Digirad: Condition stabilizing
If succeeding in the medical device market were as simple as launching a superior product, or introducing a faster and cheaper way to perform tests, then Digirad Corp. (Nasdaq: DRAD) would have already won over shareholders.
Instead, the Poway, Calif. provider of cardiovascular imaging products and services suffered a loss of investor faith from the very day it went public in June of 2004, when it debuted at $12 and then closed at $11.77.
It’s been a downhill ride for much of the time since then as Digirad faced challenges from a host of competitors and ran up against some hurdles in the way insurers reimbursed patients for healthcare, which limited the adoption of its equipment. Those problems have weighed heavily on the company’s stock, which has not traded above $5 since June 2006.
Recently, however, the company’s condition has started to stabilize. The story of Digirad today is not that of a stunning turnaround so much as a company that has repeatedly shown its ability to overcome some challenging hurdles and gradually, doggedly grow its business.
After reporting fiscal 2005 revenues of $68.2 million that were flat with the year before, the company in 2006 pushed sales up to $71.9 million, and recently forecast that it would reach between $77 million and $80 million in the current fiscal year. And, after two years of net losses, the company is reasonably optimistic that it will be profitable in 2007. Its current net income forecast ranges from a loss of $500,000 to a profit of $2.5 million.
Two analysts who track Digirad have a mean estimate for fiscal 2007 revenues of $77.85 million and a net loss of $0.07 per share, which compares with a loss of $0.34 per share last year. In 2006, however, Digirad consistently beat analysts' earnings estimates, often by a wide margin.
At this point, investors seem willing to take a wait-and-see attitude. Digirad’s current $4.54 share price is up a bit from $4.07 at the start of the year and down only modestly from the $4.71 level it traded a year ago. No wild swings with this stock right now.
In an industry flooded with businesses that make medical imaging equipment, Digirad offers machines for diagnosing heart conditions and related services that it claims are superior to those made by larger rivals such as General Electric Co. (NYSE: GE) and Siemens AG (NYSE: SI). Digirad’s machines are generally smaller and more portable than the industry standard, while also offering improved resolution and better patient comfort. The company also runs a mobile imaging leasing service, which packages an actual imaging system with a technician to operate it and software for image interpretation.
The company’s turnkey imaging service was designed to tap into a new market for cardiovascular imaging, by making it available to more patients in doctor offices and small clinics. But in trying to expand its market, Digirad ran up against the insurance industry and many providers that barred reimbursement for imaging procedures performed with mobile or leased equipment, or by unaccredited facilities. The strict reimbursement policies hit both the company’s service business as well as equipment sales. At the same time, a number of smaller companies have appeared, offering mobile imaging equipment to compete with Digirad’s products.
These developments pose a kind of glass half full/half empty scenario. Should investors be discouraged by the company’s slow pace of growth, or heartened that it has managed to grow at all at a time of so much uncertainty for the industry in which it operates?
Judging from the company’s recent financial performance and strategic decisions, it seems that some cautious optimism is in order.
For starters, Digirad is operating in a large and growing industry. It estimates that the total addressable market for its mobile imagine services business is about $2.6 billion; even assuming that’s an exceedingly generous estimate and that Digirad will never capture more than a small fraction of that market, the company still has a lot of room to grow.
It has also been growing the number of mobile cameras it operates, to 83 in 2006 from 80 the year before, while also increasing sales of its cameras to other health service providers. Last year it sold 71 cameras, up from 55 the year before. This growth occurred amid a larger decline in the sale of nuclear imaging equipment, which fell about 10% in 2006, partly because of reduced reimbursements from insurers. The rise suggests doctors and hospitals have been pleased with the way Digirad’s machines perform.
The company has also aggressively worked to cut expenses, while continuing to innovate. Last summer, it introduced a new triple-headed camera designed to improve image quality and lower the cost structure.
Digirad also has identified other ways to expand. In early May it bought Ultrascan Inc., another provider of mobile ultrasound services, for about $7.25 million. Digirad said the acquisition would help enhance its competitive position and potentially help it expand beyond cardiovascular into other areas of medical imaging.
There’s a good chance the worst could be over for Digirad, and there’s also the possibility that this company could itself become an acquisition target by a larger company looking to improve its own imaging business. Investors who have the stomach, er the heart, for the uncertainty that comes with medical regulations and insurance oversight, should take a look.
