Biocompatibles’ drug eluting beads for cancer continue to deliver solid platform for growth

Drugs are refugees in a downturn may be a pretty accurate expression. Warren Buffett surely believed it when he bought into GlaxoSmithKline (LSE: GSK) stock at the beginning of the credit crunch. Large pharmaceuticals have been prime targets for cash of investors looking for safety; those with perceived best drug pipelines enjoyed the best rides. It seems, however, that the very largest pipelines are not the only criteria to search by within the pharma sector. London-listed Biocompatibles has recently put out a 1H2009 trading statement showing a 53% revenue uptick.   

The Surrey-based medical technology company (started by Professor Chapman in 1984, trading on the exchange since 1995) works on drug device combination products, mainly in the field of oncology (medicine dealing with tumours/cancers).

With market leading position in drug-eluting beads (used in more than 35 countries for the treatment of cancers) and The Sunday Times best companies award for 2009 (2 star accreditation), this small biotech shows some promise.

Biocompatibles’ Oncology Products Division supplies medical devices (drug-eluting bead products for liver cancer treatment and radiation-delivering seed products for prostate cancer treatment) via distribution partners such as AngioDynamics, Terumo and Eisai.

Since the traditional chemo therapy has numerous side effects, such as white blood cell decline and hair loss, Biocompatibles beads are hugely promising, as they allow the delivery of chemo directly to the tumour, reducing side effects on healthy parts of the body (so far some 1000 patients have been treated during trials).

The Licensing Division, which includes Germany-based CellMed (revenues up by 183% in 1H2009), is working on development of:

a) drug-eluting bead products for the treatment of stroke, based on proprietary stem cell technology,
b) GLP-1 analogue for the treatment of diabetes and obesity (ongoing co-financing partnership with Astra Zeneca (LSE: AZN) will see Biocompatibles receive a £25m payment if trials are successful), and
c) cosmetic dermatology beads (total aging market for this product is worth $1bn) for the enhancement of cosmetic improvement results (partnered with Merz Pharmaceuticals GmbH). 

Biocompatibles’ current portfolio of granted patents revolves around three polymer systems: 1) the NFil Technology used in drug-eluting beads programme (microspheres designed to load and elute drugs), 2) the CellMed technology – required for encapsulation of biological agents, and 3) a loose collection of a variety of patents covering chemical and biological agents.

Biocompatibles employed capital is £46.8m, of which only £1.7m is borrowings. Gearing is therefore negligible.

1H2009 revenues were £13.9m (£9.1m in 1H2008), an increase of 53% (bead products accounted for 48% of total revenues, prostate cancer treatment products – 24%, CellMed and drug eluting stent products contributed 14% each). As a result of 64% increase in operating expenses, mainly due to BrachySciences acquisition and increased clinical trial activity, Biocompatibles generated a net loss in 1H2009 of £725,000. Earnings per share (‘EPS’) therefore were also negative at 1.9 pence (positive EPS of 4.9 pence in 1H2008).

Over on the balance sheet the total assets came to £58.7m at end of 1H2009 (£62.4m in 1H2008). Cash and short term deposits stood at £16m (£26m at 1H2008). Total Liabilities at 1H2009 were fairly flat on 1H2008, at £13.7m. Liquidity is extremely good and improving at Current Ratio of 4 (3.6 at 1H1008).

Cash used up in operating activities in 1H2009 totalled £1.2m (generated £878k in 1H2008). CapEx in the period was £300k (manufacturing capability investment). Under financing activities the financial liability of £1.7m is attributable to CapEx funding by borrowings from CellMed’s licensee. Biocom paid its first dividend of 5 pence a share in May.

Some have asked questions concerning the sustainability of dividend; Crispin Simon (CEO), however, was confident about the long term dividend payout policy sustainability (he points out to the fact that the company is suitably capitalised and has funds from business disposals in 2002 and ongoing Medtronic royalty income from drug-eluting stent programme).

Biocompatibles currently has an enviable gross profit margin, some ten percentage points higher than industry average. If the management were able to bring the sustainable profitability down to the bottom line to achieve the industry average return on equity of some 20%, the company’s stock would be worth at least double its current quote (188 pence).

Crispin Simon believes the recent annual revenue growth of some 50% could be sustained with visibility of at least a couple of years. This must be considered with all seriousness given that Biocompatibles Research & Development investment now runs at around 50% of revenue. The company currently runs several fairly sizable trials: 1. SPACE (in collaboration with Bayer, first patient already been treated), 2. Drug eluting bead surgical registry (386 patients already been recruited), 3. PARAGON, PARAGON 1 and PARAGON 2 (recruited 16 trial patients). These trials are all expected to deliver clinical data before the end of 2011-2012.

Add to this the imminent launch of DC Bead in Korea, distribution arrangements with SciClone in China and Eisai in Japan, and you have got things panning out on the horizon.

With the management having upped its annual revenue guidance for next year from £22-24m to £24-26m and a solid pipeline, Biocompatibles may also present an attractive acquisition opportunity to a discerning buyer with a thin pipeline. 

 All of the above must be countered by the ever-present commercialisation risks, but if the management can bring the company to delivering a sustainable positive income margin, the stock could be a wise long term investment for both undervaluation, as well as growth seekers.