Imatron Article.....
Here is an article that appeared in the Motley Fool... Thanks to Sharon Gray for letting me know about this article...
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[EDITOR'S NOTE: Today, Rogue Media and Technology looks at the prospects
for Imatron, a new medical-technology company that recently became a
darling of some investors. What, exactly, does Imatron's technology offer?
What's the company's bottom line? What have online investors had to say
about it?]
During the bull market that recently raged, where even the poor-hitting
Mario Mendozas of the corporate world were ripping off three-baggers like
they were Barry Bonds, we began to hear the cautionary words of Wall
Street professionals and their minions in the financial press warning of
speculative frenzy in the stock market.
Soon, even good news began to look bad. And some of the stocks that seemed
destined for that hall of fame of great investments have now found
themselves lucky to beat out solid doubles off the wall (when they're not
stuck running out check-swing bunts).
But as the dust settles on my mixed metaphor and the market's own recent
schizophrenia, investors are busy trying to determine which of the great
story stocks of the spring will indeed turn out to be genuine investments,
the currently no-name players capable of delivering year after year, the
stock equivalents of the next Mike Piazza.
Some analysts don't believe San Francisco-based Imatron Corp. will make
that grade. Three weeks ago Rick Berry, a technical analyst at Murphy,
Marseilles, Smith & Nammach in Atlanta, told SAN FRANCISCO CHRONICLE
columnist Herb Greenberg that this high-flyer would soon sink to below $3
a share from its recent support around $5.
"The stock literally doubled overnight on the basis of one positive
report," he said. "And the longs are all people on the online services
who don't know the difference between a hemline and a trend line."
Berry apparently offered no further explanation for his view. But Imatron
had shot up from a 52-week low of $.87 last summer to a recent high of
$8.37 this past June. And since Berry made his comments, the stock has
indeed drifted down with the market, dipping below the $4 level. (At the
time, Berry also said he expected Iomega to drop to $9 a share).
With real earnings at least a year away, Imatron's trend line may tell the
story in the short term. But with only a few exceptions, the online
investors Berry denigrated seem more interested in the company's long-term
prospects than in the short-term action in the stock. And though
significant questions remain to be answered, the *story* at least remains
compelling and perhaps genuine.
Without a doubt, Imatron has been on a hot streak, rising on a year-long
series of positive research reports that have made the company's patented
Ultrafast-CT scanner seem likely to become widely used in diagnosing
coronary artery disease, or hardening of the arteries.
What distinguishes Imatron's computed tomography scanner from others is
its use of a high speed electron beam that can take a picture of the heart
in one-twentieth of a second, or many times faster than conventional X-ray
scanners. The Imatron scanner produces an unusual three-dimensional image
of the heart and arteries that quite accurately reveals deposits of
calcium, one of the primary ingredients in the plaque that clogs arteries.
This plaque can cause angina, heart attacks, and strokes.
A scan with the Ultrafast-CT only takes ten minutes and costs about $400,
making it more than competitive with other non-invasive diagnostic
procedures. Echocardiograms, which use ultrasound, can cost slightly more
whereas the standard treadmill stress exercise test is not appropriate for
all patients and does not always detect minimal heart disease.
Invasive methods can be more accurate but far more costly and
time-consuming. Angiography, the "gold standard" of diagnosis, involves
placing a catheter into the coronary artery. The procedure causes some
discomfort and costs thousands of dollars. A thallium scan is also very
accurate, but this test costs over a thousand dollars and involves being
hooked up to an IV for hours.
The wildest hope of Imatron investors is that the Ultrafast-CT scanner
will perfectly combine cost-efficiency, convenience, and accuracy and
become a major diagnostic tool, perhaps the primary initial test, in
checking for heart disease.
The Cruttendon Roth Review, an investment newsletter, puts the U.S.
market for such a product at 80 million Americans, including all men age
40-65 and women 45-70 who have at least one risk factor for coronary
artery disease. If HMOs and insurance companies will pay for it, the scan
could become a standard preventative measure like the mammogram, with each
person at risk of heart disease being checked once every few years.
In theory, an effective early prevention method could alert people at risk
so that they could begin taking cholesterol-lowering drugs and make
lifestyle changes that might delay or even reverse the onset of coronary
heart disease. The financial savings could be enormous, as $60 billion a
year is spent, directly or indirectly, on the treatment of heart disease
in the U.S.
Much of this money pays for expensive bypass surgeries rather than
prevention. More important, nearly half of the 600,000 Americans who
suffer heart attacks each year die from them. And about one quarter of all
attacks are not proceeded by symptoms such as chest pain.
The recent string of scientific reports suggests that Imatron's
Ultrafast-CT scanner may indeed offer unique advantages, particularly in
alerting otherwise healthy people to their risk of a heart attack. It is
this cumulative clinical support, rather than simply one report, as Berry
insisted, that has boosted the fortunes of Imatron's stock.
In September of 1995, a positive scientific report sent the stock from $1
to $3.50 in one day. In this study, published in RADIOLOGY, autopsies
revealed a strong correlation between the amount of calcification as
detected by Imatron's scanner and the severity of atherosclerosis, or
coronary artery disease.
