High Expectations Thwart Omrix

Omrix Biopharmaceuticals'(OMRI Quote - Cramer on OMRI - Stock Picks) stock plummeted 40% Wednesday after the company reported gross margins below some Wall Street views, and announced it will not receive a French government contract for its lead immunotherapy product.

Omrix also faced questions about how to interpret combined sales of its two key biosurgery products, Evicel and Evithrom. The New York-based company, which already gave preliminary top line results in February, saw shares fall $10.15, down to $14.90.

For the fourth quarter, Omrix earned $3.3 million, or 19 cents a share, vs. $6.4 million, or 41 cents a share, in the year-ago quarter. Revenue beat estimates, growing 14% to $20.6 million from $18 million.

Analysts surveyed by Thomson Financial were looking for 26 cents a share, on revenue of $18.73 million.

For the year, Omrix earned $11.9 million, or 69 cents a share, vs. $23.1 million, or $1.65 a share, in 2006. Revenue rose 3% to $61.7 million, while Wall Street analysts had predicted 78 cents a share on $61.5 million in revenue.

The year-over-year discrepancy is due to the nature of sales of the company's VIG -- a treatment for complications related to smallpox vaccination -- which are dependent on government contracts. In 2006, Omrix supplied VIG to the UK government, recording $21.2 million in total product sales. In the fourth quarter of 2006, VIG product sales contributed $6 million in revenue. In 2007, there were no VIG product sales.

(Excluding 2006, VIG sales, the company said revenue increased 72% in the fourth quarter from the prior-year period, and 45% for the year.)

The company said on Wednesday's conference call that it just learned it will not receive a contract for VIG with the French government. The contract would have been worth $18 million to $20 million over the next 12 to 18 months, according to Oppenheimer analyst Amit Hazan.

Omrix also said it doesn't expect any such contracts in 2008, and its 2008 guidance does not include VIG sales.

All Eyes on Biosurgery

The company considers VIG sales as part of its passive immunotherapy unit. Its other unit, biosurgery, includes sales of and Quixil and Evicel, fibrin sealants, and its human thrombin product Evithrom, a protein used to control bleeding during surgery.

Investors have been watching for indications of how Evithrom, approved in fall of 2007, and Evicel, which received an expanded indication earlier this year, are faring.

Omrix's Evithrom, distributed by Johnson & Johnson(JNJ Quote - Cramer on JNJ - Stock Picks), competes with a cow-derived thrombin from King Pharmaceuticals(KG Quote - Cramer on KG - Stock Picks) and a recombinant product from ZymoGenetics(ZGEN Quote - Cramer on ZGEN - Stock Picks) that was approved earlier this year.

In January, the Food and Drug Administration approved the expanded use of Omrix's Evicel for general hemostasis. The liquid fibrin sealant was already approved for patients undergoing surgery when other methods of controlling bleeding were impractical or ineffective. Omrix markets this product with Johnson & Johnson unit Ethicon as well.

"Evicel is the beginning of a new era for us. With Ethicon we are particularly well positioned to expand the fields of use for biological hemostats, which we believe are underserved today," CEO Robert Taub said on the earnings call Wednesday.

After adjusting for $1 million in third-quarter sales that were not shipped in the second quarter due to an FDA delay, Omrix said quarterly sales of the biosurgery unit were $2.7 million, $4.3 million, $5.8 million and $6.5 million for 2007 -- 59%, 34% and 12% increases quarter to quarter.

Some analysts on the call expressed frustration about the company's policy not to break out sales or guidance of Evicel separately from Evithrom, which would give a clearer picture of the acceleration of each product's sales.

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