Monday, August 13, 2007 2:18:03 PM
By Rich Smith August 13, 2007
Tiny biotech-cum-subzero-warehouse ViaCell (Nasdaq: VIAC) has gotten a chilly reception lately. Despite rising sales at its trademark ViaCord umbilical cord blood storage service, and gross margin from this service rising in tandem, the firm's operating and net results remain mired in thick red ink.
While that's poetically appropriate for a blood-storage bank, it's disheartening for investors. (In fact, one such investor wrote me after last week's Q2 earnings release to complain that he was "not satisfied by management.") For my part, however, I come today not to bury ViaCell, but to praise it. I see a light at the end of this umbilical cord.
Sales soar, costs cut
ViaCell may have disappointed Wall Street's finest, and investors who relied on the analysts' prognostications, when it reported just 18% sales growth in the quarter. But considering that ViaCell warned us to expect "lower" sales growth in Q2, I think complaints over seeing that promise fulfilled are ungracious. After all, the firm did still deliver double-digit growth.
Granted, ViaCell is continuing to overpay for that growth, with sales and marketing costs 19% higher than last year, and once more outpacing growth in the sales they're meant to drive. But CEO Marc Beer is sticking to his guns on previous promises that sales will "accelerate in the second half of 2007 and [reach] the mid- to high-sixty million dollar range" by year-end. Beer cites the firm's cooperation with maternity apparel retailer Mothers Work (Nasdaq: MWRK) as contributing to growth prospects, and says he's already seeing "early stage traction" from this collaboration.
Lesser losses
Meanwhile, the firm has cut costs in an effort to accelerate its march to profitability. Losses for the quarter amounted to just $0.09 per share, half of last year's Q2 loss, and less than analysts predicted. Granted, most of the cost-cutting came in from a single one-time item: a "$2.2 million credit related to a reduction in contingent liabilities recorded with the acquisition of Kourion Therapeutics in 2003." But ViaCell also cut its general and administrative expenses by 14%, even as sales rose. (Less attractive, I fear, is the firm's move to cut R&D by $1 million -- rarely a good idea in a high-tech business. But perhaps ViaCell aims to pick up some of the R&D slack through cooperation with firms such as Johnson & Johnson (NYSE: JNJ), with which it's collaborating on new means of stem cell delivery.)
See the light?
Most encouraging to Yours Fool-y, however, is Beer's projection that his firm will become cash flow-positive in H1 2008 -- one year from now. It won't be an easy promise to fulfill. After all, the firm used more than three times as much cash in H1 2007 as it did in H1 2006. But a Fool can still hope that Beer will prove as good at fulfilling his promises about good news as he proved in delivering the bad news on schedule last week.
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