Cryo-Cell Looks Like a Cool Investment

I've been thinking about opening a position in Cryo-Cell (OTCPK:CCEL), which is primarily engaged in processing and cryogenically storing umbilical cord blood and the stem cells therein -- and which has recently started expanding it's offerings to include a similar service for placental stem cells. The company, unlike most others that are related to stem cells, is profitable but not cheap, and while it has a good track record of steady growth it has not yet shown the really significant growth of which I think it's capable.

Now, if you've read many of my postings you'll know that I'm not crazy about buying "penny stocks" or OTC companies. I have made exceptions, and SpaceDev, for one, is a company that I'm happy to own and that I think has great prospects, including the potential for listing on one of the major exchanges in the next year or so. CCEL, by my initial judgement, falls in this same camp. They do file with the SEC and their filings are quite complete, and they are profitable and growing. They are also right now roughly the same size as SpaceDev, fighting to make it up to that magical $50 million market cap that makes the exchanges start to take you seriously. Truth be told, their growth and income are much more predictable and stable than SPDV -- and they are certainly worlds better than many of the fly-by-night operations and shell companies you see lurking around the OTC and pink sheets markets. But still, buying these less liquid OTC companies is a risk that I'm definitely aware of.

Cryo-Cell operates a pretty simple business that comprises two core services -- they provide the materials and instructions to families for collecting and shipping their infants' cord blood (the messy work is done by the doctors and nurses in the delivery room) and they process it for an up-front fee, then they store it in appropriate cryogenic fashion according to FDA standards and charge an annual storage fee. The key things to keep an eye on are the number of new customers added to their "installed base" and a steady percentage of those customers who continue paying their annual bills.

My wife and I are Cryo Cell customers, which is why I know about this company. I think the next generation of relatively well-off parents will continue to want to make the small investment to preserve their cord cell blood and, hopefully, placental stem cells in ever greater numbers. And once that investment is made, it seems silly not to keep paying the $100 or so a year for storage -- who knows if you might need it someday?

Although CCEL is quite a small company, they are by far the dominant company in this particular niche of the blood bank/stem cell business. They have a chart on their website that compares the services and costs of its competitors. As of a couple years ago when I registered for this service and researched all the providers, I can vouch for the accuracy of their representations of their competitors. Cryo-Cell really does offer the most advanced storage facility (they're the only ones with a facility that fully meets the FDA's new standards), the feeling of stability that comes with having the largest bank, and somewhat better pricing than their competitors. That's why we chose them as customers.

So I'm fairly certain that as this trend of cord-blood storage and stem cell awareness moves forward, Cryo-Cell should benefit significantly more than it's competitors if they're able to maintain their competitive position.

What will move this trend along are a few things:

1. News spreading about successful use of cord blood stem cells. Cryo Cell has only had about a dozen people withdraw their cells for use so far and I don't think they have reported any overall results, but they do have some success stories that they share -- example here. It's important that that continues, whether it's evidence of those cord cells curing a child or helping a family member. Their investment in Saneron is a clear demonstration of interest in moving this science along to show efficacy. Once efficacy is shown, it will only be a matter of time before storage becomes commonplace.

2. Stem cell advancements in general. Cryo Cell thinks they may be up for some big government grants for setting up a national stem cell registry -- that's still very unclear, but certainly possible. Many people already believe that stem cells will be the answer to many chronic diseases, but the more science and successful trials are released, the more stem cells will seem like a viable treatment option for all kinds of diseases, from diabetes to cancer. Scientists working with animals have already shown great results in treating diabetes and heart attack patients. When that happens, it really enters the public consciousness and the stem cells that are normally discarded upon birth will begin to seem more and more like a valuable commodity that families will want to protect.

3. Marketing and physician acceptance. This is already changing in my experience -- when we brought the kit in from Cryo-Cell to the delivery room the nurses were not at all surprised. They said that not many people do this, but it is happening more and more lately. This was almost two years ago, and at a pretty ritzy hospital that is well known as a great maternity center in the wealthiest part of Washington, D.C., and it's with these folks who can afford a one-time $1000 fee that Cryo Cell is making an impact at first. Cryo-Cell has been spending more on marketing of late, and they do primarily web, print, and referral marketing -- anyone who has children has probably seen their flyers at the hospital or doctor's office and ads in pregancy and parenthood publications, and they give incentives to current customers to refer their friends and family.

We had mixed impressions of doctors and their experience with the service -- they all knew what it was and were perfectly willing to charge a small extra fee to process the cord blood, but some thought it was a more valuable enterprise than others. That's probably inevitable for a service that is by it's nature at this point forward-looking -- unless you have someone in your family who might immediately benefit, you're thinking about how this might help with a disease or condition in the years to come. Physician education and marketing will continue to be critical as well, and evidence of the efficacy of stem cells and of cord blood stem cells will help to bring more physicians on board to help parents in making this decision (or even in learning of this service).

We chose Cryo Cell because it had the most advanced facility and a good track record and guarantee of security, but also because it was cheaper than it's competitors by a significant amount while offering the same service and reliability. They still have that price advantage over many of their competitors, but they may be able to use that to actually increase sales significantly as they roll their new placental stem cell service into the package ("for only a little more than our competitors charge for just cord blood processing, you can process and store both the placental stem cells and the cord blood for even more peace of mind").

In the end, Americans are spending more and more money on their kids' safety, entertainment and education. I think the number of people who will be interested in taking out what is essentially a $1000 one-time insurance policy with a $100 annual payment (the numbers are rough -- you lock in an annual payment when you sign up for the service, or you can prepay for an entire childhood) on the possibility of treating some scary diseases that will continue to grow dramatically. Especially if research shows in the coming years that this can help bodies recover from strokes, or help to treat diabetes or other significant diseases that people are afraid of. After all, one of the most popular new strollers among the urban chic costs more than $700, and even first time parents may be already well accustomed to $500 vet bills. In comparison, cord blood banking seems like just another good thing you can do for your child's future.

This company is making money, and has over the past two years refocused on it's core business of processing and storing stem cells -- they also have some overseas licensees who perform the same business and bring in some income, but the US is their core market and will remain so.

My main concern about buying right now is that CCEL is on a bit of an upswing thanks to some recent news. They released their quarterly report last month, which didn't have a lot of news and led me to think they're still trucking along with sales growth a little under 20% -- not bad, but not nearly as good as I think they can do in a few years. More importantly, It was also about a month ago that they licensed the exclusive right to the placental stem cells retrieval and storage technology and started planning to offer that service, and just a few days ago they had a long and very favorable article in Smart Money.

So, do I buy in now with a partial position, or do I wait and see if the price dies down a bit when news dries up?

This company to some degree seems to trade on general stem cell news as well -- for example, it tumbled a little when the Motley Fool article about ViaCell'sdisappointing phase one study of stem cells in cancer treatment came out, even though the association was a bit of a stretch. Is the risk that there will be good news soon, or bad news soon? It's very hard to say, but the company is gearing up it's PR machine to spread the news and they're making the rounds of the investment conferences, so I'll probably continue researching and, if I remain comfortable with management and their plan, make an initial purchase sometime in the next couple of days.