top of page
This site was designed with the
.com
website builder. Create your website today.Start Now
Search
  • mistermarketorigin
    • Aug 16, 2021
    • 23 min read

Precipio: Diagnosing a Multibagger?

Updated: Sep 1, 2021


Good morning to all readers. On this occasion, I want to share with you all an investment idea in a Micro Cap company in the Healthcare sector. I came across this company by using screeners. It has an interesting value proposition and it can become one of those companies that gives us that long-awaited multibagger that is so exciting. If I make a mistake when explaining medical terms, I would appreciate the kindness of readers to indicate the pertinent corrections.


REMEMBER TO SHARE THIS REPORT SO MORE PEOPLE CAN BENEFIT FROM THIS INVESTMENT IDEA AND BE BETTER INFORMED.


DISCLAIMER

All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be considered as a recommendation or as a guarantee of any specific outcome or profit.


With that, please enjoy this report on Precipio!


Definitions:

The following definitions will be useful to understand before reading this report. More definitions will be introduced throughout the post, if needed:

Test Panels: is a predetermined group of medical tests that serve as an aid in the diagnosis and treatment of a disease. It is not a single test, but a group of tests, and therefore these multiple tests that respond to the same clinical condition can also increase the chances of detecting that condition.


1. Executive Summary

Precipio Inc. (Nasdaq: PRPO) is a company that is around USD$60M of Market Cap. It was founded in 2011 and made its IPO in 2017. Its CEO and one of its founders, Ilan Danieli, has served in this role since 2011. Due to its size and relatively low Average Transaction Volume of 2.86M (just under USD$9 million per day), large management and institutional firms cannot trade with them with the ease of a Mid cap or Large cap. The company is not yet profitable, however, we have tried to look beyond its present situation and have found that its value proposition is especially attractive and has enormous potential. Its activity is focused on the diagnosis of blood-related cancer, which is why it has developed innovative products and services in this field. PRPO has an Shares Outstanding amount of approximately 22M and a Free Float of approximately 19M. Next, let's look at who makes up the group of its 5 largest shareholders:

Interestingly, the largest shareholder is David S. Cohen, one of the current non-executive directors serving PRPO.


The investment thesis that I propose for this company is the following: “PRPO is building a powerful cancer detection and monitoring platform known as HemeScreen, around which it is building moats that will protect the future Free Cash Flow. The investor who decides to bet on it must see beyond their current situation of unprofitability and must pay attention to the forging of those moats: the quality and recurrence of income is powerful and predictable”.


2. Company Overview

As stated, PRPO is focusing its efforts on cancer diagnosis primarily within the US market, for now. In the words of the company in its 2020 10-K, "The Company's business is to offer an integrated platform aimed at mitigating misdiagnoses". The company states that there is a cancer misdiagnosis problem: “According to a study conducted by the National Coalition of Health, this results in an industry with cancer misdiagnosis rates as high as 28%, which is failing to meet the needs of physicians, patients and the healthcare system as a whole”. In addition, they mention that it is the only company (of which they are aware) dedicated to solving the problem of diagnostic accuracy, while its competition focuses on low costs and short times.


