BioStem Technologies: A New Growth Star In Health Care

seekingalpha08-21

BioStem Technologies has enjoyed exceptional growth in its first year as a public company, with revenues soaring and earnings turning positive.The company's flagship product, AmnioWrap2, has been a ...

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(OTCPK:BSEM) has made an exceptional entry into the public markets. In its first year, its revenues soared, its earnings have been positive, and its share price has risen 452.63%: Data by YCharts It launched its flagship product, AmnioWrap2, in the fourth quarter of 2023. In the first quarter of 2024, it registered revenue of $41.9 million and in the second quarter, $74.5 million. I have a one-year price target that is nearly 50% above the August 20, 2024 closing price and have rated it a Strong Buy. About BioStem The company describes itself as a “leading regenerative medicine company” on its website. Specifically, it focuses on the development, manufacture, and commercialization of allografts derived from placentas, for advanced wound care. Allograft refers to the medical transfer of tissue between nonidentical members of the same species, but with compatible blood types. The placenta is an organ that connects a fetus with its mother. The manufacturing method is proprietary, based on what it calls its BioREtain process. Products include:  AmnioWrap2, which is used in the treatment of acute and chronic wounds. VENDAJE is a structural tissue allograft used as a protective covering for soft tissue wounds. VENDAJE AC is a thicker structural tissue allograft, and also acts as a protective covering for soft tissue wounds. VENDAJE OPTIC is a structural tissue allograft for use as a protective covering during the repair of ocular surfaces.  On July 10, BioStem reported in a news release that the Institutional Review Board had approved a clinical study to evaluate AmnioWrap2 for diabetic foot ulcers. A few weeks earlier, a June 26 news release led with this headline, “BioStem Technologies Reports Breakthrough Results with AmnioWrap2® in Retrospective Wound Care Study”. BioStem was founded in 2014 and began trading as a public stock on August 21, 2023, one year ago. It opened at $1.50 and in the past year has traded between $1.47 and $15.50. It first traded on the OTC Pink Sheet Open Market, then uplisted to the OTCQB Venture Market on December 16. In April, it announced in a news release that it had successfully completed audits that would help clear the way to uplist again, this time to NASDAQ. At the close on August 20, it traded at $10.50 and had a market cap of $183.4 million. Competition and competitive advantages Information on its competition is limited, since the company has not yet produced a 10-K. However, a Seeking Alpha scan using ‘allograft’ pulled up the names of other allograft suppliers, including MiMedx Group, Inc. (MDXG), Xtant Medical Holdings, Inc. (XTNT), AxoGen, Inc. (AXGN). Other online searches produce numerous private firms that offer allografts. As for competitive advantages, BioStem has a gross profit margin of 94.16%, which suggests market strengths that give it pricing power. That may be the result of its BioREtain process at work, to a greater or lesser extent. Also, during the Q2 earnings call, CEO Jason Matuszewski made several remarks that implied competitive advantages. He noted that the second-quarter revenue had risen by “several orders of magnitude” and its allografts had enjoyed strong commercial performance “across multiple sites of service.” Further, he told analysts that BioStem is launching multiple clinical trials and preparing peer-reviewed papers on the retrospective data collected from all its allografts used on various wound types. Getting back to margins, only the gross is high, but the others are at least positive, which is an accomplishment for a young company:  Gross margin: 94.16% versus 57.08% for the Health Care sector median. EBITDA margin: 2.62% versus 5.92%. Net margin: 0.27% versus minus 4.85%.  BioStem also has a robust return on common equity, 15.35% versus minus 40.95% for the sector median. Based on this information, I believe the company has at least a narrow moat. Second quarter financial results BioStem reported its second quarter 2024 earnings on August 12, and the numbers included:  Net revenue: $74.5 million versus $1.1 million in Q2-2023. Operating expenses: $61.9 million versus $3.6 million last year. Net income: $6.4 million, compared to a loss of $2.9 million. Diluted net income for common stockholders: $0.30 versus minus $0.22. Diluted weighted average common shares outstanding: 21.4 million versus 13.3 million.  The biggest change on the expenses side was in Sales & Marketing, which went from $596.1 thousand last year to $59.0 million this year. GSA, R&D, and other expenses were relatively flat. Q2 balance sheet results are compared with those at the end of December 2023:  Cash and equivalents: $6.6 million versus $0.24 million on December 31. Total assets: $90.5 million versus $14.6 million at year-end. Bona fide services fee: $60.8 million versus $7.8 million. Total liabilities: $74.6 million versus $15.9 million. Total stockholders’ equity $15.9 million versus ($1.3 million) at year-end.  It’s not unusual to see a young company turn a corner and begin growing its revenue and post positive earnings. However, the BioStem case is remarkable and exceptional: revenue shot up from $1.1 million to $74.5 million, and net income turned black while increasing significantly. The biggest driver of revenue was AmnioWrap2, with sales that were 56.5% higher than in the first quarter (it launched in the fourth quarter of 2023). I’m also taking note of the huge increase in the sales and marketing expense, which saw a quarterly cost of $59.0 million on revenue of $74.5 million. Which seems very high, but I see similarly large outlays by its competitors/peers:  MiMedx: net sales of $87.2 million and Selling, General, and Administrative costs of $55.4 million. Xtant Medical: Revenue of $29.9 million and Sales and Marketing expenses of $13.2 million. Axogen: Revenue of $47.9 million and Sales and Marketing expenses of $19.7 million.  