Diamond Equity Research Releases Update Note on ProPhase Labs Inc. (NASDAQ: PRPH)
NEW YORK, May 16, 2024 (GLOBE NEWSWIRE) -- Diamond Equity Research, an equity research firm with a focus on small capitalization public companies has released an Update Note on ProPhase Labs Inc. (NASDAQ: PRPH). The update note includes information on the ProPhase’s business model, services, industry, financial results, valuation, and risks.
The update note is available here. Highlights from the note include:
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Operational Updates and Growth Catalysts for ProPhase Labs' Diverse Business Portfolio - ProPhase Labs is actively advancing its diverse business portfolio, addressing opportunities across its various divisions. Key updates from its manufacturing, genomics, and diagnostic businesses reflect the company's ongoing efforts to optimize operations and expand its market reach:
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Pharmaloz Manufacturing Expansion and Strategic Deals: Pharmaloz Manufacturing is poised for significant growth, engaging in late-stage negotiations to potentially sell its plant or pre-book future capacity of its second manufacturing line. The second line, expected to be operational by Q3, could, in combination with line one, generate $40-$45 million in revenue, with potential to reach $80-$100 million if two additional lines are added in 2025. The company has also secured two major deals worth over $5 million annually and is in talks with several more non-seasonal clients. Operating enhancements include the introduction of new liquid fill equipment and an average price increase of 15.2% for 2024 productions. Additionally, Pharmaloz has successfully passed a 3-year FDA audit and a 4-day UL Audit, reinforcing its regulatory compliance and market readiness.
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BE-Smart Esophageal Cancer Test Potentially Progress Toward Commercialization: The BE-Smart test for esophageal cancer is advancing towards commercialization, expected in the second half of 2024. Recent sample analyses by Stat King are validating the test’s high sensitivity and specificity. ProPhase Labs is finalizing CPT codes and negotiating with a potential global partner. The innovative 'advanced traffic light' diagnostic approach could revolutionize treatment strategies for Barrett’s Esophagus patients, potentially becoming a standard pre-endoscopy test. This market could be worth $7 - $14 billion if fully adopted. Collaborative efforts with Mayo Clinic are exploring additional biomarkers, enhancing the test’s diagnostic capabilities.
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Nebula Genomics’ Technological Advancements and Global Expansion: Nebula Genomics has expanded its business development team to boost global outreach and advanced genetic testing capabilities. Enhanced lab automation and staffing in New York have improved throughput and reduced processing times. The recent partnership with MenaDNA, Inc., along with other ongoing negotiations, potentially positions Nebula for significant global expansion, sustained by robust cybersecurity measures to protect sensitive genetic data.
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Project ZenQ-AI Pioneering Cancer Treatment Research: Project ZenQ-AI represents an innovative initiative in cancer treatment, leveraging the company’s extensive genomics database and insights from the BE-Smart test. By applying advanced AI algorithms, the project aims to discover new therapies, focusing particularly on antibody drug conjugates (“ADCs”). This strategic move harnesses AI to accelerate oncological breakthroughs, showcasing ProPhase Labs' commitment to innovation in cancer research. A large investment bank just recently projected that ADC therapy could represent a meaningful portion of the $400 billion oncology market by 2028.
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Equivir Clinical Trials and Market Expansion: Equivir is nearing a significant milestone with nearly 300 patients completing the 180-day study period. With over 329 active participants, preliminary results from 152 patients at the 90-day mark have been promising. Full data from the study is expected by the end of the second quarter. Plans are underway to ramp up production and launch Equivir capsules in the second half of 2024. Additionally, ProPhase Labs is exploring expanded distribution through partnerships, potentially reaching over 40,000 retail outlets.
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Pharmaloz Manufacturing Expansion and Strategic Deals: Pharmaloz Manufacturing is poised for significant growth, engaging in late-stage negotiations to potentially sell its plant or pre-book future capacity of its second manufacturing line. The second line, expected to be operational by Q3, could, in combination with line one, generate $40-$45 million in revenue, with potential to reach $80-$100 million if two additional lines are added in 2025. The company has also secured two major deals worth over $5 million annually and is in talks with several more non-seasonal clients. Operating enhancements include the introduction of new liquid fill equipment and an average price increase of 15.2% for 2024 productions. Additionally, Pharmaloz has successfully passed a 3-year FDA audit and a 4-day UL Audit, reinforcing its regulatory compliance and market readiness.
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Valuation - Despite a significant decrease in net revenue in the first quarter of 2024, primarily due to a drop in COVID-19 diagnostic services, ProPhase Labs’ current financial results do not fully reflect the company’s growth potential. Several strategic initiatives across its subsidiaries, including the expansion of Pharmaloz Manufacturing, advancement in the BE-Smart Esophageal Cancer Diagnostic Test commercialization efforts, and anticipated Equivir launch indicate a strong foundation for future value generation. The initiation of project ZenQ-AI, leveraging a vast genomics database for potential cancer therapies while actively engaging in material agreements within its genomics business, points toward substantial revenue growth opportunities. These material developments strengthen confidence in the company's valuation and future performance despite the current dip in earnings linked to the transient nature of pandemic-related services. We have updated our valuation model to reflect the updated financial numbers and re-assessed our SOTP valuation approach reiterating our valuation of $21.00 per share, contingent on successful execution by the company.