PRPO offers two ways to solve the problem: through services and products. In the services branch, we came across three solutions: 1) Primary Diagnostics offers the PRPO academic network as the first diagnostic option when the presence of tumors in the patient is suspected; 2) SmartPath offers the PRPO academic network as a second diagnostic option, which means that they offer a second opinion when a first diagnosis has already been made; 3) the patented ICE COLD-PCR offers the possibility of performing a liquid biopsy in PRPO laboratories using an exclusive license for the use of this technology developed by the Dana-Farber Cancer Institute, Harvard University. Let’s consider the following before explaining this last and interesting point: in an ordinary biopsy, it is required to remove a tissue sample from the tumor for the diagnosis and correct selection of the treatment, which is done through a surgical process. However, during the fight against the tumor, the biology of this tumor can be modified in response to the treatment that tries to eliminate it, causing variations of the originally proposed treatment to be required, in addition to the fact that the same tumor can present different DNA variations depending on the area from which the sample is drawn. How are these tumor modifications diagnosed? In its documents, PRPO indicates that these variations are not usually detected and that the original treatment is usually maintained, since the detection would imply the practice of frequent surgeries for the extraction of cancerous tissue, something that is not feasible in people with deteriorated health. It is in this context that liquid biopsy comes to the rescue: tumors usually shed mutant cells into the bloodstream (which is information already known to specialists), however, traditional methods are not sensitive enough to differentiate between tumor and normal cells in a blood sample. ICE COLD-PCR technology is encapsulated within a chemical (reagent) used during the blood sample preparation process, which enriches (amplifies) the detected tumor DNA within the blood sample while suppressing normal DNA. This method might be better than a regular biopsy, since cancer cells from the entire tumor (which now become detectable) are received into the bloodstream and doctors don’t work with tissue samples from only a few regions. It is worth mentioning that the differentiator between PRPO's Primary Diagnostics and SmartPath is that it offers a network of specialists from the most prestigious institutions in the academic world.


In the product branch, we have the following: 1) HemeScreen is a set of genetic diagnostic panels that, at this time, offers panels for the detection of MPN (Myeloproliferative Neoplasia), AML (Acute Myeloid Leukemia), Anemia and CLL (Chronic Lymphatic Leukemia, soon available); 2) IV-Cell Cytogenetics Media is a universal medium that allows the simultaneous cultivation of all 4 hematopoietic cell lines (in simple words, it allows cells to be cultured in a controlled environment); 3) COVID-19 Antibody Test is a COVID-19 antibody test that is currently sold to organizations and medical centers. It should be noted that this last test has not been developed by PRPO, but by ADS Biotec, but that it has entered into an agreement with that company for its distribution in the United States and abroad. THEY RECOGNIZE THAT THIS PRODUCT DOES NOT CONSTITUTE AN ESSENTIAL ELEMENT IN THEIR BUSINESS MODEL, as it is temporary, due to the circumstances.


3. Investment Thesis

Now, having reviewed all this, why do I see PRPO as a company with an extraordinary future? To be honest, the branch that I see the most potential for is products. I understand that the diagnostic services it offers can represent an interesting source of income, however, its scalability concerns me. The laboratories where it performs its services are in New Haven (Connecticut, northwest of the country) and Omaha (Nebraska, north of the country), so I find it difficult to receive orders from areas far from those centers. To expand those services, it would require renting or buying land in other states, building the facilities and equipping the labs, and of course validating them with CLIA and CAP certifications so they can operate. It is a process that requires Capex spending and is hampered by sanitary regulations. HOWEVER, THE EXPANSION OF ITS LABORATORIES IS NECESSARY FOR THE COLLECTION OF NECESSARY DATA TO IMPROVE THE PRODUCTS OFFERED, SO THIS EXPANSION MUST BE ORDERED AND METHODICALLY PLANNED. In this regard, PRPO declares the following in its documents about its laboratories: “The second aspect of our business is the development of products / technologies that improve the commercial laboratory testing quality, lowers costs and significantly reduce diagnostic time to test. In support of our strategy, the Company’s commercial laboratory serves two functions. First, it serves our oncology customers by analyzing the patient biopsies received using the technologies we’ve developed. The goal is to provide them with a diagnosis rendered by an expert and as required an academic subspecialist. The second function of our commercial lab is to serve as an incubator for our R&D center to design, develop and test new technologies”.


