Skip to content

Archive for

Research: Bionano

Bionano is another one of these examples of finding a stock shortly before it takes off. I don’t know why it happens that I research something and a day or two later a press release comes out and I am left scrambling, but it happens over and over again. And while I really don’t like writing about something that just popped like Bionano did yesterday, the blog is locked (again) and I am trying to write mostly for myself, so I need to write about what is top of mind. Just bare in mind that the news announced yesterday was not really all that earth-shattering. It is another layer of evidence that seems to be proving out that Bionano’s Saphyr system has a larger place in the genomics ecosystem, which is what I am going to talk about.

I stumbled on Bionano twice. Oppenheimer had a note on Bionano back in mid-November. I read it, and flagged it, and then promptly forgot to follow up. Then Oppenheimer had another note on them Monday and I was like, oh yeah, I meant to look into that, so I did.

So I dug into Bionano on Monday and (of course) yesterday the company has a press release. I had learned enough about Bionano that I had decided I was going to buy the stock and it did not pop right away in the morning so I had a chance. You could call it lucky or unlucky timing, depending on how you want to frame it. But I don’t know if that pop will stick – like I said the news is not really a game-changer in and of itself.

There are a few angles to the story. First, for the last 10 years Bionano has been a company with one of these ‘platforms for research’ business models that doesn’t generate much revenue because the market is limited to a few labs. They have been selling their platform for a decade with only niche success. The story today is that this could be changing.

There have been a number of papers published this year where doctors are saying that Bionano’s platform (called Saphyr) can replace the standard of care (SOC) for something called cytogenetics.

Cytogenetics is a broad term for studying changes in chromosomes. Chromosomes are long strands of DNA. Right now, if you want to detect changes in chromosomes, you have to use pretty old techniques like karyotyping, FISH and microarrays.

What about the sequencing platforms, like those from Illumina and Pacific Biosciences? It turns out that those platforms are not so good at reading long-strands of DNA like you need to do for cytogenetics. The Illumina platform isn’t really cut out for it and while the Pacific Biosciences platform does read long-strands better, it is not good enough for cytogenetics. If you do a search through the filings of Pacific Biosciences for cytogenetics you don’t even get one hit.

The Saphyr platform does work. It uses a different technology, called optical mapping, to capture the DNA sequence.

Saphyr can detect large-length differences in the DNA, which are also called structural abnormalities (these have the short-hand SV for some reason).

These SVs aren’t important for detecting the genetic markings of most diseases. But they are important for detection of some. Bionano got its start selling Saphyr and its predecessor system called Irys to labs investigating rare pediatric diseases where there was a need to detect SVs.

The problem with that focus is that these diseases are rare so they are not much of a market. But this year a number of studies have been published that have presented data showing that Saphyr is good for other, more common diseases – specifically some types of cancer – that are characterized by SVs and where right now microarrays, FISH and karyotyping are used to detect the genetic anomalies.

At the beginning of this year Oppenheimer initiated coverage of Bionano. In that report they gave this handy little table of the expected events of 2020. Included were a number of studies that would determine whether Saphyr would make it or break it as a replacement for SOC.

Now flash forward to today. The three studies noted in the table have been presented. In addition there is at least one more positive readout. In all the literature released this year, Saphyr looks to be a better solution.

Its faster (5 days versus 3 weeks). Its cheaper. It finds all the anomalies of the existing tech and in some cases is finding anomalies that the existing tech did not.

Here’s my summary of the studies that have been presented this year:

The next step, which Oppenheimer noted Monday, is the “pending publication of KOL recommendation of optical mapping to replace traditional cytogenetics tools in a peer-reviewed journal”.

Now some perspective. Bionano is not the next Illumina or Pacific Biosciences. The TAM of cytogenetics is $200-$400 million. Recurring consumable revenue at ~70% gross margins.

If Saphyr becomes SOC for these tests, Bionano is going to capture their fair share of that TAM. And that should make the stock worth more than it is right now.

The question is if there are more applications. I think so, but I’m still trying to figure it out. I did notice that the Radboud study mentioned above describes Saphyr as alternative for “reproductive disorders”:

The study authors describe Saphyr as a viable alternative to both karyotyping and CNV-microarray, especially in reproductive disorders as a potential replacement of karyotyping as the primary cytogenetic testing method. Sequencing-based methods have failed to replace karyotyping, especially in prenatal testing, because of a high incidence of false positive findings, which has not occurred with Saphyr.

That reminds me of Combimatrix, which used micro-arrays for just this sort of test. So that is another potential addressable market for the technology.

So this is a story about a platform that is maybe coming of age. But I also cannot ignore the other angle – which is investor exuberance. You saw that yesterday with the move that far exceeded the news that underlay it. Along these lines, the Ark guys are at least aware of Bionano. Simon Barnett, who is a Genomics Analyst with ArkInvest, has been asked about Bionano a few times. His responses seem to be that he likes the technology, but believes it has limited opportunities. For example:

It is worth keeping an eye on whether Barnett and Ark, which seems to have some responsibility for the rise of small biotech names this year, might be willing reevaluate Bionano given if the role of the platform expands to SOC for cytogenetics.

The other piece, which is silly but still can’t be ignored, is that the market is simply crazy right now. Stocks in the right space are being bid up to ridiculous heights. I’m making the most money from the dumbest ideas.

So here you have a company that is in the right space – genomics – and there is a whole heap load of positive data that has come out this year that expands the application of their technology to a wider range of diseases. You just have to wonder if the market might keep bidding it up even if the opportunity is admittedly limited and this is a niche player.

Bionano has 148 million shares outstanding. There are another 30 million warrants. Most of those are quite far out of the money. The company did do a very dilutive financing with 33c warrants in April but I think most of those warrants have been exercised. I am triangulating a little based on the pre and post offering disclosures but I would guess about 5 million of those low priced warrants are still out there at most.

Questions for my Portfolio

  1. Are we going to see the reverse of YE 2018?

I remember how I never really understood the decline that happened towards the end of the year 2018. The market went down every day and I just kept asking why? And then, starting just before the end of the year, things suddenly turned and it was like nothing had ever happened.

I have already related the prescient comment of my Uncle at Christmas dinner that year. He pointed out that everyone, himself included, was going to get rebalanced at year end because stocks were down and bonds were up and how that would be a tailwind.

Looking back, it seems that those with some expertise in the matter do attribute the turnaround at YE 2018, at least in part, to that rebalancing. It was all about flows and passive.

If there is a lesson this year, it is that flows and passive are now king. So I have to wonder, is year end going to mark a change as the rebalancing takes place in reverse?

2. How I can SaaS go?

In the early spring I wrote a few posts that basically could (together) have been titled – why SaaS should and will only go up. That turned out to be quite prescient, and I did well on the idea. But I do not have the constitution to hold SaaS completely without regard to gravity. I can’t do it. What remains of my SaaS holdings today (that would be CDLX, IDN, SHSP, TEAM) I have now mostly offset with other names that I am short. I am not usually one to talk about my shorts, but how can Zoom maintain its multiple once we are vaccinated?

3. It is not an everything bubble or is it?

Stocks are going up and some stocks are going up to degrees that I can only explain by calling them a bubble. But the big question is whether this is an everything bubble or not. If it is, then I should sell it all or at least hedge it all. But is it? I keep thinking back to 2000, when internet and tech stocks crumbled but many other parts of the market did fine. Can these banks that I have been buying really be part of a bubble at less than tangible book?

4. Biotechs?

The XBI is through the roof like everything else since November. But I hesitate to use the term bubble.

Unlike SaaS, EV, anything green, the biotech names don’t have the same bubbly quality to me. And the innovations here seem far earlier and far more important. Could this just be the run-of-the-mill start to a multi-year bull market?

5. Bitcoin versus or and Gold?

Gold did well for the first 4 months after the pandemic and now Bitcoin is doing well. I am starting to cycle back to gold names again. I sold half of Silvergate and half of my too sheepish to name crypto-mining POS that has traded up to la-la-land. I bought back Wesdome when it slipped below $10.

I think the timing of the moves in gold and Bitcoin is interesting. Gold moved right after the pandemic, when things were bad and the concern was real. Bitcoin moved well after that, at the same time the EV’s and ESG’s and SPACs started to go to speculative heights. And at that same time gold corrected. There is a time for owning both and that time did not appear to coincide. Is that telling us something?

Revisiting IDT – again

IDT is at it again. They are generating free cash and incubating businesses. Spin-offs will be soon to follow.

A brief history of IDT:

IDT is run by the Jonas family (first father Howard, now son Samuel, and I think some other relatives are involved). They are majority owners and they run this business however they see fit. If they don’t want to answer questions at an earnings call, they don’t. If they don’t like a question on the call, they say so. They do want they want and disclose what they want.

In other words they don’t really care about what shareholders have to say. And you know what? I am okay with that because the Jonas family does one thing very well – make money for shareholders. If they make even more for themselves in the process, who am I to protest?

The IDT template that has played out 5-6 times over the last 10+ years: They start with their boring legacy business of international calling and carrier services. This business does not grow very much but does spit off a lot of cash. Then they use the cash to incubate losses from new, fledgling businesses that are started. Once those fledgling businesses gain traction, they spin them off into their own companies, with the shares going to existing shareholders.

They did this with IDW Media, Genie Energy, StraightPath, Zedge and Rafael, and that is in addition to Fabrix, which rather than spin-off they sold to Ericsson for $65 million. If you aren’t familiar, look up the history of StraightPath and what happened to that stock.

After the Rafael spin off in 2018 it looked like the cupboard was bare. But as the old saying goes, never count out a Jonas.

I hadn’t looked at IDT since Rafael. What brought it to my attention again was simply that the stock was up. Given that IDT gets no respect, I figured that a move in the stock like we have seen was most likely because something good was happening.

It turns out that was the case. The folks at IDT are doing what they do best, incubating businesses and letting them grow.

This time around we get three nascent businesses:

  • BOSS Revolution Money Transfer – an international money remittance/payment transfer
  • National Retailer Solutions – nationwide POS payment processing solution aimed at independent convenience store
  • net2phone – a UCaaS cloud communications solution aimed at LatAm

The BOSS Money Transfer and NRS businesses are both growing at 100% yoy. net2phone is growing at 40% yoy.

Both the money transfer and payment processing businesses have recently announced expansion plans. The next step for Boss Money Transfer is to become a neo-bank (in all probability the Jonas’s have noted that neo-banks (like chime) get ridiculous valuations and all they really do is collect interchange fees, which BOSS already does with transfers). IDT first mentioned this on the fiscal Q4 call two weeks ago:

we will roll out BOSS Money Visa card in peer-to-peer transfers early next year. This is the first step in a broader and strategic challenger bank initiative that we are now focusing on to help our immigrant, underbanked and unbanked customers conveniently access and participate fully in the digital economy.

With NRS, the expansion will be to a broader range of locations. Right now NRS is focused on independent convenience stores, of which they are in 12,000 locations and increasing those deployments by 450-500 terminals per month. The expansion will target liquor stores, gas stations and fast-pay restaurants.

The NRS business is particularly interesting because companies in this space get eye-popping valuations. Consider Lightspeed POS. Lightspeed recently made two acquisitions: Upserve and ShopKeeep

Upserve is a POS platform for restaurants. Lightspeed bought it for $430 million, which is 10-11x trailing revenue.

The second was ShopKeep, a general small-business oriented POS. Lightspeed bought ShopKeep for $440 million. That works out to a multiple of about 9x trailing revenue.

NRS has trailing revenue of around $15 million. And like I said, it is growing at 100%.

Now NRS, like all things IDT, is not going to have a flashy, silicon valley start-up type of look or feel. That simply is not the way that IDT works. Check out the website of NRS. Now look at ShopKeep and Upserve. The latter two look slick and hip. The former looks like an infomercial.

But here’s the thing about IDT. That is just the way it is. You are always buying businesses that make you purse your mouth and squint your eyes. But these Jonas guys find a way to make money.

You can make a simple argument for IDT on valuation. The market cap of the stock is about $330 million. There is around $128 million of cash and securities on the balance sheet. So the EV is about $200 million.

In the last 4 quarters IDT generated $40 million of free cash ex-working capital. That puts you at a 5x FCF multiple.

All of that free cash flow is coming from the boring legacy business. Each of the incubated businesses are losing money right now. But they are also all growing with leaps and bounds.

