LifeCell: Promising Products, Tight Float (LIFC)

New Jersey-based LifeCell (LIFC) markets products made from human tissues that are used in surgical procedures, particularly the reconstructive, urogynecologic and orthopedic surgical spaces. LifeCell's patented technology produces a unique regenerative human tissue matrix that provides a complete template for the regeneration of normal human tissue. LifeCell's blockbuster product is called AlloDerm, a dermal matrix made from human skin that is used in grafts. The doctors we spoke to Thursday night have told us that AlloDerm is a "hot product" whose "growth is bound to explode further."

Friday's 8% selloff represents a terrific buying opportunity, we think. Below are some of the key drivers we believe will catapult the stock further, potentially into the mid to late $30's by Labor Day: [click to enlarge chart]

1) LifeCell's products are differentiated and spread out over a plethora of different clinical applications. Such diversification cushions the negative impact shares could experience after unsuccessful product tests, always a vertiginous risk in the medical technology space.

2) The potential for LifeCell to penetrate the breast augmentation category is huge. In 2005, approximately 290,000 breast implant procedures took place -- a $75 million market, at least. LifeCell's current penetration in the breast reconstruction space is 25%, leading us to believe that significant upside exists. LifeCell is currently running tests to study the degree to which Xenoderm/Alloderm can mitigate capsular contractions (namely, scar tissue) associated with breast implant surgery. Further data findings should bode well for the stock, as well as enable the firm to crack open international markets, where end market demand is high but depressed by contamination fears.

3) Only 6 analysts follow LifeCell. A deepening socio-cultural obsession with physical perfection and aging bodies should force more brokerage houses to start coverage on niche players such as LifeCell, which generated $105M in sales last year through its 269 employees. LifeCell's current market cap is less than $1B, making it impossible for some portfolio managers/analysts to buy or cover the stock. With a $1B+ market capitalization, LifeCell should definitely grab more attention from the investment community at large and possibly instigate a new buying wave.

4) Our back of the envelope calcs show LifeCell earning $.65-$.68 EPS in 07 off $165-$170 million in revenues. Applying a conservative 40 x multiple (premium to industry mean multiple), we arrive at our $28 fair value for shares. We add $4 to our price target based on the stock's a) takeover appeal and b) enviable cash position ($43M in cash with zero debt). Our short term price target is $32 dollars and would consider pullbacks like today's especially enticing; we urge investors to HOLD onto this security.

Risks/Conclusion: We are incredibly enthusiastic about LifeCell's prospects, but would warn readers to a tight 33M float and 16% short interest. We expect significant volatility as a more competitive milieu materializes and LifeCell unloads new data findings on the medical community. However, deeper penetration into the breast enhancement area and continued success in the hernia market should send the stock to fresh highs, as well as attract attention from rival firms aiming to grow horizontally, supplier firms interested in vertical growth, and an analyst community overwhelmed by LifeCell's high margin portfolio (22% operating margins and 13% net margins).

LIFC 1-yr chart:

Comments

[CrossProfit]

Nice complication rate chart.

1) What is the source and who did the study. Also who paid for the study. This information is standard disclosure procedure on all medical products and devices.

2) There are no competitors?

3) Another article in agreement with yours -
stocksadvice.blogspot....

[borisb]

Worked on Lifecell during June. would like to add a few optimistic points.

#1) there seems to be some confusion about weither or not up coming competeting products are in fact “clones” from what i understand Tutogen efforts are derivative. also competiting products are no where near the “transplant” caliber because Lifecell has patented Cryogenic process the others may not use. Also, i know for a fact that Lifecell product is involved in R&D cocktails for next generation products with Stem cells, while Tutogen and the others are not.

2. i suggust going back and reviewing the way management increased guiadnace last quarter. the sales hike of 6% looks dull, but the cost controls suggust alot goes right to the bottom line. if sales guiance hikes another 6% in near future, then again profits may finally rock after being stalled for 12 years. Lifecell has under performed the T-Bill returns by 1/2 since 1992, for this the worlds largest tissue engineering firm or division.

2b. rich quarterly sales sequentials near $3-$4 million per quarter instead of near $2 million per quarter would help the shares advance at speedier pace. but it must be sustainable. they were quoted about greenfields of up to $500 million last summer in the Smart Money article.

3. Considering the stock chart was somewhat elevated near $32 recently and near $30 for past 2 months insider sales have been measureably tiny.

4. Lifecell was slammed to the $26s today a $6 dip and i am counting on a decent bounce. earnings report is in 13 days.

5. The current gross profits are about 70% but the pig tissue CGS supply is due in about 1-2 years. if effective this year would add 20-25 cents in after tax eps. would add 30-40 cents in after tax eps to 2007 figures. or company could use savings to price war clones from gaining traction.

6. Breast augmentation marketing is taboo because of the nature of tissue donors. But with pig tissue coming online, company palns all out marketing campaign.

7. new niche market for 2006 catalyst is trauma surgeries in the ER. nothing giant but another step forward!

My particulair curiousity with this is will current generation Alloderm product be able able to snowball into a $300-$500 million sales because of easy greenfield penetration, and what will the sales block be for the next generation alloderm product thats combined with stem cells for advanced tissue engineering products. is that another $200-$500 million sales block? If LIFECELL pulls in $1 Billion this way, would that company sell for about 5-10 x sales. A market cap of $5-$10 Billion vs. todays $900 million-ish? It looks fairly likely.

During 2003, the government of Austrulia set up at institute to develope stem cell products with $50 million grant and invited Lifecell’s Alloderm in on the R&D. at didnt mean much at the time because it wasnt clear how special is alloderm. Word has just come out in June 2006, by the leadership of the institute that Alloderm is being used in the nerve tissue products. what a special product. Tutogen and the wanna be clones just forget it.

the stem cell insititue in Australia is planning to use the alloderm acelluar matrix to be a foundation or mesh for the stem cells. so its the mother alloderm tissue with the small delicate stem cells insereted into the foundation. i assume next generation tissues might even include organs if they get the stem cells right. vascular grafts.

Lifecell has the same gross profits and similiar seqentials as Intuitve Surgical, and has multi application drivers as well. please the next gneration stem cell play. but the price to sales ratio for LIFC on last quarter revenue block is about 30x while it is about 55x on Intuitive Surgical. suggesting more room to upside.

[RajeevMantri]

The 16% short interest might actually work in favour for the bulls. Here's what happens - as the price falls, people buy the stock to cover their shorts, and the stock stops going down. Since 16% short interest is pretty high, this is likely to happen. Doesn't make sense shorting a stock if too many people are shorting it.

Seems highly speculative and risky to me. There are better companies to invest in.

[borisb]

wow. Lifecell reported 19% sales sequentials in the second quarter
and guidance was raised. it doesnt get any better then this.
why the heck is the stock down to $27 rather then $36!!??

[DanielJacome]

up 33% since our article, we revised price target to 47 this morning

DJ - ceviche fund LP

[DanielJacome]

"However, deeper penetration into the breast enhancement area and continued success in the hernia market should send the stock to fresh highs, as well as attract attention from rival firms aiming to grow horizontally.." - 2006

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LIFC acquired for 18% premium, or $50/share....Unwinding coverage of name and downgrading on today's good news........ -2008