re: hmmm. intelligent investor I wonder if the comments in the...

re: hmmm. intelligent investor
I wonder if the comments in the Intelligent Investor, dated Friday 16-5-03, has prompted some to sell.



Cellestis goes for Gold
Progress towards sales to the US military is achingly slow, while a new product may cause further delays. STOP LOSSES AND SELL.
Unless you've ridden the speculative boom in retractable syringes - of all things - owning biotech stocks has not been a pleasant experience for a few years now. That's even true for the best of the best biotechs, a category to which Cellestis undoubtedly belongs.

Cellestis, for those not familiar with the company, already has FDA approval to market a diagnostic test called QuantiFERON-TB (or QTB) for tuberculosis. Forget SARS, this is a disease that has reached epidemic proportions worldwide, even in some developed countries.

Everyone admits QTB is far better than the existing skin test, which has been around for the last century. So why are large-scale sales taking so long?

The wheels of bureaucracy turn exceedingly slowly. In the United States, the largest potential customers are the military, prisons, and healthcare workers. The US military has recently endorsed 'QTB as an alternative to skin testing', but now wants to conduct 'initial pilot programs' to examine cost and logistical implications.

This means one thing. Further delays are virtually inevitable. Cellestis admitted as much in its recent shareholder newsletter, stating that its goal of reaching profitability by end 2003 depended heavily on US military and hospital 'uptake' over the next six months.

Our translation is that the company believes profitability is unlikely in such a tight timeframe.

Thankfully Cellestis also had some 'good' news to report in its newsletter to offset this disappointing outlook. Unfortunately we think this news might have a nasty sting in the tail.

The company has managed to fast track a second generation tuberculosis test, which it is calling QuantiFERON-TB Gold (or QTB Gold for short). This test is superior to the first generation product because it generates few false positives and can correctly identify infected people. Local and European sales are expected later this year.

QTB Gold is expected to become Cellestis flagship product and will replace QTB in most markets. Of course, further regulatory approvals will be required. In other words, Cellestis will have to gain FDA approval all over again.

Our concern is as follows. If a better product will be available in a year or two, why would the US military commit to buying supplies of the old product now? We think this issue could be a source of further delays, especially given the 'resistance to change' Cellestis has encountered.

We won't pretend we have called this stock well. Admittedly we liked Cellestis prior to and shortly after its 2001 float, so anyone who has held it since then has done very well. But we moved to an ill-timed positive recommendation in GTS 41/Jun 02 (Speculative Buy - $2.30) on expectations of quick sales, which have not been borne out.

We switched to neutral in GS 66/Mar 03 (Hold While Unstable - $1.26) but this recent news has heightened our concern. While Cellestis is an impressive company with a great product, we've said before that such advantages are not necessarily enough in biotech-land.

Be aware the stock could spike higher if sales are achieved soon. Still, we think there is a high probability of further downside now that management has all but admitted further delays are inevitable. STOP LOSSES AND SELL