Bluechiip bets on biobanking PUBLISHED: 18 Jun 2012 11:16:00 | Tony Featherstone
As big trends go, biobanking is a beauty. Something like 1 billion to 2 billion specimens are stored worldwide as the market grows rapidly, thanks to storage of umbilical cords, samples for stem cells and in-vitro fertilisation. Time magazine this year nominated biobanking as one of 10 trends changing the world.
Tiny tech stock Bluechiip wants to capitalise on a biobanking resources and services market that was worth $7.9 billion in 2009 and is estimated to be valued at $44 billion in 2025. It has spent nine years developing wireless tracking technology that makes it safer and more efficient for laboratories to store frozen biospecimens.
Most biospecimens are labelled manually or use barcodes.
Manually labelled samples can lead to human error, such as IVF clinics inserting the wrong embryo in a patient in isolated cases; are sometimes time-consuming for laboratories to find; and sample quality can be affected if specimens are disrupted too much as staff look for them.
Barcode labels, on the other hand, can become hard to read in cryogenic freezing, and radio-frequency identification technology does not work as well in extreme temperatures. Bluechiip’s technology is said to overcome these limitations by using micro electro mechanical systems (MEMS) that have fewer mechanical properties and withstand freezing temperatures.
Simply put, the process attaches a chip or tag to a vial, tube or other storage device. Laboratory staff use a reader to identify the specimen and software interprets the information. It effectively provides an “electronic licence plate” for a specimen and enables better tracking and reporting as it is stored and used.
I first encountered Bluechiip during its initial public offering (IPO) in February 2011 to raise up to $6 million. In my weekly Financial Review column, I highlighted the Victorian company’s potential, but with cautious comments and said the odds were stacked against it.
It was hard to get excited about any small IPO in 2011, let alone an unknown tech company, when seven in 10 floats finished that year below their issue price. I struggled to identify enough catalysts in the first year after listing that could substantially re-rate Bluechiip shares.
Bluechiip eventually limped across the line, raising $3 million after its chairman bought more shares through a company loan. Its 25¢ issued shares slumped to 10¢ within four months of listing and rallied to an intra-day high 30¢ after news of potential partnering deals in November. Bluechiip shares have since eased to 19.5¢ on low volume.
Operationally, the company has made strong progress and is on the cusp of commercialising the technology, not that you would know it by the market’s response. Bluechiip now has a potential catalyst to re-rate its shares and attract more interest: first sales and proof of a commercial concept within months.
Caution is still needed. Bluechiip is capped at $17 million and its shares are illiquid. It has higher potential risks and rewards and, like most micro-caps, does not suit conservative investors or inexperienced speculators.
The starting point with any micro-cap stock is cash. Bluechiip had cash reserves of $1.17 million at March 31. In theory, it could run out of funds within six months, given a $200,000 monthly cash burn rate. In practice, Bluechiip gets a research and development tax concession in the first quarter of each financial year. This year’s should be close to $1 million, up from $674,000. And a final $192,641 repayment is due for the chairman’s company loan.
Also, 13 million options will emerge from ASX escrow restrictions in the next few months. Three million options through the IPO have a 30¢ exercise price; 10 million issued through private placements have a 20¢ exercise price. Those options will be in the money if Bluechiip shares rise above 20¢. Their conversion would add $2 million in cash.
There is also potential for first sales in the second half and other government grants that can boost Bluechiip’s cash balance, meaning investors should be alert rather than alarmed about the company’s cash position. They should read Bluechiip’s latest Appendix 4C quarterly report.
Options conversion, if it happens, would swell the number of issued shares and lead to potential dilution for shareholders, although having $2 million in cash is more important for Bluechiip at this stage. Also, investors who exercise their options and receive shares could dump them to take quick profits. In a thinly traded stock, it only takes a small bout of selling to hammer the price.
With the bulk of Bluechiip’s options issued through a placement, presumably to more-committed investors, there might be less selling. But it remains a risk, and it usually pays to wait until after key escrow anniversaries play out before buying stock in newly listed micro-caps.
The next step is market sentiment. With speculative micro-caps, plot a timetable for anticipated milestones and identify the most important ones. Many small companies publish such timetables in their market presentations, yet all too often speculators clamour for inside information and market gossip, and overlook key information that is widely available.
I see three key milestones for Bluechiip in the next six months. First, its partners, such as Corning, need to confirm they have evaluated the technology and intend selling it. Second, Bluechiip should announce its first sales, which, although likely to be small, are a significant milestone that could help the share price. Second and subsequent sales are probably more meaningful. Third, Bluechiip must prove it can manage execution and manufacturing risk, and cope with increasing orders.
Investors often forget that fast growth can be a big problem for micro-cap companies. Bluechiip must transform from a small research group into a larger company that can handle sales orders for hundreds of thousands of chips and hundreds of readers. It must oversee manufacturing and distribution, while signing up and educating channel partners to sell the product. And it must raise equity capital astutely, without excessive dilution for shareholders.
Bluechiip has at least signed up two large, experienced manufacturing partners and has spent two years refining its production requirements. Its commercialisation strategy is based on large channel partners selling the technology, and appears to have built good relationships so far. After nine years of hard slog, management deserves some credit that it can evolve Bluechiip.
If Bluechiip can meet these milestones, the next leg of growth is probably a $35 million to $50 million market capitalisation that starts to attract attention from micro-cap funds. Assuming it can demonstrate sustainable and rising earnings, Bluechiip might snare one or two funds, in a more significant equity capital raising next year, to join its share register and help raise its profile.
But this bear market has zero tolerance for small-caps that make big promises and do not deliver on time, or at all. Bluechiip will need to surpass investor expectations and surprise the market with a burst of better-than-expected news.
For all the challenges, Bluechiip seems to have a decent technology headstart in its field, a potentially lucrative position in a large, growing market, and a platform technology that has many uses beyond biotech, such as in recording the transportation of frozen goods. There has been more interest in the stock from analysts lately.
Yet so many medical device makers claim world-class technology, a billion-dollar global market, an obvious problem to solve and huge potential sales – then take years to convince a conservative medical profession to use it, and have disappointing earnings.
Bluechiip could be an exception, although in this market there is no need to rush and buy it or any other micro-cap tech stock, given most are trending lower. It might pay to wait and watch Bluechiip for signs it is achieving its milestones, executing well and is past any share price pressure from escrow anniversaries.
Yes, the price would be higher by then, but if Bluechiip achieves what it says it can, the stock has much further to run over several years.
BCT Price at posting:
20.0¢ Sentiment: None Disclosure: Held
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