Short Watch List (comments).
BTX (short)

December 29, 2010 by BiotechInvest

Subscriber A. asked my opinion about BTX as short candidate. After some discussion I completely agreed with his arguments and added this company to my Short Watch List.

"If you look back at their (BTX) last few quarters you see that they have had very impressive growth on the revenue front. However those figures are very small. The saying goes a "small percentage of a big number is still a big number", well in this case a large percentage of a small number is still a small number.

Revenues in the 3Q10 (Sep 30) where up 82% yoy and the first 9M of 2010 revs are up 92% over 2009. However the total revenue for first 9 months of 2010 is now 2,261,375M."

"Another red flag to me is that they increase in revenue from 2010 over 09 is not primarily due to an increase in product sales. Instead it is due to recognition of 1.2M of a 4.7M grant BTX has received from the CA Institute of Regenerative Medicine.

Their number one product Hextend is doing worse in 2010 than in 2009. This product is not related to stem cell lines but is used to help prevent blood loss during surgery.
"For the three and nine months ended September 30, 2010, BioTime recognized $215,094 and $727,388, respectively, in royalty revenue from the sale of Hextend®, ...This compares to royalty revenue from the sale of Hextend of $225,518 and $799,910 during the three and nine month periods, respectively, ended September 30, 2009. The decrease in royalties reflects a decrease in sales to the United States Armed Forces, which was partially offset by an increase in sales to hospitals in the United States and South Korea."

"Now they are moving into stem cell lines for research and development starting this year. I do think this could have some promise for them, but with a market cap of 450M already they are way ahead of schedule....WAY ahead! They actually started selling lines in 2010 through a marketing agreement with Millipore. That is a great company to be selling their lines through, but to date there are still only 6 lines being marketed on Millipore's website:

I looked at the pricing of the lines and they sell for about 1000 dollars apiece. They also have special media for the lines, which is a good reoccurring revenue stream b/c once a researcher buys the cell lines once they can store them in liquid nitrogen and basically have a line for years and years without having to buy another. This is very common practice. What is also very common practice is to make your own media for different cell lines...not always done but can typically be done pretty easily.

I looked at the media and it was described as follows: "The hEPM-4 media formulation is based on a high glucose (4.5g/L) variation of Dulbecco’s MEM (DMEM). It is provided with additional fetal calf serum." This is very easy to replicate as DMEM is one of the most widely used media out there.

Millipore isn't the only way they are selling lines. They also have a very nice product line through their own website:
The prices of these lines are higher at 2800/line. This again really only needs to be bought once and then maintained via liquid nitrogen etc.

When looking at the financials of BTX they have 25.4M in cash at the end of the 3rd Quarter. They seem to have lots of warrants out at different prices. They don't seem to do self offerings but instead do warrants to obtain financing. I don't really have a feeling as to whether that is better, worse or indifferent when it comes to being negative to the share holder. I think it continues to be dilutive , but in a not so public way as a self offering. They recently announced another warrant offering that is good for 4 years at a price of 12 dollars. I guess this is the one place that worries me as the 12 dollar price is a higher than they've done before. They seem confident in it providing possible funding I guess. I however have a hard time believing it could get to 12 for an extended period of time....actually I guess it could get there in 4 years, but they would need some serious revenue swing and development on the drug discovery front. For that to happen they will need more money so I think dilution is going to happen sooner than later.

I think there are two potential negative catalysts. The first is a self offering in order to raise funds. The second is when they announce 4th quarter sales and the revenue is not as strong as the run in the stock would indicate. I think that will be negative for sure. Revs could be as high as 1M but that is still very low and with the increase in R&D they will still lose money."

Well, excellent fundamental analysis and today BTX pps dynamics is evidence for this.

I only can add that I always had BioTime on my radar, but never invested in this strange company. This permanent pps growth is unexplainable and weird. Current BTX price ($9.69) is too high for company's recent revenue.

I don't see any high risk for shorting BTX (especially after pps will touch $10). BTX acquisition is very unlikely, also no ground for new partnership. At bad earning release pps should go down (to $6-7 range at least).

On company website they said that "the company is developing another blood volume replacement product, PentaLyte, formulated to maintain the patient's tissue and organ function by sustaining the patient's fluid volume and physiological balance." But no any information about development stage of this product.
Thus, this company seems very overpriced now. If next earning weak they will be in troubles. Especially if funds start to damp their shares. Will they? Why not? Some of them already have 100-200% gain with BTX, and may be finally some fund analyst will reveal that this company has very weak upside potential.

Main question here what is FIM factor for BTX? I think it is around 3 for BTX (in scale between 0 to 10, ITMN has 9, JAZZ has highest i.e. 10 and XOMA has 0). We will see it today and tomorrow (funds need some tome to reinforce their manipulations to keep BTX pps high.

Disclosure: I don't have BTX positions now, will short it today.


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