Description

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

Catalyst