Pressure BioSciences , One of the Most Undervalued Biotech Companies
By Grant Zeng, CFA
Pressure BioSciences () is a research products and services provider for the life science industry. The Company’s novel, enabling platform technology pressure cycling technology (PCT) has competitive advantages over existing technologies in the sample preparation market. PCT is being increasingly recognized by research labs and user adoption will accelerate in the coming years due to the focused marketing efforts by the Company.
However, the Company is one of the most undervalued biotech companies in our view. Our call is based on two major factors: financial results and business development are improving and valuation is very attractive.
To read our full research report on Pressure Bio, download it here: PBIO Upgrade to Outperform 11-29-12
Record PCT Sales Reported for 3Q12
On Nov 15, 2012, Pressure BioSciences announced financial results for the three month period ended September 30, 2012.
Total revenue for the third quarter of 2012 was $391,616 compared to $280,422 for the comparable period in 2011, a 40% increase.
Revenue from the sale of Pressure Cycling Technology (PCT) products and services was $297,867 for the third quarter of 2012 compared to $217,734 for the same period in 2011, a 37% increase. Grant revenue in the third quarter of 2012 was $93,749 compared to $62,688 for the same period in the prior year.
The Company installed eight PCT Sample Preparation Systems (PCT Systems) during both quarters. Sales of PCT-based consumables generated revenue of approximately $28,000 for the three months ended September 30, 2012 compared to approximately $21,000 for the same period in 2011, an increase of 33%.
Operating loss for the third quarter of 2012 was $686,520, compared to $745,811 for the same period in 2011, a decrease of approximately 8%. After the exclusion of non-cash charges, operating cash burn for the 2012 third quarter was approximately $507,000 compared to approximately $658,000 for the third quarter of 2011, a decrease of approximately 23%.
Loss per common share - basic and diluted - was $0.09 for the third quarter of 2012 compared to $0.19 for the same period in 2011.
Third quarter of 2012 was an impressive quarter. PBIO’s financial results continued to improve.
PBIO recorded record PCT product sales of $0.30 million in 3Q12, an increase of 37% year over year. Third quarter product sales was also $0.05 million over our estimate of $0.25 million. PBIO also reported that revenue for the first nine months of 2012 exceeded $1.00 million, which surpassed the total revenue for 2011.
For the third quarter of 2012, the Company worked hard to increase revenue while reducing its operating loss. Operating loss for the third quarter of 2012 was $686,520, a decrease of approximately 8% year over year. Operating loss also beat our estimate of $0.9 million.
We are especially happy to see increased sales of consumables for the quarter. Sales of PCT-based consumables generated revenue of approximately $28,000 for the three months ended September 30, 2012 compared to approximately $21,000 for the same period in 2011, an increase of 33%. We expect the sales of consumables will continue to grow in the coming quarters. As we pointed before, this growth in consumables sales is very important to the Company’s long term sustainable growth. We remind investors consumables are recurring revenue source to the Company with higher margin, which are associated with the installation of PCT equipments. When more and more equipments are installed, more consumables will be used. The growth of installed equipments will eventually stabilize, but the use of consumables will increase each quarter as the equipment base becomes larger. Although revenue from consumables currently accounts for only a small portion of PCT product sales (about 10%), this number will become larger going forward and make a meaningful contribution to the top line.
Balance Sheet Boosted with the Conversion of Ironridge BioPharma Convertibles
On November 28, 2012, announced that Ironridge BioPharma Co. has converted their remaining 200 shares of the Company's Series E Convertible Preferred Stock into shares of the Company's common stock. Following this conversion, all 500 shares of Series E Preferred Stock purchased by Ironridge in the April 2012 $500,000 registered direct transaction with the Company have been converted.
The total number of shares of common stock issued to Ironridge for their Series E Preferred Stock investment was 1,113,033, of which 688,378 were reflected in the 11,189,612 shares issued and outstanding on September 30, 2012. In connection with the Series E Preferred Stock transaction, the Company paid the make-whole dividend with a combination of cash and common stock.
Ironridge BioPharma Co. is an institutional investor specializing in equity investments in the life sciences sector. Ironridge is a long-only institutional investor that seeks to be a long-term financial partner. Ironridge made the investment in PBIO this past April. The funds received were used in part to support the new marketing and sales program that PBIO introduced earlier this year, which helped PBIO achieve record PCT products revenue in the third quarter of 2012, and will also play an important role in PBIO’s anticipated future revenue growth.
With the conversion, the perceived “overhang” is gone, and PBIO paid out no more shares than originally registered. The conversion not only boosts PBIO’s balance sheet, but also validates the Company’s PCT technology platform. This is an indication that Ironridge BioPharma is optimistic about PBIO’s prospect and is willing to become its long term investor.
Two Big Distribution Deals will Boost Product Sales in 4Q12 and Beyond
On November 26, 2012, announced that it has signed deal with British Constant Systems Ltd (CS). The two companies have entered into a two-way, strategic marketing, selling, and distribution agreement.
