Current Trade: Bluechiip (BCT.AX)
Bluechiip (BCT.AX) is a technology company that has developed a revolutionary alternative to barcodes and RFID chips for inventory management. The company is on the cusp of commercialising the technology with large scale manufacturing being finalised and negotiations taking place with potential customers and distributors.
Quick Facts
ASX Code: BCT.AX
Shares on issue: 78.5m
Options: 29m (26m are employee options)
Fully diluted: 107.5m
Fully diluted market cap (@ $0.24): $25.8m
Cash: $872k (+ $500k loan being repaid early 2012)
Cash burn: ~$400k / quarter
Company Background
Bluechiip recently listed on the ASX raising $3m. The company has raised a total close to $10m to date and has received several million dollars in government grants and concessions. The funds raised in the IPO were used to purchase necessary equipment for the large scale manufacture of chips and working capital.
Bluechiip Technology Platform
The Bluechiip technology is a wireless tracking chip based on MEMS (Micro Electro Mechanical Systems) that can be embedded in glass or plastic and offers significant benefits over RFID or 2D barcodes. In particular it offers the following unique benefits:
- Operate at extreme temperatures (-196°C to +200°C)
- Sense / record the current temperature
- Immune to gamma radiation
- Frost resistant
These properties make the Bluechiip technology ideally suited for inventory management of bio-specimens, where extremely low temperatures are common and the inventory is irreplaceable. Such bio-specimens include; cord blood, stem cells, IVF samples and other human / animal tissue samples. Many of these specimens have a high value or a irreplaceable, so ensuring they are tracked correctly and aren’t unnecessarily removed from cryogenic storage is essential.
Bluechiip are also developing the necessary reader hardware and software to provide a complete end-to-end solution for managing bio-specimen inventory.
Initial Market Potential
The company is initially targeting production of test tubes and vials for the healthcare industry as there is an immediate need for a better solution. The healthcare market offers high margins that can support a premium product, providing a solid earnings base for the company to expand from.
As the company states in the Prospectus:
In the USA alone, there are thousands of cryogenic storage facilities located in hospitals, pharmaceutical companies, universities and research laboratories. It is estimated that there are in excess of 300 million tissue specimens from more than 178 million cases stored in cryogenic facilities in the USA alone, with specimens accumulating at a rate of more than 20 million specimens per year. Cryogenic facilities are also growing globally, with Europe being a major focus.
In the most recent AGM presentation, the company provides further detail on the market size:
Over 1 billion biospecimens stored in biobanks and biorepositories around the world and growing at >100M samples pa
Additional products in the pipeline to service the healthcare market include:
bags, slides and cassettes with integrated Bluechiip tags which encompass pathology, blood products, clinical trials and diagnostics
Other Market Potential
The Bluechiip technology is a platform technology. While initially targeting the healthcare sector, the same solution can be used across a wide variety of industries. These include security, defence, cold chain logistics and aviation.
However, the company is currently focussed on securing its advantage in the healthcare sector before becoming distracted by these other opportunities.
Current Agreements
The company has recently signed collaboration agreements with Corning and ATCC to evaluate bringing a premium product to market utilising the Bluechiip technology. Both companies are currently leaders in their respective markets and anticipate completing this evaluation processes by early 2012.
ATCC currently stores 10m biological samples over 200 freezers and has other commercial products that may incorporate the Bluechiip technology. Given the reputation of ATCC, their uptake of Bluechiip technology would be an important commercial validation of the technology.
Corning is a market leader in the production of cryogenic vials used by bio repositories and researchers across the world, with a current market capitalisation of $US24bn. A deal with Corning would potentially involve the development of a new premium product line that incorporates a Bluechiip in each vial. This would allowing end users access to the technology through the extensive distribution network of Corning with access to the Bluechiip reader hardware and software through other distributers.
A third “leading biorepository and biobanking services provider” has also signed a collaborative evaluation and pilot agreement. Details of exactly who that company is or what commercial potential they will offer Bluechiip has not been released to market at this stage.
STMicroelectronics has been selected as the manufacturing partner to produce the chips for sale. STMicroelectronics is a multi-billion dollar company with extensive experience manufacturing MEMS chips.
