BMRA - Biomerica: H.Pylori Announcements Important To Keep An Eye On Reaffirm Hold

Summary

• BMRA continues to advance on its pipeline, building momentum around its IBS product and H.Pylori diagnostic test.
• Despite these tailwinds, the market's reaction has been muted to each, with the equilibrium in price action reached almost immediately.
• Investors are still positioned on the bullish end of the risk/reward calculus.
• Net-net, we continue to rate BMRA a high, keeping a close eye out for movements in its H.pylori division.

Investment Summary

Since our last publication on Biomerica, Inc. ( BMRA ) we've remained neutral on the stock's prospects rolling into the new year. As a reminder, we had extensively reviewed the investment opportunity for BMRA in September, noting the company to be "one to watch for the future as it continues to work on unlocking long-term value". In particular, we were constructive on the company's InFoods and H.pylori pipeline, and after examining its financials in depth opined it was in sound financial health to continue building momentum around these segments.

Whilst there's been notable advancements across its core operations, we believe there's still a ways to go for BMRA before it can demonstrate the propensity to re-rate to the upside. Specifically, the two latest highlights for BMRA include:

1. The EZ Colon test's approval in the Kingdom of Saudi Arabia and United Arab Emirates. This came after the health regulatory bodies of each nation granted clearance to launch the product for distribution in each state.
2. The Aware breast self examination device being sold over Amazon.com, as another sales channel and route to market.

Despite these tailwinds coming to fruition, the market's reaction has been muted to each, suggesting that much of the 'good news' has been priced into the BMRA share price for the time being. Here, I'll discuss our latest findings on the company after we revisited the position, in order to gauge the distribution of probabilities for BMRA's directional share price in FY23'.

Before continuing, there are key risks that must be discussed in BMRA's investment debate:

1). The market risk of small cap equities must be considered, seeing the potential for volatility and large price swings that are disconnected to fundamental data.

2). It's also important to remember the regulatory risks associated with the company’s need to comply with the regulations imposed by various government bodies, and any failure to do so can result in fines and other penalties.

3). Not to mention the pipeline and execution risk in its new growth segments, which could fail to successfully develop new products and technologies and ultimately lead to a decrease in revenue, cash flows.

4). Given the lack of profitability, the company may need to raise additional cash down the line, increasing its long-term liabilities. We'd encourage investors to familiarize themselves with these risks before making any further decisions.

BMRA Q3 earnings mixed, investors searching for more

Turning first to the company's latest numbers , we saw top-line growth of 32% YoY with revenue of $1.64mm. The gross loss on this tightened in to $54,955, a slight improvement from the same time last year. However, it also booked ~$2mm in OpEx which widened the loss from operations to $2.1mm, versus a $1.5mm loss last year. It brought this down to a net loss of $0.16 per share, a weaker result than the prior corresponding period.

Whilst the quarter was light on numbers, we were especially focused on eyeing the movements around its InFoods IBS product and the Helicobacter pylori ("H. pylori") diagnostic test.

In particular, the H.pylori assay looks to be a potentially interesting segment with potentially strong economics tied into the mix. If you didn't already know, H.pylori is a gram-negative, microaerophilic bacterium that colonizes the stomach. It is one of the most common chronic bacterial infections in humans, with ~50% of the world's population estimated to be harbouring the bacteria.

H. pylori infection is associated with a number of gastrointestinal disorders, including peptic ulcer disease and gastric cancer. In fact, it is known to cause >90% of all stomach ulcers. The bacterium has a unique set of virulence factors that enable it to persist in the acidic environment of the stomach and evade host immune responses. In essence, it produces an enzyme called urease that neutralizes the stomach acid, allowing it to flourish in situ.

The primary mode of transmission of H. pylori is believed to be through person-to-person or faecal-oral contact, although water and food-borne outbreaks have also been reported.

Diagnosis of H. pylori infection is typically achieved through non-invasive testing, such as stool antigen tests or serological assays. Hence, the H.pylori testing market it expected to reach 4.4% CAGR to $800mm by 2028, with the largest demographic being in North America.

Hence, we are constructive on this segment for BMRA. During the quarter, it filed 510K clearance from the FDA for premarket submission. If this is successful, we should see BMRA marketing the product in the U.S., and this could be an inflection point to watch out for.

Aside from this, we also noted the concentration risk in BMRA's current set of customer accounts.

To illustrate, in BMRA's Q1 FY23 [corresponding to the Q3 FY22] it booked 88% of its revenue from non-Covid sources. However, on this, it had one foreign customer who accounted for 64% of consolidated sales. In addition, its largest 2 accounts accounted for 67% of gross accounts receivable. We'd note this could present as a risk looking ahead if any of these relationships were to break down.

BMRA technical studies

In the absence of profitability, we turned to our technical studies to guide price visibility looking ahead. You can see below the stock has rallied for the good part of H2 FY22, having tested and bounced from support a number of times to date.

The 50DMA and 250DMA crossed in early October and had to break above the c.$4.20 region in order to set new highs. However, as you'll observe, it has failed to breakout above this level and set new highs.

To us, unless it can rally to and break the resistance level shown, sideways price action looks set to remain constant for BMRA into the new year.

Exhibit 2. BMRA weekly price action, 2020–2022 [weekly bars, log scale]

However, the breadth in technically derived price targets its quite wide, giving less confidence on the upside target of $6.35 seen below. We now have downside targets as low as $2.20, having already taken out the previous $3.45 target displayed. This is a downside risk that must be considered into the investment debate, and doesn't inspire much confidence for BMRA's upside potential looking ahead.

It comes back to our original point, in that a good portion of the tailwinds from the InFoods and H.Pylori divisions may have already been priced into the share price. This also confirms our neutral stance for now.

Exhibit 3. Wide breadth of price targets [upside/downside], with downside targets as low as $2.20.

BMRA market positioning & conclusion

As you'll see below, the options chain for contracts expiring January 2023 is stacked on the call side, with volume present in a strike range of $2.50–$7.50.

This could mean one of two things [or both]. Either investors are bullish and positioned at these levels via calls to reduce exposure to the underlying stock, in order to better manage risk and volatility.

Or, investors are hedging short exposure on the underlying BMRA stock price. We'd be more inclined to the former, seeing the stock's current share price isn't conducive to a large return from being short.

This is interesting data to consider and therefore keeps us neutral versus outright bearish on the stock.

Exhibit 4. Options chain with heavy volume on the call side with strikes from $2.50–$7.50. Suggests investor optimism.

Net-net, we continue to rate BMRA a hold, but are eyeing its H.Pylori and InFoods segments closely from hereon in. These are the key mid-term growth levers to its share price in our opinion.

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