PerkinElmer and ViaCell: A Bloody Good Deal?

After the bell yesterday, PerkinElmer (NYSE: PKI  ) announced that it is acquiring umbilical cord storage company ViaCell (Nasdaq: VIAC  ) for $7.25 per share. That's a 54% premium on Friday's closing price.

On the surface, it looks like PerkinElmer overpaid for the company -- after all, ViaCell has yet to make a profit, although it was trying to get into the black in the first half of next year. With sales in the mid-to-high $60 million range expected for 2007 and gross margins north of 80%, ViaCell could be a cash cow waiting to happen.

ViaCell's biggest problem was that its selling, general, and administrative (SG&A) costs are through the roof. It doesn't matter how high a company's gross margins are -- it's impossible to turn a profit when the company's SG&A expenses exceed revenue. After adding research and development costs, the company was living in the red, just like the blood it stores.

On the conference call, PerkinElmer's management seemed more focused on what ViaCell was going to do for it than how PerkinElmer was going to turn ViaCell around. I guess in some respects, those two things are probably one and the same -- sharing selling costs and increasing brand recognition with expectant parents.

Amongst other things, PerkinElmer sells prenatal genetic screening tests. The purchase comes with a 55-person sales force with experience in OB/GYN offices, which should help PerkinElmer increase penetration into the prenatal market. PerkinElmer also plans to use ViaCell's method of direct-to-parents marketing to increase sales of its genetic tests.

PerkinElmer plans to sell the research and development that ViaCell was doing on its cell-based therapies -- much to the delight of fellow Fool Rich Smith, I would guess. I doubt the research is worth that much, but even if one of the other stem-cell companies -- Osiris Therapeutics (Nasdaq: OSIR  ) or StemCells (Nasdaq: STEM  ) , perhaps -- aren't interested in buying it, just getting the $13 million drag on the bottom line off the books should help the transaction work in PerkinElmer's favor.

It's clear that the merger is a good fit for the two companies. Whether PerkinElmer overpaid for that fit is yet to be determined. If the combined company can continue to increase sales by 15% to 20% -- as ViaCell has done in the past -- SG&A costs should eventually become a more manageable fraction of revenue, perhaps enabling PerkinElmer to reach its goal of making the acquisition earnings accretive by 2009.


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