Biotech mit Potential (Analyse) - 500 Beiträge pro Seite

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nun eine Biotech: Chesapeake Biological Laboratories, Inc.`s (CBLI:NASDAQ)

die Analyse ist aus dem Börsenbrief von Christian DeHaemer
(der schreibt auch fuer Taipan US, Taipan Deutschland
und CuttingEdge US )



"
Rare Biotech Infrastructure Play "Discovered"
Double your money on this conservative investment

It doesn`t get any better than this — it only gets worse. The U.S. economy grew 6.9% in the
fourth quarter of 1999. Those are Third World country numbers. It seems that every segment
of our economy is running on all cylinders. Not eight cylinders — this bad boy is a V-12.

The government`s most recent report said that we grew at an annual pace of 6.9% versus the
5.8% reading of last month. They always revise to the upside.

The last time the economy grew that fast was in 1987, the year of the last big correction. The
Fed was hiking interest rates then as well. The Fed is expected to hike for the fifth time on
March 21.

Three hikes and a tumble
The old Wall Street axiom states that after three hikes you are due for a tumble. True enough -
the Dow has taken it on the chin - only time will tell where the bottom lands. Don`t get me
wrong, I`m bullish on America. The technological advances we`ve seen over the past decade
are only the beginning.

However, this is not the same market in which we received record gains last fall. Stock pickers
will be swimming upstream this year. The obvious buys going forward will be communications,
global tech and biotech. And that`s where I`m looking.

In fact, I`ve uncovered a hidden biotech infrastructure play in my own backyard. Yesterday, I
took a trip to the "factory" to see what kind of thing I was getting into. It turned out better than
I expected.

Biotech, riding the super bull
Anyone who has had even a passing interest in the stock market lately knows biotechs are hot.
This past week, shares of genomics-related companies continued to power forward. These
companies develop technology that studies genetics and aids the development of drugs.

Companies that make enabling technology that speeds the process have also caught an updraft
in recent months. Some of these gains make the Internet of three years ago look tame.

The Amex Biotech Index jumped 26% last week. The Nasdaq Biotech Index rose 21%. In
average both indexes are up more than 60 percent in the first two months of the year. And
these are indexes, some of the hotter names are up 2000%-3000% for the year. Clearly, we
are in a mania.

It`s a stock drive — rawhide
There are two factors driving these markets. The fast, aggressive money is moving money out
of yesterday`s speed queens like AOL and YHOO and moving into an area of high growth, no
income and massive potential.

Secondly, the size of the biotech market is as huge as it is unknowable, and therefore these
companies can be priced to the sky - fantasy stocks. At the same time they are relatively
cheap. The market as a whole is worth some $60 billion, which is cheap compared to AOL
alone.

Genomics dramatically transform the way drugs are developed, by targeting genes associated
with diseases. The result decreases the costs and time of development, bringing drugs to
patients cheaper and faster. This is a life-altering trend. It could mean the end of diseases such
as Alzheimer`s, AIDS or cancer, as well as massive profits for shareholders.

Works for me — the enablers
I`m not here to jump on the biotech bandwagon. The Hammer doesn`t like to chase trends, so
much as get in front of them.

There is one thing I do know: manias tend to spread from the big, well-known companies to
the smaller periphery stocks. Anything associated with a hot industry gets bid up to levels it
does not deserve. We`ve seen it in the dot-coms, and we will see it in biotech`s in the coming
months.

An easy way to make money is to find a solid, growing company that benefits from the industry
growth as a whole without the risk of an all-or-nothing strategy.

In this case, it means finding the only pure play on biotech infrastructure and not having to
worry if your company that is looking for a cure for cancer will be "the" company that finds a
cure for cancer.

Spill and fill
Chesapeake Biological Laboratories, Inc.`s (CBLI:NASDAQ) purpose in life is to fill
vials, syringes and patches with sterile product for clinical testing and commercial production.
Its niche is in complex procedures using organic material — parenteral and aseptic products in
the jargon of the industry. You can`t just boil organic material to sterilize it. It`s a high-cost,
method-specific industry.

CBLI isn`t a low-cost producer nor does it want to be. You go to CBLI to get fills for your
clinical trials needed for FDA approval. The company will refine the lab-based development
(small lots) into a manufacturing-based system necessary for larger lots. This is the difference
between building a car in your garage and a GM auto plant.

An emerging trend among biotechs is to outsource the mechanical aspects while focusing on
R&D. Venture capitalists don`t want to spend money on brick and mortar.

CBLI does some commercial production as more drugs pass FDA tests. The company wants
to split 60-40 between clinical and commercial with the lion`s share going to clinical. Clinical
has higher margins, commercial is a more reliable income stream that benefits from economies
of scale. Margins average 30%.

It`s a clean machine
CBLI is located in Baltimore, at the Camden
Yards development zone, and receives some
tax breaks and loans. It`s a good location
because customers can visit CBLI and the
FDA in one day. I visited the company and
discovered some potentially profitable
circumstances.

I`m not a scientist. I wasn`t even very good at high school chemistry, but I put on the gown and
hairnet and looked through the window of the clean rooms. There were five people in the room
doing QA and keeping track of the filling procedure, which was done by machine. One of the
five was a microbiologist. There are 100 people employed by CBLI, the majority have Ph.Ds.
This is a 21st century factory. Ten floor workers, 90 executives. No wonder labor is in trouble.

