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Biotech / Medical : ACMI - Accumed Inc.
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To: Cisco who wrote (880)1/4/1998 12:49:00 PM
From: Frank Buck  Read Replies (1) of 1894
 
Cisco,

Your emphasis on gross margins as an indicator of progress for the year sounds good. Some additional factors may slightly or significantly impact these margins. These can include but are not limited to;

Pricing-pressures in the molecularbiology product sales-which currently account for the lion share of revenues. AccuMed is not the price-leader in that field and as such must stay cost- competitive with the competition on a somewhat similiar product type comparison. A reduction in price by the competition (with higher margin-of-scale capability) may force AccuMed to lower margins. Where AccuMed has a unique proprietary microbiology product that would not neccessarily be the case. The new AccuZone/Kirby-Bauer molecularbiology reader is a good example. How unique and desireable this susceptibility-testing reader is, in comparison to comparable existing units, enables a relatively predictable price point to be established.

International sales (again on the microbiology side) may be squeezed because of currency fluctuations. A strong dollar going ahead into '98 may make "similiar" foreign microbiology products more appealing. A reduction in margins may be neccessary to compensate for this variance. Again where AccuMed has a stand alone product, this may not be the case.

The closing of the Ann Arbor, Michigan facility and the move to out-source the manufacturing of products may reduce cost in the short-term. Dependence on outside suppliers can elevate the risk that price increases may be pushed to AccuMed in the long run. Contracted prices are established for finite periods, AccuMed may be forced to accept higher prices during renewal. (AccuMed currently has such an agreement with RELA for the manufacture of the ESP units) AccuMed would then either have to reduce margins or attempt to pass along the price increases. Obtaining a new lower cost supplier may take time and cause a disruption in a given quarters sales. Changes in costs of goods sold (COGS) will indicate any disturbances in this area.

The cytopatholgy side should be better insulated from a margin squeeze because of the proprietary nature of the equipment. Cisco your previous "apple and oranges analogy"- (addressed to Dana) regarding the TracCell and the NeoPath-PatherFinder system is a valid example. The bottom line is that margins can be held at a more predictable level, given the unique characteristics of the AccCell/TracCell system over another system. The margin-of-scale that AccuMed should realize with higher volumes suggests gross-margins steadily rising in step with those increases. Any decreases in gross margins this year may be an indicator that there are current problems. The expectation that 1999 will see the cytopathology revenues exceed the molecularbiology side indicates that the molecularbiology margins are more competitive and price/margin sensitive then the the cytopathology.

We have also been told that the major expected revenue stream and avenue for future growth of AccuMed is in the cytopathology side of the business. The Oncometrics-staining technology and the jointly developed AcCell/Savant should (if developed and approved) also help contribute to much higher gross margins because of its proprietary nature. It also is a "given" that 1998 should see steady increased growth in the cytopathology side of sales, if we are to expect the projected doubling of '98 revenues going forward into '99.

Frank



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