Let's go to the product branch. Among HemeScreen panels, MPN has a low number of new diagnoses each year (approximately 20,000 people per year in the United States)[1]; AML presents the same situation (approximately 20,000 people per year in the United States)[2]; The Anemia panel is the most promising (between patient visits to the doctor for a first diagnosis and patients visiting the emergency department with anemia as a first diagnosis, approximately 3.7 million are registered each year in the United States alone, while it is estimated that 1/3 of the world population has this problem, we are talking about more than 2 billion people)[3]; CLL presents the same situation as the first two (approximately 20,000 people per year in the United States)[4]. The documents also reveal that the use of the panels speeds up and makes the diagnostic process cheaper than currently used methods. However, we must add a very important fact that isn’t revealed in a visit to its website, but by reading the company's reports: currently, they are working on a new panel that will carry their proposal value of the ICE COLD-PCR from its laboratories to the laboratories of other organizations. How is this understood? The company has developed the HSRR Program (HemeScreen Reagent Rental Program), which consists of signing a four-year contract with the client, which can be a laboratory or medical center, in which it agrees to rent the necessary equipment to carry out the tests with the panels and to pay monthly by acquiring the reagents necessary for the equipment to operate. At the end of the four years of monthly payments for the reagents, the customer remains the owner of the equipment. It is at this point that one question struck me: Is there any probability that customers will be able to purchase reagents from other suppliers once the contract ends? I contacted PRPO Investor Relations Department and their response was clear: the reagents are their property and the company is the only one authorized to provide them. What does this mean for the customer? That the tests that before had to be referred to outsiders due to their cost or lack of equipment, can now be carried out within the organization, which means that the income stays at home.


In the Earnings Call 2020 Q4[5], Danieli states about the product branch: “It (labs) also facilitates our ability to create, test and develop new products that drive the product side of our business. And this is where I think the real growth engine exists. The product side of the business offers unique opportunities we've never really faced before. First of all, proprietary products create a barrier to entry, not easily overcome by competitors. Second, these are B2B products with the current revenues from ongoing usage. And lastly, the markets for each of these products are huge, exceeding $100 million per year. Therefore, both parts of our company form a strategy in which we impact patient care, both internally in our labs and by creating products that can be used to achieve the same by outside labs”.


Returning to the above, observing the characteristics of HemeScreen and the HSRR Program, we have the following: a recurring payment from customers, the signing of a contract that ensures the recurring income of the same customer for at least four years, only suppliers of the reagents with which the equipment works, anemia panel (one of the most common conditions within the cancer spectrum and that affects billions of people), the use of HemeScreen generates income for customers (who previously referred to third parties) and it is faster and cheaper than the methods currently used, and if ICE COLD-PCR is introduced as a panel (they are already working on it), the frequent use of this for the first diagnosis and subsequent follow-up of the evolution of tumors in the patients, and lastly, all the panels that they will potentially add in the future. The business model around the HSRR Program makes me suspect that it presents the best margins of all its business segments (in the message received from them, they indicate that they cannot inform me of these margins because they are non-public information).


WHAT DOES ALL OF THE ABOVE MEAN?: WE ARE IN FRONT OF A POWERFUL MOAT!


Now I wish I could explain the potential in IV-Cell Cytogenetics, but I have found it difficult to understand it. The reader of this report with sufficient knowledge in this area could enlighten us in this regard: We would love to read your comments below! As for the Covid-19 Antibody Test, as it is not even its product, I do not see a potential within the next few years. I share the following extract from a Press Release released on April 24, 2019 by PRPO in which the potential of ICE COLD-PCR, IV-Cytogenetics and HemeScreen is discussed[6]: “The above mentioned technologies offer advanced testing at a low cost, presenting an appealing offering to various countries with developing economies around the world. Precipio estimates the annual available global (excluding US) revenue potential for each of these technologies may be in excess of $50M”.


4. Investment Details

Having seen all this, let's review why PRPO could be a good company to invest in, beyond the benefits of its products and services. It is a company that is not yet profitable, and therefore the cash generated by its operations is not enough, so it must resort to external sources of funding that allow it to keep the business afloat. At least, that was the situation until recently. On June 15th, 2021, the CEO announced that the company had terminated its equity line (obtaining capital through the sale of shares) with the private fund Lincoln Park Capital[7], an entity that had been providing them with working capital since 2020: “We are now in a position where we have significantly extended our runway, and we anticipate that we will have the ability and the resources to rapidly grow the Company without further capital raises to fund ongoing operations in the next 24 months”.


