making it the company’s second most important market and causing any meaningful variability to have a significant influence on overall financial performance. And while the recent indications that sales in that territory may be gaining traction were encouraging, the lack of sustained growth, which significantly affected BMRA’s topline performance over the last three years, has us questioning whether there is much upside in this area.

We now model flat to slightly negative sales in Europe related to BMRA’s current product portfolio and think opportunity for sustainable growth may mostly hinge on new product launches. While we have yet to model any assumed contribution from InFoods (or any other new products), that could soon change - depending on BMRA’s future strategic objectives as well as if we feel there is enough information to make (comfortably) informed projections about certain commercializability-related gating factors. At this point we have no information or insight into if or when BMRA might consider targeting markets outside of the U.S. or if they do, which areas of the world they would focus on next. Europe, however, would be our best-guess as a potential front-runner if management does eventually look to expand OUS with InFoods given not only the economic similarities of most of the highly developed European countries with that of the U.S. but, perhaps more importantly, diets that are (generally) similar to that of most Americans.

Cash
BMRA raised $1.3M, net, during fiscal 2018 including $981k in Q4, from the sale of common shares via their ATM program. Another $171k (net) was raised subsequent to year-end. Cash balance at the close of FY2018 was $1.2M, up from $597k at the end of Q3’18. Cash used in operating activities in the three and twelve months ending May 31, 2018 was $322k and $1.2M ($568k and $1.2M, ex-changes in working capital), respectively. Another $56k and $130k was used in investing activities in the same periods.

In June 2017 Biomerica filed an S-3 registration statement with the SEC (which became effective July 20th), registering for sale (up to) $45M in common stock. Then on December 1st the company entered into an ATM agreement with B. Riley FBR, authorizing the sale of up to $7M of common shares. Through FY2018 342k shares have been sold under shelf, representing net proceeds of ~$1.28M. As we noted following filing of the registration statement, we think proceeds would almost certainly be mostly targeted towards advancement and further development, including clinical validation, of InFoods.

Additional, non-dilutive funds, could come from BMRA’s agreement with Telcon Pharmaceuticals (fka Celtis Pharm Co.) of S. Korea which calls for that company to pay Biomerica up to $1.25M in exclusivity fees based on "certain milestones including Biomerica’s starting clinical trials in the United States, receipt of US FDA clearance and Celtis’ first sales of IBS Products in Korea". The agreement was initially cancellable if BMRA had not obtained FDA clearance/approval of InFoods by December 31, 2017 but that deadline was subsequently extended until December 31, 2019.

Operational Update:

Harry Leider (ex-Walgreens CMO) Joins BMRA’s SAB
While most of the operational-related excitement relates to InFoods and h.pylori product development – and which we talk about below – we think the recent appointment of Harry Leider deserves mention. Mr. Leider, who served as Chief Medical Officer of Walgreens from November 2015 to May 2018, joined BMRA’s Strategic Advisory Board in April. Notably, increasing competition in the retail pharmacy space has created some significant changes in this market. Along with greater M&A activity, retail pharmacies have branched out their portfolio of products and services as they look for new ways to grow revenue. This includes expanding patient care services – such as providing wellness, screenings, vaccinations and treating minor injuries. At Walgreens Mr. Leider had responsibility for overseeing the evaluation of new technologies aimed at new services. While pure speculation on our part, we wonder if Mr. Leider’s appointment to BMRA’s SAB may signal that management is looking at the feasibility of the retail pharmacy channel for InFoods (think Theranos’ strategy – kind of, but without the bad stuff).

InFoods Study 1 Commences Enrollment

In late-June 2018 BMRA announced that the first patient had enrolled in the InFoods Endpoint Determination study.

As a reminder, two clinical studies will be conducted; the purpose of the first study, which will include approximately 180 subjects and with an expected duration of 9 – 14 months, is to identify the primary endpoint to be used in the second study. It is anticipated that the second study will serve as the pivotal study and primary support for an eventual 510(k) filing.

Study 1, titled simply (as of now, anyway) “Endpoint Determination Study Protocol” was first posted on clinicaltrials.gov on March 9, 2018 (NCT03459482).

