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BMRA: Q3 2018 Results: Asia Remains Strong While U.S., Europe Slip. Encouraged By Robustness of InFoods Study Design

04/19/2018
By Brian Marckx, CFA

NASDAQ:BMRA

Biomerica (NASDAQ:BMRA) reported financial results for their fiscal 2018 third quarter ending February 28, 2018. Revenue, down 8% yoy and 15% qoq, was softer than we were expecting with both Europe and U.S. sales contributing to the miss.

• Fiscal Q3 has historically been a relatively strong quarter for BMRA’s U.S. business – and while that proved to be true as compared to the first two quarters of 2018, on a prior years’ basis, domestic sales were relatively very weak – in fact, the lowest Q3 U.S. number since at least 2009. 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, while down both yoy and sequentially in Q3, has held much better than the U.S. And, to be fair, the prior year comp was a (somewhat anomalistically high) tough one to beat. But, unfortunately, European revenue YTD is now running (slightly) below the prior year and unless we see a marked qoq rebound in Q4, Europe, which accounts for a relatively hefty 35% of total revenue, could put a damper on BMRA’s full-year 2018 revenue growth. Nonetheless, we do not think Europe will contract by more than single-digits in 2018.

• While Asia sales dipped sequentially, they came in a few hairs better than we had forecast and turned in the seventh consecutive quarter of yoy growth. The 40% yoy revenue growth from Asia, which remains BMRA’s most significant territory and accounts for almost 50% of total revenue, offset some of the relative softness in the U.S. and Europe and helped limit total revenue contraction to the high single digits. We continue to think the recent sales momentum, coupled with contribution from EZ Detect (which received CFDA approval in January 2018), bode well for continued double-digit annual growth in Asia sales over the next couple of years. EZ Detect also recently (i.e. March 2018) received regulatory approval in Mexico where it should also begin to make a material revenue contribution during fiscal 2018.

While total revenue was not a highlight in Q3, gross margin held up well and operating expenses remained on the moderate side – both of which helped keep operating loss less in-the-red than we had anticipated. We do, however, continue to model opex to increase at a higher rate than that of revenue growth through at least the end of fiscal 2019 (ending May 2019) as a result of InFoods U.S. clinical trial related expenses.

Revenue
Q3 revenue of $1.38M was down 8% yoy (from $1.50M in Q3 ‘17), down 15% sequentially (from $1.61M in Q2 ’18) and about 11% below our $1.54M estimate.

U.S. revenue, at $208k was down 40% yoy but up 51% from Q2 of this year. U.S. sales have trended relatively soft since 2015 when they fell 17% to $1.0M in that year. They dipped another 4% in 2016 and shed 12% the next year, ending 2017 at just $874k. The run-rate through the first nine months of the current year puts U.S. sales on-track to end 2018 at around $630k – an implied 28% yoy contraction and the lowest level since at least 2010 (i.e. the furthest back that we looked).

We, however, 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 just 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 now 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 from that point into the foreseeable future.

Meanwhile, Q3 revenue from Asia was $636k – up 40% yoy, although down 28% from Q2. We note, however, that Q2 was a tough comp given that Asia sales in that quarter were the highest they have been since Q2 2013. Q3 Asia sales were also about 6% better than we had estimated.

As we have noted in the recent past, while Asia has been a territory which has historically experienced relatively high short-term sales volatility, longer-term trends continue to point towards regular revenue growth. Relatively robust and consistent revenue growth from Asia has resulted in this territory becoming the greatest contributor to total revenue as well as the most significant catalyst to recent total top-line growth.

For historical context, BMRA generated just $1.0M in sales (~21% of total revenue) from Asia 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. Asia sales grew another 22% through the first nine months of 2018. And among the territories which did post positive revenue growth through the first nine months of fiscal 2018, Asia contributed 86% of the total. Given the outsized contribution from Asia (which now accounts for 48% of total revenue) even incremental growth from current levels in this territory will have a meaningfully positive effect.

The continued strength in Asia sales is highly encouraging given the outsized contribution that this territory provides to total revenue. And we think sales from Asia will almost certainly grow from here given recent China Food and Drug Administration Approval (CFDA) of EZ Detect, an over-the-counter fecal occult blood (FOB) test for colorectal cancer. 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.

Relative to Europe - sales from this territory were a bright spot in 2017, although not nearly as robust or significant as that from Asia. Nonetheless revenue grew 3% in 2017 – which was a welcome result, particularly given the 20% battering that this territory endured in the prior year. And while European sales eked out 5% growth through the first six months of 2018, they slid 26% yoy in Q3, resulting in YTD sales now in the red by about 7%.

Europe accounts for about 35% 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. While BMRA has always kept operating metrics close to the chest, making forecasting territorial-level revenue a challenge, we have been encouraged by recent trends (despite the relative softness in Q3) in European revenue as well as certain macro fundamentals which could further benefit sales. This includes the implementation by European regulators of stricter regulatory and oversight of medical devices and diagnostics – which could slow the entry of competitive products, at least for the next few years.

And while we are now modeling forecasted InFoods contribution in the U.S., we still do not model any assumed commercialization of the product candidate in any other parts of the world. That could 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.

Gross Margin, Operating Expenses
Gross margin, at just 33.8%, was about 200bps lower than we had forecast, although not significantly different from recent history (GM averaged 33.5% in 1H ’18). But GM has slid since 2017 – through the first nine months of 2017 GM averaged 36.6% vs. 33.5% YTD 2018. More encouraging however, is that GM improved from 31.4% in Q2 ’18.

Q3 OpEx was $788k, or 57% of revenue, compared to our $951k and 61% estimates. SG&A has remained flat through the first nine months of 2018 as compared to the same period in 2017 despite expanded activity in both operational and product development areas. We do, however, continue to model opex to increase at a higher rate than that of revenue growth through at least fiscal 2019 (ending May 2019) as a result of InFoods U.S. clinical trial related expenses.

Cash
BMRA raised $290k, net, during Q3 from the combination of common share sales via their ATM program and the exercise of stock options (another $160k, net, was raised via the ATM subsequent to Q3 quarter-end). Cash balance at the close of Q3 was $597, down from $818k at the end of fiscal Q2. Cash used in operating activities in the three and nine months ending February 28, 2018 was $489k and $852k ($274k and $631k, ex-changes in working capital), respectively. Another $21k and $74k 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. To-date, we calculate that approximately 97k shares have been sold under the shelf, representing net proceeds of ~$450k. 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

InFoods Clinical Trial Initial Game-plan, Clinical Site Partners Announced, Study 1 Design on clinicaltrials.gov
The most significant news since Biomerica first announced intentions to pursue a potentially game-changing ‘therapy’ for IBS and building what we believe is an all-star IBS-related scientific advisory board came in early January when the company disclosed the initial InFoods clinical validation strategy as well as that two leading U.S. university research centers would lead the studies.

Per their January 8, 2018 press release, two clinical studies are expected to 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.

Study 1, titled simply (as of now, anyway) “Endpoint Determination Study Protocol” was first posted on clinicaltrials.gov on March 9, 2018 (NCT03459482). The posting did provide a little more insight (than we had had previously) to the expected design of both the initial and pivotal studies.

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.

We cover BMRA with a $7/share price target. See below for free access to our most recent report on the company.

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