Celebrating our 24th year!
P.O. Box 133, Redding, CT 06875
May 12, 2005
LifeCell Corp.
(LIFC $12.40, NMS)*
Year Ending December 31st, 2001 2002 2003 2004 2005E
Revenue ($ millions) 27.8 34.4 40.2 61.1 88
Net Income ($ millions) (3.7) 1.4 1.2 4.3 9.8
EPS, Diluted ($/share) (.20) .06 .05 .14 .29
Avg. Diluted Shares (millions) 18.2 24.7 26.6 32.0 33
LifeCell develops and markets products made from human tissue for use in reconstructive, urogynecologic and orthopedic surgical procedures to repair soft tissue defects. The flagship product of our new recommendation is AlloDerm "regenerative tissue matrix" that can be used to surgically repair the body when there just isn't enough native tissue to close a wound or make the repair. To date, AlloDerm has been used in more than 700,000 tissue grafts and implants. An expanding body of clinical evidence supports AlloDerm's effective use in a variety of surgical application including repairing difficult hernias, reinforcing badly torn rotator cuffs, eliminating the need for autologous (your own) skin grafts in burn patients, safely replacing infected synthetic mesh in the abdominal wall, and repair after cancer surgery, especially breast reconstruction after mastectomy. LifeCell's patented tissue matrix technology makes it the leader in tissue regeneration. The process starts with donors and their families, whose gifts are recovered by LifeCell's partners at tissue and organ banks across the nation. This donated tissue then undergoes a multi-step process in which the cellular components that can lead to tissue rejection and graft failure are removed. However, critical bio-chemical and structural components of the tissue are retained, creating the ideal matrix/framework for organizing the same tissue regeneration process that the body naturally and continually undergoes to repair damaged or inadequate tissue. Because the processed tissue matrix remains in its natural biologically active state, AlloDerm is immediately recognized and accepted as human tissue, rapidly revascularizing, remodeling and transitioning into host tissue that grows and ages normally.
To "flesh that out" a little more- tissue (actually the first two layers of skin, the epidermal layer you shed continually and the thicker dermal layer right beneath it) is removed from donors but can't be used for tissue repair on any other person in that form because it would be rejected. It isn't like a heart where you can find matching donors. So LifeCell has a way to remove much of the epidermal layer and the things in the dermal layer that would cause rejection. What is left behind is the pure white skeleton of the tissue, if you will, which can be sutured into place on anybody without fear of rejection for, say, a complex hernia repair. The surrounding native abdominal tissue and nearby tiny blood vessels will then grow into this old structure, repopulating it, even using the old blood vessel channels. AlloDerm is basically a chameleon becoming whatever the surrounding tissue is. This is incredible technology. Say you have a bad rotator cuff tear. You sew it together, but it could tear again there, so you wrap a layer of AlloDerm around the sutured area and suture that in place as well and the tendon tissue will grow into and through the AlloDerm until it becomes like the tissue it is sutured to, providing the extra needed strength. While the biggest use is complex hernia repairs, surgeons are experimenting. One has even used AlloDerm as a last attempt to repair holes and defects in the heart… and it worked. Future applications the Company is working on include trauma procedures, cardiac patch, dural (covering of the brain) patch and GI procedures.
The Company
LifeCell was incorporated in 1992 and is located in Branchburg, New Jersey. Today its AlloDerm product accounts for about 75% of sales. The largest use is for complex hernia repairs with the balance coming from breast and other cancer reconstruction, burns and periodontal procedures. Originally developed for burn grafting, this now accounts for less then 10% of total sales today. Sales of AlloDerm, which are exclusively generated by its own 41 rep sales force, increased 62% in Q1 to $14.9 million. LifeCell's total sales for the quarter were $20 million, up 48% year-over-year and 23% sequentially, so use of AlloDerm is really snowballing. Repliform is a similar but more specialized tissue matrix product that accounts for about 8.5% of sales, though sales were off slightly in Q1. This urogynecological product is used for pelvic floor conditions and as a sling to lift and support the bladder to alleviate urinary incontinence conditions in women who have had damage from multiple births. Orthopedic product revenues accounted for about 9-10% of sales (up 58% in Q1) and are generated by GraftJacket and AlloCraftDBM. The former is the product used to reinforce rotator cuff and other tendon repairs and also in the repair of diabetic foot ulcers. Wright Medical is LifeCell's exclusive distributor for this product. AlloCraftDBM (exclusively distributed by Stryker) accounts for just 2% of total sales and is essentially AlloDerm freeze dried, shattered and turned into a putty to promote bone formation. The FDA has informed the Company that it believes this product is most properly considered a medical device and therefore would require 510(k) medical device clearance. All of LifeCell's other products have been accepted by the FDA (though not always immediately) as "HCT/Ps" (human cellular and tissue-based products) and thus don't require FDA approval for commercial sale. However the FDA does have regulations to assure accurate labeling, quality and so forth. LifeCell is considering whether to appeal or seek 510(k) clearance for this small product. In the interim the FDA is allowing AlloCraftDBM to be marketed.
