Stockroom Concerns Kneecap Biomatrix's Breakout Quarter

Inventory questions have reversed a jump in the knee-drug maker's stock.
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It began with what looked like a great earnings report.

Biomatrix

(BXM)

on April 20 said it earned 27 cents a share for its first quarter ended March 31, blowing away the

First Call

consensus estimate of 18 cents. Sales of its injection for knee pain,

Synvisc

, looked strong.

In the earnings conference call, Biomatrix said its marketing partner, the

Wyeth-Ayerst

division of

American Home Products

(AHP)

, had 23,000 Synvisc kits in inventory at the first quarter's end, up from 17,000 at the fourth quarter's end. That increase was considered slight, and it was less than had been reported

April 14, when a Wyeth spokesman indicated his company had about 30,000 kits in inventory at the end of the first quarter. Wall Street's worries were put to rest.

The stock shot up 16% in the three days following the earnings report.

But then things began to fray. Investors became worried about possible inventory buildup. Biomatrix appeared to allay investor concern by pointing out that it had made a typo in referring to inventory numbers. Still, a close analysis of the sales data seems to indicate that Biomatrix shipped Synvisc kits that Wyeth didn't sell or doesn't acknowledge as having in inventory at the end of the first quarter.

Biomatrix appeared to clear up the inventory issue on April 23. The company took the unusual step of sending a fax to everyone who had been on the conference call, saying there was a typo. In fact, it said Wyeth's inventory was not 23,000 kits but 32,000, or about two months of sales at the first quarter's pace. "We definitely made a mistake, but we corrected it quickly," says Biomatrix President Rory Riggs. That meant Wyeth, with a reported 17,000 kits in inventory at the end of the fourth quarter, had added 15,000 kits to inventory in the first quarter.

The inventory level is important because it generally signals demand from doctors who give the injections; a higher number of Synvisc kits sitting in Wyeth's warehouses could mean weaker demand than Biomatrix's sales appear to show.

On news of the revised inventory number, the stock gave back what it had gained and a bit more. Since Biomatrix revised the inventory figure, the stock has dropped 22%, though at the Wednesday close of 30 15/16 the company still sported a market cap of about $710 million.

Riggs dismisses the inventory concerns, saying more product on the shelves will help Wyeth meet demand and propel sales. "We've said all along that we expected Wyeth to have closer to 90 days of inventory," says Riggs.

That's good, because extensive conversations with Biomatrix make it appear that the company shipped more product to Wyeth in the quarter than the total of what Wyeth sold and had in inventory at the end of the period.

Here are the numbers:

Biomatrix reported $12.6 million in domestic Synvisc sales in the first quarter, according to its quarterly filing with the

Securities and Exchange Commission

. Of that, about $1.4 million came from a payment from Wyeth as a carryover from the fourth quarter's inventory, according to Biomatrix's chief financial officer, Maxine Seifert. That leaves about $11.2 million, which amounts to between 68,000 and 73,000 kits that Biomatrix shipped to Wyeth in the first quarter (depending on the price), she says. Seifert won't discuss the exact amount per syringe that Biomatrix gets from Wyeth, but says it's between $50 and $55. Each kit contains three syringes.

Riggs has said that Wyeth sold 47,500 kits in the first quarter. (A similar figure can be reached by backing out the number of kits from Wyeth's sales. Wyeth reported first-quarter Synvisc sales of $23.4 million -- $22.6 million domestically and $800,000 internationally. Wyeth says its average price was $497 a kit, which works out to 47,100 kits sold domestically.)

Let's go with Riggs' number. If Wyeth added 15,000 kits to inventory in the quarter, as noted above, and sold 47,500, Wyeth is accounting for 62,500 kits, not 68,000 to 73,000. Where are those 5,500 to 10,500 other kits? That's material worth between $840,000 and $1.7 million.

Biomatrix's explanation is that it depends on what you mean by "inventory." Seifert says, "When you look at inventory, different parts of a company can classify inventory in different ways. Some look at syringes as samples. There are different ways to classify it." She adds: "It's hard to reconcile inventories in a supply chain. It's very difficult to do. The proof of the pudding is when I get paid. I recorded those shipments to Wyeth. They all left my dock."

Wyeth confirmed the fourth-quarter and first-quarter inventory numbers, as well as the price per kit, but wouldn't comment further on Synvisc inventory.

Alternatively, it may be that Biomatrix shipped kits but Wyeth hadn't booked them by the time the quarter closed. "I'm not really prepared to comment on Wyeth's numbers. It is a possibility that something could be in transit," Seifert says.

The bottom line is that a good portion of what Biomatrix says it shipped to Wyeth apparently wasn't sold in the quarter. That doesn't worry Biomatrix. With a direct-to-consumer ad campaign starting up, "I would have expected Wyeth to increase inventory to be prepared to have stock for the

direct-to-consumer campaign," says the CFO. As for the potential inventory increase, "It's not a big difference for the marketplace we're talking about."