BioLife Solutions’ Second Half Could Hold Surprise Upside

BioLife Solutions, 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 2^nd 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. Its worth iterating that BLFS, with anemic volume, isn’t a vehicle for the active trader.

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

BioLife’s 2^nd 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 12^th 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 2^nd 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 2^nd 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 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 to 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

*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) 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

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.

In connection with BLFS, PropThink has taken a long position.