Q1 was a bit of a blowout quarter to say the least. Analysts were out there in left field expecting EPS of $.04 and LifeCell knocked it out of the ballpark at the $.07 marker. That compares to last year's $.03. On the street there are now 4 Strong Buys, 1 Buy and 1 Hold. Nothing like beating estimates by 75% to get investors' attention, the shares popped $3 on the news. As a result of Q1 the Company cranked its EPS guidance up from a range of $.22 - $.24 to the range of $.27- $.31. At the mid-point, this would represent 107% growth over 2004. Similarly revenue projections were increased to a range of $84.5 - $91.5 million from earlier guidance of $71.5 - $75.5, and vs. last year's $61 million. I must admit to buying some shares on the spot even before I could do any due diligence, which as you can see checked out fine. The BI Rank eats all this up (relative strength, EPS growth, estimate increase, etc.) and cranks out an excellent rank of 10.7. While the PE on this year's earnings is around 40, this is dwarfed by the growth rate. Also note that preliminary estimates for 2006 are coming in around $.40 - $.45. The main risks here would be new competition, though LifeCell is by far the leader in its field; keeping quality control up so there is no infected tissue issue; and regulatory given the FDA is always stirring the pot. Volume is pretty good with $3.6 million of trading on Friday, but as always use tight limit orders up to $14. www.lifecell.com (908) 947-1100
Update
The market has a sort of split personality so far this year. While the blue chip Dow and S&P indices are off about 3%, the Russell 2000 and NASDAQ averages are off about 9%. Unfortunately we play in the latter sandbox and have taken some sand in the face since the last issue. In our biweekly Update Line of 4/18 we dropped our invested exposure to 70% from 80%. In a nutshell, the economy has cooled somewhat and we are now well past the 27-month average duration of a bull market, so it is definitely time to put up our antenna. As I noted previously, so far this year the market has failed the Santa Claus Rally, the first five days of the year and the month of January tests with decidedly negative performance. Also we have now entered the seasonally poorest 6 months of the year plus we are in the weakest two years of the four-year presidential cycle. Meanwhile the market worries about high energy and other commodity prices, rising interest rates, a big trade deficit, debt laden consumers, the never ending Iraq situation and, of course, the ever present risk of a terrorist attack. Other than that… we are doing just ducky. I think a 65% invested position is about right now. In addition to LifeCell, currently most attractive for purchase are SFBC, Paincare, Taseko, Continental, Envoy, Matria and Great Basin, plus Infocrossing as per text. The next issue goes on the press 6/18. Please keep an issue mailing envelope so that you will know your account #.
MATRIA* (MATR $27.65, +80%); BI Rank = 8.3 - Buy (770) 767-4500 GA www.matria.com (7/04)
Matria, a disease management company emphasizing self-insured employers, reported Q1 EPS of $.22 excluding discontinued operations ($.21 including), a penny better than the consensus. Sales at $77.6 million were about a million under analysts' guesses, but right in the middle of Matria's revenue guidance range. Also the Company reaffirmed that it expected to make $1.03 - $1.13 for 2005… vs. last year's $.70 (excluding adjustments and extraordinary items)… In other words: 2005 EPS is expected to be up between 47% and 61%. Furthermore I often grade conference calls and I gave this one an "A" for the upbeat tone. Matria expects Q2 to improve over Q1, and come in between $.23 and $.25. Heretofore unguided analysts, however, had been thinking $.26 for Q2, so I suppose that was a "disappointment," but hard to believe it was worth a 10% slash in price. Should the poor guesses on Q2 really matter if the Company hits the unchanged full year guidance representing EPS growth of 47% to 61%? Q3 is expected to improve further over Q2 and Q4 should approximate Q3. Matria took pains to remind listeners to its conference call that this is the way the seasonality unfolded last year as well. The call is on their web site and worth listening to.
