WSJ Article
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Heard in Texas:
New Deal Positions Prime Medical
To Tap Potentially Lucrative Niche
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By Jonathan Weil
Staff Reporter of The Wall Street Journal
Prime Medical Services hasn't exactly been making waves
lately, but that may soon change.
The Austin-based company is the largest U.S. owner and
operator of lithotripters, which use shock waves to
disintegrate kidney stones so they will painlessly exit
patients' bodies, without surgery. Last year, urologists
performed more than 36,000 procedures in 33 states using
Prime Medical's lithotripters. The company's fleet of 58
machines -- all but six of which are mobile units that travel
among hospitals and outpatient centers -- gives it about 19%
of the U.S. market.
The result has been steady, if unspectacular, earnings
growth. This year, per-share net income is expected to hit 76
cents, up 13% from 1996, while the consensus projection for
next year is an 11% gain to 84 cents a share, according to
First Call.
But analysts expect growth to accelerate dramatically in the
near future. That is in part due to a joint venture Prime
signed in May with EDAP Technomed, a Cambridge, Mass.,
medical-device maker.
Under the agreement, Prime Medical has the right to buy
EDAP's Prostatron microwave-thermotherapy devices at an
undisclosed discount. The devices use microwave heat to
shrink noncancerous enlargements of the prostate gland, a
condition that makes urination difficult for an estimated 7.5
million American men, who spend some $5 billion a year on
treatments.
Now, analysts say, investors have the chance to get in early
on Prime Medical as it is poised to tap into this huge
business. "I don't think the market has thought out that
potential yet," says Eugene Melnitchenko of Principal
Financial Securities in Dallas.
Until November, when the Food and Drug Administration
approved the devices, men with enlarged prostates had only
two treatment options: surgery, which is 90% successful but
carries the risk of impotence and incontinence; or drugs that
shrink prostate glands but aren't as effective as surgery.
With Prostatron, clinical studies showed improvement in
70% of patients, with no cases of incontinence, impotence or
blood loss.
Prime Medical plans to start with three traveling Prostatron
units this year, one of which already is operational in North
Carolina. After that, it expects to add another 10 machines a
year over the next five years, while continuing to buy about
three lithotripters annually. The Prostatrons cost about
$400,000 apiece before any discount, while a lithotripter goes
for around $1 million.
"Right now, we have 58 lithotripters," says Kenneth Shifrin,
Prime Medical's chairman. "There's no reason we couldn't
have as many or more Prostatrons."
Mr. Shifrin says Prime Medical is the first company with a
national reach to provide Prostatron service. "Right now,"
he says, "we certainly have an advantage." He adds that
Prime Medical won't see significant results from its venture
with EDAP for at least a couple of years.
But analysts say investors can be confident the stock price
will be supported in the meantime by the strength of the
kidney-stone operations. "Given the valuation of this stock,
investors can afford to be patient as the company transitions
into a higher-growth area," says Frank Morgan of J.C.
Bradford in Nashville, Tenn., who expects the share price to
hit $20 by the end of 1998.
Prime Medical now trades around $10.75, a low 14.7 times
trailing earnings. The average five-year earnings-growth
projection is 30% a year, according to First Call. Mr.
Melnitchenko predicts the stock will trade at $22.50 a year
from now. "There just aren't that many stocks sitting
around at those valuations," Mr. Morgan says.
The picture wasn't so rosy a decade ago, when Prime
Medical's core businesses were cardiac-rehabilitation centers
and magnetic-resonance-imaging services. The firm lost a
total of $40 million from 1984 to 1989. By 1991, two years
after new management took over, it was just above
break-even, with $15 million in revenue.
Then, in 1992, Prime bought its first lithotripter. Three years
later it was out of the other businesses, whose fortunes were
sinking amid heavy competition. By last year, revenue had
reached $72.4 million.
The losses from the 1980s actually came in handy when
Prime began turning profits, because it could carry them
forward and use them to slash its income-tax bill. Because of
these carry-forwards, the company's effective tax rate last
year was 12%. Prime will use its remaining carry-forwards
this year, when its effective tax rate will be 24%. Next year,
the rate will return to its normal 40%.
Because of the changing tax rates, analysts say, Prime
Medical's earnings year-to-year aren't comparable. Pretax
profits, for example, are expected to grow nearly 30% this
year to $45.3 million on $92.5 million in revenue, according
to analysts.
"The tax increase [from year to year] is masking very strong
operating growth," says John Hindelong, an analyst with
Donaldson, Lufkin & Jenrette Securities in New York. Mr.
Hindelong's 12-month target price for Prime stock is $16 a
share.
With a market capitalization of just $224 million, Prime
Medical's stock is prone to volatility. Last July, the
company had to scrap a stock offering of 10 million shares
when the price was dragged down during a slump among
small medical-service stocks. After hitting a high of $21 in
June 1996, it finished August at $12.25.
Now, the company says it has no plans for another public
offering. In fact, because it has an untapped $50 million line
of credit, Mr. Shifrin says, Prime Medical doesn't need any
more capital to fund future acquisitions.
The company envisions several ventures to capitalize on the
network of 1,900 urologists it has developed with its
traveling lithotripters. Earlier this month, it launched a new
division to manage urologists' medical practices. Down the
road, Mr. Shifrin says, he hopes to start a business in which
Prime would buy such things as pharmaceuticals and
medical supplies at bulk discounts and then sell them at
bargain prices to its urologists.
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Driving Hard: Houston-based Compaq Computer climbed
17.2% last week to $67.13, after Wall Street interpreted a
robust earnings report from Dell Computer to be a signal of
strength in the computer industry. Dell, based in Round
Rock, reported second-quarter earnings of 59 cents a share,
compared with a First Call estimate of 54 cents.
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Heads Up: Genemedicine jumped 15.6% to $4.63, after
announcing it had begun a Phase I clinical trial on its
Interleukin-2 cancer-gene medicine for the treatment of head
and neck cancer. The company, based in The Woodlands,
said another Phase I trial will be conducted in Germany in
the next few weeks with the help of its corporate partner
Boehringer Mannheim. |
