BMRA - Biomerica: One To Watch Closely For The Future But From The Sidelines For Now

Summary

• Biomerica is one to keep a close eye on for the future.
• A lack of earnings momentum and bottom line fundamentals has us sitting on the sidelines.
• BMRA has upcoming inflection points with its InFoods and H. pylori segments.
• There are inherent risks in investing in small-cap equities and unprofitable medtech names. This must be considered heavily.
• We rate BMRA a hold.

Investment Summary

Biomerica, Inc. ( BMRA ) is one to watch for the future as it continues to work on unlocking long-term value. BMRA's intense focus on R&D and reinvestment of income back into the company has the probability to garner strong returns if the company can convert its upcoming InFoods and H. pylori pipeline. Despite this, bottom-line fundamentals are weak, and we have wound back speculative positioning to names such as BMRA instead towards cash-generating companies. We have a very close eye on BMRA nevertheless. Rate hold.

Risks to Investment Thesis

There are many risks investing in small cap equities and unprofitable medtech companies. Volatility can be high and often greater than traditional segments of the market. Investors should also realize that fundamentals can become disconnected from market activity and that being neutral, our investment thesis is subject to upside and downside risks.

Corporate Overview

Given the stock is lightly covered here on Seeking Alpha, we'll quickly put some flesh on the BMRA skeleton. Firstly, it's a relatively mature company that's been around since 1971, first known as Nuclear Medical Systems, Inc. Today, BMRA has 2 subsidiaries, used for manufacturing and distribution respectively. The company also has ~250 current customers contributing income to its diagnostic business. The split is 32% foreign distributors, 4% domestic distributors, with the remainder (66%) distributed between numerous markets from medical schools to pharma companies to physician's offices.

BMRA's diagnostic assay menu contains various test kits that can perform anything from blood analysis, urine, nasal or faecal analysis and for various food intolerances. It sells these in 2 markets primarily - to clinical labs and at the point of care, namely, physicians' offices and drug stores such as Walgreens.

Assets to Key Optics On

In that note, BMRA is a play on products used at point of care (''POC'') in diagnostics and therapeutics (POC being home care, physician office and hospitals/labs). Specifically, investors gain exposure to diagnostic guided therapy products to treat gastrointestinal ("GI"), in particular, irritable bowel syndrome ("IBS") and irritable bowel disease ("IBD").

Its InFoods IBS offering is a tailored treatment approach that examines a patient's immuno-reactivity to different foods. It then seeks out specific foods from a patient's diet for removal, to alleviate symptoms. Positive readouts from the IBS Endpoint clinical trial with the Mayo Clinic in FY22 demonstrated InFoods IBS may be used to identify and eliminate specifically identified foods to reduce a patient's IBS symptoms.

With that, it was granted 6 patents for the InFoods technology during the 12 months, bringing its total to 12 issued patents. Note that it has more than 100 additional filed patents in review.

BMRA also finalized its H. pylori diagnostic test. The test is used to determine if a patient is infected with the H. pylori bacteria. Left untreated, it will often progress to GI symptoms like ulcers and malignancies. It applied for its 510K and is awaiting FDA clearance via the premarket submission. The company's InFoods development pipeline is seen in Exhibit 1.

Exhibit 1. InFoods is pushing ahead and continues to be an attractive segment.

FDA approval would be a key inflection point for the company and likely result in numerous distribution agreements each with their own economic multiplier.

FY22 Earnings Comments

The company came in with FY22 sales of $18.9 million (''mm'') a YoY gain of 162.5%. Underscoring the growth was an increase in Covid-19 antigen test volumes. Cost of revenues is high for BMRA, however, gross margin was higher YoY at $3mm and 15.7% of sales, ahead of FY21's 5%. The company also saw a ~200bps headwind at the SG&A line to ~$5.7mm. Meanwhile, operating loss came in at a slightly improved $4.5mm each from a $7.49mm loss the year prior. Moving down the P&L, it bought this down to a net loss of $4.6mm for the year, up from a c.$7.5mm loss the same time last year.

In addition, R&D investment was 17% lower at $1.8mm from $2.2mm the year prior, but was c.9.5% of turnover, nonetheless. The decrease was seen as there both the IBS and H. pylori were validated and required a lower capital budget.

Note, BMRA continues to print a series of quarterly and annual operating losses and hasn't clipped a net profit in more than 5-years. However, one feature of value is in BMRA's R&D investment, by our estimation. It continues to invest heavily into innovation and topline growth. However, the company is made to expense its R&D investment on the income statement as OPEX under GAAP accounting. We have capitalized this R&D investment in FY22, as seen in Exhibit 2, which adjusts book value up by c. $1.8mm for the period. The resulting adjustments also result in a slight adjustment to earnings, with an adjusted loss per share of $0.21 from the reported $0.36 loss per share for Q2 FY22.

Exhibit 2. BMRA asset book (FY22) after adding R&D investment onto the balance sheet

As seen in Exhibit 3, we recalculated the company's return on invested capital on GAAP terms and then once again by adding in the semiannual and annual R&D investment, as in the same process above. The result is a small but noticeable improvement in ROIC, data that may have implications further downstream for the company. Note, there's been a strong correlation between ROIC and enterprise value ("EV") since FY20.

Exhibit 3. Despite a small adjustment to invested capital by adding back in R&D investment, the ROIC has shifted higher in recent periods

We need to keep a close eye on this because the investment value is in the company's ability to convert R&D into future economic value through its new and existing pipeline.

Conclusion

BMRA is absolutely one to keep a very close eye on looking ahead. With two key catalysts identified in its InFoods and H. pylori offerings. As it progresses through phase-stages of commercialization, the investment opportunity widens substantially. Without an earnings profile to place value to, we are found to remain neutral on the stock's outlook. This is a slow burn, and BMRA are experts are doing it - since 1971.

Hence, why R&D investment is so critical to monitor for the company, because we need to understand how much it invests, and the return it generates on this, in combination with earnings and expectations. With that, after adding its R&D spend onto the balance sheet as an intangible investment, ROIC increases slightly. With these points in mind, we rate BMRA a hold, with no price target assigned due to this reason.

For further details see: