Research: Biomerica

While I still am of the mind that the XBI has broken out of a long consolidation and should have a good run ahead of it, the current rally seems to be getting long in the tooth. There has to be a correction at some point. This makes me wary of new biotech positions.

You could kinda see just how tipsy the sector was with the moves yesterday morning. When whatever happened to Gamestop happened to Gamestop and the market took a sudden nosedive, I saw most of my biotech positions drop 5% or so in what seemed like a split second.

I want to be careful about exposure. No matter how much I like a story. When I take a new position, I have resolved to sell an equal amount of another biotech(s) to keep my overall positions, as a whole, to a similar size.

I was looking at Biomerica at the beginning of last week but I had not taken a position. I thought there was no rush. Then Friday hit and the stock took off. I was like, oh shit. I clicked around trying to figure out if there was news and found out that the stock had been mentioned on RealVision in an interview with a guy named Joe Besecker.

I don’t know who that is but I do have a subscription to RealVision and so I listened to the interview. It really did not say much I did not already know but it did make me think that the stock was more likely to go up than down. In this market a mention by a well-known commentator like that could be enough.

So I added a position on Friday, even though I had to do it like 10-12% higher than it was a few days before. Oh well.

I do not really think that Biomerica has the stuff to take off in one of these crazy squeezes. There is not much in the way of short interest, and I am not sure there is any imminent news (though the FDA is reviewing their COVID antigen test, which may result in something). But it has a very interesting platform (called InFoods) that targets a very large market (IBS) and that is the reason I was digging into the stock in the first place. I don’t know if it will be an immediate winner, but it seems like there is a decent chance of winning over the medium term.

Apart from InFoods, Biomerica has a suite of diagnostic tests that aren’t all that exciting. They seem to generate about $1-$1.5 million a quarter from these tests.

But InFoods is really the story here. It is a diagnostic test that tests for food intolerance. It can determine what specific foods might be causing your IBS. For example, the result might say, no more chickpeas. It is that specific.

IBS is a huge market and the existing treatments in the market are $1 billion+ drugs.

InFoods is enrolling in a clinical endpoint trial. The enrollment is going to finish in April. The trial will finish in early H2.

A clinical endpoint trial is a trial that looks at a number of endpoints to determine which one will be the one used for the actual pivotal trial. The pivotal trial is used by the FDA to approve the test or not. InFoods is already used in Korea.

IBS is a very big market. It affects like 10% of the population. I saw an estimate from B Riley that if approved they think InFoods could rival the existing drugs in terms of revenue. This would be in the $1 billion range.

So this is just another one of those stories where there is a big market and a big upside if the trial goes well and InFoods is approved. The stock is around an $80 million market cap here so it has a long way to go if all goes well.

Notes below:

Biomerica

• $5.7mm of cash
• no debt
• 11.8mm shares outstanding at $6.60 – $70mm market cap
• Series A Preferred – 571,429 outstanding, look like they are convertible at $3.50, have 5% dividend
• CEO has put $300k of his own money into the stock at market prices over last 2 years – but not much of this is recent, most of it was a couple years ago
• been around since 1971
• develops diagnostic products for early detection of chronic diseases
• sold into clinical labs and point of care, also some at home sales
• their legacy platform is in vitro testing
• they have a 40 product portfolio right now with 20 of those being FDA approved
• analyzes blood, urine, fecal samples
• looks for specific bacteria, hormones, antibodies, antigens
• I think that with their existing kit they are limited in their sales because its not a full suite and NA and European point of care sales will look for a full suite of tests from the vendor
• they have big competition on the basic IVD business – Abbott Laboratories, Roche Diagnostics, Becton Dickinson & Co., Siemens Healthcare of Germany, Diagnostica Stago SAS of France,

Meridian, Caliper Life Sciences, Illumina, and Thermo Fisher Scientific

• so most of the sales of the existing test kits comes from research/clinical
• they can also sell the full suite internationally into areas where they don’t have rigorous FDA-like approvals
• but its small sales
• so that is why they focus on R&D, specifically on IBS and other inflammatory diseases
• are completing testing for FDA clearance of patented InFoods IBS DGT test – diagnose and treat IBS
• this test allows physicians to identify specific foods (e.g., pork, milk, onions, sugar, chickpeas, etc.) for each IBS patient
• would require a retest 2-3 times a year
• IBS is a big market – 45mm in US
• 825mm people worldwide
• estimated to be a $30b market
• facts on IBS from twitlonger:
  • patients visit doctor 3x more
  • 74% more direct healthcare costs vs. non-IBS
  • most believe certain foods trigger
  • 7^th most common diagnosis among patients

