The other side of the story.
I love this site because it lets people give all sorts of information on their favorite companies. I've looked at this company and have some major concerns. Maybe we can discuss them here.
First, CCSI has shown the technology works (for measuring bilirubin) and that's great. The next question is how much money can they make on it.
There are two ways CCSI can go. Market the COLORMATE III themselves, or license the technology.
The numbers that CCSI have say that $330 million is spent each year on the test in the US, that means diagnostic companies probably get $150 million (hospitals take the other half). It's a competitive market and CCSI would be doing well if they get 30% of the market, so they can maybe expect $30 million in revenues in three years. Typical margins in this business are about 20%, which would give annual profits of about $6 million (from the US, maybe $20 million worldwide). This would be after they invested something like $50 million on marketing and sales.
It would make more sense to license the technology to one of the market leaders. IF they can do this, they would get something like 2% of the revenues (a typical royalty rate). By working with a market leader, they would get a higher percentage of the market, say 60%. $150 million x 60% market share x 2% royalty rate = annual profits of about $1.8 million (from the US, maybe $5 million worldwide). The big benefit of making this deal is that they avoid the large upfront cost (and time) of $50 million or so for setting up a marketing & sales network.
[Even these numbers are somewhat optimistic because the typical business model is to charge per test. Since the CCSI technology is non-invasive, they may have trouble charging per test (no reagents or disposables). In that case one would have to forecast instrument sales (I'd guess something like 10,000--20,000 in the US every three years. At $1,000 or so per instrument that would give revenues of $10 million and profits of maybe $1 million in the US per year.]
So, either way, being very optimistic I get that CCSI would be very fortunate to be making a profit of $10 million in 3-5 years. If you use a reasonable P/E ratio of 25, that would put a market value of $250 million in 2003. That corresponds to a stock price of less than 20. This is the optimistic view.
The pessimistic view is that they can't license the technology because no one thinks it is worth it. Diagnostic companies will only license technology from a company if it is cheaper than developing it on their own or designing around it. (Most all patents can be avoided, it's just a question of cost: is it cheaper to license it or avoid it.)
CCSI has tried to protect their technology with patents and they have succeeded in acquiring several patents. In particular, #5,671,735 (http://www.patents.ibm.com/details?patent_number=5671735) has some claims relating to measuring bilirubin. However, the question is whether someone else can be prevented from developing and marketing a non-invasive bilirubin detector. The CCSI '735 patent references prior art (see: patents.ibm.com and patents.ibm.com, and it looks very, very easy to use the prior art (which is now public domain technology) to engineer a non-invasive device competitive with CCSI to measure bilirubin.
To summarize:
The extremely high market capitalization of CCSI (nearly $200 million) and low chances of substantial growth from here make me not want to buy this stock. I think that optimistically the stock may be worth $20 in 2003, but more realistically they won't be anywhere near that. As far as buyout offers go, I have seen similar companies to this (with exciting technology, but less hype) priced at around $10 million. If you don't believe me, I'd like to point out that a typical company in the point of care medical diagnostics field, i-STAT (http://quote.yahoo.com/q?s=stat&d=t) has a market capitalization similar to CCSI, but had $36 million in sales in the past year (CCSI had less than 1% of that.) If CCSI can be at this position in 3-5 years, they would be lucky. CCSI is grossly overvalued right now.
I'd say that if you are in this stock for the long term, get out now. I can't predict the short term, and it may very well hit 40, but it won't be based on fundamentals or value. It will be based on hype. The problem with trading on hype is that you don't know when the people doing the hyping will jump out. And they aren't dumb, they know that sooner or later they have to dump the stock, since the company won't ever make enough money to justify it's stock price.
Replies and other views are always appreciated.
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Jim |
