Individual Investor Online Talks about SonoSite...FYI...
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Aug 12, 1999
SonoSite: Offering a Clearer Image of its Future
by Glenn S. Curtis 8/12/99
Selling new gadgetry or pharmaceuticals to physicians is a tricky business.
Many doctors are set in their ways, and they don't always greet new technology with open arms. This makes the job that device and drug companies have all the more difficult. Such companies not only have to come up with revolutionary products and get them approved by regulators, they also must convince the doctors that their wares will help improve business and better serve patients.
Sonosite Inc. (NASDAQ:SONO - news) , however, looks to have figured a solution to these obstacles. The company went public in April of 1998, when it was spun off from ATL Ultrasound. ATL itself was purchased by Royal Philips Electronics of the Netherlands last October, and is now part of that company's medical systems division.
The shares spent most of last year languishing in the $4 to $5 range, but in the spring began a run that took them as high as $22.63. On Wednesday, the stock closed at $18.50, up $0.44 for the day. With some analysts having recently picked up coverage, there's a good chance the price will rise further before the end of the year.
Sonosite's claim to fame is a handheld ultrasonic imaging device, an inexpensive alternative to the high-cost ultrasound systems normally used in medicine. The gadget, the Sonosite 180, can be carried bedside to bedside in a variety of settings including in an emergency room or in an obstetrician/gynecologist's office.
The product weighs just 5.4 pounds and it is considered revolutionary in that a more traditional ultrasound machine costs $100,000 to $150,000. The Sonosite 180 costs just $20,000 to $25,000 soup to nuts.
The Food and Drug Administration gave the product the green light in April, and the company is expected to start shipping the product in early October.
Prudential Vector Healthcare Group analyst, Sandra Hollenhorst predicts that Sonosite will sell 630 of these systems by the end of 1999. She says sales will jump further to "2000 units in the U.S. and 1,000 units internationally in 2000," and also points out that a night shift may be added to the manufacturing line so production can meet the anticipated jump in output.
Sonosite's chief financial officer, Guy Seaton joked, "we are working weekends to try to figure out production schedules. But we are confident that we will be ready to ship on October 1."
To date Sonosite has generated over 3,000 leads, which indicates a strong interest in the product, particularly among OB/GYN's.
Down the line management sees the product being used for many types of soft tissue examinations, including breast exams, and to monitor heart functions by cardiologists.
Sonosite has already inked a distribution deal with PSS World Medical (NASDAQ:PSSI - news) to sell the products to private physicians nationwide. PSS is the leading distributor to physician offices in the U.S., with approximately 1,000 sales representatives calling on over 130,000 customers in all 50 states.
The market that Sonosite is addressing is estimated at $540 million. With the PSS deal, it stands to gobble up a sizeable market share.
There's another positive sign.
The company doesn't have to worry about insurance reimbursement. Medically speaking, the insurance companies consider the system to be like any other ultrasound machine. That means that doctors and hospital administrators can use the system on patients without worrying if a scan or procedure is covered. Other medical device makers haven't been so lucky, and when the insurance companies balk at covering claims, that can stall sales of some devices.
The company's management and other insiders seem bullish on its prospects. Executives purchased more than 23,000 shares in the $5.75 to $7.19 range last November. But there was a more recent buying binge, too, which caught our eye. Officers and directors have bought more than 18,000 shares in the open market since April at prices ranging from $14.81 to $19.69.
Do the insiders know something that the rest of the Street doesn't? Maybe. But if insiders are buying the stock on a rally, that's a sure sign that they're confident about the company's outlook.
Sonosite had traded as low as $4.50 less than one year ago. But attention by Wall Street and other long-term players helped the price jump. Now the stock may be ripe to move even higher.
Like other development stage companies, the Bothell, Wash. company will burn through a boatload of cash until its product sales hit critical mass. But there looks to be plenty of cash on hand to cover these costs.
The company raised $35.5 million in a secondary offering of three million shares at $13 a pop in the second quarter. This translates to $4.30 per share in cash on the balance sheet, a very healthy ratio given current prices. Sonosite shouldn't need to raise additional money in these turbulent markets.
The company also has only $500,000 in debt on its books. This should let it focus on making the product work, and not be distracted by meeting interest payments.
Wall Street seems enthused by the goings on at Sonosite. Prudential Securities and Deutsche Banc Alex. Brown picked up coverage earlier in the year.
While consensus estimates have the company losing $3.13 per share this year and $0.75 next year, the sell-side analysts say the cost, weight and quality of images of the ultrasound machine are a strong indication of future profits, which should materialize in 2001.
To give an idea of the expected ramp up, consider that Prudential is forecasting the company to generate $7.3 million in revenue in 1999 and $37.9 million in 2000. This powerful growth on the top line should enable Sonosite to reap profits.
Bottom Line:
Technology in the medical field is rapidly improving. Physicians desire faster, smaller and more cost effective tools to treat their patients. Insurance companies are particularly interested in devices that lower costs. Sonosite has a tremendous opportunity to appreciate in value as the medical community warms to its new product.
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