IRIS International: A medical device maker on the move
Investors who want a stake in health care are well advised to consider the world of diagnostic medical devices. Dominated by global multibillion-dollar outfits like Medtronic, Inc. (NYSE: MDT), Stryker Corporation (NYSE: SYK) and Thermo Fisher Scientific, Inc. (NYSE: TMO) and Japan's Sysmex Corp. who pour hundreds of millions into research and development and have a strong hold on distribution channels, the category is a formidable challenge to even the most experienced players.
Chatsworth, Calif.-based IRIS International Inc. (Nasdaq: IRIS), a small, scrappy manufacturer of high-tech in-vitro diagnostic (IVD) imaging systems—blood analysis, urinalysis, oncology and infectious disease diagnostic devices—for major medical institutions, is boosting market share, thanks in part to an aggressive sales push and a pipeline of products with great promise. In the dog-eat-dog health-care sector, where high-profile pharmaceutical and biotech stocks reign supreme, IRIS hasn't gotten much notice, at least not yet.
But the little medical device maker is on the move. IRIS staged an impressive performance in the second quarter ended June 30. Net income rose to $1.8 million, or $0.10 per share, from a net loss of $4.5 million, or $0.25 per share, a year earlier (despite a charge of $5.2 million from the 2006 acquisition of Leucadia Technologies Inc., as well as a $500,000 charge related to the hiring of a new chief financial officer in May). Revenues rose 26% to a record $21 million, from $16.6 million.
The future looks bright, too. IRIS still has three years left in a five-year deal to supply the U.S. Department of Veterans Affairs with urine analyzers for the agency's medical centers and outpatient clinics in several states. IRIS plans to introduce three new products by the end of the year: iChem VELOCITY, a fully automated urine chemistry system to be launched in Europe; the NADIA PSA, a tool for the early detection of prostate cancer, which is expected to receive a Food & Drug Administration go-ahead; and a high-performance centrifuge (for blood/plasma separation), which will target an entirely new market. In addition, IRIS has plans to break into the molecular market with HIV and cancer detection technology, which could be rolled out in 2008.
In an August 13 statement, IRIS President and CEO César García was optimistic: "While we cannot disclose the details of our meeting with the FDA on July 30 regarding our ultra-sensitive NADIA-PSA, we are satisfied with the outcome and our course of action has not changed. We plan to submit the additional data required and expect to have our ultra-sensitive NADIA-PSA cleared by the FDA and in the market by year-end. We are also pleased with the reaction of our customers and distributors to the introduction of our iChem VELOCITY automated chemistry analyzer at the IFCC exposition in June. Although we are slightly behind schedule, we expect to commence shipments of iChem VELOCITY units late in the fourth quarter."
Ernest W. Andberg, CFA, an analyst at Feltl and Company, is bullish on IRIS. "Our rating remains at BUY with a price target of $21.00. This assumes the shares can sell at up to 4x our 2008 revenue estimate of $98m, plus cash on the balance sheet. Recently completed and announced acquisitions of diagnostics companies suggest this valuation could be conservative," Andberg says. He sees more prosperity in the future. "IRIS continues to make excellent progress in terms of revenue and earnings growth. The pipeline of business is strong and management increased ’07 revenue guidance. New products approvals are expected boost revenue growth and margins further in Q4."
Andberg isn't the only sector expert to hop on the IRIS bandwagon. "The company continued to exhibit improving razor/razor blade economics, as IVD consumables revenue grew to $11.9MM, up 7.6% quarter-over-quarter and 26.6% year-over-year. Instrument sales, meanwhile, remained surprisingly strong," said Salomon Kamalodine, a Los Angeles-based analyst with B. Riley & Co., who reiterated their "Buy" rating on August 14. "...investor focus can now turn to the company’s product pipeline, which includes several promising projects, all of which remain on track to be commercialized over the next three years."
Domestically, IRIS has a decisive competitive edge as the leader in automated urine microscopy, with about $200 million a year in sales. Outside the United States, Sysmex dominates the global market (largely Europe and Asia) as the world's top supplier. When it comes to international expansion, the challenge for IRIS will be to differentiate itself from its main competitor. (IRIS ' systems are less cumbersome to use than Sysmex's, which require lab personnel to physically remove test samples that require more detailed examination and to place them under a microscope.)
IRIS shares currently trade in the high teens, a steal compared with its pricey peers, which hover in the $50-$67 range. On Monday IRIS Vice President Robert Mello exercised options for 16,500 shares for $1.31 each, immediately selling them for $17.85, The Associated Press reported Wednesday. On Thursday the stock opened at a new 52-week high of $19.08 before closing $0.22 higher at $19.01. The thin following of analysts who cover the stock have a consensus one-year target estimate of $19.67.
Watch for upward revisions.
