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March 9, 2007
A Cold and Flu Story Gone Cold
Not one to get sick often, I purchased some Cold-fX for the first time earlier this week after I was bombarded with flu like symptoms. What perked my interest in the product was that there was only one bottle remaining on the shelf. Tylenol Cold & Flu products were in ample supply.
As it turns out, Cold-fX is the number one selling Cold and Flu remedy product in Canada, and the company recently started to make inroads in the United States. Moreover, Health Canada recently approved/revised the company’s claim that it “helps reduce the frequency, severity and duration of cold and flu symptoms by boosting the immune system.” Steep costs aside - $18.94+tax for a bottle of 60-tablets - these developments could help provide the backing for what is already an exciting Canadian growth story.
Two Near Term Challenges
The company has been successful in Canada not only because there is evidence to suggest the product works, but also – and perhaps just as importantly – because Cold-fX has been successfully marketed. Can Mark Messier (signed on by CVQ in June 2006) really generate a buzz (in the U.S.) like the one Don Cherry helped create in Canada?
The recent approval from Health Canada could turn out to be a mixed blessing in that the government also said that Cold-fX will no longer be permitted to recommend increased dosages of up to nine capsules per day. Rather, according to Health Canada, “The approved dosage for COLD-fX is 200 milligrams (one capsule) two times a day”.
Financials and Valuations ~ Download Excel
The costs incurred to fund U.S. expansion have been high. For example, what could have easily been a $7+million quarterly net profit in 1Q07 turned out to be a $1.5 million net loss, largely because of U.S. launch costs. Whether or not this method of expanding the business proves successful may depend on how much stress the company’s balance sheet can withstand. What is clear is that the company is not being pulled into the U.S. market, nor is the Canadian side of the operations profitable enough to fund the company’s expansion plans.
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Along with the balance sheet concerns there is the issue of valuations. Trading at more than 10-times book and 5-times sales (trailing four quarters), the company’s share price could be devastated by any growth letdown.
Investment Opinion and Outlook
The number of Americans getting a cold each year is almost double that of the Canadian population.
Although it may be worth doing more U.S. channel checks for clues to how the expansion is going, it is unrealistic to conclude that CVQ is an attractive/safe investment today. Rather, without further FDA backing and/or many years of investment to increase brand awareness, speculating that the company’s Canadian accomplishments can be readily duplicated in the U.S. is simply that.
This is not to say that investor’s that gambled on the company years ago have not profited (they have!), but is to say that as far as ‘U.S. expansion stories’ go, a Canadian company like Tim Horton’s may be the better/safer gamble.
As for my flu symptoms, entering day-3 of the Cold-fX experiment I can honestly say that I am feeling better. If only I had gotten sick in say 2004, perhaps a more optimistic investment opinion could have been offered on CVQ.
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