The NRS business could be worth a significant part of IDT’s capitalization already. 10x revenue on $15 million puts you almost there. Even at 5x you are half the EV.

The Boss Money Transfer business, which has done $55 million in revenue the past 4 quarters, could get a 1-2x revenue multiple just on a comp with MGI, or it could be much higher if IDT is successful in their bid to turn it into the next neo-bank.

net2phone has $34 million in trailing revenue and I don’t even know how to value that one. True UCaaS businesses get 5x revenue multiples and some much higher.

My bottom line is that I don’t know what all these parts are worth. But who cares? They are worth more than the current price of the stock. And you are betting on the jockey here. If history is any guide, the Jonas team will find a way to realize that.

Innovate Solutions & Support – Another Dividend

ISSC had a curious press release after the market closed last night. The company announced a special dividend of 50c to common shareholders, payable December 21th.

What makes the announcement curious is that:

  1. The company just announced a special dividend of 65c 3 months ago.
  2. The company reported fiscal Q4 earnings literally hours before with nary a mention that such a dividend was coming

In fact, on the call, ISSC was asked about what they planned to do with the remaining cash on the balance sheet. After the first special dividend, the company had cash of $12.6 million, down from $22.4 million prior to that first dividend payout.

Roger Goldman:

My question, as it usually is, goes to the use of cash. We’ve got a company with no debt, with solid operating profit and, even after the dividend, a fair amount of cash on the books. Any thoughts of either an acquisition or a small regular cash dividend that I think would have a great impact on the stock price?

 Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. – Founder, Chairman & CEO:

 It’s a good question. Some of that I can answer. Some of them, if you can…

Roger Goldman:

 No. I know you can’t. I know you can’t.

 Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. – Founder, Chairman & CEO:

 But it’s a reasonable question. Absolutely. Look, we have — we know we generate a lot of cash. And our interest is we’re operating in a business not for us to look at cash that doesn’t generate any income at all. I mean I personally have cash accounts that they’re paying interest in pennies.

So we have no interest in doing that anymore. If we can reasonably invest it in other things, we’re doing some automation on the floor and CapEx kind of things.

 We are actually looking at dividends on a long-term basis because we believe that the business itself will generate cash on a regular basis, and that we believe that our stockholders could make good use of cash. So we’re very conscious of that. That’s what precipitated the $0.65. And yes, we continue to look at it, especially in light of what might be changes in taxation policy.

Does this sound like another special dividend was imminent?

ISSC put up a very good revenue number in the quarter. Revenue was $6.3 million, up from $4.8 million the year before.

The stock sold off during the day yesterday because the backlog was low. It ended the quarter at just about $3.6 million, whereas it was above $6 million the previous quarter.

Investors focused on that and fled the stock but they must have missed the call. Because on the call a number of very bullish comments were made.

The company said they expected a better than seasonal Q4 quarter, that they were seeing exponential growth from retrofits, that the retrofit business is ‘looking better every day’ and that they expect “that the growth is going to be exponential.”

They singled out Textron on the call.

We announced last quarter that Textron had awarded us an OEM production contract to supply our ThrustSense Autothrottle with LifeGuard protection on the new King Air 360 twin turboprop. In November, Textron celebrated delivery of its first Beechcraft King Air 360 turboprop aircraft.

 More recently, Textron announced that the ThrustSense Autothrottle is standard equipment on the new King Air 260. Delivery is scheduled to begin in the first half of 2021.

 We are pleased to be working with Textron and are grateful for the support through the certification and moved into production. They are a strong supporter of our technology. The IS&S autothrottle is the first among a list of 360 upgrades mentioned in their King Air 360 promotional material.

For those new to the story, these are my notes on what they have said on Textron and the retrofit opportunity in the past.

  • Textron retrofit business could be more than the OEM business – sounds like it should be – the 5,000 aircraft out there are all operating, they are significant investments, retrofit cost is small compared to the expensiveness of the airplane
  • Have not sold one retrofit yet and market opportunity is $250mm to $300mm

After announcing all this in the morning, apparently they got the board of directors together in the afternoon and decided to dish out 67% of their remaining cash to shareholders in a second dividend. Just cuz.

Like I said, curious.