If previous years showed a strong dilution of PRPO, we now know that the company has entered a stage where it will be able to sustain itself, which means NO MORE DILUTION (or less aggressive dilution) IN THE NEXT 24 MONTHS (except for an extraordinary situation). The day this was announced, the price fell, something irrational from my point of view given the excellent news that this is.


On the other hand, I think it is important to draw attention to a fact that may not be well known: in March 2021, Ron A. Andrews, the CEO of Oncocyte Corporation, a company that could be considered a competitor of PRPO, joined the board of directors of our company. In some forums that I visited in search of information, the possible acquisition of PRPO by Oncocyte is speculated, although it could be any other. Let's consider this possible catalyst. In this regard, I also quote a statement from Mr. Andrews when he joined the board of directors[8]: “I am excited to join the board of Precipio as the team embarks on the same mission for physicians treating patients with various forms of cancer of the blood. HemeScreen is a great opportunity for the company and I look forward to mentoring Ilan and the team as they execute on their vision". Andrews, with all his experience and experience in the field, has noticed, as we have, the enormous potential hidden in HemeScreen.


Note also the information on sales segmentation that appears in 2020 10-K: “Patient diagnostic service revenue accounted for 89% and 80% of our total net sales for the years ended December 31, 2020 and 2019, respectively”. As can be seen, there is still great potential for the product branch to gain relevance and gain ground in the years to come. Regarding the above, we have the note in which the income projections are discussed[9]: “Precipio reaffirms the forecast that product income will reach approximately 50% of pathology income for the fourth quarter of 2021”. We noticed the potency of product revenue. For the sale of HemeScreen, PRPO has used webinars as the main means of marketing, along with face-to-face visits to medical centers and cancer laboratories. The same company has recognized that the restrictions due to the health emergency have contributed to the slow expansion of its products.


