After a brief rocket shot up into the sky, newly public ViaCell
The reason for these companies' swoon isn't entirely clear. ViaCell, the larger company by far, reported strong revenue growth and a noticeable narrowing of its losses last month. And Cryo-Cell actually reported some profits. In fact, Q1 2005 was Cryo-Cell's fifth consecutive profitable quarter, building on a fiscal 2004 in which the company recorded both profits under generally accepted accounting principles and positive free cash flow in every quarter.
Moreover, there's at least a possibility that the federal government is about to give both companies a helping hand. On Friday, the Institute of Medicine (an independent federal research organization) began taking steps to fulfill a 2004 congressional mandate to set up a $10 million national cord blood stem-cell bank program. Among other tasks, the project should involve drafting quality and licensing standards for the operation of private and public cord blood banks.
At first glance, this initiative might frighten ViaCell and Cryo-Cell investors. The prospect of tightened federal regulation threatens to raise the costs of doing business. And the specter of the Feds stepping in and making cord blood storage a federal program, squeezing out private players, can only make shareholders nervous.
But consider the bright side. Increased federal regulation may increase costs, but it will also raise barriers to entry into this business and perhaps begin to weed out some of the weaker players. That could divert business to ViaCell and Cryo-Cell. The second concern, that the government may preempt private industry in this field, seems unlikely to happen. The Bush administration is not known for its fondness for replacing private industry with government agencies -- the contrary would be more accurate.
It seems more likely that when or if the new government initiative ultimately moves forward, it would be limited to setting the quality standards already mentioned and perhaps requiring that cord blood companies submit data on what they're storing to a central database, to aid in knowing who has what stored where. Any fears that the government will step in and shut these companies down, however, are likely overblown.
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Fool contributor Rich Smith has no position, short or long, in any company mentioned in this article.
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