Particular points of interest related to Study 1 as detailed in the posting include:

- RCT-design and will incorporate triple blinding (i.e. patient, provider and investigator)
- Targeting enrollment in each arm (i.e. treatment vs. sham) of 90 patients and a minimum of 30 patients in each IBS classification of: IBS-D (diarrhea), IBS-C (constipation) and IBS-M (mixed)
- Arms
     ◦ Treatment (i.e. food elimination diet): patients will be given an elimination diet based upon foods with a positive antibody profile in the InFoods IBS test. The elimination diet will also exclude any and all foods to which the subject has a known IgE allergy and foods the subject already currently eliminates
     ◦ Sham: patients will be given a "Sham" elimination diet. The sham diet will eliminate the same number of foods but none of the actual foods to which the patient had a positive antibody profile in the InFoods IBS test. The sham diet will also eliminate any and all foods to which the subject has a known IgE allergy and foods the subject already currently eliminates

- Inclusion criteria includes
     ◦ Meets Rome III or Rome IV IBS diagnostic criteria
     ◦ Respond "No" to IBS Adequate Relief (IBS-AR) in the past week at the screening visit #1
     ◦ Score between ≥ 3 and <7.5 on the Abdominal Pain Intensity Assessment (IBS_API) based on a weekly average of worst daily (in past 24 hours) abdominal pain on a 0 to 10 point scale
     ◦ A positive IgG antibody response for at least one food in the InFoods IBS panel
     ◦ Patients who are on stable (> 3 months) doses of medications or treatments for their IBS (e.g., probiotics, fiber, Viberzi, Linzess, Amitiza, Alosetron, Plecanatide, anticholinergics, antidepressants, Zofran bile acid sequestrants, or anti-diarrheals) will be allowed to continue their medications as long as no change in treatment is planned for the duration of the study and no dose adjustment is made during the duration of the study

- Exclusion criteria includes
     ◦ Patients who have used Rifaximin in the past 3 months
     ◦ Patients engaged in another type of diet therapy i.e. FODMAP
     ◦ Chronic pain from other conditions besides IBS

Our Comments on Study 1 Design:
Is of robust design, RCT and triple blinding. Clearly Study 1 was designed to serve as a template for a pivotal study. Inclusion and exclusion criteria all appear to be consistent with designs of pivotal IBS drug studies – which is also highly encouraging. The only slight divergence appears to be with excluding patients with pain score > 7.5. We have no concern relative to that, however, as it almost certainly relates to minimizing potential noise given that higher pain scores can often be associated with non-IBS causes.

A “primary endpoint” of IBS-API (i.e. pain measure) is also listed in the clinicaltrials.gov posting – however, that should be considered to only be one of several measures that will be assessed in Study 1 as potential primary endpoints to be incorporated into a pivotal study. Others, as we have indicated in our recent prior updates, will likely include primary endpoints that have been used in recent pivotal studies of IBS drugs including defecation related endpoints (i.e. stool consistency and frequency). We should know more about all of the endpoints under consideration when with future updates to the posting.

The clinical studies will be conducted at Beth Israel Deaconess Medical Center (Harvard teaching hospital) and the University of Michigan. Drs. William Chey and Anthony Lembo are members of BMRA’s scientific advisory board and are affiliated with the University of Michigan and Beth Israel Deaconess Medical Center, respectively (and will presumably be the principal investigators at their respective trial sites). As a reminder, Dr. Lembo is Director of the GI Motility Laboratory at the Beth Israel Deaconess Medical Center's Division of Gastroenterology. He is also one of the principal investigators of Biomerica’s recently initiated h. pylori clinical study (see below). Dr. Chey Professor of Internal Medicine, Director of the GI Physiology Laboratory, and Director of Medical Services for the Michigan Bowel Control Program at the University of Michigan.

Comment on Primary Endpoint…
We will be very interested to eventually find out what InFoods’ pivotal study primary endpoint will be and its similarity (or not) to those used in prescription IBS drugs’ pivotal studies (see our Appendix for more detail about primary endpoints).

Given that FDA has already determined InFoods is a non-significant risk diagnostic (i.e. Class I), the efficacy hurdle for U.S. regulatory clearance may be considered to already be set inherently relatively low (which is not uncommon for diagnostics of many conditions and diseases). However, FDA clearance of a diagnostic usually does not portend the commercial potential of that of a drug that also successfully gains U.S. regulatory approval. In other words, while FDA clearance is of obvious importance for InFoods to enter the U.S. market, meaningful physician uptake may require “compelling enough” clinical evidence.

