Sid Haksar manages a concentrated, value-oriented investment partnership inspired by the 1950s Buffett partnerships. The below investment thesis was originally posted on SumZero , the leading community for hedge fund and mutual fund investment analysts where professional investors share investment ideas exclusively with one another. Through The Motley Fool, select content from SumZero is now available to individual investors.
Let me a pose a question to you: How much would you pay for a company that has lost money every year for more than two decades, generates sales in the range of $1 million to $2 million a year, and has a negligible R&D budget crucial to its longevity? The market has put a firm value of around $310 million, and the share price has increased more than 30 times since 2006.
Company overview
BioTime (AMEX: BTX) is a biotechnology company engaged in two areas of biomedical research and product development:
- Stem cell technology and products for use in regenerative medicine (more on this below).
- Blood plasma volume expander and related technology for use in surgery and trauma treatment.
BioTime's only revenue generator is Hextend, a blood plasma expander that is used in the treatment of hypovolemia, a condition caused by low blood volume, often from blood loss during surgery or injury.
Hextend is manufactured and distributed in the United States by Hospira (NYSE: HSP) and in South Korea by CJ CheilJedang, under license from BioTime. Summit Pharmaceuticals has a license to develop Hextend in Japan, China, and Taiwan. The percentage of revenue generated by Hospira, CJ CheilJedang, and Summit Pharmaceuticals was 68%, 20%, and 12% as of FY 2010.
The primary customer for Hextend remains the U.S. armed forces.
BioTime has claimed in the past that Hextend has a $750 million addressable market. Asensio & Company put out a very comprehensive research report in 1998 (see the PDF version) that put the market size at $30 million and declining at the very best. Further, Asensio & Company highlighted that it was highly unlikely that Hextend would be able to make any major inroads into the market, given a product that did not have any clear demonstrable advantages relative to other similar products.
The fact that Hextend has contributed only $1 million to $2 million to the top line of BioTime over the past several years is a case in point and talks to the self-promotional nature of the company.
BioTime also has a product in phase 2 trials called PentaLyte. The company has been trying --albeit unsuccessfully -- since late 2007 to sign up partners in both the United States and abroad for the opportunity to license and commercialize PentaLyte.
Background to stock appreciation
So what has taken the stock price from $0.30 to its current price around $7, a 24-fold move in a little more than three years?
The answer to this question lies with the hiring of Dr. Michael West as CEO, and the change in the positioning of BioTime as a stem-cell-research-focused operation. An initial founder of Geron, Dr. West joined BioTime in 2007 after having served on the board of the company since 2003. He is touted by the media as one of the fathers of stem cell research, having carried out significant research on the subject in addition to authoring a book, The Immortal Cell: One Scientist's Quest to Solve the Mystery of Human Aging. Before joining BioTime, Dr. West was president and chief scientific officer of Advanced Cell Technology from 2004 through 2007.
What is worth noting is that under Dr. West's watch at Advanced Cell Technology, the stock price went from a high of $7.00 to a low of $0.30 by the time he left, a massive destruction of value based in large part by continued missteps and investor disappointments.
Since Dr. West's arrival, BioTime has been aggressively pushing regenerative medicine as its major growth engine. Regenerative medicine refers to therapies that are based on human embryonic stem ("hES") cell technology and designed to rebuild cell and tissue function lost to degenerative disease or injury.
Upon joining BioTime, Dr. West entered into a license agreement with Advanced Cell Technology, whereby BioTime acquired the worldwide rights to use Advanced Cell Technology's core technology that supposedly turns skin cells into stem cells. Thus, since 2007 through the present, BioTime's primary focus has been on stem cell research.
BioTime is using a strategy whereby it is focusing on the development and sale of advanced human stem cell products and technologies that can be used by researchers at universities and at companies in the bioscience and biopharmaceutical industries. The rationale is that by providing products and technologies that will be used by researchers and drug developers at larger institutions and corporations, BioTime will be able to commercialize products more quickly and inexpensively than would be possible with the development of therapeutic products alone. However, to date, no revenue has been generated through this channel, and the magnitude of future revenue remains unknown.
Stock promotion/hype in overdrive
BioTime's stock surged (up 28% on the day on massive volume) in March of last year upon the presentation by Dr. West and others of an article in Regenerative Medicine (see a copy of the article) highlighting the potential reversal of the aging process of human cells. To give a sense for the promotional nature of this management team, the company, in dramatic fashion, halted trading in its stock for nearly the entire day before the release of the article.
What was omitted was that Dr. Robert Lanza is an editor of the publication and Dr. West is on the editorial board. Furthermore, Dr. Lanza is employed at Advanced Cell Technologies, Dr. West's previous employer. To call this "peer reviewed" without disclosing as such in the press release seems a bit sketchy to me. (See the publication's editorial board.)
Over the next several months, the stock traded down, losing all of its gains and then some before the next bit of the promotion kicked in to keep the momentum going. Enter Patrick Cox, a writer of the Breakthrough Technology Alert, a newsletter from the stable of Agora Financial. Cox has been the biggest promoter of BioTime, having initiated coverage in May of 2008.
This past Nov. 10, Cox put out a report titled "BioTime Cracks the DNA Cell Command Code" that was picked up by Business Insider. The report extolled the virtues of the company and its technology. The stock moved up 12% the day after the report was published and reached a 52-week high of $9.94 on Dec. 28.
Then again, on March 2, the promotion machine kicked in. This time, John Mauldin, a frequent commentator on the financial markets, put out a piece of research written by Cox on his website titled "Want a New Cardiovascular System?" Upon the publishing of this report, BioTime's stock jumped up 14% on the day amid heavy volume rising from $6.81 to $7.75.
Valuation
To put BioTime's current valuation in perspective, let us examine Geron, which is arguably considered to be the leader in stem-cell research. Geron has an enterprise valuation of about $445 million. Furthermore, Geron has three products that are currently in phase 2 trials and one product in partnership with Merck that is currently in phase 1 trials. More importantly, Geron's R&D budget dwarfs BioTime's R&D budget by the order of approximately 9. Also, Geron has 175 employees, with 53 holding Ph.D. degrees and another 41 holding advanced degrees.
On the other hand, BioTime currently sports an enterprise valuation of $310 million; apart from PentaLyte (a blood plasma volume expander product in phase 2 Trials), it has no products in phase 1 trials, a paltry R&D budget, and 31 employees, of which 12 held Ph.D. degrees.
In spite of this differential, BioTime today is valued at approximately 70% of Geron's enterprise valuation.
Bottom line
I believe that the current valuation of BioTime is completely unjustified and has been driven in great part by both a promotional management team as well as a highly promotional penny-stock newsletter. The hype surrounding the stock will continue in the near term, and I do expect Cox to issue an update soon enough, which will provide yet another opportunity to short the company.
With an insignificant R&D budget, lack of a near-term therapeutic pipeline, and continued cash burn, I expect another repeat of the Advanced Cell Technology saga to play out at BioTime. Though rooting for the company to find the key to eternal youth, I don't see that happening, at least in my lifetime!
P.S. Note that approximately 23% of the float is currently shorted, so size positions accordingly.
