ZEVEX International Inc. (ZVXI)
Name: ZEVEX International Inc. (ZVXI)
Web Site: http://www.zevex.com
Brief Description: ZEVEX International is a diversified medical device company committed to creating products that transform life with patented and proprietary medical device technologies - from enteral pumps and disposable sets to sensors, surgical tools, and medical electronic systems.
07/13/06 - Initiated with Buy rating and price target of $21 per share.
ANALYST OPINION: After several years of intensive R&D and a corporate transformation, this micro-cap technology company hit the market with a radically innovative product, which made ZVXI a recognized product leader. The product launch allowed the company to achieve previously unprecedented double-digit revenue growth rates, making ZVXI operations profitable.
Technology expertise and know-how combined with enhanced marketing and distribution capabilities, a strong management team and favorable market conditions should allow the company to successfully compete in the market generating increasing revenue streams in the years to come. The company has excellent opportunities to increase the penetration of its products in the domestic and international markets as well as to accelerate the development and launch of new products.
ZVXI markets medical devices under its brand names through strategic partnerships with leading global distributors of healthcare products. The company’s technology components are increasingly integrated into the products of leading producers of medical devices. At the same time, the company has just started tapping into the application and commercialization potential of its know-how.
VALUATION: Based on DCF, P/E and P/S valuation we have derived a fair value of $21 per share of ZVXI ( 28% above current price).
OUR ESTIMATES:
| year end - Dec 31 |
Revenue |
EPS, diluted |
| FY06 |
$38.1 Mn |
$0.48 |
| FY07 |
$45.1 Mn |
$0.61 |
HIGHLIGHTS:
Technological expertise, experience and extensive product portfolio
ZVXI has over 20 years of experience with over 100 different types of products designed and manufactured for more than 50 different established and emerging technology medical companies. ZVXI’s technology know-how includes 35 US and 30 international issued patents, as well as 39 pending patents. In May 2006, the company received the prestigious Innovation Booster Award from Royal Numico, a strategic partner at the third annual Numico Booster Awards in Amsterdam, Netherlands.
Technological leadership and compliance with industry standards
In 2005 ZVXI introduced the next generation enteral feeding pump EnteraLight Infinity. In the first quarter of 2006 this product accounted for major part of Therapeutics division sales, which represents 65% of the total company revenue. EnteraLight Infinity is the most portable, the lightest, the most durable, the most accurate and the most mobile feeding pump in the world. For its quality and unique innovative features the product received the Silver Medical Design Excellence Award (MDEA) at the Medical Design and Manufacturing Conference and Exposition in New-York City on June 14, 2005. ZVXI also has developed and manufactures a custom optoelectronic sensor for a product of Baxter Healthcare that received a Gold MDEA 2005. ZVXI has designed and manufactures for its partner Organ Recovery Systems Inc. a unique LitePort kidney transporter which was awarded the Gold MDEA in 2004. The company operations have been certified to world-class medical device quality standards meeting ISO 9001:2000 and ISO 13485:2003 certification requirements. The company employs a quality system developed to meet US Food and Drug Administration’s Good Manufacturing Practices.
Strategic Reorientation of business towards profitability
During the last five years, ZVXI has undergone a transformation intended to improve its strategic focus and enhance its sales and marketing capabilities. ZVXI has redefined its operating segments and has implemented lean manufacturing. Currently, the company operations are based upon common or related technologies enhancing the development and manufacturing of innovative products, improving product quality and service performance and providing for efficient sharing of business resources with customers. In 2005, the company boosted its marketing and selling efforts hiring a vice president of sales and marketing and a director of business development in Europe. ZVXI has built a strong team of competent and experienced managers, many of whom have over 20 years of managerial experience.
Revenue growth combined with increased profitability
In 2005, the company experienced revenue growth in both segments. Having been accepted by the market in a very short period of time, the company’s innovative product EnteraLight Infinity has become the key driver of a significant revenue growth during 2005. In the current year this trend has accelerated further. The company’s revenue for the first quarter of 2006 grew by more than 77% year-over-year, with revenue generated by Therapeutics products having jumped by 140%. The key contribution to this increase was made by export of Therapeutics products which grew by 841%. The domestic sales of Therapeutics products have increased by 22% over the same period. Revenue growth in 2005 allowed ZVXI to make its operations profitable. Management expects the revenue for the whole year 2006 to increase by 25% and continue growing in subsequent years.
The share of SG&A expenses in the company revenue decreased from 30% in Q1FY05 to 23% in Q1FY06 as a result of rapid revenue increase. In the future, management expects further reduction of expenses relative to revenue.