The good news for BMRA is that there are several factors which may mean the “compelling enough” hurdle may not be too difficult to clear – which we discuss below. The choice of primary endpoint in InFoods’ clinical studies may have significant influence (perhaps the most influence) on commercial adoption. If InFoods’ primary endpoint is the same (or at least similar) to those used in IBS drug pivotal studies, that should allow for an apples-to-apples efficacy comparison between them - and the additional benefit would be that GIs are already versed on them.

But while a similar endpoint might be ideal, as long as whatever measure is chosen has been sufficiently validated (and InFoods demonstrates efficacy), we think there will be demand for InFoods. The fact that InFoods can be used as an addition to IBS drug therapy means that BMRA’s diagnostic does not have to demonstrate superiority to current prescription medicine – in this scenario, as long as InFoods can provide incremental benefit to drugs, it should have utility.

“Compelling Enough” May Not Be Tough Given InFoods Appeal to the “3Ps”…
With BMRA’s dream-team scientific advisory board presumably guiding InFoods’ clinical strategy, we have confidence that whatever endpoint is chosen will have sufficient industry acceptance. Assuming success in the clinical studies, we like the chances for significant adoption of InFoods because of its potential to appeal to the “3Ps” in the healthcare treatment chain – that is, the patient, physician and payer. Here’s why;

- IBS Drugs Have Major Drawbacks (see our detailed discussion in Appendix):
     ◦ data from pivotal FDA studies of currently available Rx IBS drugs have shown that;
          • they are ineffective for the majority of IBS sufferers
          • they were often barely better than placebo
          • most IBS drugs have a negative effect on IBS that exceeds their benefits (Shah, E. and Pimentel, M. (2014), Evaluating the functional net value of pharmacologic agents in treating irritable bowel syndrome. Aliment Pharmacol Ther, 39: 973–983. doi:10.1111/apt.12692)
     ◦ IBS Rx drugs are expensive
           • typical cost-per Rx between $400 - $1,000
           • due to the high cost of IBS drugs and the chronic nature of the disease, payers will often require patients to try other, less-expensive, therapies before approving payment
               ∙ lack of efficacy and high cost of drugs drives up total IBS-related healthcare costs as physicians use trial and error approach to try and treat the disease
     ◦ IBS drugs can have unpleasant (such as diarrhea) and dangerous (such as risk of pancreatitis) side effects. Some are also not recommended for chronic use
     ◦ there is no drug indicated for the treatment of IBS-M

- Pent-up Demand for Better IBS Treatment of Options
     ◦ IBS, particularly IBS-D, can be highly detrimental to quality of life
     ◦ given that IBS drugs do not provide sufficient relief to most IBS sufferers, physicians and patients are eager for other options
     ◦ survey conducted by a 3rd-party research organization found that 70% of physicians surveyed indicated that they would use InFoods

- Reimbursement
     ◦ BMRA (as guided by their IBS-expert SAB) believes InFoods is reimbursable under an existing CPT code(s), although they have yet to divulge which one(s)
     ◦ we estimate (i.e. guess) that an InFoods diagnosis will charge will be in the range of $100 - $300 and a patient can expect to be tested 2 – 3 times per year = $400 - $900/year. This is relatively insignificant compared to the ~$13k/year current average total healthcare cost per IBS-D patient which may further incentivize payers to reimburse for InFoods
     ◦ as noted above, payers often require failure of less expensive (i.e. oftentimes non-Rx and not IBS indicated) treatment options prior to authorizing payment for Rx IBS drugs. As such, InFoods may be able to be positioned as a less expensive, first-line option to IBS

Novel H. Pylori Test Clinical Studies Commence Enrollment
The company remains committed to expanding their product menu. While clearly the single major focus is successful development of InFoods, other high-potential projects continue in parallel. Another program, related to a novel Helicobacter pylori (h. pylori) diagnostic was the latest to be divulged. BMRA already has several h. pylori tests in their product catalog including ELISA blood antibody tests, a rapid antibody test for the OTC market and a rapid stool-based antigen test for the professional POC market.