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ProPhase Labs Q1 FY2024 Financial Summary - For the first quarter of fiscal year 2024, ProPhase Labs reported net revenue of $3.6 million compared to $19.3 million in the same period last year, a decline primarily due to the cessation of COVID-19 diagnostic testing. Furthermore, the consumer products segment also experienced a revenue decrease of $1.1 million. Cost of revenues decreased to $4.1 million from $8.8 million, reflecting reduced operational scales, particularly in diagnostic services, where costs fell from $5.2 million to $0.7 million. The company experienced a gross margin loss of $0.4 million compared to a gross margin profit of $10.5 million in the same period of 2023. The diagnostic services contributed $10.0 million to the loss, and consumer products accounted for a $0.9 million decrease. Consequently, the overall gross margin plummeted from 54.5% in 2023 to (11.9%) in 2024. The fluctuation in the gross margin for consumer products has typically been influenced by changes in production volume, costs, and the timing of shipments. Operational costs were trimmed, with general and administrative expenses decreasing by $0.7 million to $7.6 million, while research and development costs rose by $128,000 to $272,000, indicating an increased focus on product innovation. As an overall result, the company reported a net loss of $6.3 million for the first quarter of fiscal year 2024. As of March 31, 2024, the company’s cash and cash equivalents stood at $1.7 million, down from $2.1 million at the end of 2023. The reduction in cash was mainly due to $5.1 million used in operations, $0.9 million in capital expenditures, and $189,000 spent on repaying debts. These outflows were partly offset by $3.4 million from selling debt securities and $2.5 million raised through new loans. With over $4.6 million in cash as of April 30, 2024, and no immediate plans for raising additional equity, the company is focusing on three potential liquidity events. These include a strategic acquisition at Pharmaloz, securing capacity on line two, and capital inflows from enhanced accounts receivable initiatives. Each of these developments could significantly boost liquidity in the near term. Looking ahead, ProPhase Labs forecasts a marked improvement in revenues and EBITDA in the latter half of 2024, driven by strategic enhancements across its subsidiaries.
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Near-Term Growth in Pharmaloz Manufacturing Poised to Strengthen ProPhase Labs' Market Position - ProPhase Labs is positioned for substantial growth as it capitalizes on the ongoing shortage of lozenge manufacturing capacity—a sector where it remains a crucial player. At the recent Expo West, the largest health and wellness event of the year, Pharmaloz stood out as the only participant offering future capacity for lozenge manufacturing. This positioning garnered significant interest from nearly a dozen companies, with negotiations currently underway with several prospects. These potential partnerships focus on functional lozenges that provide year-round benefits like vitamins and immunity boosters, promising to diversify and stabilize production beyond seasonal peaks. The anticipated completion of line two in the third quarter is expected to further expand revenue capabilities, particularly from the fourth quarter onwards.
About ProPhase Labs Inc.
ProPhase Labs, Inc. (Nasdaq: PRPH) is a diversified diagnostic, genomics, and biotech company seeking to leverage its CLIA lab services to provide whole genome sequencing and research directly to consumers and build a genomics database to be used for further research. The company also operates a contract manufacturing subsidiary and offers the TK Supplements line of dietary supplements, which are distributed in food, drug, and retailer stores. For more information, visit https://www.prophaselabs.com/.
About Diamond Equity Research
Diamond Equity Research is a leading equity research and corporate access firm focused on small capitalization companies. Diamond Equity Research is an approved sell-side provider on major institutional investment platforms.
For more information, visit https://www.diamondequityresearch.com.
Disclosures:
Diamond Equity Research LLC is being compensated by Prophase Labs Inc. for producing research materials regarding Prophase Labs Inc. and its securities, which is meant to subsidize the high cost of creating the report and monitoring the security, however the views in the report reflect that of Diamond Equity Research. All payments are received upfront and are billed for research engagement. As of 05/16/24 the issuer had paid us $95,500 for our research services which commenced 03/21/23, and is billed annually upfront, consisting of $35,000 for the annual subscription in the first year and $35,000 in the second year (in two $17,500 installments for six month periods paid upfront) and $2,500 for additional one-time research work for the first year coverage and $20,000 for a research report on a subsidiary of Prophase Labs Inc. and $20,000 for another research report on a subsidiary of Prophase Labs Inc. The issuer has paid us for non-research-related services consisting of $2,500 for attending a virtual conference. Issuers are not required to engage us for these services. Although Diamond Equity Research company sponsored reports are based on publicly available information and although no investment recommendations are made within our company sponsored research reports, given the small capitalization nature of the companies we cover we have adopted an internal trading procedure around the public companies by whom we are engaged, with investors able to find such policy on our website public disclosures page. This report and press release do not consider individual circumstances and does not take into consideration individual investor preferences. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in small capitalization equities including the complete loss of their investment. Investors can find various risk factors in the initiation report and in the respective financial filings for ProPhase Labs Inc.
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