Heck of a post from TruthBeSaid that bears repeating.
Valuation & My Take
Hi All: This is a long message, I have put down all my thoughts, you will need patience to go through. If you are in a hurry, go to the "bottom line" right at the end.
I haven't posted in a long time, although I have been following the action on this company, elated to start with with in Feb then disheartened by lack of action, delight at NHS action subdued by expected/feared lack of action. Great achievements but lack of follow-through to monetize them has become the company's style, unfortunately, I have to say. The long awaited FDA clearance came through - I had no doubt that this would happen. I have posted here and written to the company that they should not wait on the full clearance and instead go for partial clearance for knee OTC and get on with producing earnings from it, as we had solid clinical results for knee (Bagnato et al). This is what finally happened and getting OTC was a break through achievement for the company, no doubt. It took too long and debt and OS have grown to undesirable levels. It is now 1 full year since the FDA clearance but the company has not capitalized on the break through to generate profits. In the meantime NHS reimbursement approval has come through too, another important achievement, again something I had no doubts about - in fact my last post in Aug'17 was on the imminence of this approval. Is that also going to be left not monetized and the PPS allowed to flounder? I think not, as I believe that the UK situation is quite a bit different. With the negatives out of the way, here are the positives which far outweigh the negatives:
On UK/NHS as opposed to US/FDA, for one thing, we already have a recognized presence there and the NHS reimbursement is going to give us a modest fillip even without any company action. There are two reasons for this:
(1) the existing customers will more readily buy the product, to do so and to benefit from the NHS coverage, they will ask their GP to prescribe it. They will tell their GP that this is working for them and they want a prescription to get the product at a reduced price. Given our company's approach, I expect that the existing users singing the product's praises will be the way the GPs will hear about and be introduced to the device. Note that NHS coverage does not make this free. Patients still need to pay GBP 8.6 charge per prescription (not clear if this charge is set for 1 device or for an years supply; I expect for 3 months supply which will be 1 device). A majority of the chronic pain sufferers may fall in one or other category where this charge is waived and they will definitely seek prescriptions from their GPs. These existing customers are our boots on the ground, so to speak. Thus, without any work from our sit-on-your-hands company we can still expect some initial growth. I estimate that there are about 30000 customers in the UK (see reasoning below). That will be 30000 product promotion calls on GPs, by pain sufferers who swear by the product, far better than a salesman call. If a GP prescribes to try the product on at least one other new patient, we will see a doubling of sales in the first year. But some action is needed to drive more growth beyond these minimal levels. You might ask, why will the current customers know about the coverage? Hopefully BIEL will send e-mails, they have e-mails from their studies, and they will also find out at Boots at next purchase.
(2) The reimbursement price set at GBP 13.95 includes distributor margin, which the NHS sets at 12.5%. There is no bar on discounts from manufacturer to distributor/retailer. I do not know what the distribution model is going to be, whether Robinson Young will still be the wholesaler and what combined pharmacy retailer+wholesaler margin would be. With the NHS approval, the company is in a good position to negotiate a better deal here and should drive a harder bargain. With NHS reimbursement carrot, we can threaten to switch distributors. Let us assume that the combined distributor/retailer margin will not be above 30% (In the unregulated US market this is ~ 25%; 2-3% wholesaler; 22% for the pharmacy). Thus the company earns a revenue of 70% = GBP 10 per piece sold. That is $14. I have estimated the cost per piece to the company at $3 from past company statements. That leaves $11 as earnings per piece sold. This will be $9 if distributor/retailer margin is 40%. This is higher than the $4-$6 earning I have estimated from past financials, in fact significantly higher. This should represent a growth in the earnings.
These two avenues foretell growth without any company action. Together they represent a doubling to quadrupling (x2 for less hesitant buying and new GP prescriptions; x2 for better margins). This is all with our management doing nothing. My hope is that the company has been hamstrung by lack of funds to promote the products to drive growth. With the above cost-free growth there should be funds generated to advertise and drive more aggressive growth. Hopefully, the company will use these funds wisely.
Now, for some estimates and valuation:
While the company doesn't tell us how many pieces they are selling and in which geographies, this is something we can estimate reasonably well. From past financials, my estimate is that we are selling ~ 150K (thus about 30-40K customers x 4 per year) pieces in the UK (~ 300K globally). This is the part I am expecting a doubling on, this year, to 300K. With a $10 earning per piece that will be $3M. About 150K pieces are sold over rest-of-the-world with $4 earning per piece which comes out to 0.6M. These add up to 3.6 M gross profit on a revenue of 4-5M. Let us call it $3-3.5M (allow lower margins than my estimates in UK; $8 instead of $10 to gross profit) on $4-5M revenue. From past financials, our other expenses, including interest is around $600K per quarter, that is $2.5M annual. This has come down recently but I will keep the higher number to allow sales support expenses. This will result in 0.5-1M profit from operations, as opposed to perpetual loss on this line. It is clear that break-even or upto $1M earnings is on the cards this year. All this with the company doing nothing. Let us leave it there and take a look at the big picture.
