Microcap Featured in Dialysis Investing (XCR, NXTM, DVA, FMS, DCAI)

Xcorporeal, Inc. (AMEX: XCR) is a potential undiscovered gem in microcap and low-priced stock investing, and it is in the arena of kidney dialysis.  This week’s "INSIDE WALL STREET" segment in Business Week featured this stock, and this may be their most unusual pick in months with perhaps the greatest upside potential if it can live up to the hopes and plans.

This one has been under review for our "10 Stocks Under $10" weekly letter, although we have not yet added it to the list because of its performance and lack of history.  Xcorporeal first came to us after it’s Wearable Artificial Kidney (WAK) prototype device was featured in the December 15, 2007 journal issue of The Lancet, an influential medical journal.

It is entering a space dominated by public companies such as DaVita Inc. (NYSE: DVA), Dialysis Corp. of America (NASDAQ: DCAI), Fresenius Medical Care AG & Co. KGaA (NYSE: FMS), and Nxstage Medical, Inc. (NASDAQ: NXTM). Of the public dialysis companies, this is also the most risky stock of the ones we have reviewed in the dialysis companies.

It has a $55 million market cap and had about $20 million in liquidityas of September, 2007.  With a $1.2 million estimated monthly cash burnrate on last look, it is obvious the company may have to do asecurities offering again.  It is still in the prototype stage aswell.  It has identified what it believes as a  multi-Billion dollaropportunity, although from an analytical point the company could onlyexpect to get a fraction of that down.  This came public via a reversemerger in August, 2007, so it has limited history as a public companythat so far has been an rewarding history after having raised over$29 million from two prior private placements.  It moved to the AMEX onDecember 7, 2007, so it has an even more limited history as a listedcompany.

The Lancet noted, "WAK’s clearance rate, if sustained and usedcontinuously, could be more effective than conventional three timesweekly or daily hemodialysis treatment. This proof of concept studyalso provides preliminary indications on the safety features of the WAKand permitted the patient to be ambulatory during treatment……TheWAK is a battery-powered, wearable dialysis machine that will allowusers to have their blood cleansed round the clock instead of beingtethered to conventional dialysis machines, intermittently, for manyhours."

The company also makes portable machines for in-home use and forhospital use, and its first FDA 510(k) filing is not currently expecteduntil late in 2008 for hospital device and home dialysis device 510(k)is not currently expected until late 2009.  The FDA decisions can notcurrently be considered as a given or an assured event despitepreliminary positive study results.

DaVita Inc. (NYSE: DVA) is a large player in the field with a near $5Billion market cap, and it is trading close to its 52-week lows.  Theother small cap play is Dialysis Corp. of America (NASDAQ: DCAI) has amere $71 million market cap and it too trades close to its 52-weeklow.  Fresenius Medical Care AG & Co. KGaA (NYSE: FMS) is a kidneydialysis company that provides dialysis treatment at its own dialysisclinics, as well as produces and supplies a range of machines anddisposables.  It was the one that acquired Renal Care Group. GAMBRO isthe one that used to be public and is now private, was delisted fromStockholm.  Nxstage Medical, Inc. (NASDAQ: NXTM) has a portablehemodialysis system for the treatment of end-stage renal disease andacute kidney failure in the United States; it has fallen by two-thirdsover the last year and its market cap is $165 million.

Lastly, its management team and board members has an impressive rosterof medical and financial professionals with public company and fundraising experience, so it doesn’t look like a group of managers tryingout their first public foray.  After reviewing the company, we haveclassified this as one of the all or none opportunities with along-term horizon before a pay-off can be expected.  It is solely forpure risk-based capital that would have an expected return that eithersees exponential gains or one that implodes.  We’ll be watching thisone closely for some time to come.

Jon C. Ogg
March 14, 2008