Under the terms of the Agreement, PBIO has been awarded non-exclusive rights to market, sell, and distribute CS's unique, high-pressure cell disruption equipment and consumables in the United States, Canada, and Mexico. Meanwhile, CS has been awarded the rights to market, sell, and distribute PBIO's pressure cycling technology (PCT) based instruments and consumables in England, Scotland, Wales, Ireland, Spain, Portugal, Italy, Norway, Sweden, Finland, Denmark, and Singapore. CS currently has strong sales and distribution channels in all twelve of these countries. PBIO, on the other hand, has none. The Agreement is in effect until December 31, 2013; however, PBIO and CS expect to extend the Agreement prior to its termination.
This is a big deal for PBIO in our view. The two companies are worldwide leaders of complementary ultra-high pressure product lines for the life sciences market. Constant Systems is a British company that has been providing niche biomedical products and services to a global client base since 1989.
The two product lines complement each other exceedingly well. While both the CS and PBIO technologies are based on high pressure, each product line has fundamental scientific capabilities that the other does not have. PBIO's PCT Platform uses certain patented pressure mechanisms to achieve small-scale, molecular level effects. CS's technology uses different, proprietary pressure mechanisms for larger-scale, non-molecular level processing. In a number of routine laboratory applications, such as protein extraction, both effects can be critical to success. Therefore, for protein extraction and a number of other important scientific applications, laboratories will benefit by using the CS and PBIO products, either separately or together. This is a wonderful synergy of two well-respected, growing, and complementary product lines.
Constant Systems’ reach will introduce PBIO’s PCT products into 12 countries where PBIO does not have current coverage. Equally important, CS’ pressure-based cell disruption systems are needed by many of the same companies and scientists in North America that use or need PBIO’s PCT. Therefore, revenue for PBIO could be boosted in two ways in 2013 and beyond.
On November 7, 2012, PBIO and Cole-Parmer signed a supplier agreement. Under the agreement, Cole-Parmer will distribute PBIO’s Shredder SG3™ System.
Cole-Parmer is a leading global source of laboratory and industrial fluid handling products, instrumentation, equipment, and supplies since 1955. Its product lines, including popular brand names such as Masterflex®, Oakton®, and more, are sold through company-owned customer channel outlets and a strong network of international dealers.
With Cole-Parmer’s reputation and extensive distribution channels, sales of SG3 will be greatly boosted in the coming quarters, which will make a meaningful contribution to PBIO’s top line growth down the road.
PCT Platform Continues to Show Advantages in Multiple Studies
Recently, PBIO announced that multiple research reports have cited the ability of the Company’s PCT Platform to improve the detection of RNA, DNA, and/or protein in forensic, environmental, and biodefense applications, and in research studies focused on the discovery of biomarkers of disease. These studies were conducted in laboratories worldwide, including:
On Nov 2, 2012, PBIO announced that scientists from two separate research groups presented data at the recent HUPO 11th Annual World Congress (Boston, MA) indicating that the incorporation of the Company’s PCT Platform into their sample preparation processes resulted in a marked improvement in the quality and/or efficiency of test results. These studies were presented by scientists from the Center for Biologics Evaluation and Research of the FDA and from Janssen Research and Development.
On Nov 14, 2012, PBIO announced that Dr. Bradford Powell, a prominent microbiologist and recognized infectious diseases expert, presented a keynote address during the opening ceremony of this year’s annual Clinical Microbiology & Microbial Genomics Conference (ClinMicro-2012). In the Keynote address and a second, main session presentation in the conference, Dr. Powell presented data highlighting the advantages of the Company’s powerful and patented PCT Platform that have been shown to enable significant improvements in molecular-based microbiological testing, a rapidly growing and extremely important area in laboratory medicine today.
On Oct 18, 2012, PBIO announced that two research groups have reported on the ability of the Company’s PCT Platform to improve the detection of DNA in challenging forensic samples. The studies were presented by scientists from the Institute of Applied Genetics, Department of Forensic and Investigative Genetics, University of North Texas Health Science Center (UNTHSC) in Fort Worth Texas, and from the Harris County Institute of Forensic Sciences in Houston Texas. The study results were presented at the 23rd annual International Symposium on Human Identification (ISHI), being held from October 15-18, 2012, in Nashville, TN.
We believe these findings, together with previous publications, strongly support the importance of the PCT Platform in the life sciences field, including forensics, environmental analyses, biodefense, and biomarker discovery applications. This has created increased interest in its PCT Platform in the past, and will continue to drive sales in the future.
In terms of valuation, we think PBIO shares are undervalued based on the Company’s fundaments. Currently, the Company trades around $0.20 per share with a market cap of $2.0 million. We believe this deeply undervalues the Company based on the current fundamentals mentioned above. We understand that market discounts the value of the Company because the Company has only limited revenue base and has been losing money since its inception. We also understand that the Company has a relatively weak balance sheet, and further financing will be needed soon. However, when we look at the Company and the industry in which it operates in more detail, we realize that this is a company with huge opportunity and one that can grow its revenue and earnings at a tremendous rate in the next few years.
We are now optimistic about the Company’s prospect. With a rapidly growing market worldwide, combined with its unique technology and broad range of product offering, the Company is well positioned to boost its top line and bottom line in the coming years.
We think PBIO is more like a development stage biotech company. Our price target of $1.25 per share represents a market cap of about $14 million. As long as the Company can execute its growth strategy correctly, we believe this goal is achievable.