Finally, let's review Danieli's statements regarding his vision for PRPO expansion, contained in Earnings Call 2021 Q1[10]: “So what are the key drivers that enable us to continue achieving this growth. There are several factors I'd like to highlight to you today. First and foremost, we have a dedicated team that believes in our vision and delivers that message to our customers every day. Among our sales team, we have cancer survivors. We have people who have experienced the tragedy of misdiagnosis and how it can derail a patient's battle against cancer. The bar from one of my favorite speakers, the talented Simon Sinek. This is our why. This is the reason we get up for work every day. That passion resonates throughout the team and its power is sold by our customers. Second, we have a strongly differentiated value proposition. While our lab competes -- while other labs compete for price, cost and speed of results, we focus on accuracy. We believe that at the end of the day, the only thing that matters when we're delivering a diagnosis is to get it right. That's our duty to the patients, and that's why our company is good. In our field, when a mistake is made in approximately 1 in 5 patients, we've received above 99% accuracy. Unfortunately, we have a terrific lab and operations team that enables us to deliver that level of accuracy without compromising on other factors of cost and speed of results. So our customers get the best of both worlds. The third aspect of our success is the value we create for our customer, the physician. Through the various programs we offer, we ultimately help the doctor's practice to be more successful, grow and improve its financial strength. After all, a doctor that's armed with a correct diagnosis will likely take better care of their patients. And with technologies such as our HemeScreen for physician office labs, we are now providing them with a program that both helps them provide unparalleled patient care through rapid turnaround time as well as a new and profitable revenue source. […] On the product side of our business, HemeScreen continues to be one of our golden bullet products as we continue to add practices to the program. We are seeing solid traction within the market, and we continue to believe that by the end of the year, HemeScreen will be a substantial component of our revenue and a handsome contributor to our margins. […] We're also focusing on expanding our market penetration to 3 additional market segments to complement the physician laboratory markets we launched our HemeScreen offering. The first is the hospital market. There are approximately 6,000 hospitals in the U.S. Excluding the smaller hospitals that may not have sufficient volume and the larger institutional hospitals, we estimate there's a total market of approximately 4,000 hospitals that could be potential candidates for running HemeScreen in-house. Most of these hospitals either run the same test using alternative technologies resulting in poor turnaround time and even poor economics or they send them out, receiving poor turnaround times and no economics. We believe that HemeScreen is changing that landscape and can enable hospitals to bring the technology in-house, improving both turnaround time and providing economic to the lab. The second segment is large commercial categories. Although we've experienced the challenges, hurdles and the lengthy time line it takes to produce and incorporate the technology into a large laboratory, we believe HemeScreen presents an opportunity to deliver value to that segment as well. We will be exploring this market, which comprises of approximately 25 large laboratories in the U.S., and we hope to see some success in that field as well. The third segment is the international market. Now that we've seen the initial success in the adoption of HemeScreen domestically, in the latter part of this year, we intend to begin exploring the potential of expanding our offering internationally. After all, presumably, most, if not all, laboratories worldwide face the same challenges as U.S. laboratories do. As travel restrictions due to COVID gradually ease, we anticipate that some of the laboratories outside the U.S., which we've been in contact with, will be more open to exploring bringing this valuable technology into their own lab. […] Our R&D team continues to work on building additional panels and expanding the HemeScreen suite of product to provide solutions to other diseases. The AML panel is an extraordinary product, but it's not the last one because we are working on a strong pipeline of additional panels, each of them strengthening the overall offering of the HemeScreen product line. […] The combination of unacceptability due to the pandemic plus the lack of focus from laboratories due to internal operational issues has made the sales process slow and difficult but not impossible. We remain optimistic as to the potential of IV-Cell. The first sale is always the toughest one, but I'm confident that we will get there. We will, of course, continue to update our shareholders when we win our first customer”.


IF YOU ARE FINDING VALUE IN THIS REPORT, REMEMBER TO SHARE IT ON YOUR SOCIAL MEDIA! LET’S DEMOCRATIZE QUALITY INFORMATION!


5. Industry Overview

Now, we must be aware that every company is part of an industry, and that therefore its fundamentals (such as its sales) and its market valuations are affected by these macro factors. For this we will use the information provided by Allied Market Research[11]. In 2020, the global cancer diagnostics market was valued at approximately USD$168.6B, and it is projected to acquire USD$280.59B by 2028, which equates to a CAGR of 6.9% from 2021 to 2028.


Defined by the entity that made the research, “Cancer diagnosis is a method of identifying different biomarkers, proteins, and some signs that lead to the identification of the presence of a cancerous tumor”. Cancer diagnostic procedures include biopsies, endoscopic examination, surgery, and genetic testing, among others.


Regarding the segmentation of this market, we have the following categories: according to the type of the product, according to the application and according to the end use. Let's review in which categories PRPO participates:

  1. Depending on the type of product, the market forks into consumables (kits, reagents, etc.) and instruments (used machinery that works together with consumables). PRPO is found in both groups with HemeScreen.

  2. Depending on the application, the market is divided into breast, lung, pancreas, skin, blood, prostate, etc. cancer. Originally, PRPO is focused in blood cancer, but with the ICE COLD-PCR technology, the company's products and services could potentially be used across almost all (if not all) of the cancer spectrum.

  3. According to the end use, we have the segment of hospitals & clinics (largest segment), diagnostic laboratories, research institutes and diagnostic imaging centers. Through HemeScreen, PRPO can serve the entire spectrum of institutions. Next, I put an image that summarizes the above.

