$RPID Thesis Update into the 2H Reports
Rapid Bio Microsystems is the largest position in the Small and Micro-cap strategy and is also a holding in the All-Cap strategy.
The following is not investment advice, nor an offer to buy or sell securities. It’s for educational purposes only.
In our view, Rapid Bio Microsystems is a $10 stock slumming it as a $3 stock. But for it to get from $3 to $10 the company has to fundamentally perform. The following is our view of what needs to occur over the next two earnings reports.
As a reminder, Rapid Bio Microsystem’s main product is the Growth Direct System which is an automated incubator for the quality control division within pharmaceutical manufacturers. 70% of the top manufacturers are trialing or have adopted the system in limited form. It takes share from manual and less automated systems and its competitors with similar levels of automation are just beyond the nascent stage and my view, they will miss this next round of pharmaceutical investment meaning that RPID, today, and for the foreseeable future is a one of one.
Trump tariffs that have encouraged the announcement of significant new pharmaceutical manufacturing in the US have been extremely positive for RPID’s long term prognosis and have raised the long term upside. Our initial thesis was built on Rapid’s ability to convince companies of the benefits of implementing automation within their quality control processes. The Company has a solid IRR proposition and a relatively short cash on cash return for their customers due to reduced employee needs, improved reliability and detection of a tedious but important process, improved bookkeeping, and increased manufacturing throughput through reduced inventory holds. That sales pitch is more than possible in established manufacturing facilities, but some of those facilities have relatively low uptime and therefore improved quality control is less mission critical. For a new factory replacing manufacturing that had done elsewhere and is planned and built whole cloth, however, the sale should be significantly easier. If the announced investments occur, and the factories get built, Rapid’s Growth Direct Systems have a good probability of being installed - although those sales will come relatively close to factory completion, so 2-3 years out from today. In the meantime a GDS system helps reduce the cost of manufacture, standardizes the process across a manufacturing fleet, and will be adopted by companies who see the value proposition both within a single factory and across a manufacturing system and are willing to retrofit. Samsung Biologics, for instance, announced a standardization process for its fleet during the second quarter that I believe is suggestive and positive for RPID.
For a product like this, the company has two hurdles to adoption. The first is for the product to be good enough for Tier 1 manufacturers. It is. That’s finished business. The second is for the company to be on stable financial footing such that it is an undeniably reliable partner to those Tier 1 manufacturers. They’re working on that.
From a balance sheet perspective, the Company believes it has cash on the balance sheet and a debt facility to ensure that they have enough cash to get through their current cash burn and achieve sustainable cash flow positivity. The Company’s problem is their consumables’ gross margins. For other companies that sell a machine and a consumable, the machine is typically very low margin, or negative, while the consumable carries a very high margin. In RPID’s case, the machine’s gross margin is low but positive and the consumable’s is negative. The company would suggest there’s significant room to re-engineer the consumable to lower the cost and improve costs through better procurement. I believe both contentions, but it’s really hard to independently verify either and to understand the timeline to realization of either, even in broad strokes.
That’s an area the company can improve. Quite simply, the company isn’t doing investors or their customers who want to independently evaluate their prospects any favors with their current disclosure. To us, there’s no competitive advantage to be gained by keeping cost information close to the chest - given the lack of competition. Either the Company is gross margin negative today and into the future and there’s a bankruptcy filing coming in a couple years or the gross margin becomes positive and customers’ inhibitions to adoption decline considerably. Providing long term directional guidance makes investors more of a pain in the ass, but ultimately helps your sales people sell the product because as it they also have to sell the Company. Companies sometimes forget that being public is an advantage to be aspired to because, while investors can sometimes be greedy and a pain in the ass when they hold management accountable, their customers’ and potential customers’ concerns can also be assuaged by getting periodic and audited financial information and strategy updates. It’s a sales advantage we believe RPID should use and one that should the company seek to use, would be beneficial for the stock as well.
What is possible to verify is that RPID has a partnership with Merck-Millipore to help with sell the device. Millipore is good at this, but across industries, the historical track record of similar sales partnerships is mixed….at best. Rapid’s partnership does have a minimum threshold of machines, Milipore has to buy, predominantly in 2026, any bring forward to 2025, would both help the company scale more quickly and be a positive as to how the partnership is progressing. Also, and uniquely, Millipore is working with Rapid in a separate process to help Rapid with its consumables’ procurement costs. It’s interesting to have a much larger company help a much smaller company on both the revenue and cost side of the business. Particularly a larger company that also has a lower cost of capital. It seems there are obvious synergies but they remain two separate entities.
Progress on procurement is probably also 6 months away.
So given the keys to the story, I am looking for the following as Company reports its 3rd and 4th quarter.
Gross margin improvement on its consumables. It’s the ball game. If it improves and can get positive without Millipore, their potential customers can more easily adopt and multiple system orders can begin to flow through.
Increased financial transparency. More disclosure around, and line of sight to, further COGS improvement on both the consumable and the machine. With real concrete examples and timelines.
Any leakage of what should be a very good 2026 into 2025 or out to 2027.
Better than expected cash burn.
A multi-system deal would go a long way in improving investor confidence that many of the things that are supposed to happen, have been approved by a major customer and are going to happen.
Thanks.