Amid Buying Spree, Inverness to Sell More Stock—But Some Observers Skeptical

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in the U.S. that’s focused on these kinds of products. Personnel cuts and shifting some manufacturing to China will also help. Zwanziger also anticipates being able to cut production costs at Biosite’s California facility.

And the acquisitions have helped Inverness expand its offerings—and its global reach. Within the last year, the company has picked up key tests for heart disease, coagulation and cholesterol monitoring, and cancer detection. It has also nabbed new distributors and a home health care company, and finalized a consumer diagnostics joint venture with Procter & Gamble.

All this has impressed other analysts, including Stifel Nicolaus’s Greg Simpson. While he conceded that there is talk that “IMA is just a ‘roll up’ and largely a financial engineering play,” in his most recent report Simpson re-iterated a “buy” recommendation on Inverness because the company had exceeded expectations in key areas such as revenues and earnings per share. “We expect earnings momentum and earnings visibility to improve markedly in the fourth quarter of 2007,” Simpson wrote.

Xconomy tried to speak to Simpson, but just before our scheduled interview, he got word of Inverness’ pending stock offering and had to bow out, as Stiffel Nicholas is one of the companies handling that offering.

But Trainer is focusing on a somewhat different mix of indicators than Simpson and the other analysts who’ve given Inverness good ratings. Trainer says that according to his model, to justify the current stock price, “Inverness has to grow their profits at 50 percent compounded annually for 15 years, and I don’t know if a company has ever done that.” Alternatively, the company could turn in a “reasonable” revenue growth rate of about 6 percent for 100 years or more.

“The disconnect between revenue and profit is substantial,” Trainer says.

Revenues at Inverness grew 64 percent in the third quarter compared to the second quarter, to $237 million. But that included a boost of $80 million in new revenue from Biosite. During that most recent webcast, Zwanziger said future profits would come “half from acquisitions and half from organic growth.”

But some observers question the POC market’s ultimate potential for growth. Ken Rubenstein of California-based Lion Consulting says, “Frankly, you just can’t imagine that many tests that will be useful in a doctor’s office.” According to him, a ballooning of the POC market is still “pretty much a vision that’s out there.” The idea caught a lot of interest in the 80s, when people imagined moving a lot of tests to doctor’s offices and into consumers’ hands in order to speed and expand treatment. But many attempts to capitalize on this potential fell through. “Biosite is the shining example, and just about the only exciting thing that came out of that era,” Rubenstein says.

Undaunted, Zwanziger is promising both new products and more acquisitions, though he hasn’t said exactly where he is looking. And he’s not worried about how to keep paying for all these deals, either. “We have historically leveraged the stock to six times trading and then de-leveraged it,” he said in the webcast.

He also mentioned that his previous acquisition targets, by and large, have been pleased to be purchased all or in part with Inverness stock. “With the obvious exception of Biosite, which was not the friendliest transaction, sellers want the stock,” Zwanziger said.

Given the trajectory of Inverness so far, can you blame them? But you also have to wonder how that trajectory can be maintained over the long term.

Inverness’s 2007 Acquisitions*

Deal AnnouncedCompany/HQ Location
ValueKey Assets
OctoberAlere Medical Inc./Reno, NV$302MDisease management network, including home monitoring for heart and respiratory diseases
OctoberBiostate Healthcare Group/UK$33.4MUK distribution network
OctoberPan Bio/Australia$37MWorldwide infectious disease test sales, including Dengue Fever
AugustHemosense/San Jose, CA$165MPOC and home-based coagulation monitoring
AugustMatritech/Newton, MA$36MPOC bladder cancer test
JuneCholestech/Hayward, CA$326MCholesterol and related POC monitoring tests
MayBiosite/San Diego, CA$1.6BPOC cardiac tests, marketing strength, and R&D
MayOrange Medical/Netherlands$5.7MBenelux distribution network
FebruaryPromesan/Italy$4.9MItalian distribution network
FebruaryFirst Check Diagnostics LLC (assets only)/Lake Forest, CA$25MHome-based tests for drug abuse
JanuaryMedOx/Ottawa, Ontario$5.4MCanadian distribution network
Approx. total $2.5B 

*as of 11/12/07

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