Monday, September 28, 1998
Serologicals Corp.
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Phone: 404-296-5595
Website: http://www.serologicals.com
Price (9/25/98): $24 7/8
HOW DID IT DOUBLE?
Serologicals is in the vampire business: sucking blood (actually plasma) from victims (eh, donors) in order to extract valuable antibodies. While you might just prefer to wear garlic instead of plopping down a stake on the Count Dracula of the biopharmaceutical biz, an equity stake in Serologicals would have paid off handsomely. Indeed, Serologicals has been a feast over the last couple of years.
The story is that Serologicals operates in a highly regulated -- and thus highly profitable -- industry. Although Serologicals has been forced to work around troubles at Bayer, its major customer, the firm has met the challenge and kept profits flowing.
For the first half of FY98, revenues rose 30% to $59.7 million while net income soared 44% to $7.9 million. Earnings per share increased just 31% due to dilution from a secondary offering last November. Still, that offering allowed Serologicals to continue its acquisition binge, which is permitting the company to leverage its infrastructure and boost net margins
BUSINESS DESCRIPTION
Atlanta-based Serologicals provides human antibody-based products and related services (donor recruitment, donor management, and clinical testing services) to major healthcare companies. Its products are the active ingredients in both therapeutic (81% of sales in FY97) and diagnostic products (19% of sales).
Its anti-D immune globulin (anti-D) is used to treat Rh incompatibility, a sometimes fatal condition in children, and AIDS-related idiopathic thrombocytopenic purpura (ITP). The firm offers other specialty antibody products used to combat rabies, hepatitis B, respiratory syncytial virus (RSV), and cytomegalovirus (CMV). It also makes monoclonal antibodies from cell lines.
Expanding via acquisitions, the company now operates 64 sites, including 16 donor centers focused on specialty antibodies and 47 sites that collect intravenous immune globulin (IVIG). In March, it acquired Therapeutics, which operated a clinical trials facility, and Allied Plasma, which operated four IVIG donor centers.
Last year, Bayer accounted for 47% of sales, Centeon for 11%, and Alpha Therapeutics for 12%. Though it sells to over 200 customers, 84% of sales went to just 10 customers. Insiders own 12% of the stock. The stock split 3-for-2 on August 14.
FINANCIAL FACTS
Income Statement
12-month sales: $111.2 million
12-month income: $14.4 million
12-month EPS: $0.58
Profit Margin: 12.9%
Market Cap: $641.8 million
Balance Sheet
Cash: $28.2 million
Current Assets: $62.2 million
Current Liabilities: $15.9 million
Long-Term Debt: $3.1 million
Ratios
Price-to-earnings: 42.9
Price-to-sales: 5.8
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Over the last four years, Serologicals has delivered 44% annualized sales growth. Not too shabby. Last year, revenues jumped 49% with earnings per share up 31%. So, you could have found Serologicals any time in the last few years by screening for companies delivering strong sales gains.
Looking into the industry, one would have found that the Food and Drug Administration (FDA) had imposed more stringent donor screening guidelines while undertaking more detailed and frequent inspections of operating facilities. The result has been an industry shakeout.
Contributing to the consolidation, healthcare companies are looking to reduce their number of suppliers. So they're seeking out firms that can provide value-added testing and manufacturing services along with the antibodies. This has meant the players left standing are getting a bigger piece of the antibody fruitcake.
WHERE TO FROM HERE?
Heavy insider selling in late July at a split-adjusted $21 a share ought to be noted, but it looks like simply a continuation of quarterly diversification sales. Probably nothing to worry about.
On the other hand, investors should worry about Bayer, which experienced a delay in getting its relocated laboratory testing facility approved by the FDA. As a result, Serologicals had to shift testing to other facilities, including its own. This transition was one reason sales rose just 16% in the second quarter. That, in turn, hurt gross margins on IVIG antibodies because its donor centers were running below capacity.
While the problem seems rectified, this disruption highlights the firm's dependence on Bayer. Serologicals' 10K for FY97 indicated that Bayer was planning to reduce its original purchase commitment. While the relationship seems solid, investors need to factor in a risk premium for such heavy reliance on one customer.
Serologicals has also talked about the "challenge" of meeting demand in an environment of increased regulatory attention and "customer-driven changes." Demand for IVIG and other scarce antibody products increased during the second quarter. Yet, it's hard to reconcile tight supply and strong demand with the 81% increase in the firm's accounts receivable since December 31 and 116% increase year-over-year.
Zacks shows consensus EPS estimates of $0.63 for FY98 and $0.77 for FY99. So, Serologicals trades at 36 times this year's estimates and 30 times next year's numbers. Given that the company has barely managed to meet estimates the last few quarters, earnings per share have been slowing, and the company remains heavily dependent on one major customer, that price seems a little rich. But with the barriers to entry in this business, Serologicals may be worth keeping an eye on.
-- Louis Corrigan
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