Current treatment

• Linzess at cost of $450/month
  • Xifaxan cost of $1760 per month
  • each has side effects
• those two drugs do $2b a year in revenue
• Infoods would be fraction of cost of IBS drugs
• would see the physician share in the revenue directly
• in the 10-Q they say they think if approved, opportunity is similar to any of the major drugs for IBS
• this makes it a win-win for doctors and insurers
• here is list: gastrointestinal diseases, food intolerances, diabetes and certain esoteric tests

InFoods IBS DGT

• designed to diagnose and treat sufferes of IBS
• help physicians identify foods for each IBS patient (ie. pork, milk, onions, sugar, chickpeas, etc)
• will be sold into clinic and into physician office – not really sure how this works but there are two iterations of the product, one for clinical and one for POC
• they had an independent market research firm do a survey and found 90% of POC doctor would use InFoods on their patients
• expect patient enrollment to be complete by end of April
• this is just a clinical endpoint trial
• 180 patients
• there are 9 endpoints – 1 of the 9 will be chosen for the pivotal trial
• will provide proper endpoint for final FDA pivotal trial
• endpoint trial commences after pivotal trial
• has received “non-significant  risk” determination from FDA
• also have a diagnostic test for COVID
• use blood sample, check for certain antibodies, can detect within 10 minutes
• this is an antibody test though – determines if you were infected, not if you are infected
• they think it will be good for vaccinations – to determine if it has worked
• submitted to FDA an application to sell their ELISA COVID antibody test kit
• FDA has assigned an examiner, they are actively working with FDA on this
• can sell outside of US with CE Mark – which they got
• have patents on InFoods for use in other indications: functional dyspepsia, Crohn’s Disease, ulcerative colitis, gastroesophageal reflux disease (“GERD”), migraine headaches, and osteoarthritis

South Korea

• have agreement with Telcon for sales in SA
• term is 5-years plus 2 years to obtain Korean FDA clearance
• $1.25mm in milestone payments and mid-teens royalties
• Telcon had also bought stock (333k shares) at 100% premium to price at the time
• InFoods is already been sold here from this agreement

Team

• current trial has a bunch of big name participants: Mayo Clinic, Beth Israel Deaconess Medical Center Inc., a Harvard Medical School teaching hospital, University of Texas Health Science Center at Houston, Houston Methodist and the University of Michigan
• apparently have IBS expertise on board – Doug Drossman is President of ROME foundation, one of leading not for profits in gastroenterology
• Drossman is chair of scientific advisory board
• Drossman has ben principal in GI-related drugs with GlaxoSmithKline, Forest labs, Novartis Pharma
• Edward Barnholt – chairman at KLA-Tencor, director on Ebay and Adobe
• Mark Sirgo is on BoD of Salix Pharma, was instrumental in growing Salix into GI major

Q221

• Net sales of $1.4mm – nothing to write home about
• Burning cash at a $1.5mm per quarter clip
• their clinical lab revenue is down, but phys office revenue is up a lot on a smaller base
• entered agreement with UK for covid rapid test
• but they have an SEC investigation ongoing which isn’t great
• attained CE clearance in Europe in Jan 2020
• from their 10-Q:

“This nasal swab antigen test received CE clearance on January 8, 2021, and is now available for sale in the EU.  The Company has received an initial order for over $1 million of these tests and is in the process of filling this order.”

• not sure if that should be $1mm or 1mm?
• said they had significant increase in Asian sales in Q321 so far
• Announced an ATM for $15mm a few days ago

Helicobacter pylori

• they have a test for H. Pylori
• called HP Detect
• they said at YE 2019 study would be done in 6m
• would involve 200 patients
• I think it uses stool samples to identify H. Pylori
• but there doesn’t seem to be much being done here
• planned to utilize a 510(k) pathway clearance of the test
• they said they completed patient recruitment in Sept 2020
• I’m not sure what happened to this?
• they also had some sort of colorectal diagnostic test that seems to have disappeared
• company called Meridian has only-FDA cleared test for H. pylori
• it looks like revenue from their gastrointestinal product tests, which is off-patent so there could be competition, was around $55mm in total lst year, which was down 20% yoy b/c of the patent, I did find that 2017 revenue from the H. Pylori test specifically was $30mm in 2017
• so it’s a decent sized market if BMRA product is approved

I also wanted to talk about VXX for a second. I traded in some of my short index positions for a position in VXX. In this market it feels to me like the best bet against a correction is the VXX. While RWM and PSQ will go up as the market goes down, the VXX is levered to it. When I look at past market corrections, particularly the more violent ones (as I suspect this one, whenver it does come, will be), it is the VXX that has been the best place to be.