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Biotech / Medical : Xenogen (XGEN) -- Ignore unavailable to you. Want to Upgrade?

To: tuck who wrote (23)	5/28/2005 2:53:25 AM
From: tuck	Respond to of 45

Vague CC notes: None of top management is an outstanding public speaker. But so what. Two analysts follow the company, one from CIBC, and one from Thomas Weisel. They seemed mostly concerned with fine tuning their financial models, which is fine, but misses an important issue. Namely the frikkin' lawsuit. Perhaps they did the same digging I did, came to the same conclusions, and figured management wasn't going to tell tham anything if they asked, so why bother. Fine. Nobody asked about their burn rate versus their cash position, and what avenues they were exploring for financing. Because the need is pretty obvious. The company forecasts selling 100 to 125 systems this year at ~$250,000/unit, meaning about $30 million in revenue. Mice and reagents would add to this, roughly another $10 million. Analysts actually lowered their earnings estimates after this CC. Despite management's contention that margins would improve due to better production efficiency, better buying tactics, and good pricing power. Apparently two things work against that, and the analysts are weighting those pretty heavily. First, Xenogen sells directly in Europe, but through distributors in the Pacific Rim. When questioned, they said the strongest international sales were from the Rim. They have to give a chunk to distributors, hence lower margins. Also, IVIS 200s, though they fetch a higher price, have so far cost disproportionately more to manufacture, hence lower margins. Again, management says they are getting more efficient with these, but analysts are clearly in "show me" mode. At this rate, XGEN runs out of money at year end. As cheap as the stock looks, considering demand, it is clear to me that a financing will have to be done in a tough environment. In light of that, I am maintaining my discipline in spite of my soft spot for this company, and holding off buying until the financing hits. Probably this fall. I'll be looking carefully at how onerous it is. A PIPE with cheap warrants or a heavy discount? Or a straight secondary, with a sell off before hand because some well connected folks hear about it before it's announced? I'll pay little more than what those investors pay, thank you. But I believe that will be THE time to buy, and plan to go big on that downspike, with entry determined by the terms of the deal. Cheers, Tuck