We get back to healthcare with a rundown on BICO Group (OM: BICO) (OTC: BCCO.Y) (OTC: CLLK.F), a Sweden-based business that enables researchers and scientists to model, build, test, analyze, and observe 3-D printed cells, tissues, and organs.
This company helps researchers reduce the time and cost of identifying potentially efficacious drugs and can help provide initial results on whether drug compounds are safe and effective before having to test them on animals or humans.
We talk through the huge implications it could have for research in life sciences and personalized medicine and try to clear up some of the jargon around the company.
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This video was recorded on Dec. 15 2021.
Dylan Lewis: It's Wednesday, December 15th, and we're talking about a picks-and-shovels life-science company, Bico Group and I'm your host Dylan Lewis and I'm joined by fool.com analyst, Yasser El-Shimy. Yasser, how's it going?
Yasser El-Shimy: I'm doing well, how about you Dylan?
Dylan Lewis: Doing all right. I think this is going to be a fun show for folks that have been longtime listeners and desperately miss the Wednesday healthcare episodes. We are going to be going deep into a business that I had to learn a lot about for the show, I had to learn a lot of words and I think Yasser we're probably going to do a lot of defining and get ahead of some of the jargon we'd be dropping on this episode.
Yasser El-Shimy: Don't worry, we are doing the learning together. I think I have to start with a disclaimer that I'm not a medical doctor, I'm not a scientific researcher. A lot of this stuff, it's OK that it's hard, it's complicated. A lot of it is whole jargon. We'll do our best to try and make it as straightforward as possible.
Dylan Lewis: Yeah. I will say, I love getting new and different ideas in front of me. I'm sure our listeners do too. I mean, I tend to be more of a tech investor, but I learn from everything, no matter what gets thrown on my radar, it broadens your horizons even if it's not an investable idea for you. It's probably going to teach you a little bit of something about where the world is going and that is certainly the case with this company. This is Bico Group and I think we should probably get out ahead here and say, this is an international company, Yasser, not based in the United States. We need to get that from here.
Yasser El-Shimy: You're absolutely right. Even though they do have a headquarter in Boston, Massachusetts, but their main headquarter is in Stockholm, Sweden, and they are listed on the Nasdaq stock exchange in Sweden. I would also very much urge, I mean, none of what we're going to discuss as financial advisors, we're not recommending a stock to any fool listeners. But if you are interested in the company and the stock, I would highly recommend that you checkout their international listing as opposed to their OTC shares over here which are highly liquid.
Dylan Lewis: Yeah. We're going to do our best to keep things in dollars here that we might accidentally slip into krona because that's how a lot of their financials are denominated. But by large, we're going to keep things in USD, because that's where it's really audience is and that's where it's a little bit easier to make sense of things. Let's kick things off with just a very simple, who they are and what they do.
Yasser El-Shimy: Sure. Bico Group is a company that enables researchers and scientists to model, build, test, analyze, and observe 3D printed cells, tissues, and organs. I know that's a mouthful. But basically, it's a company that allows any research lab in a university, or in a pharmaceutical company, or in a cosmetics company, to build human-like tissues and organs in a lab environment and then test them, analyze them, and run the entire workflow of research through that. The company uses the razor blade business model. They sell bio-printers at a competitive price. They've actually revolutionize the field. Bio-printers used to cost as much as $250,000 plus when Bico Group formerly, the company is called Cellink, came to the market, they were like, no we're going to sell them at $5,000 and save 250,000, but we're going to build the subscription like business model where we're selling you bioinks. The bioinks are the material, the compounds that are used to actually do the printing. Just think of your toned printer, the inkjet printer and how you need to replace your ink, that's pretty much the business model. I should say that the bioinks are consumables, as they call them, these are highly profitable, very high gross margins, and therefore that's very interesting business model. I would just conclude here by saying that the BICO group, and as you can see on the name group, is a reference to the fact that they are an umbrella company. They have 13 subsidiary companies under them, they have been highly acquisitive in the past. Trying to think of them and their business model as a constellation software of bioconvergence.
Dylan Lewis: You mentioned the business model, razor and blade. We have seen health med-tech companies take what would normally be a very high upfront cost for machinery, and flip the model on its head and say, "We're basically, compared to the standard cost, giving it away for free." or giving it away for very little to the providers with the hope that we could build a viable business with the usage based model. It's huge in terms of convincing people to try your technology because the barrier is a lot lower for something like that, Yasser.
Yasser El-Shimy: Absolutely. You just get a foot in the door and then you keep that subscription going, but that's a very lucrative business model.