Having seen this, let's focus on the global blood cancer diagnostics market and draw on the information provided by Grand View Research[12]. Its market size is estimated at USD$2.5B in 2019, and its CAGR is estimated at 14.6% from 2020 to 2027. This indicates that this niche will grow faster than the entire cancer diagnostics market as a whole. According to the American Cancer Society, it is estimated that non-Hodgkin's lymphoma (NHL) is one of the most common forms of cancer in the USA, accounting for approximately 4% of all cancers in the country (it is estimated 74,200 people were diagnosed with this form in 2019). Next, we present a graph on the expected growth of the blood cancer diagnosis niche.

The proliferation of sequencing techniques such as Next Generation Sequencing due to the increasing cost of development and sequencing of the Human Genome Project in the field of genomics is expected to drive market growth. And what does PRPO offer? Cheaper, speed and precision. In this context, our company is configured as a disruptor.


6. Financial Overview

Having reached this point, it is important that we look at the financial X-ray that PRPO presents to us. Let's go quickly to visualize it.


Income Statement

Being a Microcap, as investors, we demand high growth rates. Since 2015, PRPO has grown its sales at a CAGR of 25.9%, which is acceptable for a company of this size. It should be noted that as of the writing of this post, for the 2021 Q2 period, a Press Release has reported revenues of USD$2.3M[13], which means a growth of 26.10% compared to the previous quarter and a growth of 75.84%. compared to 2020 Q2. We see that Costs of Goods Sold have grown at a CAGR of 20.6%, a slower pace than sales growth (which is good). I estimate that this cost growth will slow as HemeScreen gains more acceptance and its use becomes more widespread, given that the business segment has wider margins. Gross Profit, since 2018, has been growing significantly (from 7.9% to 22.3% in LTM).


After the above, we observe the situation of a company that has not yet reached profitability: Operating Expenses, Interest Expense, Legal Settlements that exceed the Gross Profit. We observed a negative Net Income, although it would be best to see the FCF, which gives us a better X-ray of the business. The EPS also shows us negative values. In the same way, the Operating, Net and EBITDA Margins are negative as it is an unprofitable company.


Balance Sheet

Cash has been improving in recent years, although it is worth saying that this has happened not because of cash received from operations, but because of capital issue. The Net Property, Plant and Equipment has been increasing due to the expansion of spaces for commercial purposes. Total Assets have experienced a severe increase, this largely because the item Other Intangibles (which includes intellectual property and technology) has begun to be recognized.


On the other hand, we note that PRPO, in the years prior to its IPO, was highly leveraged (in 2016, Long-Term Debt was approximately 4 times higher than Total Assets): its debut on the stock exchange contributed to giving them the resources necessary to deleverage, largely extinguishing the financial debt it had. Total Equity has been increasing due to periodic capital increases (Additional Paid In Capital) due to the need to cover operating expenses. We also notice the latter in the Shares Outstanding that have been increasing year after year (necessary dilution to continue operating). Finally, the Net Debt became negative in 2020, showing us a clear sign of financial strength and a notable improvement in its Debt-Equity Structure (currently 29% of liabilities and 71% of equity). The company has been operating with negative Net Working Capital for several years, which implies that it is using its suppliers to finance.


Cash Flow Statement

Cash from Operations has remained in negative territory during this time, however, let's look at a statement made in Earnings Call 2020 Q4[14]: “As HemeScreen revenues are beginning to build and our upfront investment costs are behind us, we see HemeScreen being a material factor in accelerating total reported revenues, gross profit and the time line to cash flow breakeven”. HemeScreen is a product capable of bringing the company's cash flows to its equilibrium point.


On the other hand, Capex spending remains at a minimum (expected in companies that barely show positive flows), as well as Cash from Investing. Similarly, it follows from the above that the FCF is also negative. Finally, we observe that the financing used by the company comes largely from the issuance of shares and not from debt, which provides a borrowing capacity that may be being reserved for future aggressive expansions.


