|Shares Out. (in M):||29||P/E||25.0x||20.7x|
|Market Cap (in $M):||893||P/FCF||30.0x||22.0x|
|Net Debt (in $M):||125||EBIT||22||24|
IMPORTANT Regarding BCPC and CureMark *
2013 Earnings assume no contribution from the following.
CM-AT At the end of August, 2011, CureMark had a U.S. patent issued. (Curemark currently has no foreign patents issued). The patent is not for a pharmaceutical product but for a process, a method for diagnosing a deficiency of chymotrypsin in stool samples. The suspicion was that autistic kids have insufficient amounts of chymotrypsin (as well as of other protein-digesting enzymes), which would result in reduced breakdown of proteins in the GI tract. This would lead to lower than normal levels of amino acids (which are the breakdown products of digested protein). Therefore, lower levels of amino acids would be circulated to the rest of the body, which would result in lower quantities of newly synthesized proteins (since amino acids are also the building blocks of new proteins). Reduced levels of specific proteins could include reduced levels of protein hormones that act assignaling agents to the brain and/or reduced levels of proteins made in the brain that are vital for normal function. Over a decade earlier, an academic center independently of Curemark had published results showing that at least a subset of autistic patients had low levels of secretin. Secretin is a peptide hormone comprised of 27 amino acids, that indirectly increases the levels of active protein-digesting enzymes in the small intestine. The published study thus suggested that low levels of secretin and protein-digesting enzymes played might lead to autism. Curemark therefore decided to embark on a program to treat autistic patients with secretin and/or various protein-digesting enzymes, in the hope that this would eventually reduce their aberrant behavior.
Because secretin and the various protein-digesting enzymes are not patentable, and are found naturally in human beings- which is a very good reason to believe FDA approval will be forthcoming -Curemark focused on developing a patentable diagnostic test for chymotrypsin, one of the protein-digesting enzymes, in stool samples of autistic patients. Then they would provide secretin and/or a mixture of the various protein-digesting enzymes to patients with low chymotrypsin levels. Presumably, Curemark’s product is an encapsulated mixture of secretin and/or digestive enzymes, which is taken at mealtimes. The treatment itself is probably not patentable. Perhaps the form of the therapeutic is. Balchem with its special encapsulation technology does the encapsulation of therapeutic granules to be sprinkled on food at meal times, three times a day. The product is not going to cheap but it's not going to be expensive either as treatments go we think. it is important to note we believe we are erring on the very low side of pricing below.
Market Estimate One out of 100 kids develops autism, and according to Curemark, perhaps 70% of them can be helped with this treatment. Say the population of kids ages 3-8 (according to the clinical trials) is around 25 million in the US, then we're talking about 250,000 kids, of which perhaps 70% could be helped, again note we are speaking about only the US. So we're talking 175,000, which would be taking the treatment, three times a day. Let's speculate at a cost of $50 (we actually have reason to think cost may be materially more) a day or $18,250 a year or over $3 billion/year just in the US. But with limited or no patent protection of the material in the encapsulated enzyme recipe, this could in the fullness of time potentially possibly be split among 2 or 3 generic drug companies. The rest of the world is of course to be realized is a market which is a multiple of the US market. I am just not addressing it for the time being.
IMPACT ON BALCHEM
Investors can consider CM-AT a free option on BCPC. in Balchem Zeroing in on what the potential profit to BCPC might be we postulated the following. Assume only $1.5 billion in sales/yr (this is merely a half of the market estimate above of $3 billion a year in the US alone).
Estimate Re manufacturing and royalty paymentsSelling price to CureMark by BCPC i.e. manufacturing charge by BCPC hence revenues to BCPC = $20 million for somewhere around a billion treatments, less BCPC own cost of manufacture = $10+ pretax profit to BCPC guestimate and we could very easily be low in this est.
Royalty payments on CureMark sales are be paid to BCPC and we believe it to amount to (but we are unwilling to state the exact % here or now) X% on first A millions of sales, Y-% on next B millions, Z% on everything above C millions.
Payment to BCPC we believe would be in range of $60 million on $1.5 billion (so presume 4% royalty at this level, which although not the exact % is we believe close enough) of sales and would be all pretax profit
Total pretax profit to BCPC from (merely) $1.5 billion of sales = $70 million ($10 +$60 Million).
Note: BCPC Pretax Profit in the LTM through 3/12 were $57.1 million.
