|Shares Out. (in M):||15||P/E||15.2x||11.8x|
|Market Cap (in $M):||64||P/FCF||15.2x||11.8x|
|Net Debt (in $M):||-13||EBIT||6||8|
BIOC is a neglected micro-cap trading at ~10x EV/FCF based on my conservative estimates for 2010. The strength of BIOC's business model is misunderstood as BIOC's bookings/earnings were down in 2009 as a result of delays in pharma/biotech R&D spending due to the economic turmoil. However, BIOC's business model is not broken and its disappointing 2009 results provide an opportunity to cheaply purchase this healthcare gem with the following characteristics:
- Strong competitive advantages and barriers to entry
- High ROIC and a scalable business model
- Revenue visibility with a backlog of signed contracts
- Strong balance sheet ($13M cash ($0.86 per share) and no debt)
- Experienced management with a solid track record
- Growth: even if clinical trials decline in this environment, the FDA's push to include imaging as part of clinical trials highlights the long-term growth in BIOC's core segment.
COMPANY SNAPSHOT AND COMPETITIVE LANDSCAPE
BIOC is a leading healthcare services company that provides services for clinical trials run by pharma, biotech and medical device companies. The Company has the following two divisions:
BioImaging Division: BIOC designs, conducts and manages the imaging component of clinical trials to evaluate the effectiveness of potential drugs and medical devices. BIOC focuses on phases II, III and IV of clinical trials, although the majority (~75%) of revenue is from phase III. BIOC specializes in the oncology, musculoskeletal, central nervous system (CNS) and therapeutic segments. BIOC's clients include many leading pharmas/biotechs as well as medical device companies and major CROs.
eClinical Division: The eClinical Services division provides full service electronic data capture (EDC), a combination of EDC, interactive voice/web response (IVR/IWR), reporting and data management solutions in order to make the process of collecting and analyzing data from clinical trials more efficient and reliable. BIOC entered the eClinical services market in 2008 by acquiring Phoenix Data Systems (PDS), a company specializing in EDC services for pharmas/biotechs. In September 2009, BIOC expanded its eClinical presence by acquiring Tourtellotte Solutions, which adds IVR/IWR functionality and supply chain management software to its eClinical offering.
Positively, in January 2009, BIOC sold Capmed, a loss-making and non-core division that specialized in electronic medical records.
|Diluted s/o:||15.1 million|
|Market cap:||$64.4 million|
BIOC'S CORE BIOIMAGING DIVISION
BIOC's core imaging division accounts for ~70% total revenue.
BIOC's ECLINICAL DIVISION
BIOC's eClinical division accounts for ~30% total revenue. BIOC is in the process of building a full service, end-to-end, eClinical solution. BIOC entered the eClinical services market by acquiring Phoenix Data Systems (PDS) in 2008. PDS collects/manages data from clinical trials using electronic data capture (EDC) technology. PDS has participated in >600 trials across all therapeutic specialties. In September 2009, BIOC expanded its eClinical services presence by acquiring Tourtellotte Solutions, a company providing Interactive Voice/Web Response (IVR/IWR) and supply chain management software. Tourtellotte software is being used in over 150 active clinical trials. Our channel checks suggest that by integrating a leading IVR/IWR service with its eClinical offering, BIOC is well positioned in the eClinical services market.
The eClinical services market has grown at 10-15% over the past decade and this growth is expected to continue in the coming years. As 50%+ of clinical trials are still paper-based, EDC still has a significant portion of the market to capture. Paper based trials are deficient: they take longer to run, are more expensive, and have higher error rates than data captured electronically. BIOC's offering is specifically tailored to the small/medium pharma/biotechs. Our channel checks indicate that the breadth of functionality of the eClinical offering and the number of completed trials (and associated referral list) are enabling BIOC to increase its share of this market as biotechs/pharmas are risk adverse when selecting an eClinical vendor.
The eClinical division is not yet a great business like the Bioimaging division but BIOC is positioned to become a leader in this growing segment. There is a risk that the two large players (Phase Forward, Medidata) migrate down to the smaller trial market. However, to date this has not been an issue as BIOC is able to provide a higher level of service to small/medium clients than large player systems, which are structured more towards conducting EDC for the major pharma/biotech clients.
FINANCIALS AND VALUATION
|FCF per share (excluding one-time items)||$0.08||$0.17||$0.32||$0.28||$0.36|
Applying a 15x multiple to my estimate of 2010 FCF and taking in to account the excess cash, I value BIOC at ~$6.25 per share, ~50% higher than the current stock price. Our channel checks suggest that the clinical research delays have subsided and that the imaging and eClinical businesses are positioned to return to their long term growth rate of ~10% in the coming years. There is also significant operating leverage in this business and 10% EBIT margins should prove conservative based on my 2010 revenue forecast. Given the growth opportunities and the operating leverage, I believe that my estimate of BIOC's value is conservative.
As soon as the market realizes that BIOC's business model is robust and the Company begins to benefit from the development/growth of its eClinical Division, the market should reward BIOC with a higher valuation.
Note: Reimbursement revenues are expenses that are reimbursed by the client and therefore carry 0% GM. Excluding the reimbursement revenues shows that BIOC's core service business yields an operating margin of ~14%. The eClinical division includes results for only three quarters in 2008 while the 2009 eClinical results exclude revenue from the recent Tourtellotte acquisition. In 2010, I include an additional $3M revenue for Tourtellotte (which is easily achievable as Tourtellotte had ~$5M run rate prior to the acquisition).
- Significantly less R&D spending in the pharma/biotech space over an extended period of time. As discussed above, imaging is becoming a larger part of clinical trials (and the FDA is pushing for it) so even if there are fewer trials the level of imaging should hold up well.
- A large number of cancellations (this is not likely as there is minimal project concentration given that BIOC simultaneously undertakes >200 projects)
- Another "CapMed style" acquisition (let's hope management learned a lesson) or overpaying for acquisitions in the eClinical space
- Solid 2010 guidance (to be released in February)
- FDA becomes even more vocal in advocating imaging in clinical trials
- Acceleration in revenue growth from the eClinical Division
- Acquisition by a CRO (such as eResearch Technology looking to expand in to the imaging space) or a private buyer looking to take advantage of BIOC's strong balance sheet and attractive valuation
- Analyst coverage
|Subject||RE: 15x FCF?|
|Entry||01/20/2010 01:11 PM|
Thanks for the question. My thesis is that BIOC is a good scalable business with sustainable competitive advantages and sustainable high returns on capital. I expect FCF to grow at a double-digit rate for many years, for the reasons discussed in the write-up. If my thesis is correct then 10x is cheap and even 15x is arguably cheap. Of course, my thesis could be wrong, and if you have thoughts on that I'd appreciate you sharing them. Thanks.