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May 19, 1999 RECOMMENDATION: BUY
HemaCare Corporation (OTC BB: HEMA)
Market Data:
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HEMA Corporate Information:
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Summary Investment Considerations
HEMA provides outsourcing of comprehensive blood management services, including related services such as therapeutic apheresis and donor testing services, to hospitals and other healthcare institutions. It is the only publicly traded, for-profit company with an FDA Establishment license permitting the sale of blood products across state lines, as well as accreditation from the American Association of Blood Banks (AABB). Through its Blood Management Programs (BMPs), HEMA offers hospitals and other healthcare institutions the convenience and efficiency of in-house blood services without the associated financial and regulatory risks and burdens. In October of 1998, HEMA acquired privately held Coral Therapeutics, bringing HEMA additional experienced management, greater operating efficiency, and expanding the Company’s market presence from Southern California (where it provides blood products and services to over 80 hospitals) to additional markets in twelve states in the Northeast and South. HEMA is the only "pure play" in the blood services industry and is trading at less than half of annualized revenues. We believe that HEMA is in an excellent position to grow revenues and earnings from its current base of business and we are initiating coverage of HEMA with a BUY rating. We recommend purchase of HEMA by investors tolerant of the risks associated with micro-cap and small-cap equity investments.
I. Large Market Opportunity — Unique FDA Establishment License
- Hospitals spend roughly $5 billion annually in the US on blood products and services and are continually looking for ways to provide more cost-effective health services.
- The industry is dominated by independent not-for-profit entities, whose core competency is collection and manufacturing, and not necessarily services.
- There are a number of small and medium-sized blood services companies in markets that HEMA is not currently operating in. These companies could potentially be attractive roll-up acquisition candidates. HEMA’s FDA Establishment license allows it to ship blood products among customers nationwide to balance supply and demand.
II. Operating Strategy — Leveraging BMPs into Higher-Margin Services
- BMP Strategy: HEMA’s Blood Management Programs (BMP) make the Company a partner with its hospital customers, so that both parties have an interest in achieving the hospitals’ patient service, regulatory, and financial goals. HEMA leverages existing BMP relationships into higher-margin services, such as therapeutic apheresis, within the partner hospital and at surrounding hospitals and healthcare institutions.
- Early Success: HEMA’s most recently reported quarterly results reflected higher volumes of apheresis platelet sales and higher gross margins, which resulted from lower average per unit cost of sales.
- Protecting Margins: HEMA is currently negotiating supply agreements with regional and community blood banks so that it can better manage costs associated with seasonal shortages of red blood cells and thereby better control gross margins.
III. Compelling Valuation at Current Levels — Trading at Less Than Half of Revenues
- HEMA’s latest quarterly revenues were $4.5 million, and net profits were $243,000, or $0.03 per share, compared with revenues of $2.9 million and income of $16,000, or $0.01 per share during the same quarter the year before. HEMA is trading at less than half of annualized revenues.
- As of 3/31/99, HEMA had approximately $1.7 million in cash and equivalents.
Company Background
HEMA provides outsourcing of comprehensive blood management services, including related services such as therapeutic apheresis and donor testing services, to healthcare institutions. It is the only publicly traded, for-profit company with an FDA Establishment license permitting the sale of blood products across state lines, as well as accreditation from the American Association of Blood Banks (AABB). HEMA was founded in 1978, and went public in 1986. The Company was accredited by the AABB in 1990, and received its Establishment license from the FDA in 1991. In 1995, HEMA developed its Blood Management Program strategy, and later that year began BMP operations in Los Angeles and St. Louis. Late last year, HEMA acquired Coral Therapeutics, a privately-held for-profit blood services company with operations in the Northeast and South.