Contracts tend to start up more frequently in Q1 meaning that quarter and Q4 are seasonally more burdened with the startup costs, with revenue recognition beginning late in Q1 and accelerating in Q2 and especially Q3. Meanwhile, Matria noted that its Disease Management offering provides an ROI of 7 times (think about that), so pricing pressure is not much of an issue. Furthermore, Matria's pipeline is long and strong. Based on what I heard I did not expect the stock to drop. The Company did everything right but it did not beat estimates nor raise guidance. Some crime. You would be hard pressed to find a better industry to invest in, especially if the economy starts to weaken at some point. While $.21 or $.22 might seem to be off to a somewhat slow start, it is a seasonally slower quarter that came in right on guidance and on analysts' estimates and Matria remains comfortable with full year guidance. To me the bottom line is, well, the bottom line. EPS growth expectation from 2004's $.70 from continuing operations to $1.03 - $1.13 is on track. Again, that's 47% at the minimum…any complaints? The shares remain a Buy.
SFBC INTL.* (SFCC $32.06 NNM, +157%); BI Rank = 8.6 - Buy (Sold 25% 6/24/04 at $28, +125%) (305) 895-0304 FL www.sfbci.com (Recommended 8/01)
SFBC conducts clinical trials for new drugs that need to prove safety and efficacy for FDA approval. It has been growing rapidly through a good balance of healthy organic growth and acquisitions. Exclusive of a non-recurring charge related to the early repayment of $70 million of debt (which cost $.10 a share) EPS came in at $.43, as compared to the consensus of $.38. This was a whopping 79% increase over last year. Revenues increased 159% to $78 million in the quarter over the year ago level. While PharmaNet, a large and nicely accretive acquisition, accounts for a good chunk of this, it should be noted that organic revenue growth in the quarter was an impressive 18.2%. Due to this acquisition, revenue is now about 1/3 from foreign soil including Canada and now also includes a fair amount of reimbursed out-of-pocket expenses. While these make revenues technically $97.1 million, the $78 million figure I used above excludes them as does the revenue guidance of $315 - $330 million, which the Company reiterated. SFBC did take its basic guidance for 2005 up by $.03 (it does not provide quarterly guidance), but this was offset by the dilutive effect of the stock offering which I mentioned in the last issue looked like about $.13 a share ( I was a little high on that, it's $.09). Unfortunately there are a few EPS adjustments to sort your way through and for more on that it is best to refer to the April 28th Q1 press release. However, not to unnecessarily complicate this, the Company's latest guidance, reflecting the offering and reflecting the amortization of intangibles stemming from the Pharma Net acquisition, but not reflecting the $.10 charge in Q1 for the early repayment of debt as this is non-recurring, translates into $1.70 - $1.78 a share for 2005. And the bottom line is that at the mid-point, this represents impressive 39% EPS growth over the $1.25 reported for 2004. If investors step back and look at the forest instead of the trees they'll see EPS growth that would be the envy of almost any company. Starting with 2000- $.54, $.71, $.93, $1.25 and around $1.74 forecasted for 2005… and the 2005 PE is under 20… any complaints? Unfortunately, investors have their own agendas and for some reason sold the shares down under $30 around the time of the earnings release, but the shares are coming back now and offer a great Buy in my opinion. For 18 times this years earnings you can buy a company that grew EPS 34% last year and is forecasted to grow EPS 39% this year- Buy.
