Medical Device Link.

IVD Technology Magazine
IVDT Article Index

Originally Published September 2000

The stock market, the food chain, and the IVD industry

Carl McEvoy and Michael Farmer

Things are looking up for IVD companies on Wall Street. Here's what two analysts think of the strengths and weaknesses of the industry's top publicly traded companies.

The 1990s were a grim period for share prices of IVD companies. In the last five years some of the greatest brand names in the IVD industry—Kodak, Coulter, DuPont, Sanofi, and Chiron—were sold for less than two years' revenues.

Recently, however, things are looking better. In the last year, the stock market's valuation of IVD companies has increased, a trend that is expected to continue for the forseeable future.

This article analyzes the top publicly held focused reagent, instrument, or system manufacturers (FRISMs) and analyzes the relationship between sales, profitability, and market capitalization in them. So as to compare like companies, publicly held divisions of larger diversified companies and private reagent, instrument, or system manufacturers are excluded from this discussion, as are the European and Japanese FRISMs.

The top publicly traded companies whose business focuses on IVDs include such firms as Beckman Coulter, Diagnostic Products Corp. (DPC), Bio-Rad, and Cytyc. This group consists of 34 North American, three Japanese, and three European companies, which all together account for nearly 20% of global IVD sales. For the majority of the public FRISMs, the IVD business represents at least 85% of sales. Exceptions are Applied Imaging (60%), Beckman Coulter (75%), Bio-Rad (57%), Inverness (66%), Diametrics (65%), and Vysis (60%).

The most important public FRISMs that are listed on one of the U.S. stock exchanges appear in Table I, in order of their market capitalization. These firms have sales adding up to $2.9 billion annually; their aggregate market capitalization at press time is approximately $9.7 billion. But Cytyc distorts the average with its extraordinary market capitalization and profitability.When Cytyc is removed from the equation, a more realistic picture is achieved—aggregate sales are $2.8 billion and the aggregate market capitalization is $7.9 billion. For the purposes of this article, 2.8 times the amount of annual sales can be taken as an average market capitalization for a public FRISM, a figure considerably better than what Kodak, Coulter, DuPont, Sanofi, or Chiron got.

The Players

Of course, all of the companies are struggling to win the survival-of-the-fittest game. Major players in the market can be grouped into six different species (See sidebars, below).

The Tiger. There is only one company in this category—Cytyc—arguably the most successful of the companies being analyzed here. The Cytyc story is pretty amazing by IVD-industry standards. It has created a new preanalytics business and has greatly improved the way Pap smear specimens are collected and processed. It has no debt, it will not have a direct competitor anytime soon because of its patents and proprietary specimen-collection
process, and it has hardly scratched the surface of its export potential. The company could buy Vacutainer (currently the world's biggest preanalytics business) without breaking a sweat.

Cytyc has earned barely $110 million in revenue, yet has a market capitalization that approaches $2 billion. The firm ranks second among the public FRISMs in market capitalization, return on investment (ROI), and profit margin. It is first in return on equity (ROE) and sales per employee.

Lions. Like lions with thorns in their paws, these five strong companies have many factors in their favor, but are currently undervalued.

Beckman Coulter has perhaps the broadest menu in the business—offering closed systems for chemistry, immunochemistry, and hematology testing—but its market capitalization of $1.8 billion is barely equal to one year's sales. The company's share price suffers from the debt it took on to buy Coulter (the most aggressive debt-equity ratio in this group by far) and from the perception that it is too focused on routine testing markets where reimbursement is being squeezed.

Bio-Rad is ranked first in quality control materials and is a strong contender in virology and hemoglobin testing. However, its market capitalization of $301 million is barely half of its annual sales. Bio-Rad's share price suffers for three major reasons—its debt, its dividend policy, and because some on Wall Street find it hard to tell if the company is fish or fowl. Roughly 57% of its annual business is in the IVD industry; the rest is in the life science and industrial markets.

DPC's technology was based strictly on radioimmunoassays until the early 1990s, but it is now one of the largest players with one of the broadest menus in the nonisotopic immunoassay market. DPC's market capitalization of $528 million is a bit better than the previous two companies at about 2.3 times its annual sales, but still below the average.