Dylan Lewis: If you're looking at the website for this company, you're going to see a couple of buzz words, and I think it's worth us talking about what they are and how it comes together within the industry, that problem that it helps address. The first one is bioconvergence. I'm going to take something straight from the company's website here, Yasser. Bioconvergence is an industry segment within healthcare and research in life science that emphasizes the synergy between engineering, technology and computerized systems is based on the understanding that biology and tech, the two pillars of biotechnology, aren't as hard to reconcile as they appear. In trying to define one buzzword, I might have brought some more in there. But really, what we're [laughs] trying to do here, it seems to me in an oversimplified way, Yasser, is basically take the best of what we're able to do with biology, the best of what we're [laughs] able to do with engineering methods and put them together to improve what happens in the life sciences and the healthcare space.
Yasser El-Shimy: That's right. I think this is what's still fascinating about this company taking a pioneering step in that field. The name BICO itself, is in fact short for bioconvergence. That's why they named the company that recently, it renamed the company, which is sell ink and reference to the Bioinks stuff they used to sell or that they still sell, but that's no longer the main part of the business. Yeah, you're absolutely right. The founder of this company, Erik Gatenholm. He was thinking like, "How do we combine biology and biological matter with all the advancements that we're seeing on the technology field including in AI, genomics, mechanical engineering, optic sensors, nanotechnology, robotics." and the list goes on and on. "How do we combine or how do we actually take advantage of all these technological advancements in order to bring the field of biology and the study of the human cells and tissues and organs forward?" It's definitely a very interesting business model.
Dylan Lewis: Yeah. I think bioprinting in particular is probably one of the easiest ways for people to wrap their head around what bioconvergence looks like in a very practical sense and some of the problems that it can help address. Why don't we walk through that? You mentioned it before, but I think it's a helpful illustration so people can understand what this business does and really how it fits into the life science industry?
Yasser El-Shimy: Right, absolutely. BICO offers you the ability as a research lab or as a medical lab to design a 3D model of cells, tissues or organs, then get a 3D model construct printed. You first start with the software design, then you use the bioprinter to actually print that 3D model of cells or tissues or organs, then characterize it for functionality. In plain English, basically analyze it for response, like to drugs and other kind of stimuli, effectively evaluating it for regenerative medicine potential in particular and then do a very detailed downstream analysis on what the cell interactions might be, so you want to see how the cells are reacting to the print compounds or cells are reacting to each other. Then finally, you build the model that improves on the two-dimensional culture that you just built. Start to finish type of work here that they do and they provide you with all the tools to do it. Just to give you a recent example here, less than two weeks ago, a research lab at Boston University, my alma mater. Go Terriers. Announced that they built, for the first-time ever, a 3D bioprint of a heart on a chip. Of course, they used one of BICO's bioprinters for that. Without getting into technicalities, this is quite a big deal. To build a 3D bioprint of the heart on a chip. Because it opens away not only to study cardiac disease on printed hearts as opposed to actual hearts, but also test medical applications and compounds on a heart under lab conditions. You don't actually have to test these things on animals or humans, you can test them under lab conditions. Then what's even more exciting to me is the fact that this should be the prelude toward their ultimate goal here, which is the bioprinting of a human heart from a patient's own cells and then transplanting it. By the way, this not just apply to a human heart, could apply to any other organ like the liver, the kidney, and so on. Instead of patients having to wait for very long periods of time to find a candidate who can donate an organ for their transplant procedure, and then unfortunately once they have the organs, they have to be on a lot of immunosuppressant medicines that really mess up with their immune systems in order to enhance the chances of those, let's say alien organs, being accepted by the body and not reject it. If you have an organ that's printed from your own cells planted into you, hopefully it should increase the chances of doing it faster, safer, and with higher chances of success.
Dylan Lewis: I love dipping my toe into life sciences and biotech stuff because it always sounds space age. I'm always like, we live 40 years in the future. It sounds incredible. I think the value prop here, you did a great job outlining it. The simple value prop if you're trying to get it down to about a sentence, is you're taking what would normally be a super time consuming process and giving people the opportunity to identify effective treatments earlier than they would be able to normally at a scale that they probably would be able to normally.
Yasser El-Shimy: Absolutely. It's all about efficiency, it's all about safety. Hopefully it's also about eliminating the need to test on animals. This is obviously an ethical issue to a lot of people, many labs would rather avoid that procedure to begin with. But yes, this helps labs basically go through the testing part of medical compounds either for pharmaceutical or cosmetic reasons. They can test, for example, let's say a company is trying to design an anti-aging cream and they want to test its effects on the skin, you can bioprint a human tissue in a lab and test that compound on that human live tissue that's printed and see, number 1, if it's safe. Number 2, if the compound works for what you're trying to achieve. That eliminates the need to go through a very lengthy and very potentially dangerous a process of testing these compounds on animals.