This industry is heavily scrutinized. The FDA is at the facility an average of two times a week.
There is even a video surveillance room where representatives of client companies sit for hours
ensuring proper fills. It`s no wonder when you consider that each illed vial can cost anywhere
from $2,000 on up.

CBLI has never had a significant regulation problem at its new facility. A reputation for quality
is paramount in this industry — CBLI appears to have one. Needless to say, there is a high
barrier to entry for start-up companies.

Turn around jump shot
CBLI has been around for 20 years. In the past they had one major customer, Allergan, that
represented 47% of its revenue. Allergan stopped using CBLI a year and a half ago.

CBLI was forced to change to stay in business. They opened a new, state-of-the-art facility
and hired a sales force. Now they have 110 customers - both big pharma and small start-ups,
none representing more than 10%. Furthermore, biotechs tend to stay with the companies who
are governmentally approved to produce their drugs.

Over the last two years the company suffered losses due to the start-up costs associated with a
new building and receiving FDA approval of that facility. Furthermore, since no one wants to
be the first customer, it took some time for word to get out and the customers to arrive.

The sales force was hired eight months ago. The sales cycle in this industry is six to 18 months
— suggesting further catalyst for revenue growth as the company hits full stride.

Hurricane magnets
During my visit I noticed several offices inside the main building were being emptied. These
people were being moved into trailers on the property. This suggests that the main building,
which is pre-wired with five separate ventilation units, water purification system and every
other high tech, double-safety gizmo necessary for clean room filling of organic material, is
being expanded in the short term.

The building, a renovated milk warehouse (70,000 sq. ft., 40 ft. ceilings) is currently about
50% full. Clean rooms are pre-built in modules, dropped in and connected to the infrastructure
(low cost expansion).

Since the high cost infrastructure associated with building new clean rooms is already in place,
any ramp-up in volume by adding more clean rooms will go strait to the bottom line.

The company is running at 40% capacity with two clean rooms and two shifts. The maximum
capacity is 80%. There is room to grow.

Further cost reductions should be realized with the final closing of the old plant and the
centralization of business at the Camden Yards facility.

Lower costs — higher revenues — I`m in
It`s a simply story. An old company in a now-hot industry is forced to change. It goes through
a few tough years and emerges out the other side, lean, mean and ramping revenues. Check it
out...

Revenues jumped 84% over the past nine months to $8,055,000 over the previous year. For
the past three months revenues jumped 60% to $2,991,000 over the previous year.

Net income for the three months and nine months ended Dec. 31, 1999 was $192,000 and
$447,000, respectively, which compares favorably with the losses of $1,585,000 and
$2,251,000, respectively, for the same periods in the last fiscal year.

General and administrative expenses decreased $51,000 and $183,000 respectively to
$388,000 for the three months and $1,091,000 for the nine-month period ended Dec. 31,
1999 or 13% for both periods. The closing of the old facility should ensure this trend
continues.

SHARE INFORMATION
Market Cap ($)
Shares Out.
Float
Instit. Own
Insiders Own
22.36Mil @ $4/share
5.590 Mil
4.600 Mil
2.4%
17.7%*

*small insider holding reduces threat of share dilution


HISTORICAL QUARTERLY REVENUES (Thousands of U.S. Dollars)

1997
1998
1999
2000
JUN
1,564
1,717
1,117
2,449
SEP
3,015
1,745
2,283
2,614
DEC
1,837
1,720
1,621
2,991
MAR
2,238
1,834
1,726
est:3,4
TOTAL
8,654
7,016
6,747
est:11.3


EARNINGS PER SHARE (U.S. Dollar per share)

1997
1998
1999
2000
JUN
-0.020
-0.020
-0.070
0.020
SEP
0.090
-0.010
-0.050
0.020
DEC
0.040
-0.010
-0.300
0.030
MAR
0.010
-0.050
-0.550
—
TOTAL
0.120
-0.090
-0.970
—



This represents the third consecutive quarter of sales and profit increases over the previous
year as well as sequential quarterly growth. Furthermore, the CBLI has signed agreements
related to the manufacture of commercial products, which will commence during the next fiscal
year beginning April 1, 2000. The corner has been turned.

If you assume a 40% revenue growth rate going forward you get 15.82 million for fy 2001 (fy
2000 ends in March). This gives you a price to sales ratio of 1.41.

The comparables for this company are non-existent. CBLI`s competitors are private
companies or part of massive conglomerates. That said, this company is sitting in a sweet spot
in the biotech infrastructure sphere.

It seems to me that a solid company with manageable debt, relatively high margins, in a rapidly
expanding company should trade higher than two times sales. However, to be conservative,
let`s assume that the company will trade at two times fy 2001 sales, giving you a potential
market cap of $31.64 million, or $5.72 on the share price. That`s the minimum this company
should trade for today.

However, if you consider its rapid low cost expansion going forward and the possibility for
some fast money hype — Affymetrix, Inc. (NasdaqNM:AFFX) trades for 77 time sales —
you can imagine the real possibility of a mass mania surge driving this stock into the double
digits. Regardless, the downside from here seems limited.

For a conservative biotech growth play with a market mania kicker - Buy Chesapeake
Biological Lab below $5.50.

COMPANY CONTACT, ADDRESS & PHONE #: John T. Janssen,
CFO/Treas. Chesapeake Biological Lab 1111 S. Paca Street Baltimore, MD
21230 PHONE: [phone].

"

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