H. pylori is a gram-negative bacteria found in the stomach. While it is relatively common – as much as 50% or more of the world’s population are infected with the bacteria – most people do not exhibit symptoms. But, of the 15% - 20% that do have a reaction, symptoms can include stomach pain, reflux, nausea and bloating. H. pylori is associated increased risk of ulcers and is the strongest known risk for developing gastric cancer. Additionally, length of exposure to h. pylori is positively correlated to the risk of gastric cancer. Once diagnosed, standard therapy consists of proton pump inhibitors and certain antibiotics.

In November 2017 BMRA announced that enrollment commenced for the clinical studies for their new and proprietary h. pylori test which “is designed to increase the sensitivity and specificity of H. pylori testing and monitoring of treatment.” The studies are being done in collaboration with the University of Southern California and Vanderbilt University, along with an unnamed European University. Biomerica is ballparking 6 – 12 months for the clinical studies, following which analytical studies will be conducted. BMRA anticipates an eventual application seeking U.S. regulatory clearance will follow FDA’s 510(k) pathway.

Additional details about the study, titled Specimen Collection Study for H. Pylori Testing in Patients With Dyspepsia, are listed on clinicaltrials.gov (ID: NCT02970110). Principal investigators are Dr. Anthony Lembo (Harvard Medical) and Dr. Douglas Morgan (Vanderbilt Medical). Dr. Lembo is also a member of BMRA’s Scientific Advisory Board and a recognized expert in GI disorders. Per clinicaltrials.gov, the study, which will be conducted at a minimum of two sites, will acquire human specimens from patients (n=200) undergoing endoscopy with gastric biopsy for the diagnosis of active h. pylori infection. The biopsy tissue (sampled from the stomach) will be evaluated with histology and rapid urease test (or RUT, a commonly used test which identifies the presence of urease, an enzyme secreted by h. pylori). The study design also notes that a stool sample will be obtained by the participants prior to undergoing endoscopy and that “results and specimens will be used in a future clinical trial [i.e. “analytical studies” referenced in BMRA’s PR] of a non-invasive in vitro diagnostic assay for the detection of H. pylori antigen”. Which we think suggests that BMRA’s novel h. pylori test will be stool-based.

In April 2018 BMRA contracted with Guardian Angel Research Center to conduct a specimen collection study protocol for h. pylori testing in patients with dyspepsia.

Currently there are several methods to test for the presence of h. pylori. This includes histology, RUT and culture – all of which require invasive biopsy sampling, and non-invasive methods including urea breath test (UBT), serology and stool antigen tests (SAT). There are advantages and disadvantages of each. This includes expense and discomfort of invasive testing and lower accuracy of non-invasive serology testing. Below is a summary (compiled from data of several studies) of the different tests and their relative advantages and disadvantages – the table is from a study by JY Lee and N Kim, published in the January 2015 issue of Annals of Translational Medicine (Ju Yup Lee and Nayoung Kim. Diagnosis of Helicobacter pylori by invasive test: histology. Ann Transl Med. 2015 Jan; 3(1): 10).


View Exhibit I

Our Comments: Currently available SAT tests are generally considered highly accurate, although as the table illustrates, there are drawbacks including that the use of PPIs, antibiotics or recent bismuths can affect sensitivity. We will be interested to hear future updates on the progress of the clinical and validations studies and more details about the test under development. Learning more about the novel nature, and how it differs from currently available SATs, will be of particular interest to us. We think that if the test was designed to address one or more of the shortcomings of current SATs – such as, for example, being unaffected by PPIs (with no meaningful compromise to accuracy) or even improving on accuracy, that that may provide for significant differentiation.

Approximately six million non-invasive h. pylori tests are performed each year in the U.S. – if we assume $100/test, that calculates to a domestic market size of around $600M. And this is expected to grow given increasing prevalence of h. pylori and a greater shift from direct (i.e. invasive) to non-invasive methods – which could be further catalyzed with the advent of novel technologies (potentially including BMRA’s test) addressing some of the drawbacks of currently available tests.

Given BMRA’s relatively tiny size ($34M MC, ~$6M annual revenue), capturing as little as one-quarter of one percent of the U.S. non-invasive h. pylori market (or ~$1.5M) would be highly significant for the company. One percent market share could mean doubling of revenue from current levels. We hope to know more about the test in the non-too-distant future which may help in assessing potential competitiveness to currently available diagnostics as well as provide some useful data points for modeling purposes.

We cover BMRA with a $7/share price target. See above for free access to our updated report which includes a detailed discussion of the IBS market, our valuation methodology and financial model.

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