DPC is one of just five companies that report double-digit profit margins. Although the family ownership stake in DPC depresses its share price, DPC has the advantage of having little debt. It is ranked among the top five in revenue, market capitalization, ROI, return on assets, and profit margin.

All three of these companies are strong. They rank first, second, and third among the public FRISMs in both revenues and head count. All three are profitable. All three are taking advantage of the emerging markets, in which healthcare is still expanding, and are reducing their dependence on the shrinking margins of the mature domestic market. All three have strong management, broad menus, and a growing installed base of closed systems.

Immucor is the world leader in blood-typing, with a broad range of relevant reagents and an automated system (the ABS-2000) began appearing in labs in 1999. It is ranked sixth among the public FRISMs in revenue and, until recently, has been consistently profitable, with annual sales in the $70 million–$75 million range. However, its market capitalization is currently less than half its annual sales, down from more than two times its sales one year ago.

Ventana is ranked seventh among the public FRISMs in revenue and is the leading competitor in immunohistochemistry automation by a wide margin. Like Immucor, until recently, it has been consistently profitable, also with sales in the $70 million–$75 million range. Ventana's market capitalization is still more than four times its sales, but its stock has lost two-thirds of its value since March 2000.

Although stock prices for Immucor and Ventana have declined recently, both companies are market leaders in undercompetitive market niches.

The five lions are all vigorous competitors, and will be even better once these thorns are removed from their paws.

Mice That Roar. These companies are distinguished by their very modest revenues, absence of current profits, and market capitalizations that make other IVD companies envious.

With the exception of Diasys—which is blessed with a tidy balance sheet and a well hyped distribution agreement with Bayer—all of these companies have either a very interesting new technology or a clever new twist on an old technology.

• Calypte (Alameda, CA) has the only urine test for HIV-1, with other urine-based assays to come.
• Careside (Culver City, CA) has the first point-of-care (POC) instrument suite for chemistry, hematology, coagulation, and certain immunoassays.
• Chromavision (San Juan Capistrano, CA) is a pioneer in the new field of cellular imaging.
• Diasys (Waterbury, CT) has a semiautomated urine-sedimentation system.
• Hypertension Diagnostics (Eagan, MN) has a noninvasive test for blood-vessel elasticity.
• ID Biomedical (Vancouver) has a new test for antibiotic-resistant bacteria.
• Matritech (Newton, MA) is working on novel oncology tests for bladder and breast cancers.
• Pharmanetics (Raleigh, NC) has one of the best POC hemostasis systems.

These are companies with defensible patent positions and substantial growth prospects. It is likely that, if they execute effectively now, several of them will become attractive prospects for acquistion by larger companies within the next few years.

Hares. These are journeyman companies, most with stocks that have performed better than average, either because they are reporting better margins or because they have persuasively promised to do so someday. Even though for some of these companies POC applications are not their entire business, they are seen as POC players.

Abaxis, Biosite, Cholestech, Inverness, Meridian, Quidel, and Trinity are currently profitable. The remaining three—Diametrics, I-Stat, and Orasure and —are not yet profitable.

Abaxis, Cholestech, Diametrics, Inverness, and I-Stat make closed instrumented systems with which nonprofessionals can perform quantitative tests. The other five companies—Biosite, Meridian, Orasure, Quidel, and Trinity—have built their businesses around rapid noninstrumented qualitative assays of various types.

Three of the seven profitable companies have double-digit margins: Biosite, Cholestech, and Trinity. Biosite shareholders have been rewarded best with a market capitalization of 13 times annual sales. Cholestech and Trinity shareholders must be wondering why those companies both have better margins than Biosite, but are trading at only about three times their annual sales.

Three of the other POC companies have single-digit margins and consequently modest valuations between 1.7 and 2.0 times revenue—Inverness, Meridian, and Quidel . With margins of only 2%, Abaxis has a valuation of roughly three times revenue—about the same as Cholestech and Trinity with their double-digit margins and very similar revenues (all three in the $25 million–$30 million range).

Among the profitable companies, it looks like Abaxis and Biosite are doing the best job at convincing investors that their prospects are good. Cholestech and Trinity are executing very effectively, but they could do a better job at getting their stories out to investors. Inverness, Meridian, and Quidel would wish to execute as efficiently as Cholestech and Trinity and tell their story as effectively as Abaxis and Biosite.