HEMA’s Growth Strategy
The blood services industry is dominated by two not-for-profit entities — the American Red Cross (ARC), and America’s Blood Centers (ABC) (a consortium of independent blood centers), with 48 and 47 percent of the industry respectively. The strength of these two organizations is primarily in red blood cell collection and manufacturing. HEMA is competing with the major industry players on the basis of:
- An ability to deliver its services more efficiently than the non-profit organizations;
- A higher level of service than the non-profits can provide (deliveries, returns, inventory management, etc.);
- Blood product and service programs tailored to requirements of individual customer needs; and
- Its exemplary regulatory record over more than 20 years of operations.
HEMA’s strategy for growing its business is to gain customers in new markets by initially providing base blood products and services under a Blood Management Program such as red blood cell collection and/or donor room management, and then expanding the relationship so that HEMA is able to manage and provide higher-margin blood-related services to both the BMP and other customers. HEMA is able to offer benefits to customers, even if the only services being provided are the basic services. These advantages include a reduction of costs, a reduction of regulatory risk and burden, and an increase in expertise for hospitals that perform certain procedures (such as therapeutic apheresis) on an infrequent basis, since HEMA can provide personnel trained specifically to perform the procedure on an as-needed basis. For customers that are receiving HEMA’s more advanced services such as therapeutic apheresis services or stem cell collection and cryopreservation, hospitals can offer patients emerging medical procedures as an outsourced service, thereby avoiding the financial and regulatory issues associated with new clinical programs.
HemaCare Customers — Representative List
Below is a selected list of some of HEMA’s customers.
- Albert Einstein Medical Center
- Beth Israel Medical Center
- Catholic Healthcare West
- City of Hope
- Columbia Healthcare
- Dartmouth-Hitchcock Medical Center
- Kaiser Hospitals — Southern California
- Maine Medical Center
- New York University Medical Center
- Sisters of Charity
- Sisters of Providence
- TENET Healthcare
- Universities of California at Los Angeles, and Irvine
- University of Connecticut
- University of North Carolina
- University of Southern California
Sample HEMA Blood Management Program (BMP)
Below is a diagram outlining a BMP at a hospital. HEMA provides the management, staffing, and regulatory compliance expertise, and the hospital provides the facilities. All or some of the services on the list are offered to the hospital in which the BMP is based, and then HEMA can leverage the fixed assets and personnel resources by offering blood services to other hospitals — affiliated and non-affiliated hospitals and other healthcare institutions.
We believe that the BMP offers customers significant benefits including an on-site blood donor center, a reduction of the overall program cost, the opportunity to import state of the art clinical protocols, outsource regulatory compliance, introduce new technologies and enhance community relations at the same time.
Risk Considerations
This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of HemaCare Corporation. For a complete description of risks and uncertainties to HEMA’s business, see the "Risk Factors" section in HEMA’s SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:
- Market risk: Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
- Business/Competitive risk: HEMA operates in an industry which is donated by large, not-for-profit entities, many of which have greater resources, management, financial and otherwise, than HEMA. The blood services industry is intensely competitive. There can be no assurance that HEMA will be able to continue to offer its blood management services on a competitive basis.
- Donor Supply Risk: California Law prohibits the infusion of blood products if the donors were paid unless the recipient’s physician determines that blood from a non-paid donor is not readily available. Apheresis platelet products obtained from paid donors, including HEMA’s paid donors, are exempted from this provision under a 1994 state statute that contains a "sunset" provision. Unless a new exemption is passed, the existing exemption will expire December 31, 2001. HEMA is currently evaluating a number of available options with regard to the exemption’s expiration.
Sources for Additional Information
The following are website addresses offering related information, and links to other sources of information.
www.HemaCare.com HEMA’s corporate website
www.SmallCapsOnline.com SmallCaps Online’s site for company information and research
www.FDA.gov US Food and Drug Administration homepage
www.sec.gov US Securities and Exchange Commission, with links to EDGAR filings
www.AABB.org American Association of Blood Banks homepage
www.RedCross.org American Red Cross homepage
www.AmericasBlood.org America’s Blood Centers homepage
The information in this report has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC has performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC or persons associated with SmallCaps Online LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. This material, or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document that is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1999 by SmallCaps Online LLC. All rights reserved