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Boston Biomedica, Inc. RATING: BUY
March 16, 1999 Sector: Biotechnology/Medical Devices
H. David Kavrell Description: Infectious Diseases/Pressure Cycling
Equities Analyst DJIA: 9930.5 NASDAQ Comp: 2439.0
(888) 528-6740 NASDAQ: BBII
Recent price $3 1/8 Fiscal YE: Dec 1998A 1999E 2000E 2001E
52 week range $2-$8 1/4 Q1 Mar. (0.14) (0.07)
Shares Outstanding 4.8 M Q2 June 0.03 (0.06)
3month average daily volume 20,000 Q3 Sept. (0.72) (0.06)
Market Capitalization $14 MM Q4 Dec. (0.11) (0.01)
Insider Ownership 30% Fiscal year (0.94) (0.20) (.04) 0.15
Book value/share $3.20 P/E (x) NM NM NM 18.3
We Initiate Coverage with a Rating of BUY Price Target: $9.00
 Boston Biomedica, Inc. (BBI) is an emerging growth story whose strategy is to fund significant opportunities in R&D from their successful core operations and possibly from debt.
 The Company has a history of 12 consecutive years of revenue and profits with products displaying double digit growth that participate in the infectious disease market.
 Revenues from BBI's core businesses will provide security to shareholders as the Company pursues significant market opportunities in pressure cycling and drug discovery.
 Pressure cycling technology (PCT) is a novel, enabling technology platform with applications to many products and industries. The initial markets pursued by BBI with this technology will be in the $275 million and $500 million plasma inactivation and nucleic acid extraction markets.
 BBI's drug discovery program involves collaborating with the University of North Carolina in a novel approach to identify natural products and their synthetic derivatives to block HIV infection.
 BBI has a history of being able to successfully turn around unprofitable acquisitions and is in the process of replicating this achievement with BBI-Source, their instrument manufacturing subsidiary.
With BBI's common stock is selling at less than book value and approximately .5 times sales per share, the common stock is undervalued. Our target price of $9 per share is conservatively based on 1.5 times 1999 estimated sales of $30 million
Any recommendation contained in this report may or may not be suitable for all investors. Moreover, although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. National Securities Corporation may make markets and effect transactions, including transactions contrary to any recommendations herein, or have positions in the securities mentioned herein (or options with respect thereto) and also may have performed investment banking services for the issuers of such securities. In addition, employees of National Securities Corporation may have positions and effect transactions in the securities or options of the issuers mentioned herein and may serve as directors of such issuers. Copyright © 1998. All rights reserved.
Boston Biomedica's Core Business Units – Successful Operations Providing Security
Since its founding in 1986, Boston Biomedica, Inc. (BBI) has recognized that better, more effective laboratory tools were needed to control the quality and technical evaluation of infectious disease diagnostic test kits. BBI is dedicated to providing high-quality products that allow laboratories the opportunity to independently challenge the overall performance of HIV, Viral Hepatitis and other infectious disease tests. To that end, the Company develops, manufactures and markets quality control products for use with in vitro infectious disease diagnostic test kits. These products, derived from human plasma and serum, are used as an independent assessment to ensure the accuracy of test kits as well as monitor the personnel and equipment required in their use. BBI's products are the “gold standards” for evaluating test kit performance and are sold in more than 25 countries around the world.
BBI also provides specialty laboratory services including clinical trials through its wholly owned subsidiaries, BBI Biotech Research Laboratories Inc. (BBI Biotech) and BBI Clinical Laboratories, Inc. (BBI CL). Both of these subsidiaries were unprofitable when first acquired and BBI has turned both of these into profitable business units. BBI is in the process of repeating this achievement with BBI Source Scientific, Inc. (BBI Source), the acquisition that develops, manufactures and repairs diagnostic instruments and, in addition, serves an integral function in the development of pressure cycling technology.
As a result of the success of BBI's core business units, the Company boasts a twelve year history of consecutive revenue and profit growth. While revenues continued to grow at a double-digit pace during 1998, BBI made the strategic decision to fund two huge R&D opportunities in PCT and drug discovery with operating profits.
BBI's customers include test kit manufacturers, regulatory agencies and end-users of test kits such as blood banks, hospital laboratories and clinical reference laboratories.
BBI's Products and Services
BBI generates revenues from offering a combination of products and services to its customers. Within the class “products”, which currently constitute approximately 50% of revenues, BBI offers quality control products and laboratory instruments. Within the class “services”, which currently constitute the remaining portion of the Company's revenues, BBI offers specialty clinical laboratory testing, contract research, clinical trials and laboratory instrumentation services
BBI's core businesses with continue to grow at double-digit rates for several reasons:
 increasing regulatory scrutiny over increasing rates of dangerous infectious diseases such as AIDS and Hepatitis
 recognition of value in using quality control products to ensure the highest safety of blood supplies and achieve early diagnosis of disease
 the discovery of new diseases and therapies
 advanced test kit technology such as the new polymerase chain reactions (PCR)
Pressure Cycling – A Huge Emerging Market Opportunity For BBI
Recently, BBI acquired the technology of Pressure Cycling, a novel, enabling technology platform with applications to many products and industries. The technology uses safe, simple-to-use equipment capable of rapidly cycling pressure between relatively low and high levels. This reversibly and repeatedly modulates the solid and liquid phases of solutions and the binding interactions of biomolecules. Pressure has many advantages as a control parameter including being instantaneously and uniformly transmitted through any volume of liquid; its actions are often enhanced by the use of low temperatures. In many cases, PCT functions to modify biomolecules without the addition of any toxic or denaturing reagents.