The worldwide population which can afford these devices is 1.5B (1.25 OECD+10% each of China and India). About 20% of these are chronic pain sufferers - I see higher fractions but let us be conservative. That is 300M. Consider a time when the company has matured and has garnered 10% of this market. That is 30M customers. Each needs 4 pieces a year, so 120M pieces in annual sales. Assume $5 gross profit per piece for global sales and the earnings are 600M. Let us give x20 PE ratio at that time (=.growing at ~ 20%). The market cap will be 12B. This is the valuation if the company is managed well (they have certainly started to show evidence of that) and in a stage transitioning to a value company with 10% market share and growing at 20% rate. That will be $0.75 PPS. This can happen in 5 years, if well managed. To estimate the current implied market cap let us use the discounted earnings approach. For risky investments a 30% discount is considered. For our highly risky company let us allow 50%. The 5-year discounted market cap is 12B/(1.5^5) = 12B/7.5 = 1.6B. If you take 10 years to reach that stage, this number is 0.2B. The implied PPS is $0.01 - $0.1; So, we are talking about 0.05 PPS is what is expected now. So, why aren't anywhere near that?
This is because the company has not shown any promise of generating these earnings, on top of that questionable family family financing loop. The outstanding notes can double or triple the OS (I hope the family is not so greedy as to triple), a doubling should still leave the expected PPS at ~ 0.02. I conclude that they key is the lack of results, revenue follow through on promise and other very significant approval achievements, thus far.
All this is changing. I expect a lot of cash flow from NHS approval, without any company action. And this cash can allow exponential growth. Once we some earnings, approach break-even, and transition to positive earnings, things can explode. Once the company shows its mettle, the discount rate will be a lot lower (which depresses the current discounted PPS exponentially) and the growth to full long term market cap of $12B will be exponential.
The hope is that this can all change quickly this year. Keith hopefully is a silver lining in the cloudy skies. Hopefully he will last and not be shadowed by family greed. The family has put in effort and funds, no denying that and they rightly deserve big returns, but so have so many other investors. Hopefully they will see the right and just path out.
Assuming all this pans out well, in 5 years time one can expect reasonably a PPS of ~ 0.75. Or 0.3 allowing for the notes. As the quarters roll by this year, the complexion of the company can completely change. Break even and profit can roll in starting 1st or 2nd quarter and with funds available for promotion and right vision, we can move quickly reaching the $0.02-0.05 PPS expected for a company of this potential at this stage. All we really need is that quarter which I think is round the corner. We can estimate the current PPS also from a different view point. Let us take that we do get a $1M profit. A company with this potential for growth can command a PE of 300-500. All depends on how quickly the profits show up and grow. That would be a market cap of 300-500M and a PPS of $0.02-0.05 same range as what we estimate from the discounted cash flow. So, it all makes sense.
In summary, the company is on the threshold of exponential growth, in spite of the management. It is the potential of the technology that this company has reached this stage. The management did not help hasten our arrival here but deserves credit for getting to this point. Whether the full potential outlined here is realized depends now on the path the management takes. They have been slow in the past and did not seize opportunities, but this time it can be different. UK-NHS can generate profits without company action and that can be the ignition.
Bottom line then is:
5-10yr market cap: 12B USB - PPS $0.75 discounted current market cap implied : 0.2B-1.6B - PPS: $0.01-$0.1 by Q2, when some UK sales pick up is seen: $0.005 by break-even: Q2-Q3: $0.01-0.02 by positive earning, this year: 0.02-0.05
If we see any announcement of deals in the US or elsewhere or results from ongoing clinical studies and or positive action on regulatory front all of which are on the cards, this time frame can shrink. I fully expect the pps to reach $0.1 in the near future (1-2 yrs) and > $0.5 in 5-10 years.
Divide numbers after 1 year by a factor of 2, for family debt holders cashing in. I do not expect it will be more than a factor of 2, probably less. As the PPS rises, the number of shares from debt conversion will become smaller and smaller, or the debt can be paid off. Hopefully the family will be reasonable not ask all debt to be converted at the initial note price, even if they do the OS will only double or triple utmost.
I will update my thoughts after the March 31 annual report, hopefully there some movement to be seen there already. The Q1 report is soon after, by May 15, Q2 report by Aug 15. Much to look forward to. This is the make or break year for BIEL and I think it is going to be on the make side.
I am still buying and have not sold a single share. I am in this for the long run, will have to make hard decisions in the next few months on deciding if I should sell part of my holding. If you got this far, sorry this was long but I wanted to present all my thoughts clearly and with objectivity and balance so that potential investors can make their own decisions. Hope that is useful. Finally, best wishes!
