IRIS International Reports In-Line Q2; New Products Should Boost Growth

Singular Research recently sent a note to clients, raising their price target and reiterating their BUY rating on IRIS International (IRIS). Key excerpts follow:

Q2:08 EARNINGS SUMMARY

Despite coming up against the last few units from the large multi-unit order last year, IRIS International (IRIS) sold 125 units of its key iQ200 product in Q2:08, compared to 128 units in Q2:07. The decline in units led to a small YOY contraction (-2% YOY) in revenue from the IVD instruments division. The broad installed base of iQ200 units (more than 1,900 installed worldwide at quarter’s end) is leading to substantial growth in the company’s IVD consumables and service business, which saw 22% YOY growth in Q2.

Sales from IRIS’ small sampling instruments division also perked up during Q2, generating 14% YOY growth, thanks to new products launched in the last 12 months. Adding these three components together, the company generated revenue of $23.8 million in Q2:08, representing 11% YOY growth.

Revenue increased 10% on a sequential quarter basis. IRIS earned better than expected gross margins (rising 145 basis points YOY on a consolidated basis) on its consumables and sampling product lines, which helped offset some of the revenue weakness. Operating expenses increased, but at a slower rate than recent quarters. Management stated that it was making additional product enhancements to its iChem Velocity automated urine chemistry product line based on customer feedback from beta testing during Q1:08. The changes meant that roughly $1.2 million worth of units did not ship in Q2 but are expected to ship in Q3:08.

The company remains on track to launch the iChem Velocity in the U.S. in Q3 or Q4, after receiving FDA clearance. The iChem Velocity product will be sold as both a stand-alone device, as well as bundled with an iQ200 microscopy unit into a product that IRIS calls the iRiCELL complete urinalysis workstation. Having combined these two products into a single solution opens up a substantially larger target market (on the order of $350 million per annum), which is more than twice the size of the target market of the iQ200 as a stand-alone product. As an additional benefit, the iRiCELL combo unit utilizes more consumables, which should provide an additional growth kicker to the company’s already strong consumables business. We expect sales of the iChem Velocity and iRiCELL combo unit to accelerate throughout H2:08, providing strong upside potential to revenue growth over the next several quarters.

INVESTMENT THESIS

We continue to applaud management’s strategy and execution regarding its new product development. With the addition of the iChem Velocity and the NADIA PSA test (discussed below), IRIS is quickly moving from essentially a one product company today (the iQ200), to having several new “platform products” in the area of fully-automated urinalysis, hematology, and molecular diagnostics (detection of protein precursors to help diagnose diseases).

Such new products could double the company’s revenues within a few years, therefore, it is vitally important to IRIS that it get these launches “right”. This is particularly true of the company’s NADIA PSA assay, which has demonstrated it can detect the recurrence of prostate-specific antigen [PSA] up to two and a half years sooner than anything else on the market today. This translates into earlier detection of any relapse of prostate cancer.

Based on initial test results, the company is currently performing additional clinical tests on its PSA test unit in order to qualify the unit as a prognostication device. As a prognostication device, the unit would likely generate much higher revenue and reimbursement per unit (on the order of $300 to $1,000 per test) than if it were just a monitoring device ($30 per test), enhancing its value to a laboratory.

Management continues to hold discussions with larger med device companies for licensing and partnerships on its NADIA PSA technology, as well developing its NADIA technology for other applications such as HIV and breast cancer. Having at least two open-ended growth opportunities is what sets IRIS apart from other small-cap medical device manufacturers and leads us to believe IRIS should trade at a premium versus its peer group on a forward basis.

Disclosure: none