Description

This is not a complicated story and I don't want to make it out to be. My value add here is that I've been digging around for 4-6 months and I've done a survey of about 20 doctors on the product to find out whether its legit and I think the price is finally coming down to an acceptable level. I think at below $8.00 for a 1-2% position would be a good portfolio allocation for anyone for a 100% 2 year upside, about 20% downside. 

In short. Iradimed is the world's only manufacturer of MRI compatible IV pumps. Its a niche market, its only competitor exited the market a few years ago and its good for a $22-$24mm revenue run rate a year which is just about where the company is right now. Next year its coming out with an IV compatible monitor to go with the pump and if it works, it should really boost the company's free cash flow generation ability.  The founder/owner of 60% of the stock is a smart guy, I've met with him a couple of times and I thought he was legit. He has a history of selling his companies before and he was pretty clear that his goal is to sell this company in the intermediate term.

So what is an MRI compatible pump? Basically, you can't have anything metal near an MRI machine. So how do you put patients on an IV through this? 2 options: a) you dont b) you use a very long IV line stiched together by hand from 5 other IV lines which takes a long time to set up

There are 36,000 installed MRI scanners in the world growing at 6 to 8%, and the company has sold 4,100 of them at an ASP of $28,000 to $34,000. They estimate their addressable market is about 22,000. Realistically if they sell a 600 a year it would be pretty good. There is also a small after market component. From the doctors/anesthesiologists I've spoken to that have it in their hospital, they tend to love the product and it really makes life easier for them. So I think this confirms that there is a natural market for this product and its a proven concept that works. So whats the problem?

1) It's just not a ROI device or just not in any calculable level. Their main selling point is safety safety safety. And thats valid. For high end hospitals thats a marketable priority. There are other ROIish benefits to it, ON THE MARGIN, like the drugs in the five IV lines are wasted once its done, so less drug usage; more marginal throughput, you can put through more ICU patients (thought one doctor said she would never put ICU patients through an MRI), and you can put kids through if they are hooked up to calming drugs; and productivity improvements from shorter set up. So this makes it a somewhat hard(er) sell in a way...

2) ... on that note. The last 2 years the sales force has had it easy. Competitor exited and they were filling the void left by them with $32mm 2015 and 2016. At the same time the company decided to try to do bigger sales (5-6 IVs per hospital) instead of 1 which lengthened the sales cycle as all the sudden purchasers needed to put this in their capital budgets and have reviews. In general the sales force productivity needs improvement. The CEO claims they are well on their way and it should really uptick in next 12 months. I'd wait and see on this strategy.

So this is a good part to introduce survey. Ive spoken to 20 doctors so far:

-4 of them have it in their hospital. They love it. Saves time and they hated the long IV lines. Their nurses love it too.

- 14 have not heard of it but think it would be useful. Reasons: hate long IV lines; had problem patients they wish they could put through but didn't; think it would increase through put/save time.  Safety really wasn't on anyone's mind. Notable none of them had any pull. i.e. they are not target. Its usually admins and I havent had a chance to speak with them.*

- 2 thought it was stupid. Just fine with long IV lines, and would never put through patients who needed IV lines anyway.

So basically my conclucsion on this product is that its pretty much at its natural monopoly market share at $22-$24mm earning $2-$4mm FCF (on a $60mm EV). I dont see this dissapearing and its probably fairly valued here without market giving them much credit for any growth/sales force productivity. In fact with 1mm short (27% of float) I would say a little too bearish (who shorts $60mm EV company?)

*3 said a monitor would be nice to have .... so what else is there?

In 2H2017 the company is introducing an MRI patient vital signs monitor for a $50,000 price. This is not a virgin market (1000 - 1200 sold a year already). This already exists. But they think its a natural compliment sale to the pump and they think they can take 10% share easily (100-120) with an expectation of 60 units sold in 2H2017 (I dont believe that for 2017).  They think they can take 30% of the expansion market and overall its a $22mm opportunity a year.  I don't know. The margins will be similar.  But lets put it this way ... in 2015-2016 when they had abnornmal sales of $32mm (i.e. $8mm above current run rate or 1/3 of their expected $22mm) their CFO was $8-$9mm (or $7-$8mm FCF). I don't think thats impossible. I would put it under somewhere between possible and probable. 

Counter point: still not a calculable ROI device.

Long-term goal: be an MRI compatible device company. CEO has been in this market for decades. They have $26mm in cash ($28-$29mm by year end). He's looking to buy a complimentary MRI device company. Maybe something in entertainment (think watching movies via VR like device in a dentists office while they drill your teeth for hours). The goal is to be a 2-3 MRI compatible product company which would then be very attractive to a large competitor acquirer with a huge sales force. I think its a good strategy, but I can see how some might not think so.

So valuation: 

In the downside case I don't think any growth happens and it trades down to $6.00 - $6.50 ($60mm -$65mm and $30mm in expected cash) and a non growth scenario its a 10% FCF yield company. I think anything below that and longer term the founder thows in the towel and just cashes out via a sale. So a permament capital impairment scenario is 20% downside for me. Of course if there is any fraud/FDA issues and its a zero but thats why my recommendation is 1-2% allocation.

Base case

I think the company has modest success in improving the pump sales and modest success in monitor devices. It gets back to $32-$35mm 2018 revenue run rate and has $8mm FCF/EBITDA.  It should get ~4x revenue multiple, industry (small cap medical devicies) low ~18x forward EBITDA multiple and that gets you about $16-$17 stock price or 100% upside from today. I think this is possible, though maybe would take to mid, end 2018 to achieve run rate.

Upside case

If everything goes right, they boost pump sales to $30mm a year run rate, and they get good reception in monitor market for the $20mm run rate the $50mm in revenues translates into $20-$25mm in EBITDA (80%+ gross margin, ~$20mm SG&A) and 20x multiple gets you $400mm in EV, plus $40mm in cash so that gets you $44 stock price or 450% upside from today. Not impossible, but not probable either.

Other upside scenario, they sell out. You can easily get rid of public company expenses and probably let go of the half of the sales force. So cut out half of $14mm in SG&A and have $30mm in revenues at 80% gross margins for $15mm in synergy EBITDA even at 15x can get you to $225mm in EV $250mm in MV and $20-$25 stock price.

I think with the founder at 60% he’s likely motivated to cash out sooner than later.

Risks are obvious:

-      Tiny medical device company. They’ve had FDA issues and it seemed like it was really after them on a non issue which took a year longer to clear up than needed. So FDA risk is real.

-      One product (or 2 product company). One misstep and you’re done.

-      Shorts are a 27% of float, 10% of shares outstanding. I kicked the tires, I think the stock down 50%, it was a good short before but I’m not seeing whats left now. I think the unwind will be a bitch. But maybe someone knows something I don’t. I just think this implies major fraud and with a guy who owns 60% of it, and has a good reputation in the industry I am just not sure how hes motivated to commit fraud.

- They could make a value destroying acqusition. 

Catalyst

 - Success with improvement in sales force in near term

- Success with monitor introduction into market. If they sell 60 in 2017 (their expectation) that would be a coup I think.

- Sale of company