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Friday, June 19, 1998
BioTime Inc.
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Phone: 510-845-9535
Website: http://www.biotimeinc.com
Price (6/18/98): $6 7/32
HOW DID IT FIND TROUBLE?
BioTime has had a rough time of late, and short-sellers see more of the same ahead. This development stage biotech enjoyed a spectacular three-year run that amounted to a 6000% return for those who sold at the October 1997 high of $27. Since then, the stock has been pounded by a wave of critical commentary and so-so results from a clinical trial of Hextend, a blood volume expander that is the company's lead product.
The firm's rise to highflyer glory owed a lot to its inclusion in Individual Investor magazine's Magic 25 for '96 and '97. Wild-eyed enthusiasm for other actual blood substitutes aided the frenzy. And it didn't hurt that David Crossen of NationsBanc Montgomery has been pounding the table for the stock.
But devastating critiques from financial columnists Herb Greenberg and Chris Byron helped push BioTime from its highs. TheStreet.com's Jesse Eisinger then chimed in, quoting experts who declared Hextend a copycat product with a limited market of $30 to $50 million at best.
In December, the company made positive comments about its Phase III trial, the first in humans since BioTime had simply skipped the normal steps in moving from animal studies to human studies. Specifics released in mid-January revealed that Hextend had done as well as DuPont Merck's Hespan (the leading hetastarch product) but showed no significant new benefits. That was bad news since BioTime hoped to charge a lot more for Hextend and extend its use into other markets.
About this time, notorious short-seller Manuel Asensio started attacking the company. In late April, the Wall Street Journal's California edition gave new weight to Asensio's critiques. The stock has been sliced in half since then.
BUSINESS DESCRIPTION
Based in Berkeley, California, BioTime is a development stage company working on synthetic plasma expanders, blood volume substitute products, and organ preservation solutions. Its main products are Hextend and PentaLyte, both made of a hydroxyethyl starch, electrolytes, sugar, and a buffer. Hextend stays in the blood longer than PentaLyte.
Hextend is a plasma expander, not a blood substitute. It can't carry oxygen or proteins. It's main use is in emergency care and surgeries where the goal is simply to sustain a patient's fluid volume to maintain blood pressure and tissue/organ function. Hextend can do this without exposing a patient to possible contaminants (such as viruses) in transfused blood products. About 2.5 million surgeries in the U.S. each year include blood transfusions.
The market is dominated by less expensive crystalloids (normal saline and Ringer's solution) and more expensive colloids (the natural protein albumin and less costly 6% hetastarch solution). Hextend is similar to Hespan, but it includes added sugar, calcium, and a buffer. BioTime hopes to prove Hextend can be used in greater volume than Hespan while creating fewer coagulation troubles.
The Phase III trials included 128 patients and took place at Duke University and New York's Mount Sinai. On average, 1.6 liters of Hextend were used, with no serious adverse events even with Hextend volumes as high as 2 to 5 liters. Hespan use is limited to 20cc per kilogram of body weight (about 500-1,000cc in practice). Though Hextend patients received fewer blood products (red blood cells, frozen plasma, platelets, and clotting factor) than did those on Hespan, the differences weren't statistically significant.
BioTime signed a licensing pact with Abbott Labs in April '97 that has generated $1.4 million so far. BioTime can reap up to $37.5 million more in licensing fees (10% of net sales if sales are over $30 million; 5% of net sales if between $15 million and $30 million). Additional royalties will be 5% of sales plus another 0.22% for each $1 million in annual sales.
Insiders own 21% of the stock with 7% held by Chair/CEO Paul Segall and his wife, VP/Secretary Judith Segall.
FINANCIAL FACTS
Income Statement
12-month sales: $0.84 million
12-month income: ($3.8 million)
12-month EPS: ($0.39)
Profit Margin: N/A
Market Cap: $61.8 million*
(*Doesn't include effect of warrants covering 825,000 shares at $1.10 per share or 541,500 options to buy shares at prices ranging from $0.66 to $18.25)
Balance Sheet
Cash: $5.1 million
Current Assets: $5.4 million
Current Liabilities: $0.8 million
Long-term Debt: none
Ratios
Price-to-earnings: N/A
Price-to-sales: 73.8
HOW COULD YOU HAVE SEEN IT COMING?
The Abbott deal was positive. But it's hardly surprising for a development stage biotech that's accumulated a steady stream of losses ($13.8 million total as of March 31) to get sliced to bits after experiencing a 6000% increase. Clinical trials determine whether a company survives, and lukewarm results can clobber a stock.
There were also warning signs. Segall's former company Cryomedical Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMSI)") else Response.Write("(Nasdaq: CMSI)") end if %>, which licenses technology to BioTime, had all but disappeared after a short period of glory. Also, investors should get nervous when they see relatives among the top managers.
In addition, Jonathan Steinberg's Wisdom Tree Capital hedge fund held a 10% stake in BioTime while his Individual Investor mag was recommending it. Given Steinberg's participation in the dubious rise of Diana Corporation, investors should have been downright skeptical.
Finally, Asensio's arrival was the ultimate wake-up call. Though the guy can be obnoxious and simply wrong on details, he's got a terrific overall record for calling disasters. You just don't want to own a stock he's shorting.
WHERE TO FROM HERE?
In late April, Crossen of NationBanc Montgomery was still talking of a 12-18 month price target of $32. Meanwhile, Asensio was talking $2.
On March 31, BioTime completed its New Drug Application (NDA). Although bulls had hoped for expedited review, the FDA could take a year to decide Hextend's fate. Asensio believes it will be approved, but he argues that there's no way it can claim a fair share of the hetastarch market at the proposed $100 per liter selling price. (Hespan goes for about $40 per liter.) He also sees no hope of its penetrating the far larger markets for albumin, crystalloids, or fresh-frozen plasma.
BioTime still trades at 12 times book value. If the FDA doesn't approve Hextend this year, year-end tax loss selling could still make this an interesting short. Then again, about 23% of the shares have already been shorted, so any good news could produce a fierce rally.
-- Louis Corrigan
([email protected])
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