Omrix's Wild Ride

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High-growth stocks can be hard to value. Not only are growing revenues hard to predict, but expenses can fluctuate wildly as the company grows.

That seems to be the problem with Omrix Biopharmaceuticals (Nasdaq: OMRI). Friday's earnings release sent the stock down almost 5%, but the results don't look too shabby to me.

Product sales were up 34% year over year. The biggest surge came from its biosurgical products, as its marketing partner, Johnson & Johnson (NYSE: JNJ), began to sell more Evicel -- its fibrin sealant used to stop surgical bleeding. Early in the quarter, the FDA signed off on an application to market Evicel in all surgeries. The approval is allowing Johnson & Johnson to increase the market for fibrin sealants and take market share from Baxter (NYSE: BAX).

Its new approved thrombin product isn't having quite as easy of a time in the thrombin battle of 2008. Omrix estimates that it's ahead of newcomer ZymoGenetics (Nasdaq: ZGEN), but both are trailing entrenched leader King Pharmaceuticals (NYSE: KG). The problem seems to be that, while both of the newcomers' human-based products have a better safety profile, King's thrombin -- which comes from cows -- has been used for so long that doctors just aren't worried about its rare side effects.

While revenue looked good, earnings continued to languish as selling, general, marketing, and administrative expenses continued to expand -- 27% of revenue this quarter compared with 17% of revenue in the year-ago quarter. Omrix is expecting that number to come down a bit and be closer to 22% for the rest of the year excluding nonrecurring expenses. Spending a little now to make a lot later is certainly a sound business strategy as long as expenses as a percentage of revenue trend down in the future.

Looking forward, Omrix is hoping to have a trial for its fibrin patch completed by 2009, which would put an approval in the first half of 2010. It's also expecting approval of Evicel in the EU later this year, which should help grow sales in 2009.

Don't focus on the stock movements of Omrix. As long as there is revenue growth, a healthy pipeline, and management keeps expenses in check, the trajectory should be generally up from here.