The Bull Case for LifeCell Corp.: Pig's Skin Means Potential Outperformance

| About: LifeCell Corp. (LIFC)

Americans around the country donate 22,000 tissue and organ samples post-mortem to banks across the country every year. This tissue needs to be used within 24 to 48 hours in order to remain in the high threshold of acceptance by a patient’s body.

But a company called LifeCell Corp. (LIFC) is extending the amount of time that skin grafts may be used for medical procedures. LifeCell makes human-derived tissue-based grafts for use in reconstructive, orthopedic, and urogynecologic surgery. The grafts made from 6,000 tissue samples provided to LIFC annually are frozen and available for use for an entire year.

The company’s main product is called AlloDerm, a tissue replacement that is used in 20% of major hernia procedures and post-mastectomy breast reconstructions. AlloDerm adheres to damaged skin and teaches it how to start growing again, and according to the company, hardly leaves a scar.

But 22,000 tissue donations a year is still low and leaves LIFC with a limited supply of natural material in order to make their grafts. The small supply of human tissue makes it almost impossible to use for frivolous plastic surgeries that have become the norm.

Although LifeCell already commands a market cap of $1.04 billion in the biotech industry, it could triple that with the introduction of its new product in 2007 called XenoDerm. XenoDerm uses pig’s tissue instead of human tissue, and offers a solution to the company’s limited supply problem. LifeCell could begin to market XenoDerm for use in cosmetic surgery, as it could reduce, or even prevent, hardening around breast implants.

290,000 breast enlargements occur every year. If XenoDerm works as it’s expected to, LifeCell could practically own the breast enlargement industry.

Of course, XenoDerm will be a blessing to burn victims and those undergoing major surgery, who now must wait years for skin graft donations, and undergo ten to fifteen surgeries with synthetic grafts that leave bad scarring.

How Do They Do It?

LifeCell was originally formed in 1986 to market Dr. Stephen Livesey and his University of Texas colleagues’ unique tissue preservation technology. This technology is called “cryopreservation,” where biological tissues and cells are freeze-dried without compromising structural or biochemical integrity. It also prevents any freezer burn on the tissues that could make the sample unusable.

Now, scientists at LifeCell can cryoperserve a variety of tissues, like dermis (skin), blood vessels, and nerves. They have created an “acellular tissue matrix” which is able to resist infection and rejection, be stored for long time periods, and have the strength of synthetics while still being pliable. These tissue matrices help burn victims, for example, regenerate lost tissue as naturally as it does throughout a human life cycle.

In essence, LifeCell makes regenerative human tissue that teaches normal yet damaged human tissue how to begin growing again.

AlloDerm is the company’s most popular product and has been available since 1994. This patented tissue product is useful for plastic surgery, general surgery, burn, and periodontal procedures. It can be used for anything, from “gingival grafting to abdominal wall reconstruction.”

The AlloDerm product has been used in more than 800,000 grafts and implants over the past decade according to recent information on LifeCell’s website. Its patented technology makes it the leader in tissue regeneration science.

In order for LifeCell to be able to create their product, donors and their families must first gift body tissues and organs to banks across the nation. LifeCell receives some of these donations and removes cellular components from the tissues and organs that could lead to graft failure or rejection by the patient. LIFC’s scientists preserve critical biochemical and structural components that help the body naturally regenerate the necessary organ or tissue. These components stay in their natural state and are recognized as human tissue and are able to easily transform into what is called “host tissue.”

The National Institute of Health [NIH] awarded LIFC a $1.1 million grant for research and development in 2003. The company currently has ten major research projects underway, helping the company to understand tissue and cellular engineering technology more thoroughly so that they can develop new products for currently unmet regenerative needs for patients. LIFC plans to branch into new markets, like breast reconstruction in the short-term.

Best of all, the company takes its sales profits and recycles them into research. In 2005, 14% of its product sales went into continuing tissue research.

Historical Evidence Points to Continued Upside

In one-year, the stock has returned 22.61%. It’s returned 338.66% in three years, and a whopping 1,571% over the past five years.

Volume continues to increase over the long-term. What I like most about LIFC’s stock chart is its comfort level with corrections.

The daily price chart for LIFC is phenomenal. Since April 2005 (when the stock traded for $9.15 per share) price has stayed very tight to the 10-day Moving Average for support. 200-day Moving Average support has been wholly consistent as well, as volume continues to climb, pushing past its average of 179,000 shares consistently.

LifeCell Corp. is a consecutively profitable company because of the growing demand for its patented technology. Over the past six quarters, they have been able to increase their revenue at 48% or higher clips.

Year-to-date for 2006, revenues are at $66.2 million, up 58% compared to the same six-month period in 2005. Net income is currently $0.27 per diluted share, or $9.2 million. In the first quarter, AlloDerm sales increased 69% to $25.3 million for the quarter. In the second quarter, they increased by 73%.

To further its business, LIFC secured a $4 million credit facility from Silicon Valley Bank in early January 2003, to help support continued research developments.

The company holds $61.7 million in cash and no debt.

Currently, LIFC’s trailing P/E is 67.35. That’s pretty high. But, its forward P/E going into 2007 is better at 36.21.

Future Outlook

Current analysts’ earnings estimates for LifeCell are as follows:

$0.16 per share for the current third quarter.
$0.18 per share for the fourth quarter.
A total of $0.61 for the 2006 fiscal year.

In its second-quarter earnings announcement, LifeCell’s forward-looking statement anticipated $143 million to $148 million in product revenues, compared to a previously stated range of $130 million to $138 million.

We should expect to hear more about LifeCell’s continued research. First on the docket is LifeCell’s XenoDerm version of AlloDerm derived from pig skin. Supply limitations will be lifted drastically for this company and its sales could go through the roof.

XenoDerm is so promising because many tissue banks do not particularly like their donations to be used for cosmetic surgery… a nonetheless burgeoning industry in the 21st century. XenoDerm will be made available to plastic surgeons around the country for suitable use, and could revolutionize the cosmetic industry.

According to LifeCell CEO Paul Thomas, XenoDerm is “the real platform” for LifeCell’s international growth, because of various market and cultural factors that make the use of human tissues problematic or unethical.

The company has proved that it can continue to turn strong quarterly profits based on its patent technology and specialized biotech field. Continued investor support can make this stock worth $70.00 per share as it begins to market its new XenoDerm product to alleviate limited human tissue supply. In the short term, I expect $35.00 per share from LIFC going into its third-quarter earnings announcement and its full fiscal year report.

Disclosure: Author does not hold a position in stocks mentioned

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