Q3 is Key for Thermogenesis

Thermogenesis Corp (KOOL), a developer of cord blood collection and processing units, released subpar fiscal second quarter results on Friday.

While earnings increased by 19%, net profit dropped by more than $250,000. Although on a per diluted share basis the bottom line was equal to last fiscal year’s second quarter.

The company had two excuses for the poor results. It had a backlog of $2.5 million from its AXP product line due to "manufacturing capacity constraints originating at the Company’s contract manufacturing organization, shipments of the AXP disposables did not meet market demand".

In fact, at the conference call executives said that the company was only able to deliver a fraction of the AXP disposable bag units requested by its distribution partner GE Healthcare (GE).

The second problem, according to the company, was a delay in an order for four BioArchive units that was expected during the fiscal second quarter, but came in a couple of weeks later. The order will be included in the third quarter report.

While company executives did explain that the manufacturing constraints should be alleviated very soon, if not already, this could be the very last time Thermogenesis can afford be late on delivery with no major problems. I doubt that GE Healthcare and other clients will sit patiently through another delivery delay no matter the excuse.

Thermogenesis has to be absolutely sure that its new manufacturing capacity can withstand multiple times the number of orders in backlog. How could a company standing on the verge of a substantial surge in product orders fail to forsee potential problems in manufacturing capacity?

Thermogenesis was featured as a BHI Stock Pick way back in October at $3.86 a share. Since then, the stock price jumped to $5, then slowly and painfully dropped all the way back to $3.86 on Friday! The stock could very easily drop some more, possibly to the $3 range, in the coming weeks.

I did explain back in October that investors in Thermogenesis stock should be patient, as the real litmus test will be around early to mid 2008 when the company’s bottom line is expected to be in the black. But considering the current problems, I am obliged keep a keen eye on manufacturing activities when the third quarter results are released.

While waiting for the Q3 report to be announced investorscould be treated to FDA approvals of the CryoSeal system, and the AutoXpress unit. But the third quarter report is key, as another poor showing in three months could force me to recommend the first stock sale at BioHealth Investor.

Disclosure: The author does not hold a position in Thermogenesis stock as of the publication date of this article.

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