7. Competition

PRPO, in its 10-K, recognizes its competition. In them, we find public and private companies. Of the latter we have no information about their situation, so we will focus on the former: Neogenomics (Nasdaq: NEO) operates a network of laboratories in the USA, Europe and Asia focused on cancer tests, which shows us that it is a business more expanded than ours and has a market cap of approximately USD$5.8B. As you can see, it competes with PRPO in the laboratory segment. NEO has two business segments: Clinical Services and Pharma Services. The first consists of the services offered in its clinics (the same as the PRPO services branch), while the second consists of the services provided to other companies for the manufacture of drugs. PRPO has not entered this last branch. In the Income Statement, we see a Gross Margin of 43% (the only positive), while the Operating Margin is negative and the Net Margin is equally negative, with the exception of the last twelve months (LTM), in which there are a gain on Interest and Investment Income of USD$91.51M. However, the business model built in NEO is not as scalable as that of our company with its HemeScreen.


Outside of this competitor, the others mentioned in the documents are much larger and more diversified companies that offer different types of tests in their laboratories (apart from carcinogenic ones) and are even in the drug research stage, so their business, revenue, costs and margins differ greatly from our company.


8. Valuation


At this point, I find necessary to remember the following:


All investment and investment strategies involve risk of loss. Nothing in this website should be construed as investment advice. Any reference to the past or potential performance of an investment is not and should not be construed as a recommendation or guarantee of any specific results or benefits.


I must point out that due to the unprofitability situation of the company (negative Net Income and FCF), using this data as a basis for valuation is absurd. Buying shares at this point means betting more on the qualities than the current financial situation of PRPO, which is trading at $3.07 at the time of writing this report. Using the information provided by Professor Damodaran, the historical average P / S of the industry (of the last 6 years) of Healthcare Products (the HSRR program places our company within this sector) is 4.65, while the P / S current PRPO is 10.40, so it would be overvalued according to this ratio.


On the other hand, if we review the historical average P / BV ratio of the Healthcare Products industry (of the last 6 years) according to the data of Professor Damodaran, we see that it has been 4.48. PRPO's Book Value today is USD$14.55M, so the target market cap would be USD$65.18M and its current market cap is USD$61.11M, which gives us a slight safety margin of 6.24 %, which is insufficient from my point of view. One catalyst for the action would be a takeover by a larger company, while another catalyst would be the approval of the full patent for its HemeScreen technology (for now, the product has a provisional patent), and a final catalyst would be closing a deal with a large customer.


THESE RATIOS APPEAR TO ME OF LITTLE USEFULNESS FOR THE TYPE OF COMPANY THAT IS PRPO. THE PURCHASE OF SHARES AT THIS POINT OF ITS DEVELOPMENT IMPLIES TO HAVE CONVICTION ABOUT THE BUSINESS MODEL THEY ARE BUILDING. IT IS WORTH INDICATING THAT IF PRPO DOES NOT MEET EXPECTATIONS FOR GROWTH, THE MARKET MAY SEVERELY PENALIZE IT. I CONSIDER THAT IF AN INVESTOR BUYS SHARES, THEY SHOULD NOT BE SOLD UNTIL THE COMPANY IS PROFITABLE OR WHEN MR. MARKET GOES CRAZY AND GIVES A RIDICULOUSLY HIGH AMOUNT.


Pros for an investment


1. PRPO's value proposition regarding HemeScreen is powerful: it captures revenue for labs, hospitals, and private practices that previously sent elsewhere. This product is highly scalable and with obvious generous margins.


2. This is a Micro cap of approximately USD$60M, a group of shares that is characterized by having an appreciation potential greater than Mid caps and Large caps.


3. Debt levels are almost zero, which gives it ample maneuverability when it comes to acquiring debt in the future.


4. The inclusion of ICE-COLD PCR within the HemeScreen panels would contribute to the product being used with astonishing recurrence, significantly increasing reagent orders.