While $59 million looks high, it is relatively consistent with other companies in the same line of business. Presumably, much of BioStem’s budget goes to Venture Medical, BioStem’s commercial partner. Venture Medical’s president, John Schroeder, said, in a news release announcing the partnership, “With our extensive wound healing-focused salesforce, leading-edge marketing, clinical, reimbursement, logistics, and billing and operational solutions, Venture Medical is uniquely positioned to partner with BioStem Technologies to address the vast unmet clinical need for rapid healing modalities in chronic and post-surgical wounds.” And, if the company can bring that line item down even a few million dollars, it would have a powerful effect on net income and EPS. BioStem growth prospects The company did not issue an outlook or guidance in its Q1 or Q2 earnings reports, but there are several indications that growth should continue. First, the company has sales momentum. First quarter sales rose to $41.9 million from $0.576 million in Q1-2023. In the second quarter, they rose to $74.5 million. It believes it has met the requirements for a listing on NASDAQ, which should attract far more investor interest than being listed on the OTCQB Venture Market. Third, there is demand for these treatments because of the costs for patients and insurers. During the Q2 earnings call, CEO Matuszewski said, “Given the substantial economic burden diabetic foot ulcers place on the US healthcare system, where estimated annual treatments can cost up to $13 billion, we are confident that our allografts will deliver a meaningful impact.” The one Wall Street analyst who covers BioStem expects revenue this year to total $276.7 million, which implies another $160.3 million in the second half of this year. That works out to roughly $80 million per quarter. For 2025, the analyst sees revenue hitting $328.51 million, which would be another increase, of 18.72%. On earnings, the analyst forecasts EPS of $1.43, far above 2023’s minus $0.57. In 2025, earnings are expected to rise another 45.45%, to $2.08. Overall, this is an aggressive growth story, and one that has solid credentials. Valuation As noted, BioStem began trading on August 21, 2023, and since then, the share price has soared by 452.63%: Data by YCharts That type of growth should suggest overvaluation, but I don’t think that’s the case. There’s little available in terms of metrics because we’re working on the basis of just a few quarterly reports since BioStem went public. However, the Price/Sales ratio is available, and often used with new companies that have little earnings history:  P/S [TTM]: 2.84 versus 3.82 for the Health Care sector median. P/S [FWD]: 0.66 compared to 3.80 for the median.  How do these compare with those of its competitors/peers?  MiMedx P/S [TTM]: 2.55, P/S [FWD]: 2.81 Xtant P/S [TTM]: 0.72, P/S [FWD]: 0.72 AxoGen P/S [TTM]: 3.06, P/S [FWD]: 2.91  Based on P/S and comparisons with the other firms, I believe BioStem is fairly valued. What will it be worth in 12 months? Back on April 1st, the shares hit $15.50 before backsliding. I’m going to use that as my one-year price target; it represents a 47.61% increase on the August 20 closing price of $10.50. A nearly 50% increase is an ambitious target, but I think BioStem is likely to hit it, based on another $160.3 million of revenue in 2024 (reflecting the popularity of AmnioWrap2) and probably even more in the first half of 2025. There is a reasonable chance the company will get its NASDAQ listing, which would lead to upward pressure. And, if it can trim its sales and marketing costs, net income and earnings should grow, too. With that price target, I rate BioStem a Strong Buy. No other Seeking Alpha analysts have rated, nor have the Wall Street analysts. The Quant system gives it a Hold. Risk factors for BioStem  The company has been in business for a decade now, but only in the past year has it been publicly traded. That means a limited number of data points for estimating its valuation and trends. Based on its retrospective studies, it seems fairly likely AmnioWrap2 will make it through its clinical trial successfully. However, there are no guarantees, and if it fails, the company will lose its biggest revenue engine. BioStem operates in what appears to be a competitive market. If another company or companies develop even more advanced technologies or disruptive technology, it could be hurt. As a new company, its trading volume is relatively low; on several days in August, fewer than 10,000 shares traded. That may make price discovery unreliable. On the other hand, being listed on NASDAQ would likely mean a large increase in volumes. Aggressive growth can be attractive, but it also can lead to operational and financial challenges. Can manufacturing keep up with sales, will there be cash flow issues or quality issues because of growth, can the company find the seasoned executives it needs? Conclusion It’s a satisfying feeling when a health care company appears to successfully meet a compelling health care need. BioStem Technologies appears to have done that with AmnioWrap2, with very fast growth in the first and second quarters of this year. I expect more of the same next year, based on continuing demand for AmnioWrap2. If it succeeds in becoming a NASDAQ stock, the upward share price trend should continue. With a one-year price target of $15.50, I rate BioStem a Strong Buy.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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