May 12, 2010 - 10:53am EST by
2010 2011
Price: 7.80 EPS -$0.18 -$0.25
Shares Out. (in M): 46 P/E nm nm
Market Cap (in $M): 363 P/FCF nm nm
Net Debt (in $M): -33 EBIT -4 -5
TEV (in $M): 330 TEV/EBIT nm nm
Borrow Cost: NA

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I believe BioTime is one of the most overvalued, over-hyped stocks in the market.  The company's fully-diluted market cap of over $350mm has increased more than thirty-fold in the past two years and the company continues to lose money (as it has every year for two decades) with no prospect of turning a profit, in my opinion. (Note borrow is tight on this company but it is generally available.  Also, a large impending warrant exercise should make it easier/cheaper to borrow and might bring this stock back to earth).

DISCLAIMER:  We currently hold a short position in this security.  We may change our position at anytime without posting an update.  The views expressed here are merely the opinion of the author.  Please do your own research.

BioTime's primary product is a blood extender called Hextend that is generally used by the U.S military to effectively act as a blood substitute in the treatment of battlefield casualties.  While it is not core to my current short thesis, it is worth noting that BioTime has a controversial past owing to its direct involvement in a 1999 Columbia University study in which over three times the acceptable dose of a Hextend-related product was knowingly administered to the study group, resulting in two deaths and life-threatening bleeding in many of those patients. 

Products like Hextend are not proprietary or widely used, and consequently, the company has consistently generated only $1 million of annual sales and has operated at a loss of $1 to $2 million.  So why, then, has BioTime's market capitalization increased over thirty-fold to over $350 million in the past two years? 

The answer begins with the hiring of Dr. Michael West as CEO in late 2007.  Dr. West was already a board member of BioTime and had just left his position as head of a company called Advanced Cell Technology ("Advanced Cell").  After numerous investor disappointments, Advanced Cell trades at a mere $0.08 today.  Following the poor outcome at Advanced Cell, Dr. West took the helm at BioTime and entered into a license agreement for Advanced Cell's primary asset, a supposed method of transforming skin cells into stem cells.  Over the past year, Dr. West has been portraying BioTime as an innovative stem cell technology company which has attracted the attention and enthusiasm of many shareholders (Dr. West seems to have gained a degree of credibility with some investors as he was involved early in his career in the founding of Geron, a decent-sized stem cell company). 

It is our belief that the unfortunate end result experienced by the shareholders of Advanced Cell is likely in store for the shareholders of BioTime.  To be clear, BioTime has no prior experience in the stem cell field and no material revenue-generating prospects from this business.  BioTime has only 17 full-time employees, $131 thousand in fixed assets and a small, unprofitable business in Hextend.  In a recent escalation in the company's promotional activities, BioTime's stock soared to new heights in March based on the publication of a paper by Dr. West and several others on the potential reversal of the aging process of human cells in a journal called Regenerative Medicine.  The company released this paper in dramatic fashion by halting its stock for nearly a full trading day in its advance.  The stock surged upon its release as certain investors now appear to be betting that BioTime and Dr. West have discovered the proverbial "Fountain of Youth."  While we certainly hope they are right, we have some serious doubts.  Perhaps these investors would share some of our skepticism if they were aware that the "peer-reviewed" Regenerative Medicine names the Chief Scientific Officer of Advanced Cell and Dr. West himself as two of its editors (a fact that the company conveniently failed to mention).

Recent Developments / Share count

The company recently announced the acquisition of a small, money-losing Singapore-based company that does stem cell research.  Based on some information in the appendices of the latest 10Q, this company seems extremely tiny (only a few employees) and does not appear to generate any revenue.  The company issued 1.383 million shares for this. 

Additionally, the company is trying to induce their warrant holders to exercise warrants at a 9% discount to the $2 strike price on 12 million warrants.  So, pro forma for this transaction (as it may occur) and the acquisition, the company will have 46.4 million shares outstanding, placing the market cap at $363 million and the enterprise value at $330 million.  

Remember, this is a company that (1) had a market cap of sub $10 million in 2006/2007, (2) generates $1-2 million of sales per year, (3) has lost money every year for two decades!, (3) has 17 employees and (4) virtually no R&D budget.

I believe the issuance of the shares in connection with this warrant exercise could be a great catalyst since they will be registered for sale and represent over 50 days trading volume and will make the borrow easier.





End of hype, continued operating losses, newly issued shares get registered


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