AMERICAN HEALTHWAYS* (AMHC $38.47 NNM, +374%); BI Rank = 7.1 - Hold (Sold 25% 10/03,+173%; Sold 50%, -1%) 615-665-1122 TN www.americanhealthways.com (8/02)
American Healthways, arguably the leader in the field of disease management, climbed more than $6 since our last Update in a weak market until it banged its head on the $40 level and recoiled a bit to $38.47. There are no company developments that I am aware of and the stock is not rising due to increasing full year FY8/05 estimates as these have remained unchanged for the past 3 months at a consensus of $1.01. By the way, this compares to $.76 last year, so represents 33% growth. The PE on those earnings is 39. It is worth noting that the $1.32 expected for FY8/06 (which has not changed either) equates to a PE of 29 times earnings 16 months out. Perhaps the rise is simply due to new investors flocking to the story of Disease Management and American Healthways, the leader in this field (as evidenced in part by it being the only company to win TWO of the Medicare test projects). However on that front, the Company speculates that some part of the rise may have been the result of new Medicare Advantage rates which recently came out and were attractive in hopes that more HMO plans would have incentive to take on Medicare beneficiaries… and then AMHC could help those plans with disease management. I also wonder if American Healthways, a pure play in Disease Management, benefited from the upbeat nature of Matria's 4/20 conference call. The Company also continues to win its share of new contracts and contract extensions/expansions. AMHC has the wind at its back and I think if any stock deserves an above PE, American Healthways, which has a PE of 40 on FY8/05 EPS, is worthy- Continue to Hold.
ABLE LABORATORIES* (ABRX $25.59 NNM, +123%); BI Rank = 3.8 - Hold (Sold 50% 6/11/03 at $20.25, +77%) (212) 838-3777 www.ablelabs.com (2/03)
Able is a small ($115 million in revenues) generic drug company that goes for a lot of bunts and singles (smaller drugs) and has heretofore avoided the litigatious monster drugs that are fiercely "defended" by the innovator when they go off patent. That said an announcement this past Friday that the Company would partner with InvaGen to develop and market 6 generic pharmaceutical products targeting branded markets estimated at $10.3 billion… woo… represents a new direction for Able with a $115 million run rate. Five of these are Paragraph 5's which means they involve some patent challenge. One of the six has been developed and filed already, but no revenues are expected before 2007. InvaGen is a privately held generic development company located on Long Island (NY). Q1 results were also issued on Friday and were impressive. EPS of $.24 was up 140% over last year and exceeded estimates by a penny. Sales soared 43% to $30.7 million based on a slug of generic product approvals that came through the pipe in the later part of 2004. Since then however the company's R&D effort has been spread thin and focused on the preparations to move production to the new facility. Only one ANDA has been filed this year but more are expected later in Q2 and throughout the second half. The six currently pending target branded markets aggregating $500 million. In addition the Company has 15 products under development targeting $2.5 billion. Despite its excellent performance, the Company notes that competition is intense for opportunities coming off patent, including from low cost foreign sources, and branded companies are fighting back with their own generic versions. The Company has done very well in this environment, but the dearth of applications pending at the FDA (just 6) caps how many can be approved this year. Also the delay in filing ANDA's this year (at one point in November the Company forecasted filing 15 between then and the mid-year 2005), that could have restored this unusually depleted inventory at the FDA, could not have come at a worse time. Long-term of course the picture looks bright enough, but near-term I do not see enough new products coming on line to overcome normal price erosion of older products, especially in this competitive environment. Still, Able is sticking with its $125 - $130 million revenue forecast for this year. But higher SG&A has caused my forecast to drop $.05 to $.85 - $.90, and I think quarterly EPS is unlikely to top Q1 in the next few quarters. The BI Rank is a shaky 3.8. While I see near-term weakness because analysts have way over shot once again at $1.10 for 2005, the shares could be Held for the long-term.
PAINCARE* (PRZ $4.46 NNM, -2%); BI Rank = 9.5 - Buy (407) 367-0944 www.paincareholdings.com (3/05)
Paincare is a leading provider of cost effective, high-tech pain relief through the ownership or management of pain management physician's practices across the country. The Company also licenses pain management programs to unaffiliated practices and owns 4 ambulatory surgery centers conducting minimally invasive surgery focused on the relief of pain. The stock got off to a good start after our recommendation, then digested a run that had started from under $4 in March, and the stock has since been climbing back to about where we started. I think the big run digestion was complicated by a decline in the overall stock market, especially for small-cap companies. As I have said on our update line, the stock is a better buy today at these lower prices than it was when I recommended it because nothing has happened on any front to account for the retraction. Two funds were believed to be taking profits. The $.25 is still on track (vs. $.15 last year), the Company continues as it said in the Q4 conference call to work on an all debt financing with no equity component, and that is still the plan and in the works. A third of the way through the year the Company is right on pace for its target of adding 6 acquisitions and 15 services contracts. They have announced the acquisition of a Colorado Pain Specialists with 6 clinics in the Denver area and a 4th surgery center (well, 67.5% of it) in Lake Worth Florida. Combined these companies will add $8 million to annual revenue and $3.3 million to operating income. The Company sticks to a formula for virtually all of its acquisitions paying 5 times EBITDA using half stock and half cash, and of that, half of each is paid up front and the other half is paid out over three years subject to hitting certain performance targets. Paincare has also sold 5 pain care management programs (like EDX-Direct, MedX and its new Intra Articular Joint program) to non-affiliated practices. I expect Q1 should be fine when reported on 5/10 (the consensus is $.04) and the shares are a Great Buy here in my opinion. Earnings were due out on Tuesday, 5/10.
