REDONDO BEACH, CA / ACCESSWIRE / October 12, 2015 / The SPDR S&P Biotech ETF (ARCA: XBI) has fallen more than 20% over the past three months, which significantly outpaced the S&P 500's 4.7% fall over the same timeframe. With the House of Representatives subpoenaing Valeant Pharmaceuticals International Inc. (NYSE: VRX) for documents related to drug price increases, the market is concerned that the federal government may be stepping up its efforts to curb increases in drug prices.
The bear market in biotech has left investors with few options. On one hand, drug development stocks could have a harder time raising money with higher interest rates and a broader bear market. On the other hand, larger companies could begin to face margin pressure if the federal government continues to investigate drug pricing practices. The few remaining sweet spots in the industry may be smaller firms that have only recently begun to commercialize.
Protea Biosciences Inc. (OTCQB: PRGB), a molecular information company providing innovative bioanalytical solutions to the pharmaceutical and life science industries, could fit the bill with its existing commercial technology and significant long-term promise.
Growing Service Revenue
Protea Biosciences' Laser Ablation Electrospray Ionization ("LAESI") technology platform, which is exclusively licensed from George Washington University, enables clients to send tissue and biofluid samples directly to the company's laboratory where it's analyzed without any sample preparation in a fully automated way that generates data in seconds to minutes and maps the exact location of molecules in 2D and 3D images.
Markets and Markets estimates that the mass spectrometry market will be worth $5.9 billion by 2018, growing at an 8.7% compound annual growth rate. While the MALDI mass spectrometry process is probably the most widely used, the process requires a carefully prepared sample to be incubated overnight with limited imaging capabilities. The company's LAESI technology could cannibalize the multi-billion dollar industry over time, creating significant potential.
Last quarter, the company reported revenue of $511,783 – an increase of 48% year over year – while the percentage of revenue from services versus instrument sales has increased from 17% to 43% to $219,064. The higher margin service revenue has helped the company reduce its net loss from $3.2 million to $1.8 million, while creating stable recurring cash flow that provides investors with greater visibility moving forward.
Figure 1 - Protea Biosciences Revenue - Source: YCharts
With customers that include major pharmaceutical, biotechnology, chemical, and medical device companies, the company's revenue comes from a solid and diversified base rather than from a single customer. Management believes that its technology could be applied to agriculture, pathology, biomarker discovery, biodefense, and forensics end markets down the road as well, which could further grow and diversify revenue over time.
Transitioning to Diagnostics
Protea Bioscience's long-term potential is best illustrated by comparing it to Foundation Medicine Inc. (NASDAQ: FMI). While the company began as a pharmaceutical research services provider, it leveraged this business to create a diagnostics franchise that has been embraced by the markets. The company's products are used by physicians and biopharmaceutical companies to provide genomic information about each patient's individual cancer to optimize care.
The company has already secured non-exclusive co-marketing agreements with industry leaders like Waters Inc. (NYSE: WAT) to bring its LAESI technology to scale, but its real long-term potential may be as a diagnostics platform. Through collaborative partnerships with top academic centers, the company aims to develop and validate tissue analytics based cancer diagnostics technologies to help improve patient outcomes.
As a model of this approach, the company partnered with the Memorial Sloan-Kettering Cancer Center and the Dana-Farber Cancer Institute to generate molecular profiles of early stage lung cancer tissue samples. The goal is to improve the classification and differential diagnosis of cancer by demonstrating that different cancer cell subgroups within a lung cancer will have different molecular profiles and behave differently - ultimately enabling precision treatment and disease monitoring. "We are applying our proprietary Mass Spectrometry Imaging technology to improve the molecular identity and classification of cancer," stated Steve Turner, Protea's CEO. He added, "We are validating our molecular diagnostic tests through collaborations which we establish with researchers at top tier medical research centers."
Looking Ahead
The biotech industry may be suffering from a combination of drug pricing concerns and a lack of access to capital, but some small-caps offer great opportunities for investors. Protea Bioscience's unique combination of growing revenue, narrowing losses, and significant long-term value creation make it an excellent opportunity in the space. Investors interested in the biotech space may want to take a closer look as a result.
For more information, visit the company's website at www.proteabio.com.
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SOURCE: Emerging Growth LLC
