Investors in cord blood storage and research pioneer ViaCell (NASDAQ:VIAC) could be forgiven for wondering today whether "the patient will live." At first glance, the Q1 2006 news out of ViaCell certainly doesn't look good. Here's how the major numbers break down:
- Sales: up 20% year over year.
- Processing and storage costs: up 19% (in line with sales growth).
- Selling, general, and administrative costs (SG&A): up 46%.
As expected, the company remains solvent by virtue of one division and one division alone: its ViaCord umbilical cord blood storage unit, which provided $11.9 million of the quarter's $12.1 million in revenues. But even that good news, in this Fool's view, fails to outweigh the bad news.
To wit, as ViaCell increases in size, this quarter at least, it did not benefit from any scalability in its storage operations, the costs of which rose in tandem with greater sales. Meanwhile, SG&A expenses grew much faster than did the cash cow-storage unit's revenues. Now, ordinarily, I'd be willing to give ViaCell the benefit of the doubt and presume that much of the increase in SG&A costs was attributable to the wildly unprofitable biotech arm of the business. But ViaCell's earnings report quickly disabuses the reader of that notion, pointing out: "The increase in [S&GA] spending was primarily a result of the planned sales force expansion and higher marketing expenses relating to ViaCord."
In other words, marketing and administrative costs rose more than twice as fast as did the revenues they aimed to attract. Not a good trend there, folks.
ViaCell's dilution solution?
Then we've got the little matter of stock dilution. ViaCell noted that its net loss for the quarter grew slightly in comparison to last year, rising from $5 million to $5.1 million. Yet the firm's per-share loss narrowed from $0.17 to $0.13 per share. How is that possible?
Elementary, my dear patsy: The company diluted your stake. Between the end of March 2005 and the end of March 2006, ViaCell's weighted average diluted share count grew -- better sit down for this -- 22.9%. As a result, while the firm's total loss increased, by dividing that loss among more shares, ViaCell shrank the loss per each individual share. (As a sidenote, see Seth Jayson's recent column discussing how ViaCell peers StemCells (NASDAQ:STEM) and Geron (NASDAQ:GERN) are likewise "diluting the bejeezus out of the long-term shareholders."
I've got to tell you -- if this keeps up much longer, I'm going to get a lot less sanguine on this company than I've been in the past.
Fool contributor Rich Smith does not own shares of any company named above.