Dylan Lewis: This is super cutting edge stuff, the company in some ways has been around for a long time. In some ways, not been around for a very long time. It goes back to 2014. I want to give people a sense of how they're able to put this technology, Yasser, into something that is a viable business. What the nuts and bolts of how they actually make money looks like.
Yasser El-Shimy: It's a very interesting story because if you look at the background of one of their co-founders, Erik Gatenholm, who's the CEO currently. He was actually an MBA student and he was introduced at the very young age of 23 years old to 3D bioprinting around 2014. At that time, academics and pharmaceutical companies, anybody who actually was in the field of bioprinting, have to mix their own bioinks in-house. Then they have to show out that at least $250,000 of that bio printer. But the fact that they have to mix their bioinks in-house meant that it was a lengthy process and it also opened the door for error, human error otherwise. Because each lab now has different standards of what constitutes bioinks. Sometimes there would be compatibility issues. A lab can make a bioink and then the bioprinter doesn't work. Who do you go to? If you complain to the company that sold you the bioprinter, well, they aren't going to tell you, "Well, it's your fault for the bioink didn't work." Erik recognized that gap in the market and he actually co-founded Cellink. in 2016, again, 25 years old. He listed the company at the Nasdaq first North exchange in Stockholm only 10 months after founding the company. Some facts here, the IPO was oversubscribed by over 1,000 percent, showing very strong appetite among investors to get behind this company, especially on the European Arena.
Dylan Lewis: Yeah, oversubscribed IPO is usually a pretty good sign. A lot of pent-up demand there. We talked about the razor and blade model and how they're intentionally bringing these pieces of equipment in at a lower cost to people that will be using them. It's a very effective way to build market share and build a customer base very easily. As we start to talk about the financials, some of the key business metrics. You mentioned earlier that it's a highly acquisitive company.
Yasser El-Shimy: I'm sorry.
Dylan Lewis: I think we need to talk about what that means for the company's finances and really what people should be paying attention to you when they're looking at this business.
Yasser El-Shimy: Similar to any company that does a lot of acquisitions, you really got to pay attention to how well these acquisitions are integrated into the mother company. Do they add value? Do they dilute shareholders? I'm just going to go ahead and make it very clear to our listeners and our viewers here that the Bahco has in fact doubled the share count over the past five years. That has effectively diluted early shareholders. But early shareholders are still sitting on very stratospheric gains on the last, I think over 2,500 percent of gains since IPO. They're not too upset about that, but they have doubled the share count. Every time they acquire a company, they mostly use equity issuance as a tool to acquire these companies. The other thing to watch out for is the differentiation between what we see as a top-line revenue growth as opposed to organic growth or organic revenue growth. What do we mean by organic growth? It means the old companies that form the backbone of what Bahco is. How well are they doing, how well are they growing compared to just the sales numbers being potentially artificially inflated by all the new companies that they've been acquiring? On that context, I think they've been doing well.
Dylan Lewis: I think one of the easy ways to think about it if you're not used to looking at highly acquisitive companies is think about the restaurant industry. You can grow by having your existing stores sell more in the form of comps, or you can grow your revenue by opening new stores. Ideally, you see both of those things moving in the same direction, but you can inflate your topline if you're opening a lot of new stores, even if your existing stores are underperforming with a highly acquisitive company, especially when it is diluted shareholders along the way, you want to make sure that both of those numbers are moving up into the right. Because otherwise that dilution maybe isn't worth it for shareholders.
Yasser El-Shimy: Absolutely. Actually, after they have reported their third-quarter numbers, the share prices have been very much pressure, but I think they've almost lost half of their value. But a lot of other growth companies have recently been punished. But Bahco has also been pretty severely punished over the past month or so. That's because the organic growth number came around 60 percent. Now, if you go through the management commentary, they explain that by the fact that they have tough comps year-over-year from Q3 2020 where they sold a lot of one-time hygiene products for the pandemic and they no longer do that. If you take those one-time hygiene products out of the equation, organic growth comes up to about 80 percent year-over-year, which is still fairly good. It's a decline from 90 percent in the second quarter, but still 80 percent year-over-year organic growth. I'll take that any day.
Dylan Lewis: Yeah. If you looked at the top-line chart here, it is up into the right in a dramatic way over the last couple of years, four-year revenue for 2020, 45 million. Over the trailing 12 months, we have revenue of around 114 million. We're seeing that top-line growth is outpacing a lot of the organic growth. We want to make sure that all of the pieces of the business, the new and old, are performing. One of the other things I think it's important to check in on the business like this is because of the razor and blade model, how much money are they making from the usage-based part of their business model?
