Investors who choose to invest in speculative stocks often choose the biotechnology sector as their sector of choice. It’s easy to understand why; biotechnology companies offer more opportunities for substantial profit than any other kind of company. The company that I would like to bring to investors’ attention in this article may seem like another speculative biotechnology play, but in reality, the truth is far different. BioLife Solutions (PINK:BLFS) is a Washington-based company that develops and sells bio-preservation solutions that allow researchers and drug companies to preserve and store biological or medical compounds far longer than they can with generic ‘home-brews.’ I first profiled BioLife back in October on Seeking Alpha, and readers who wish for an in-depth look into BioLife’s products, its distribution system, and the efficacy data regarding its preservation solutions, should read that article. BioLife reported its Q3 2012 results on November 13, and the company continued to execute on all fronts. For the record, unless otherwise noted, financial statistics and management commentary cited in this article will be sourced from either the company’s Q3 2012 earnings release, or its latest 10-Q filing.
Q3 2012: Accelerating Growth, and a Pathway to Profitability
What distinguishes BioLife from ‘traditional’ speculative biotechnology companies is that unlike such companies, it already has multiple products on the market, and sales are growing. In Q3 2012, revenue grew by 135% to $1,681,480, as BioLife’s contract manufacturing revenue continued to surge. BioLife’s sales growth of 135% represents an almost doubling of the 76.19% revenue growth rate the company posted in Q2 2012. In Q3 2012, the company’s revenues rose sequentially by 53.22%. BioLife is also nearing positive cash flow. The company did post operating cash flow of $121 (yes, exactly $121) in Q3 2012, but that was due to working capital benefits. However, CEO Mike Rice reiterated his expectations that BioLife would begin to post positive operating cash flow in Q4 2012.
BioLife’s shift to contract manufacturing revenue, as well as continued investments in its sales staff and infrastructure are putting pressure on gross margins. In Q3 2012, the company’s gross margin fell to 35.4%, down from 51.7% a year ago (and from 41.5% sequentially). However, operating expense discipline in terms of revenue more than makes up for the fall in gross margins. In Q3 2012, operating expenses fell to 44.26% of revenue, compared to 91.51% a year ago. Sequentially, operating expenses fell from 69.46%. As a result of this discipline, BioLife’s losses have narrowed substantially, with its Q3 loss coming in at $352,228, falling by 26.41% from a year ago (and falling 29.4% sequentially).
The company also used its Q3 earnings release to raise guidance; BioLife is now calling for 2012 revenues of $5 million, as opposed to its previous guidance of $4 million. Based on the company’s revenues for the first 3 quarters of 2012, this implies Q4 revenue will come in somewhere around $1,385,230. While that may be a sequential decline, it still represents growth of 71.23% relative to Q4 2011 results, as well as an increase from the 41% revenue growth the company posted in Q4 2011 (compared to Q4 2010). Q4 2012 will mark the beginning of BioLife’s transition from pure revenue generation to positive operating cash flow, and eventually, profitability, and growth of over 70% is still solid.
Financials: Sizable Debt, But There is More Than Meets the Eye
BioLife’s capital structure also sets it apart from traditional speculative biotechnology companies. One of the strangest ironies in this sector is that most development-stage biotechnology companies, despite having no products on the market or revenues, have fairly clean balance sheets. Debt is rare, or if present, is often in the form of convertible notes that provide the company in question with an ‘escape hatch’ if it finds itself in a funding crisis. Instead of debt, most biotechnology companies fund themselves through equity, diluting their shareholders on a regular basis as they attempt to complete their clinical trials and make the transition from a development-stage company to a commercial one. However, unlike most new companies in the sector, BioLife has chosen to eschew equity in favor of debt. While this has resulted in a lack of dilution for investors (BioLife ended Q3 2012 with 69,679,854 million outstanding shares, an increase of just 40,000 shares over the past 4 years), BioLife’s debt has grown from $4,656,905 in Q3 2008 to $13,176,963 as of Q3 2012. BioLife ended the quarter with just $7,529 in cash (we expect that number to rise in Q4 as the company achieves true positive operating cash flow). It would seem that BioLife faces an imminent financial crisis, as its debt burden is far larger than its available cash. But, this is not the case. BioLife’s debt is not due until January 11, 2016, and that gives the company more than enough time to fortify its balance sheet to pay off these liabilities. And as Zacks noted in its latest research note on BioLife, it is likely that the company will convert these notes into equity. At a price of $0.30 (shares closed at $0.40 on November 21, 2012) per share, BioLife would have to issue 45 million shares, or well over half of its existing share count to redeem all of the principal and accrued interest. While it is true that this would be highly dilutive, the impact to shareholders will be mitigated by the fact that BioLife is up over 470% since June 2012, and assuming that BioLife continues to execute on its expansion plans, the shares will continue to rise, thereby decreasing the amount of equity needed to redeem to company’s notes payable.