INFOCROSSING* (IFOX $14.50 NNM, -7%); BI Rank = 9.3 - Buy/See Text (858) 456-4533 www.infocrossing.com (1/05)
Infocrossing is a leading provider of selective IT outsourcing services, primarily taking on some portion of the mainframe computer operations of Fortune 1000 companies. While the Company does alright during good times, it actually prospers more so when times are tougher and IT departments have just been asked to cut 10%. Because Infocrossing's niche is to use operational synergies to offer a lower cost operating solution for the Company's computer room, Infocrossing becomes part of the solution and not an IT cost that would be cut. Infocrossing has come from a loss in 2003 to earning $.40 a share in 2004 on a near doubling of revenue, to a projection of $.72-.74 a share for 2005 on 65% revenue growth. That translates into at least 80% EPS growth this year. You will not find many companies with that kind of growth sporting a PE of 20 on 2005 earnings. The stock is acting like earnings aren't going to hit the mark, but visibility is pretty good here with long term contracts the norm. As we discussed last time IFOX did have to adjust its EPS guidance for a higher tax rate than originally anticipated (due to complexities of deferred tax accounting) and for a greater share count (in part because the stock price had appreciated so much and more dilution figured in and in part due to more than expected option conversions). However, it is worth reminding everyone once again that these are not cash items. The Company did not reduce its operating profit projections nor revenue projections. So operationally and cashflow-wise everything has remained on track. Guidance (and the consensus) for Q1 is $.11 and $.72 - $.74 for the full year on revenues of $37 million and $167 - $170 million respectively- IFOX can be Bought once management reiterates guidance (Q1 results are due out 5/12). If in doubt check the Update Line.
VENTIV* (VTIV $22.06 NNM, +29%); BI Rank = 9.0 - Hold (800) 416-0555 NJ www.ventiv.com (6/04)
Ventiv provides sales force teams to pharmaceutical companies on an outsourced, contract basis. Ventiv was due to report earnings the day we go to press (5/9), so too late to make this issue. Following some weakness after our last report largely in sympathy with the general market (there were no fundamental developments to account for it), Ventiv began drawing some favorable reviews. Around April 12th Zacks upped the stock to a 1 rating; Caris and Company initiated coverage with an Above Average, which was upgraded to a Buy on April 26th. Then Oppenheimer, who had initiated coverage with a 40-page Sector Perform back in late March (that coincided with a $1.50 hair cut for VTIV), upgraded that to a Sector Outperform on May 4th. So a fair amount of positive activity there. On the business front Ventiv also announced two new contracts- one this past week with Barrier Therapeutics to assist in marketing two of its dermatological products, Salage and Zimycan, and the other for a 50 rep team and other services (like sample management) to help Connetics sell its dermatology products. The latter was actually part of an announcement earlier this year that Ventiv had added 245 reps across 6 sales team clients. The Company expects to add 300 sales reps this year NET of those contracts that expire, as some always do. At any given time Ventiv is bidding on a 1,000 to 1,500 rep pipeline of work and typically wins 40 to 50% of that. Ventiv reiterated its full year guidance early last week of $1.03 to $1.09 including a recurring $.10 tax benefit (for at least the next 3 years). Analysts are at $1.11, perhaps betting that Ventiv will continue to raise guidance as 2005 progresses. I hope so as EPS growth without the tax benefit to $.93 to $.99 over last year's $.83 is uninspiring- Hold.
.... and so forth with an update like this for each of the 12-16 stocks we are following at any given point.