In the year following introduction to the market CM-AT could easily mean a double or tripling or more of "regular" BCPC pretax earnings sources which are anticipated to grow normally over the years ahead. What's more 1- CT-AT is expected to grow well beyond the projections as its use expands in the US and as it markets in the world outside an 2- CureMark is working on other disease uses for the product and on other products and we believe BCPC has similar manufacturing/royalty arrangements with he company
|Subject||latest viewpoint in response to article|
|Entry||02/08/2013 01:05 PM|
|I agree one trillion percent with all of your piece and especially the two comments: 1- "BCPC management has demonstrated adept skill at integrating accretive acquisitions" and too your comment that I agree 10 trillion percent with and in spades, 2- “Our confidence is further elevated by a superb management team devoted to growing the company carefully, a rare ethos we seldom see in small-cap [any cap I world say] growth stories these days.” Mr. Merriam you mention “Although return-on-assets (ROA) trends in the diversified chemical sector have declined in the past few years, BCPC is flattered by its 14% average five-year ROA” (actually 207 – 2011 averaged 14.5%) and has been steadily coming down since 2009 -- you did not mention that) although you subsequently mention “Also, it doesn't hurt that BCPC sports a solid balance sheet, $5 a share and no debt”, and you could have mentioned that the fact that cash has been increasing steadily and has because it has risen to over 55% of net worth and 67% of tangible net worth and is earning nothing, it is clear why returns have been declining. It is also clear that since management has stated it is not going to pay big dividends and it is unlikely to repurchase stock and that it intends to make an acquisition(s) when one with the right fit at the right price is available and not before, it will indeed do so and so. It should also be abundantly clear ROA as well as ROE will rise again and likely substantially. My gosh, if management paid out all the cash, ROE would be over 33%. (Latest 12 month earnings per share of $1.36/adjusted $4.09 BV at 9/30/11). Management will be “paying out” some most or all the cash – they may very well even leverage up – when making the right acquisition! ROE and ROA could then soar beyond belief. As you also mention “To a potential suitor, a $1 billion market cap with a healthy liquidity profile and a portfolio of products serving multiple end-market customers would be appealing. To any producer looking to broaden their presence in encapsulates, food, pharma, animal, and medical markets, acquiring BCPC might make strategic sense”. I have never thought Balchem a likely takeover for several reasons including the fact that Dino Rossi has built a king of the hill set of businesses in a variety of relatively small niche areas of activity so a big company would not likely see Balchem expandable in any meaningful way such as Dino can given it is a small $300 million sales company. Obviously I may be very wrong and there are companies which like to own niche businesses such as BCPC. But I am doubtful. Dormant Assets Let me explain more about Balchem which I think you may have missed or perhaps chosen not to mention.I would like you to understand that stocks in many ways are like people – heck companies and active businesses are in fact people. As you well aoppreciate the only difference between some companies is the people. This company has special people in both your an my book. Companies rarely grow in a clock-like automatic programmed fashion and do experience growth in spurts and in fact may even have to take a rest once in a while or heaven forbid experience some decline. Stocks, actually companies, may even look expensive when they rest. The Performance in 2012 was "restful".But as long as they have big opportunities they may really not be as expensive as a current P/E may sometimes make them appear. Balchem's business increased last year only 2%-3%, essentially it ran flat, and its stock price became uncharacteristically very volatile. Its shares had a rollercoaster-like ride, first diving 36.6% in the first quarter from $41.93 on 1/12/12 to $26.60 on 3/6/12 and subsequently recovering two-thirds of the decline gaining 37% to $36.45 by year end (and hit $ 38.16 in the "Cliff" rally. The reason I like Balchem and to look not at a year or two or any quarter but rather beyond the horizon is while its basic businesses continue to grow and atre highly profitable, in addition it has two dormant assets each with tremendous potential. What I refer to as dormant assets are assets within a company that do not yet produce a level of profit appropriate to that asset or that have not yet been monetized, and the value of which, therefore, may not be recognized by most investors. In some cases, the value may be widely acknowledged, but may require too long an investment horizon to be of interest to most investors. Dormant assets can fall into a variety of categories, including patents or other intellectual property rights, undeveloped land assets, vacant real estate assets etc. or Balchem’s two assets. The two dormant assets Balchem possesses which await being capitalized and which could create substantial profits one day are one its growing cash hoard and the other being a royalty interest in a pharmaceutical which has yet to be marketed. The Company as you indicated surely had over $150 million by the end of 2012 and it won't be long before they build the bank account to $200 million in cash. Now, the company has a long history of earning close to 20% on its acquisitions and on its net worth. As the cash has built up returns have slid some due to the cash earning nothing and in fact at last reporting date it had become far too substantial (terrible problem to have right?) as it amounted to 55% of net worth -- 67% of tangible net worth -- and btw as you mentioned the Company now has no debt. Altough you hintedt that dividends could go up, CEO Dino Rossi has neither any intention of paying a material dividend or a special dividend nor of purchasing the Company's own shares in the market. The reason is CEO Rossi believes opportunities exist to acquire businesses that are a perfect fit to Balchem's businesses and keep on growing Balchem and he has a fantastic record of doing this over the years. Incidentally he has never used investment bankers in his7 acquisitions or paid any middlemen fees because he knows every private company and every division of every public company in his unique fields of activity. He is not going to buy anything that is not a strategic fit or which is far afield unless it is that truly unique opportunity that comes once in a lifetime and also comes with management in place. Moreover, he is a very disciplined buyer and will only swing if thrown a fat pitch if you follow the analogy. Furthermore Dino has publicly stated "we want to see projects that are going to return 15% to 19% on those investments". If successful, the Company could add as much net income as it has earned in all of the latest 12 months. Then there is the second dormant asset, CureMark, which if it comes to market with its autism sprinkles medication which Balchem has been contracted to manufacture utilizing its proprietary encapsulation technology could be another home run. Balchem would not only be paid a manufacturing profit but would also be paid a royalty on sales of the pharmaceutical. I have good reason to believe in success mode the CureMark sprinkles RX product could be in the $billion or even $bilions category. Balchem could earn as much or more than the aforementioned which means it has the potential to be a grand slam homer.|