Another study published in October suggested that doctors could use the
Ultrafast-CT to eliminate heart attack as a cause for 1.4 million of the
5.5 million patients who enter U.S. hospitals annually complaining of
chest pains. The company believes such diagnosis could save $2 billion
annually in unnecessary hospital costs. Another study from Dr. John
Rumberger of the Mayo Clinic confirmed this report.
More recently, the news about Imatron's scanner has only gotten bettter.
A number of papers presented at the 45th Annual Scientific Session of the
American College of Cardiology in March reiterated and clarified the
scanner's promise.
One prospective study tracked 1,200 patients for 19 months and showed that
the Ultrafast-CT was quite effective in predicting cardiovascular events,
including heart attacks, in people with coronary artery calcification but
no outward symptoms of heart disease. Patients who experienced heart
attacks during the course of the study initially scored seven times higher
on the Imatron scanner than those who remained well.
Another paper confirmed that the scanner could save billions of dollars
annually in unnecessary medical costs, since it could quickly help
emergency room personnel determine which patients complaining of chest
pains but with no history of heart disease needed to be hospitalized. In
this study of 133 such patients, 86 patients showed calcification.
Of these, seven suffered heart attacks within 30 days. Of the 47 patients
who tested negative on the Imatron scan, none suffered coronary events.
The study thus suggests that 25% of these patients need not be
hospitalized and that the Ultrafast-CT scanner can determine which ones
can be sent home.
Another study of 290 patients showed that a positive scan was "the single
most predictive factor" for coronary artery blockage caused by plaque. A
positive scan was more predictive than all other medical and
lifestyle-related risk factors combined, and thus might be used as the
primary method of screening patients to determine which ones should be
subjected to the more definitive and expensive invasive tests such as
coronary angiography.
Indeed, in March the journal of the American Heart Association,
CIRCULATION, published a report on a large, multi-center study involving
710 patients that compared Imatron's scanner with angiography. The report
showed that the Imatron scanner was "highly sensitive for the detection of
coronary artery disease," with 95% sensitivity as compared with
angiography.
This means that of the 427 patients who tested positive for significant
heart disease by angiography, 404 showed calcification on the scanner. Of
the 23 that did not, 19 had obstructions in only one arterial vessel. The
Ultrafast-CT scanner detected calcium build-up in 250 of the 253 patients
with disease in more than one vessel, meaning that it showed 99%
sensitivity for patients with more severe heart disease. This rate is
unsurpassed by other non-invasive procedures.
What's clear, then, is that the Imatron scanner is far less specific than
it is sensitive, meaning that its detection of calcification is not a sure
sign of progressive coronary artery disease or an immiment heart attack.
Of the 283 patients that tested negative by angiography, 159 showed
calcium deposits in their arteries.
The researchers of the CIRCULATION study suggested that the test needed to
be evaluated more thoroughly before it could be recommended as a screening
test for asymptomatic people. Nonetheless, the researchers deemed their
results "very promising" and strongly suggested that the Ultrafast-CT
showed signs of becoming "a useful noninvasive test for the diagnosis of
coronary artery disease."
A more recent study published in CIRCULATION and highlighted in a May 31st
American Heart Association news bulletin confirmed these earlier reports
and sent Imatron surging from around $3.75 a share in late May to over $8
just days later.
A follow-up analysis of the earlier 19-month study of 1,200 subjects, this
report from doctors at St. Francis Hospital in Roslyn, N.Y. found that the
Ultrafast-CT can accurately predict coronary events in seemingly healthy
people better than cholesterol tests can. Patients with high calcium
scores on the test were up to 35 times more likely to suffer heart attacks
as compared to those with low scores. The authors concluded that the
Imatron scan should be used routinely to test for hidden heart disease in
otherwise healthy, middle-aged men and women.
Indeed, the company now expects the American Heart Association to issue a
recommendation some time in late September or early October expressing its
support for the Ultrafast-CT scan as a standard diagnostic procedure for
the detection of coronary heart disease. The AHA's support is expected to
accelerate the approval by Blue Cross/Blue Shield, plus other insurers and
HMOs. Despite considerable popular interest, the CT scan will only become
widely used once insurers begins to cover the costs.
Still, two key questions remain. First, will the Imatron scanner really be
adopted by physicians as a primary diagnostic test? Second, does the
company have a business model that allows it to prosper from this hot
technology if it is widely adopted?
The recent online discussion in the Imatron folder in THE MOTLEY FOOL,
America Online's leading financial forum, reveals a surprisingly
thoughtful discussion of these issues, given Berry's comments. In fact,
shortly before Berry made his remarks to Greenberg, one doctor-poster
named "StuZZZ" said he thought doctors would be impressed by the
technology, but he still had doubts about the actual usefulness of
Imatron's scanner.
"There is a general axiom in medicine that one does not perform a test
unless the data obtained will be used. IMHO, the Imatron scan in most
scenarios fails this test."