Boston Biomedica, Inc. has chosen to initially employ pressure cycling in two major markets:
 Pathogen Inactivation
 Cell and Tissue Disruption and Nucleic Acid Extraction
Pathogen Inactivation
A number of products are candidates for pathogen inactivation including vaccine preparations, pharmaceuticals and food. For several reasons, BBI has chosen blood products, particularly plasma, as one of the first areas where PCT will be applied. These include: (1) BBI's expertise in the fields of infectious diseases and blood banking, (2) pathogen inactivation in plasma is a large potential market that industry experts estimate to be approximately $275 million and (3) there exists an important need for technological advancement in this area.
It has been estimated that approximately 30% - 40% of the US population will receive a transfusion at some point during their lifetime. Transfusions containing one or more blood components are often required to treat diseases or disorders and to replace blood loss resulting from trauma or surgery. Approximately 35 million whole blood donations occur in North America, Western Europe and Japan annually, with approximately 80% of those units being separated into the plasma, platelets and red blood cell components.
Microbial inactivation seeks to improve the safety of the existing blood supply by inactivating infectious agents. A number of different methods are in use or are in development for achieving microbial inactivation, with particular emphasis on viral inactivation.
BBI is working with several major blood banking organizations in evaluating PCT for the inactivation of pathogens in plasma. In preliminary studies, dramatic decreases in titers of most viruses and bacteria have been observed with the concomitant retention of most key plasma protein activities. In one experiment, greater than nine orders of magnitude reduction in bacteria titers were achieved in a 15 minute PCT treatment. Additionally, inactivation was achieved without the need to introduce toxic or expensive chemicals into the plasma product, and without the need to pool plasma units from many donors.
Cell and Tissue Disruption and Nucleic Acid Extraction
Industry analysts have estimated the nucleic acid separations market at approximately $500 million with double-digit growth. This market includes: (1) DNA sequencing and gene-based drug screening (genomics), (2) nucleic acid-based clinical diagnostics, and (3) genetic vaccination and gene therapy. One of the most important steps in the preparation of nucleic acids for these processes is cell and tissue disruption and nucleic acid extraction.
BBI is working with several large industry participants in evaluating PCT for the nucleic acid separation of human, plant and animal tissue. High pressure is employed to rapidly cycle between the liquid and solid phases of intracellular and extracellular liquids. It is anticipated that this will effectively disrupt mycobacterium, plant tissue and other hard-to-lyse materials in a manner conducive to automated, high throughput purification and integration with analytical techniques that involve the use of enzymes.
Drug Discovery – Another Huge Opportunity for BBI
In addition to Boston Biomedica's research efforts being focused on the development of new and improved quality control products especially for the emerging end-user market, for the last several years the Company has collaborated with the University of North Carolina in a novel approach to identify natural product derivatives that block HIV infection. This approach to drug discovery focuses on plants that have a demonstrated therapeutic application based on traditional medicine primarily within China. It was hypothesized that screening materials with known medicinal qualities would increase the probability of identifying compounds suited for clinical development. Based on this idea, Dr. K.H. Lee of the University of North Carolina initiated a collaboration with BBI Biotech Research Laboratories to identify candidate drugs to combat HIV infection. Dr. Lee, originally from Taiwan, is the Kenan Professor of Medicinal Chemistry at the University of North Carolina and has focused on plants that have been studied for hundreds or thousands of years as part of traditional medicine, primarily in China. This screening collaboration has now been ongoing for several years, funded in part by a NIAID drug screening contract and also by direct funding from BBI-Biotech.
This novel drug discovery program has proven to be highly efficient, identifying more than 350 compounds with significant therapeutic indices from the 5,000 plant derived agents tested to date. More than 20 compounds derived from different families of compounds have been characterized as novel, potent inhibitors of HIV-1 replication. The collaboration is currently proceeding to characterize the 6 most potent drug candidates discovered in the project including 3 related coumarin and 3 related triterpene compounds. Boston Biomedica currently has five patents issued covering three distinct families of potential anti-HIV compounds.
Boston Biomedica has the worldwide license for the commercial rights of products developed by the collaboration and intends to pursue the development of drugs for the treatment of AIDS in partnership with existing clients of its survey program and collaborate with larger pharmaceutical companies after significant milestones have been accomplished.
Valuation and Recommendation
Boston Biomedica has clearly changed their business strategy from when the Company went public in 1996 and we believe the investment community has yet to understand the potential from PCT and the drug discovery program. Because the common stock is currently selling at less than book and at approximately .5X sales, it is probable that there has been no value attributed to the Company's R&D programs. The risk that these R&D programs may fail is mitigated somewhat by the common stock's current valuation.
Traditional comparables to BBI would include companies such as Serologicals (NASDAQ - SERO - $18 3/8) and U.S. Bioscience (NYSE - UBS - $9 ¼) whose common stock sells at approximately 4X and 10X sales respectively. However, because of BBI's R&D programs in PCT additional comparable companies would include VI Technologies (NASDAQ - VITX - $10 ¼) and Qiagen (NASDAQ - QGENF - $78) whose common stock is selling at approximately 4X and 20X sales respectively. A very conservative estimate for BBI would be approximately 1.5X 1999 estimated sales of $30 M or $9 per share.
DrRisk |
