Clarient Inc. has seen sales surge for the past four years. Profits are another matter.
The Aliso Viejo medical testing company has struggled to make money as it has wrestled with debt. That’s changing, according to Clarient.
The company is shedding a big obstacle to making money,about $30 million in debt,with an investment deal from a venture capital firm.
Westport, Conn.-based Oak Investment Partners is investing up to $50 million in Clarient in a two-part stock purchase.
The deal has the blessing of Clarient’s largest shareholder and creditor, Pennsylvania investment company Safeguard Scientifics Inc.
Safeguard is seeing its Clarient stake go from 60% to 47% with the Oak Investment deal. It also is set to see a $30 million line of credit that it extended to Clarient be paid off.
Usually, a big shareholder might balk at seeing its investment diluted by a stock sale. Not here. Safeguard seems happy to have its credit line paid off and its ownership stake reduced.
Safeguard lined up the deal with Oak and said the deal will “directly strengthen Safeguard’s balance sheet.” It also relieves Safeguard of having to offer more financing to Clarient.
So far, Clarient’s paid off $23.8 million of debt with the first set of proceeds, according to Chief Executive Ron Andrews.
The funding and paying off debt “allows us to evolve or emerge as a profitable, fast-growing cancer diagnostics company with some leverage in the marketplace,” he said.
The provider of cancer tests for pathologists, oncologists and drug makers has seen 18 consecutive quarters of sales growth, going from $2.2 million in sales in 2004 to $73.7 million in 2008.
But Clarient still faces viability questions. Its 2008 annual report filing has a “going concern” section that warns investors about the company’s ability to stay in business.
Such language is common for growth companies. But Clarient was specific: Without the investment deal, it is unlikely the company would be able to repay credit lines coming due in the first quarter of 2010.
“Retiring most of their debt is a monumental achievement for Clarient,” said John Henderson, a money manager who runs the Inflection Point newsletter on Internet stock site Seeking Alpha. “With the dark cloud liquidity questions and high borrowing costs finally dissipated, Clarient should see the significant top-line growth it has enjoyed for the past few years finally start to drop to the bottom line.”
Clarient’s debt was weighing the company down since it carried a 14% interest rate, Henderson said. Paying it off will save the company $11 million in 2009, he said.
“I’m not much of a debt guy,” Andrews said. “I wanted to be out of debt, especially given our new found operating profit. We wanted to translate that to net profit, net earnings.”
Clarient swung to a $100,000 operating profit in the fourth quarter from an operating loss of $3.2 million a year earlier.
The company hasn’t yet set a date for its first-quarter earnings announcement. Wall Street expects Clarient to post a net loss of $1.5 million on revenue of $22 million.
For the full year, analysts expect Clarient to post a profit of $2.3 million on sales of $96.7 million.
Andrews said he’s hopeful that Clarient will post a net profit in the second half of 2009.
Clarient shares are up about 60% since late March, when the investment was announced. The company had a recent market value of about $210 million.
“The stock has improved significantly since that announcement, so we’re pretty pleased with the response we’ve gotten so far,” Andrews said.
Investors are attracted to the recession-resistant nature of the company’s products, according to Matt Dolan, an analyst with Roth Capital Partners LLC in Newport Beach.
Clarient offers an investment opportunity “that is resilient to economic cycles, as cancer remains relatively unaffected and patients must seek diagnosis considering the disease’s implications for mortality,” Dolan said.
The company’s rivals include Genzyme Corp. of Cambridge, Mass., and US Labs, an Irvine-based unit of Laboratory Corporation of America Holdings.
Clarient, which has about 300 workers, plans to double its sales force to about 40 representatives by July 1, Andrews said.
New products are in the works. The company is rolling out the DX Breast Cancer Profile test, which Seeking Alpha said is expected to be “a significant revenue contributor in the near term.”