Stable demand for complementary products
ZVXI produces and sells complementary products for its enteral feeding pumps and kidney transporters disposable sets and accessories. The life cycle of disposable sets and accessories is much shorter then the life-cycle of the products they complement. For example, according to industry standards, for each enteral feeding pump placed, 12-15 disposable sets are used per month. The growing base of installed pumps and kidney transporters is a source of increasing demand for complementary products. According to management, complementary products generate “a lion’s share of revenue”.
Distribution strengths
The company distributes its products under its own label and under private labels of other medical device companies. The company’s trademarks are well recognized. Domestically, the company distributes its products via a national sales force working with home health care companies and medical device marketing companies. Internationally, ZVXI’s major distribution partner is Royal Numico, a multinational clinical nutrition supply market leader. Royal Numico distributes ZVXI’s products to more then 32 countries. Besides, Nestle, the world’s largest food company, distributes ZVXI’s Therapeutics products in Germany, Medicina in the United Kingdom and Baxter Healthcare in Puerto Rico. Applied Technology products including components and medical systems are sold under private labels of medical device “blue chip” and qualified emerging growth technology companies. These include Abbot Laboratories, Advanced Medical Optics, Inc., Alaris(R) Medical Systems, Inc., Baxter International, Inc., Medtronic(R), Inc., Organ Recovery Systems, Inc., and Terumo Medical Corporation.
Growth expected to continue
Management expects revenue to grow by 25% in 2006, driven primarily by further increase in international sales of EnteraLight Infinity. The total revenue from this cooperation is expected to achieve $10 million. Meanwhile, domestic sales of the product will be boosted. As of March 31, 2006, the Applied Technology division customer order backlog had grown by 43% compared to the first quarter of 2005. The largest clients of Applied Technology division continue posting market share gains, which in turn should increase the demand for ZVXI’s products. Management is committed to maintain the company growth. In 2007, management plans to launch new products. In particular, the potential of EntraLite Infinity will be used for creating other innovative product applications. The company also plans to elaborate new applications (different organ perfusion devices) of its LifePort platform. We believe that the company’s promising technology and superiority over its competitors will turn into higher sales and improved financial results. Management plans to further leverage the company’s existing core competencies, to expand the network of distribution partners, particularly in the US, and to attract new customers. At the end of Q1FY06, ZVXI had a backlog of $7.7 million (versus $5.4 million one year earlier), 90% of which is expected to be shipped before the end of the year.
Key growth drivers (management presentation)
- Execution of current business: 2006+
- New customers and products: 2007+
- New markets: 2008+
- Acquisitions: 2010+
Expanding Enteral Feeding Market
The market for enteral feeding in USA and Europe is set to grow with the continued aging of population, changes in lifestyle leading to nutritional imbalances and diseases and shifts from other forms of nutrition to enteral feeding. The share of the global population aged over 65 is expected to rise from 13.0% to 24.5% from 2003-04 to 2044-45 [http://www.frost.com]. This translates into a greater proportion of ageing patients with chronic illnesses. Enteral feeding at home in the United Kingdom is estimated to be growing annually at a rate of 20-25% [http://www.biospace.com].
Successful patent infringement claim
In April 2006, ZVXI settled a patent infringement lawsuit with a medical devices manufacturer whereby ZVXI will receive $1 million through a settlement agreement. This illustrates ZVXI’s ability to protect its intellectual property and also should improve considerably the company’s cash flow, even if this is a one-off event.
RISKS:
Increasing dependence on a limited number of customers
In Q1FY06, sales of Therapeutics products through Royal Numico generated approximately 33% of ZVXI’s revenues. ZVXI’s revenue growth projections for the rest of the current year as well as for 2007 and 2008 are based on expectations of expansion of business with Royal Numico. A year ago no one customer accounted for more than 15% of the company’s revenue. In the sector of Applied Technology ZVXI also depends on orders from a limited number of customers.
Increasing revenue dependence on one product segment
During the last year, the share of ZVXI’s Therapeutics products (primarily enteral feeding pumps) in the total revenue increased from 56% to 65%. This share is expected to increase further in 2006.
Small market share and established competitors
ZVXI competes with such established companies as Ross Laboratories – a division of Abbot Laboratories, Kendal Healthcare – a division of Tyco Electronics, and Novartis AG.
In the Applied Technology sector, ZVXI also competes with companies possessing greater financial and marketing resources, such as Benchmark Electronics, Nova Biomedical, Plexus Inc., Snmina-SCI Corp., and Sparton Electronics Corporation.
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