Abaxis, Inc.: Catering to both crowds
Reporting record results is not usually how a quarter is supposed to turn out for a company that says it was seeking to repair the weakest links in its operations. But that’s exactly what medical-device maker Abaxis, Inc. (Nasdaq: ABAX) did in the three months ended Sept. 30.
Based in Union City, Calif., Abaxis is one of those rare birds, a company that has successfully developed products that it markets to both doctors and veterinarians to help keep humans and animals alive.
Abaxis’ results for the second quarter of fiscal 2008 showed revenue of $25.2 million, a 20% improvement from a similar period the year before. Net income grew 37% to $2.9 million, with earnings per share hitting $0.13, up from $0.10. However, the EPS fell a penny shy of the consensus estimate of analysts surveyed by Thomson Financial.
Despite that slight earnings miss, analysts who follow Abaxis generally have a favorable outlook for the company. According to Thomson Financial’s tally, three have the equivalent of a “strong buy” rating on the company, while one labeled it as a “hold.”
There are two pieces to the Abaxis puzzle—highly portable testing devices for not only humans, but animals as well.
For humans, its compact Piccolo xpress blood analyzers offer precise, multiple-chemistry testing with results that compare favorably with the output from larger laboratory devices. More than 800 are in use by government agencies across the United States.
For animals, veterinarians can use the VetScan HM5, an automated blood analyzer on dogs, cats, horses and seven other species; two other devices are also available.
Founded in 1989, Abaxis arose out of research for NASA on a small biochemical analyzer for use in space laboratories. Abaxis obtained patent rights to develop an analyzer that could perform multiple tests from a single drop of whole blood. The first Piccolo analyzer came out in late 1995, a few months after VetScan was launched.
Abaxis says it currently covers more than 90% of the general chemistry tests normally used in medical and veterinary diagnostics.
But it’s not just the analyzers that Abaxis sells. Just like the marketing strategy of Schick or Gillette, what is truly important to Abaxis are the testing supplies that the devices use. Total medical and veterinary reagent disc sales in the quarter topped 1.2 million units, a 24% increase from the year-ago period.
Following the Oct. 24 release of its second quarter results, investors spotted Abaxis’s healthy potential, giving it a 21% one-day run-up to $29.38, its best performance since April 2001. In trading this week, shares backed down from that level, closer to the $28 median analysts’ 12-month price target for Abaxis that existed before the financials were released, and have since edged higher again. On Wednesday, Abaxis shares closed at $29.32. Over the last 52 weeks, shares have ranged between $16.94 and $30.
During the quarter, Abaxis was hit with a number of distractions that kept it from selling its products. In June, shares had a one-day 4.3% tumble after chief operating officer Robert Milder’s retirement plans were announced. The company also has had to deal with quality-control problems, while awaiting approvals for testing agents to make the $15,000 Piccolo more of a one-stop testing shop. In its bid to tap into worldwide demand for its products, Abaxis was seeking out a new distributor for Japan.
Clint Severson, the chairman, president and chief executive of Abaxis, indicated on an Oct. 24 conference call with investors that some of the bigger hurdles have been tackled—or would be shortly.
Topping the hit list was quality control, as device failures that had exceeded 20% were trimmed to about 5%. “We spent a big part of the quarter fixing … the complete instrument-manufacturing process,” he said on the call. “I am pleased to report that the problems have been identified.”
The company continues to seek new vendors and is working with existing vendors to deliver quality parts.
“We still have more improvements in the works, but this accomplishment allows us to focus more on selling rather than more on fixing,” Severson said.
Abaxis has continued to deliver the news that investors like to hear. During the Oct. 24 conference call, Abaxis executives said that the company was about ready to patch gaps in its structure, by naming a new operations leader and announcing a new distributor for Japan.
On Monday, Abaxis announced the appointment of Donald Wood, who has a track record in managing other biotechs, as vice president of operations to oversee all manufacturing. The next day, Abaxis said that Central Scientific Commerce had signed an exclusive distribution agreement to handle the company’s line of medical and veterinary products in Japan.
Those lapses in the quarter were acknowledged in an Oct. 25 note to clients from SunTrust Robinson Humphrey analyst Jonathan Block. Still, he wrote, “We reiterate our Buy rating and 12-month price target of $28.”
SunTrust raised its fiscal 2009 revenue estimate slightly, to $130.2 million from $125.3 million, and the earnings estimate to $0.85 per share from $0.80.
Block had raised Abaxis to the “buy” rating and established the $28 price target in an Oct. 4 research report. In an Oct. 29 interview, he said the appointment of Wood brings “new blood to the company, which should be viewed as a positive.”
Also following the earnings release, analyst Ross Taylor of C.L. King reiterated a “strong buy” rating on Abaxis on Oct. 25, but raised his target price to $30 from $26.
For the current quarter that ends in December, analysts polled by Thomson Financial are looking for earnings per share to rise to $0.16 from the $0.13 posted last year, while revenue is expected to increase about 19% to $26 million from the year-ago $22 million.
The company has also received some additional notice when it was featured in Forbes’ Oct. 29 issue that contained an annual list of the 200 Best Small Companies. CEO Severson, who has been at the Abaxis helm for a decade, was named Entrepreneur of the Year, with his photo gracing the magazine’s cover. The list put Abaxis at No. 11, up from 25th last year.
Being recognized by Forbes “adds to the visibility” of Abaxis (ABAX), SunTrust’s Block told SmallCapInvestor.com, “and it certainly adds to their credibility. It also puts more pressure on them to execute.”