A manufacturing partner is still being selected for the production of the reader hardware.
Potential Earnings
At such an early stage in the commercialisation phase it is too early to provide any robust earnings estimates. The cost of manufacturing is not public and the price or margins of the final product is not yet defined. That being said, we can evaluate some scenarios to gain an insight into the potential of the Bluechiip technology.
Below I look at a number of assumptions for the initial cryogenic storage market the company is initially targeting. This ignores the sales of reading hardware and software, revenue from collaboration agreements and sales of other Bluechiip tracking products (ie: embedded in racks, cassettes, bags etc.)
It’s also important to note that the company operates from a fairly low cost base and is outsourcing all manufacturing. This allows the company to rapidly scale up earnings to meet demand by utilising the domain expertise of others.
Assumption 1 - Conservative Margin
Price / Chip (Attributable to BCT): $0.60
Manufacturing Cost: $0.30
Margin / Chip: $0.30
Assumption 2 - Optimistic Margin
Price / Chip (Attributable to BCT): $1.20
Manufacturing Cost: $0.10.
Margin / Chip: $1.10
We can now look at two different scenarios.
Scenario 1 - First 12 months of sales
Assume that in the first 12 months the collaboration agreements announced to date are successful. We could see sales of 2-3m Bluechiip vials for each of Corning and ATCC. Assuming 5m sales (half-way point) would give gross earnings of $1.5m (conservative) - $5.5m (optimistic)
Scenario 2 - Next 3 years
Assume that Bluechiip can capture 5% of the 1 billion biospecimen market worldwide. That would equate to 65m chip sales over 3 years. This would provide $19.5m of earnings (conservative) - $71.5m (optimistic). Assuming half of those came in the third year, the company would be selling 30m chips pa by the third year.
In reality there will likely be multiple price points for chips depending on their features (temperature sensing, memory capabilities etc.) which will impact the manufacturing cost and end market price.
Potential Valuation
In the context of the above potential earnings estimates, lets assume the company can reach sales of 10m chips / annum with a gross margin of 0.50 within 2 years. Assume the sales of reader hardware and software can cover administration / management costs.
That would provide EBITDA of $5m pa. Assume a PE of 20 (high growth company) and we would have a market cap close to $100m = $1 / share fully diluted. That would provide an annualised return over 40% pa with plenty of upside remaining.
Potential Timeline
Here is a hypothetical timeline of events assuming all goes well with the company’s commercialisation plans.
- Late 2011 - Further details on 3rd collaboration agreement
- Early 2012 - Conclusion of existing collaboration agreements
- Early / Mid 2012 - Initial product sales
- Mid / Late 2012 - Capital raising to meet demand / expand product offering
- Late 2012 - Cash flow positive
It’s important to note that the best laid plans almost always take longer than initially expected. This is especially the case with new technologies and startup companies.
Company Risks
As is common with many small caps on the ASX, liquidity is an issue. There are many days when BCT doesn’t trade making entry and exit a difficult process.
Funding will continue to be an issue for the company. It raised the minimum subscription in the IPO and only has sufficient cash to last to the middle of 2012 at current burn rates. A capital raising may be necessary to fund manufacturing of initial customer orders or to fund working capital in the near term.
Summary
The company already has some very large market players evaluating their technology. At this stage, it appears quite likely that at least one of those companies will take up the Bluechiip product in some capacity.
Provided that happens and the product works as promised, there is fairly limited downside on the current market capitalisation. However, the upside potential is many multiples of the current price - which is why I see this as a good risk / reward investment over the medium term.
As illustrative above, until the market is informed of manufacturing costs, price points, expected volumes and has some commercial partners it will be difficult to determine if BCT.AX is worth $0.30 or $3.00.
Important Notes
Bluechiip is speculative in nature and none of the above may eventuate. It is likely that some (or all) of the assumptions outlined will prove to be inaccurate. Please read the About page for a full disclosure on this post, NOT being financial advice or a recommendation to buy or sell this stock.
Disclosure
I currently own shares in Bluechiip.
Useful Links
- Bluechiip Website
- Corning
- Cryogenic Vials currently sold by Corning
- ATCC
- STMicroelectronics
- Analyst Reports
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