Three of the POC hares are still losing money but have managed to retain appeal with investors. Diametrics and I-Stat are similar in that they are both developers of closed systems for critical-care chemistry testing that have signed away distribution rights to billion-dollar companies. I-Stat's deal with Abbott and Diametrics's deal with Agilent are two big reasons why these stocks have performed so well. I-Stat's market capitalization of $350 million is 7.4 times revenue and Diametrics's $188 million valuation is 8.7 times revenue.

Orasure, the new firm created by the pending merger of Epitope and STC has a strong share price right now. Its $199 million market capitalization is 15.7 times revenue.

Tortoises. Like the hares, these are journeyman companies. A few of these stocks look good, but most do not. They may be taking a long time to get there, but they each have a good chance of reaching the finish line for their shareholders. These companies all have annual revenues in the range of $10 million–$30 million. There are four currently profitable turtles—Biopool, BioSource, Hycor, and IRIS. Those not yet profitable are Applied Imaging, Digene, Igen, Tripath, Visible Genetics, and Vysis.

Except for BioSource, with double-digit margins and a valuation of roughly 4.4 times revenue, the four profitable turtles have modest profits and modest valuations (2.9 times revenue for Hycor, less than annual revenue for Biopool and IRIS). Hycor's shares have done very well over the last year, but more because the company is known to be for sale than because of its stellar performance. None of these companies are new, but they are all currently executing effectively in competitive markets, in some cases after having been previously left for dead.

• BioSource makes esoteric immunology and molecular biology assays.
• Biopool has one of the broadest menus of routine and esoteric coagulation reagents and has just bought into the nucleic acid testing business by announcing a merger with Xtrana (Denver).
• Hycor is mainly known for its QC materials and allergy tests.
• IRIS has one of the world's two automated urine-sedimentation systems, plus one of the broadest lines of tabletop centrifuges.

The six not-yet-profitable tortoises are very different from the profitable tortoises. They are younger companies, each with a unique technology that has not yet been widely accepted.

• Digene has developed a nucleic acid test for HPV and other infectious diseases.
• Igen developed the technology that was licensed to Boehringer (now Roche) and grew into the Elecsys systems.
• Tripath has a unique image analysis system for Pap smear screening.
• Visible Genetics is mainly known for HIV genotyping.
• Vysis and Applied Imaging are both in the embryonic prenatal and genetic-testing business.

Digene, Igen, and Visible Genetics probably have the greatest upside, which has not escaped the notice of the stock market. Digene's $554 million market capitalization is 24 times annual sales. Igen's $285 million market capitalization is nearly 14 times revenue. Visible Genetics's $458 million market capitalization is 23 times revenue.

Tripath, formed by the merger of Autocyte and Neopath, has excellent technology for automating Pap smears, but it is hard to shine in the same market as Cytyc. The company's valuation of $161 million is about eight times revenue.

Vysis and Applied Imaging may yet merge as Autocyte and Neopath did, but for now the market values Vysis at 3.8 times sales and Applied Imaging at just 2.7 times sales.

Conclusion

Over the last five years, merger and acquisition activity in the IVD industry totaled more than $10 billion (discounting the $6 billion in nondiagnostic assets that Boehringer sold). Almost 30 companies were sold during that first wave of consolidation. Over the next five years we can expect at least another 20 to 30 acquisitions that would total at least $10 billion at today's multiples, but possibly as much as $15 billion if current trends continue.

Many of the public FRISMs will likely change hands over the next few years.

The biggest companies will be trying to fill out their menus while the niche players will focus on positioning themselves. Genomics companies that may not even exist today will be buying IVD companies that understand how to reach their end-users. Traditional drug companies that are not currently in the IVD business will roll out new biotech drugs that need monitoring, which may inspire one or two of them to buy an IVD firm—or two.

Five years from now, people will look back nostalgically at how easy it was in the 1990s to buy a great brand-name IVD company for less than two years' revenue.

Carl McEvoy and Michael Farmer are partners in the market research firm Asiatic Research (San Francisco).