5. Revenues have been increasing at a CAGR of 25.9%, while Costs of Goods Sold are increasing at a CAGR of 20.6% and Operating Expenses at a CAGR of 2.9%. Cash from Operations has increased at a CAGR of 10%, approaching positive territory.


6. PRPO's tiny size makes it unattractive for analysts to follow, creating inefficiencies in its valuation.


7. The quality of income from HemeScreen is magnificent: once a contract is signed, they have assured revenue (predictability) for at least four years, which creates a very high switch cost for the customer.


8. The more labs they open, the more data and information they have to launch new panels that make HemeScreen and its successor technology more appealing.


9. The news of the termination of the financing line in exchange for shares with Lincoln Park Capital would indicate a stop on the dilution that PRPO has been experiencing throughout these years (we will see this in the next quarterly reports).


10. On May 23th, 2019, Ilan Danieli voluntarily entered into a Long-Term Purchase Plan (it forces him to buy shares no matter how the business develops), this to demonstrate the confidence he has in the company[15]. This commits Danieli to bring the PRPO destinations to fruition, which is seen in his statements: “As someone who is entirely invested in the mission of our company, I’m delighted to have this vehicle that will enable me to not only benefit financially from the long term appreciation of the share price, but also to clearly signal to the market my confidence in the future of our business, and my commitment to what we are doing”.


11. PRPO promotes the Research Access Program. Let's see in its own words (on its website) what this program consists of: “Precipio will make available a limited number of ICE COLD-PCR mutation enrichment reagents (ICEme reagents) to cancer researchers who intend to conduct research in liquid biopsies and publish their work in peer-reviewed journals. Precipio will also offer access to their High Resolution Analysis (HRM) technology coupled with ICE COLD-PCR (ICP) for liquid biopsy. Precipio is interested in generating compelling studies and publications that will include ICP technology as a centerpiece of the study”. This is explained because PRPO understands that the massive adoption of its products and services is closely linked to the dissemination of these in specialized medical media, and is willing to provide everything necessary to external researchers (which also inspires us trust that its products do what the company claims they do and it is not a Theranos-style case).


12. Government regulations that can affect the fundamentals of the business (which establish regulatory moats) are usually slow and publicly discussed before being modified, so there is a considerable window of time for the company to adopt strategies that mitigate the effects of them.


13. The CEO interviews personally inspire me with confidence in theleadership of the company: https://youtu.be/c0HlisVWgFU ; https://youtu.be/Tn4BJNOOeKs


Cons against an investment


1. They have incurred losses since their inception and expect to incur losses in the near future. They are not sure if they will make a profit, and if so, if they will be able to sustain it.


2. They may need to issue capital to sustain their activities, and a failure to obtain it would delay, reduce or eliminate the development of their programs and advances, causing the limitation or cessation of their operations (the news at the bottom of the page helps alleviate concerns regarding this point[16]). This capital issue would dilute the current shareholders.


3. Their products and services may become obsolete due to the disruption of competition.


4. They are dependent on a limited number of key personnel, so if they are unable to attract and retain specialized talent, the business could be hard hit.


5. They will need to increase the size of the organization and may have difficulty managing growth.


6. The company depends on certain licensed technologies. They do not control them and any loss of rights could prevent the sale of their products.


7. All diagnostic technology development and clinical services are performed in two laboratories, and in the event that one or both of these facilities are affected by the termination of the lease, a natural or man-made disaster, operations could be seriously affected.


8. PRPO has minimum annual purchase commitments with its suppliers, regardless of whether it had profits or losses in a specific year:


IF YOU HAVE FOUND VALUE IN THIS REPORT, REMEMBER TO SHARE IT ON YOUR SOCIAL MEDIA! LET’S DEMOCRATIZE QUALITY INFORMATION!


For all that has been seen above and in honor of the transparency that I must have with my readers, I must communicate that I have long open positions in PRPO at an average price of USD$3.06 per share.


Without more to write,

May the Value be with you!


53 views
bottom of page