StuZZZ said that he didn't think any health insurance company would cover
the test anytime soon in the absence of patient symptoms. He also noted
that the best use of the test would be to intervene with cholesterol
management and lifestyle modifications. "Yes, the cholesterol management
might be a bit more aggressive [as a result of the test] but in my
experience as a clinician, I have found that most people, despite the best
encouragement, do not institute life-style changes until an event occurs,"
he wrote.
"The only clinical INDICATION that I see at present would be to consider
an Imatron scan in a patient with atypical chest pain who has a negative
or equivocal stress test in someone who is otherwise heading towards
angiography."
But he believed that the calcification detected could not be precisely
correlated with the degree of plaque actually present in the arteries.
"Therefore, I'm not sure that a negative Imatron scan will prevent the
above patient from reaching the cath lab."
A strong AHA recommendation followed by widespread acceptance by HMOs and
insurers would alleviate such doubts. And the public demand for the scan
generated by coverage in US NEWS & WORLD REPORT, 20/20 and even LIVE WITH
REGIS AND KATHIE LEE may help push the medical community to accept it as
rapidly as the data come in to support its use.
Even so, it's not yet clear whether Imatron is well-positioned to benefit
from the scanner's mass acceptance.
Imatron designs, manufactures and markets the scanners, which sell for
about $1.8 million a piece. At the moment, however, the company is locked
into a puzzling distribution arrangement with Siemens that Foolish
investors have yet to make complete sense of. On the one hand, Siemens
seems to have exclusive rights through the end of 1997 to distribute the
Ultrafast-CT in the U.S., Canada, and Europe. Unfortunately, Siemens has
done a poor job of selling the product. And precisely what the financial
arrangements are between the companies remains confusing.
So despite the fact that the Ultrafast scanner is used in 35
research-quality sites in the U.S. and 65 worldwide, Imatron itself has
had trouble turning a profit. For fiscal year 1995, ending December 31st,
the company lost $2.4 million, or $.04 a share on only $26.7 million in
revenue, nearly $7 million less than in 1994. Much of the loss and drop in
revenue came in the fourth quarter, amidst the stellar research reports.
The company is not expected to become profitable until 1997, and that
process depends on a number of variables. Of most importance is the
company's HeartScan subsidiary, the "primary engine of long term company
growth," according to Imatron President and CEO Lewis Meyer.
HeartScan operates centers providing coronary artery disease risk
assessment diagnostic services centered around the use of Imatron's
Ultrafast-CT scanner. HeartScan currently operates three centers (Houston,
Seattle, and San Francisco), but the unit plans to open at least four new
centers this year and twelve in 1997. According to Meyer, these centers
are expected to bring in about $2.5 to $3 million a year after the first
year of operations.
Even if all of that revenue went directly to Imatron, the company's
current market capitalization of around $300 million seems to put a pricey
valuation on the company as a multiple of sales. And the revenues are
expected to look much better than earnings for a while as the company pays
for the expanded HeartScan operations.
Unfortunately for Imatron investors, the company owns just below 50% of
HeartScan. An equity offering announced June 26th raised $16 million from
European investors in exchange for at least a 40% ownership stake in the
subsidiary.
Imatron hopes to spin off HeartScan to it shareholders within the next two
years, allowing Imatron to fully book scanner sales to HeartScan while
allowing HeartScan to focus on its medical service business free of the
equipment manufacturing side of the company. And Imatron is working to
position its manufacturing business so that the company profits from
annual service agreements.
Still, expansion plans may require the company to seek more equity
financing in the future. And whatever profits HealthScan brings in have
already been cut in half in exchange for a relatively small amount of
expansion money.
Moreover, top company insiders have signalled a possible short-term top in
Imatron stock. By mid-June, they had registered to sell 2.6 million
shares, a huge chunk of their holdings, even as the good news has pushed
Imatron's stock to its recent highs.
CEO Meyer sold 420,000 shares at around $7 a share. CFO Gary Brooks sold
100,000 shares between $6.64 and $7 a share, after selling 50,000 shares
months earlier at just below $4 a share. Imatron Vice President and
HeartScan chief Dale Grant sold 100,000 shares at around $7.50. Each
executive has stock options for at least an equal number of shares, but
these sales are significant nonetheless.
Some short sellers in the FOOL folder have offered reasonable scenarios by
which the company's plans could all work out and have the stock *still*
look wildly overvalued at the current level of $4 a share. But given the
perhaps extraordinary potential of the Ultrafast scanner, international
sales and growth in the HeartScan segment of the business may each exceed
current expectations. The company's efforts to associate with leading
institutions have been quite successful thus far, and these efforts are
important in laying the groundwork for the technology's widescale
acceptance.
Surely though, Imatron faces a number of challenges. The first sign of how
well it will do is likely to come from the AHA report, which could give
the company a significant boost. But however the story plays out, one
suspects that Foolish investors with a long-term perspective and diligent
attentiveness to valuation may do better than those who heed the views of
a technical analyst quoted in brief in a business column.
Besides, knowing something about hemlines may be better than knowing
nothing about trend lines. I hear it's actually good for your heart. Are
there studies that can make the same claim for technical analysis?
-- Louis Corrigan (RgeSeymour) |
