Value Play Seen in Great Basin Scientific, Inc.

Effects of Warrants Already Priced In
Link to News Story
  December 16, 2015
 
Great Basin Scientific (NASDAQ:GBSN) is a molecular diagnostic testing company based in West Valley City, UT.  Its primary objective is to provide cost-effective “sample-to-result” pathogen diagnoses of infectious diseases such as E. coli.  The company’s molecular diagnostics platform operates with distinct advantages over current technologies in terms of providing rapid results, furnishing information-rich results, simplicity, and low-cost.  The company’s primary goal is to reduce pathogen diagnostic time, resulting in reduced treatment costs and improved clinical outcomes for patients worldwide.
 
With proper patents and FDA clearance in the US, as well as comparable patents and clearances in the EU and emerging markets, global sales of Great Basin’s molecular diagnostics platform could easily top $100 million annually.  Back in 2013, researchers predicted the number of health clinics to rise sharply by an annual 20%-30% annual growth rate for several years as tens of millions of uninsured Americans gained health coverage under the Affordable Care Act (ACA).  Moreover, with the political winds favoring more economic prescription costs and treatment alternatives, Great Basin seems to have the right concept at the right time.  By targeting hospitals as well as clinics and labs, the company’s low-cost approach should engender significant worldwide market penetration.
 
While the company is not yet operating profitably, this year second quarter 2015 revenues increased by 31% over the same period last year, and third quarter 2015 revenues increased by 33% over the same period last year.  Year over year revenues increased by 111% from 2013 to 2014, and year-to-date revenues for the first three quarters of 2015 nearly total revenues for all of 2014.
 
Yesterday, Great Basin announced that the United States Patent and Trademark Office (USPTO) issued the company Patent 9200213 for the company’s compositions for signal amplification, a milestone achievement.  The company’s “direct-from-sample” pathogen detection method will now be patent-protected for use with proteins as well as nucleic acids.  The company now possesses five patents in the US and Europe.  The underlying technology improves assay sensitivity and provides for the detection of pathogens directly from clinical specimens such as blood, urine, and stool without the need for time consuming and expensive PCR (polymerase chain reaction) techniques; and it can now be used with proteins in addition to nucleic acids.  Using PCR, millions of copies of a section of DNA can be made in hours, yielding enough DNA for analysis.  PCR has propelled huge scientific endeavors such as the human genome project; however it remains cost prohibitive.  Great Basin’s pathogen detection method is the only patent-protected low cost alternative.
 
Back in October, Great Basin announced that it submitted its Shiga Toxin Direct Test to the FDA for 501(k) clearance following the successful completion of a clinical trial that met all of the company’s clinical objectives.  Upon clearance, the test will be the first and only stand-alone molecular diagnostic platform to detect the Shiga toxin producing E. coli and the serotype O157 pathogens directly from a patient specimen.  When compared to traditional blood culture methods, this panel allows for faster diagnosis and therefore more timely and appropriate therapies, leading to lower treatment costs and shorter hospital stays for affected patients.  According to company CEO Ryan Ashton, “Great Basin remains on plan with all 2015 and early 2016 product and customer objectives.”
 
A consistent source of pressure on share prices is the company’s disclosure in September that it sold 2,724,000 “Units” pursuant to a prospectus dated February 25th, 2015.  Each Unit consists of one share of Series E Convertible Preferred Stock and eight Series C Warrants.  Each share of Series E Convertible Preferred Stock is convertible into four shares of common stock at the option of the holder.  The Series C Warrants may be exercised for cash at an exercise price of $2.55 or on a cashless basis pursuant to a formula disclosed in the Prospectus.  In the event of a cashless exercise, the Company may settle any such exercise through the issuance of shares of Common Stock or through a cash payment.  The preferred stock and warrants became convertible on August 25th.
 
The effects of the outstanding Warrants can be seen in the interesting December it’s had so far: falling from a high of $15.54 on December 1st to a low of $3.33 yesterday, a drop of nearly 80%.  Based on the closing bid price for the Company’s common stock on December 1st, if all of the currently outstanding Series C Warrants were exercised pursuant to the cashless exercise provision, the Company would issue less than 60% additional shares.  This implies that the selloff resulting in an 80% share price reduction is well overdone; the effects of the remaining Warrants have been priced in and future upside in share prices is expected.  For this reason, we consider Great Basin a value play.
 
Moreover, because of the significance of the patented technology Great Basin possesses, we are working on two more related articles: a more thorough description of the history of the Warrants and more importantly, a more detailed estimate of potential market penetration for Great Basin’s products.  We expect to have the Warrant story published by Christmas, and the Market Penetration story published by New Year’s.
 
Disclosure:  We are long GBSN.  We do not have a financial relationship with the company.