Unless you're a scientist, Fluidigm (FLDM -3.96%) is probably not in your lexicon. This business sells specialized laboratory instruments and the chemical reagents needed to operate them. That makes it pretty easy to overlook, as does its market cap of just $450 million. Agilent Technologies (A -0.52%) and Illumina (ILMN -0.60%) weigh in at a combined $65 billion by comparison.

But investors willing to take a deeper dive into the business and its trajectory might find reasons to get a little excited about the company's long-term potential. Fluidigm focuses on an emerging area of biology-based technologies and, despite struggling to scale in recent years, appears to have discovered a sustainable way to monetize its expertise in 2018. If the business can continue to execute, then it should be on the path to profitable growth -- and maybe a spot in your portfolio.

Check out the latest Fluidigm earnings call transcript.

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Image source: Getty Images.

The business

Fluidigm relies on the tried and true (albeit difficult to scale) business model of lab hardware innovators. The company generates upfront revenue by selling machines to academic and biopharma labs around the world and then has the opportunity to generate recurring revenue from the installed base of machines by selling the chemical reagents needed to operate them.

The premier example of the business model in action is Illumina, which sells a portfolio of DNA sequencing machines and the accompanying consumables. While it's more commonly associated with its DNA sequencers in the minds of investors and scientists, the company generated 65% of its revenue from consumables in the first nine months of 2018. 

Many companies are trying to replicate Illumina's success in their own niche areas. Fluidigm is focused on the up-and-coming field of single-cell analysis. That's the name for experimental techniques that allow researchers to study single cells in their natural biological environment, whether that's within a complex tissue sample or isolated in a fluid with finely controlled parameters. By studying how single cells change in response to environmental challenges in real time, scientists can discover novel therapeutic targets or better understand how metabolic pathways are turned on or off.

Fluidigm has a competitive advantage in developing single-cell analytical instruments thanks to its expertise in microfluidics, from which the company gets its name. It specializes in designing and manufacturing integrated fluidic circuits -- tiny silicon chips with channels carved out of them that allow for the precise control of liquid samples -- that make single-cell analysis possible.

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Image source: Getty Images.

By the numbers

The potential of single-cell analysis is huge, but adequately monetizing it has proved difficult. One problem was that Fluidigm was a little early on the single-cell analysis revolution. Another was that the specific instruments being sold didn't require large volumes of consumables.

While the company still sells a diverse portfolio of instruments, the results from 2018 strongly suggest its long-term viability is based on two core areas: real-time genomic analysis and mass cytometry. The former provides complementary data to traditional DNA sequencing methods (more finesse than Illumina's approach), while the latter provides unparalleled detail of complex tissue samples.

Mass cytometry is what should put Fluidigm on investors' radar. That's because it's one of the primary methods used to develop and study buzzy biotech technologies ranging from CAR-T to CRISPR. And because of that, it's in increasingly high demand. Consider the three-year trend in the company's installed base of machines:   

Instrument Application

Annual Consumables Per Machine

Installed Base, 2018

Installed Base, 2017

Installed Base, 2016

Genomics, preparation

$27,500

200

245

230

Genomics, analysis

$47,000

550

560

585

Mass cytometry

$75,500

240

200

160

Data source: press releases.

Fluidigm's machines for preparatory work are a little too niche, as more robust liquid handling instruments can do essentially the same thing. That makes the declining installed base a little less worrisome than it appears.

The company's genomic analysis portfolio is also slipping a bit, but these instruments should see an uptick in demand in the coming years as researchers begin to explore genomes in much greater detail. One application the machines enable is a technique called digital PCR, which even Illumina is keeping an eye on, as evidenced by its recent investment in start-up Stilla Technologies.

Meanwhile, Fluidigm appears to have finally found the most economical combination of microfluidics and single-cell analysis yet with its mass cytometry machines. They're in increasingly high demand in the field of immuno-oncology and provide the highest consumables potential of all instruments in the portfolio. It showed in the company's full-year 2018 results: 

Metric

2018

2017

Year-Over-Year Difference

Mass cytometry revenue

$59.6 million

$46.8 million

27%

All other revenue

$53.4 million

$55.2 million

(3%)

Total revenue

$112.9 million

$101.9 million

11%

Gross profit

$61.6 million

$51.9 million

18%

Total operating expenses

$109.8 million

$110.3 million

0%

Operating loss

($48.1 million)

($58.4 million)

N/A

Operating cash flow

($25.2 million)

($24.0 million)

N/A

Data source: press release.

The emergence of mass cytometry has allowed Fluidigm to grow revenue without increasing operating expenses. That allowed all of the revenue increase to trickle down the income statement as profit. While the business still reported an operating loss of $48.1 million in 2018, down from $73.1 million in 2016, nearly half was non-cash expenses, as evidenced by operating cash outflows of just $25.2 million. It exited 2018 with $95 million in cash.

Fluidigm doesn't see demand for mass cytometry machines waning anytime soon, which isn't surprising considering they're the foundation for developing and studying next-generation immunology therapies. What's more, the business is increasing the consumables sold to operate each machine over time, from $62,500 per instrument in 2018 to an expected $75,500 in the year ahead. That suggests it has a committed user base and that the company's arrival at sustainably profitable operations could happen sooner than Wall Street currently estimates from growth of the installed machine base alone.  

A man staring at a chart of expenses and profits. The chart has two intersecting lines, one labeled value and the other labeled cost.

Image source: Getty Images.

Can this business capitalize on its life sciences R&D niche?

Fluidigm's expertise in microfluidics allowed it to swiftly pounce on the emerging opportunity of single-cell analysis in recent years, although perhaps it was a little too early. Last year the technology's potential appears to have finally started to catch up to what the company's platform can deliver.

The business is well positioned to continue exploiting an insatiable appetite for mass cytometry instruments, which could also illuminate a path to sustainable profits within the next few years. Meanwhile, Fluidigm's genomic analysis portfolio should rediscover growth as more scientists demand higher fidelity data from the living systems they study.

A lack of profits today result in shares trading hands at just 4.2 times sales (Agilent sits at 4.9 times sales and Illumina at 12.5) and a PEG ratio of only 0.7 (Agilent and Illumina are both near 2). However, patient investors with a long-term mindset might be willing to stake a small position in the promising lab-instrument provider, especially given its promising trajectory.