BioLife’s inventory surged by 67.84% from Q4 2011 to $849,211. Shouldn’t this be seen as a red flag, as a sign that the company is having trouble selling its products? On the surface, the answer to that question may be yes. But, it is important to examine BioLife’s inventory in more detail, because what matters more than the headline inventory balance is the composition of the company’s inventory, which I detail below.
BioLife Inventory
|
Raw Materials |
$461,582 |
$354,819 |
$173,510 |
$304,410 |
|
Work in Progress |
$207,494 |
$319,753 |
$11,768 |
$39,389 |
|
Finished Goods |
$180,135 |
$242,238 |
$320,678 |
$131,327 |
|
Total |
$849,211 |
$916,810 |
$505,956 |
$475,126 |
As the table above shows, BioLife’s inventory growth is being driven by raw materials. Its stock of finished products has dropped by 78.02% in the first 9 months of 2012, as the company has expanded both its revenues and customer base. While inventories are higher across the board relative to Q3 2011, BioLife’s sales are now more than double what they were in 2011, and it is expected that BioLife sees some inventory growth alongside its revenue growth. The fact that the company’s stock of finished goods declined both sequentially and relative to Q4 indicates that BioLife is not having trouble generating demand for its products. And the surge in raw materials indicates that the company is confident in its demand outlook.
Analyst Coverage & An Unaccounted For Upside Scenario
Few OTC companies have analyst coverage, but BioLife is an exception. The company is covered by Zacks, and the firm raised its price target on shares of BioLife to $0.50 from $0.30 on the back of its strong Q3 results and raised guidance. Based on the company’s November 21, 2012 closing share price of $0.40, that implies upside of 25% from current levels. As Zacks noted in its latest research note on BioLife, “given the stronger than anticipated recent financial results and near-term guidance along with our view that certain business activities and opportunities are materializing more rapidly than perhaps we had previously anticipated, we have made some upward adjustments to our modeled revenue for both the remainder of the current year as well as for out-years. We now model 2012 revenue and EPS of $5.0 million and ($0.02), up from $3.8 million and ($0.03) prior to Q3 results. Our 2015 revenue estimate has moved from to $8.9 million, up from $6.9 million previously. The upward revisions to our model have moved our price target from $0.30/share to $0.50/share.”
While GAAP profitability is several years away, BioLife’s losses will continue to narrow throughout the course of 2013, 2014, and 2015, and with sustainable operating cash flow almost at hand, the company will be in a stronger position to invest in and expand its business. It should be noted that there is an element to the BioLife story that Zacks does not model in its revenue projections, or its price target. BioLife’s preservation products are now used in over 50 different clinical trials, and the company’s contracts are structured so that BioLife will receive royalties from the sales of any therapy approved by the FDA that was developed using its products. As Zacks notes, “If and when one or more therapies currently in clinical testing that are using BioLife’s biopreservation media gain FDA approval, this could spark a significantly greater ramp in revenue. Management believes that each regenerative medicine product that reaches worldwide commercialization could be worth as much as $1 million – $2 million in revenue (three to five years after launch) to BioLife as the biopreservation media supplier.” While royalties of $1-$2 million are small in absolute terms, they are meaningful when BioLife’s size is taken into account. Furthermore, these royalties will be, in essence, pure profit, which the company can use to fortify its balance sheet and continue to invest in its business.
Conclusions
BioLife is certainly a risky investment, but it is not riskier than any other speculative biotechnology company. Unlike a development-stage biotechnology company, BioLife is already generating revenue and is expanding its customer base. It is nearing positive operating cash flow, and the company has a clear pathway to profitability over the course of the next several years. And BioLife is planning on moving from the OTC to the NASDAQ once it strengthens its finances. For investors who have room for risk in their portfolios (most PropThink readers likely fall into that category), BioLife could be a solid addition to a healthcare and biotechnology portfolio.
