MTS Medication Technologies: Drug Organization
With its automated medication dispensing systems for long-term care facilities, MTS Medication Technologies Inc. (AMEX: MPP) is in step with the times. Forget about Gerry and The Pacemakers. The new trendsetters for the Beatles generation: MedLocker and the Multi-Dose Punch Cards.
Instead of a British invasion, MTS is expanding from the United States into the United Kingdom and Germany, and also is entering the promising retail and nutraceutical markets. The St. Petersburg, Fla.-based firm’s products include its MedLocker, which securely stores medications, and punch cards, disposable packaging that labels multiple drugs. Most important is its OnDemand systems, which make automated patient packs and dispense patient-specific doses for the right time and day.
MTS’ customers are pharmaceutical suppliers to institutions. Its prescription pill management machines allow pharmacies to automatically or semi-automatically assemble, fill and seal drugs into packaging that represents a weekly or monthly supply of a patient’s medication. In addition to its long-term care and assisted living facilities, MTS also supplies correctional institutions.
More people are getting really old faster than others are spreading into middle age. The U.S. Census Bureau says the total U.S. population is expected to grow at a compound annual rate of 14% between 2000 and 2050; the number of those 65 and over is expected to grow annually at 35%. And the number age 85 and older is expected to surge almost 70% each year.
That’s a lot of folks, a lot of ailments and more and more drugs, all of which is expected to stoke MTS’ growth. Analyst Glenn Garmont at Broadpoint Capital says the demographics bode well for the company’s two largest customers, Omnicare, Inc. (NYSE: OCR) and PharMerica Corp. (NYSE: PMC), who supply prescription drugs and other services to about 65% of the long-term-care industry. In turn, this should keep MTS’ drug machinery humming.
Garmont, just one of a couple of analysts who follow the company, started coverage of MTS with a “strong buy” rating September 7. He says in his research initiation that he believes MTS is well positioned for continued growth within its core long-term care pharmacy packaging business, both domestically and in Europe.
“Given the increasing emphasis being placed on the cost and health benefits of high medication compliance, we view MTS Medication Technologies as being in a ‘sweet spot’ with its innovative drug and supplement packaging solutions,” Garmont wrote.
Omnicare and PharMerica dominate MTS’ revenues, representing 23% of total sales in fiscal 2007 through March; the company’s top ten customers accounted for 52% of sales. Pharmacy suppliers have grown as the industry has consolidated, which is somewhat responsible for MTS’ narrow customer list. Lost sales to either Omnicare or PharMerica would be hard on MTS.
The company also sells products to drug wholesalers, who resell to pharmacies. Sales to three major wholesalers, McKesson Corp. (NYSE: MCK), Cardinal Health, Inc., (NYSE: CAH) and AmerisourceBergen Corp. (NYSE: ABC), represented about 18% of fiscal 2007 sales.
Though risky, the concentration of MTS’ business within a few dominant companies so far has greased the channels for the company’s products. Net sales for the first half of fiscal 2008 increased 18.4% to $28.9 million from a year-earlier, and net sales for the second quarter rose 9.3% to $14.1 million. In 2007, sales totaled $51.1 million.
The company has turned its revenue gains into heady profits this year, after losing $0.35 per share in 2007. For the six months through September, net income rose 37.7% to $1.3 million, or $0.19 per diluted share, compared with $944,000, or $0.15, in the year-ago period. In the second quarter, MTS earned $0.12 per share, up 37.9%.
For current fiscal 2008, MTS expects revenues in a range of $60 million to $63 million. Earnings per share are expected at $0.45 to $0.50. Shares of the $81 million market cap company closed Thursday at $13.20 each, within a 52-week range of $8.88 to $14.25.
The key for MTS is that the number of OnDemand technology systems on the market has reached the point at which it is generating sales of consumables, or the company’s punch card packs. Garmont calls MTS an example of the “razor/razor blade” model, in which machines are made to drive sales of the higher margin packaging. “With 85%-90% of quarterly revenue derived from the sale of consumables, MTS has a high level of revenue visibility,” Garmont says. Omnicare in May agreed to buy a number of OnDemand systems, and some of these are now being installed.
Although the company is keeping long-term care its primary objective, opportunities for growth are being pursued in Europe. MTS has distribution deals in the United Kingdom and Germany, helping to push sales up 47% in the second quarter from the previous year. There is lots of room for more growth: in fiscal 2007 through March, MTS’ sales outside the United States were less than 15% of total.
Part of the European sales gain came as a result of the February 2007 acquisition of German company Consilio—a small purchase that already has raised MTS’ profile in Europe. But organic revenue growth in the United Kingdom was up more than 30% in the quarter, management said on its conference call, expressing confidence that growth will be sustainable.
The company also sees opportunities in retail and is selling into that market now. Management is focused on attracting a large chain to its machinery and says it expects to record retail revenues from such a deal next year. MTS also sees a significant opportunity for its technology in nutraceuticals, or nutrient supplements.
Main competitors include Drug Package, Inc., AutoMed Technologies and RX Systems, Inc., but MTS says it believes its packaging equipment distinguishes it from competitors’ less automated systems. It claims to have the highest throughput, and can fill and seal up to 900 consumable medication cards per hour.
A lot of drugs, a lot of folks. With exceedingly light average daily volume of about 16,000 shares, it may be a little early to turn on to MTS Technologies (MPP). But don’t tune out, either.