Yasser El-Shimy: We'll find that they've been increasing the share of the sales of what they call consumables, or such as Bio Inc.'s, year-in, year-out so it's a growing share of the revenue. I think in Q2 2021, it has surpassed 17 percent. That's fairly good that's heading in the right direction. Now compare that to, let's say Q2 2018 where it was less than two percent, almost one percent. They have come a long way in terms of raising the revenue from consumables. Again, and that's important because these consumables or Bio Inc.'s are highly profitable, they come with very high margins. You want to see that trending in the right direction over time. Just one more thing I would add here Dylan is that if you look back over the past five years since they've gone public, they have grown their topline by a CAGR of about 130 percent while growing their gross margin by a similar number, also a CAGR of 130 percent. That tells me that they have a little bit of pricing power. They are not just going for a sales at all costs mentality. They're trying to get there toward profitability and that's an encouraging sign.
Dylan Lewis: One thing that jumped out to me when I was looking at the business is you did a great job laying out the margins for the company and how it compares to some other players in the industry. For a company that is seeing scale and leverage, we're actually seeing margin contraction, which I was a little bit surprised by.
Yasser El-Shimy: Yeah. Again, they explain that margin contraction in the last quarter due to tough comps to those onetime hygienic products that they sold in 2020. But there have been other actually, I would say potentially more discouraging signs related to their cash flow from operations. They have been really hammered by supply chain disruptions, delivery cost increases, intermittent lockdowns, especially in Europe. We can clearly see that in the operating cash flow declining by nearly 10X in the first three quarters of 2021, compared to last year, as deliveries took much longer to execute leading to rising inventories, sale cycle getting elongated, cost of goods sold also increasing due to inflationary pressures on raw materials. In other words, everything is becoming more expensive and they are feeling that as a company that they'll sell hardware. Items it's not a software business primarily. That can be understood, but we would still like to see this improving over time as they come through this tough period of supply chain disruption and installation.
Dylan Lewis: I know we only have a couple of minutes left and a good number of things to hit. Just to quickly walk us through the checklist. You mentioned CEO, co-founder Erik Gatenholm, still involved in the business, still calling the shots, and I think one of the reassuring things with this company is incredibly high inside ownership.
Yasser El-Shimy: Very high inside ownership. Despite all the share dilutions, you have 30 percent of the common shares outstanding owned by the three co-founders, Erik Gatenholm who is the CEO, Hector Martinez, Chief Technology Officer, and [inaudible 02:54:28] Danielle Sander, Chief Financial Officer. So that's encouraging to see they've been very involved, they're still serving on the company. They have actually formed quite a robust board, including a scientific advisory board to the company that has a lot of weight within the scientific and medical communities. Kudos to them for taking this concept and just running with that and building what is likely going to be a major player in this field.
Dylan Lewis: Yeah, I believe this is about a two billion dollar company roughly with market cap?
Yasser El-Shimy: It's less than that, [laughs] it's about $1.9 billion sale. It's still a small cap.
Dylan Lewis: That's what I get for rounding. But with a company that size, we know the inside ownership and really founder-led business element is huge. The leadership team on a company that size can have much more outsized impact on the direction of that company going forward. You want to see great alignment there and we have that with this business. Quickly before we wrap the show, just curious, what other X factors do you see with this company or what other things should people be paying attention to as they're checking it out?
Yasser El-Shimy: I would just reiterate, they are the current pioneer in this field of by convergence. They've created effectively a one-stop shop ecosystem for a lot of research labs and medical labs that handles the entire workflow process from sample handling all the way to production. They have excellent commercial execution. They've been able to persistently close deals. They are customer-first, and that's very important to see, especially in this business. They actually credit the reason behind most of their acquisitions and most of their innovations in the field to their customers, giving them feedback on what they need. CEO actually travels to meet with lab professionals all across the world and talk to them about what their needs are and then develop the products to meet those needs. Finally, I would say they are writing a pretty potentially explosive secular demand trend for regenerative precision and personalized medicine. As we see more and more developments in biotech and especially in some synthetic DNA and synthetic biology, companies like Ginkgo Bioworks, Twist Biosciences and so on have been leading that field. Bahco should stand to benefit quite a bit from that secular trend.
Dylan Lewis: Yes sir, I think we're going to have to put a bow on it there, but this is an awesome conversation. I'm glad you put this company on my radar and the radar of our listeners. I know folks finding for those healthcare episodes will be happy about this one. Thanks so much for joining us today.
Yasser El-Shimy: Of course, [inaudible 02:57:23].
Dylan Lewis: Listeners that's going to do it for this episode of Industry Focus, if you have any questions, you want to reach out and say, hey, shoot us an email [email protected] or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff you can subscribe on iTunes, Spotify, or wherever you get your podcasts.
As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time. Fool on!
