Update: Move Over Godzilla -- It's Zila
iionline.com
When Individual Investor magazine first wrote about Zila Inc. (NASDAQ: ZILA) back in 1991, the company's shares traded for $1.00. Since then the stock has zigged and zagged before settling at a recent $4.19. But a recent strong earnings announcement on the heels of a 57% revenue gain encouraged us to take the pulse of the company again.
About the Company: From A-to-Zila
Zila has four operating groups: Zila Pharmaceutical, which sells non-prescription oral healthcare products, Cygnus Imaging, which makes intra-oral video camera systems, and digital x-ray systems, Bio-Dental Technologies, which sells software for dentists, and Zila Dental Supply, which distributed 15,000 items through direct mail, catalog sales, and telemarketing.
The company made two deals in 1997--acquiring an anti-bacterial oral rinse product, Peridex, and Oxycal Labs which makes an enhanced form of Vitamin C under the trademark Ester-C. The addition of Oxycal and Peridex was a major source of the 57.1% revenue growth the company has experienced for the first nine months of this year.
Blockbuster Product?
But investors in the company have been most enamored by the prospects for Oratest, Zila's proprietary oral cancer diagnostic test. The product has been approved in Australia, Canada, and much of the European Union. Unfortunately for Zila, the U.S. Food and Drug Administration has been slow in evaluating the product. At first there was tremendous confusion over whether the company should seek a 510K (device) or NDA (New Drug Approval) for the product. After expending loads of time and money, Zila was told by the FDA that it must seek the more stringent NDA approval for the product. Management is hopeful that it will receive positive feedback from the FDA in the next several months.
Naturally, if and when Oratest is approved, selling, general, and administrative expenses should increase markedly. But management appears confident that the anticipated growth in revenue and the corresponding gross margins of Oratest (70% anticipated), as well as the core products of the company, will more than offset the added expenses.
Price Target
Based upon continued growth trends, and a hopeful ramp up of Oratest next year, management hopes to bag $80 million in revenue in FY 1999 -- a 28% increase in revenue from $62.1 million in 1998. Pauli & Company analyst, Dr. Deborah Ziwot thinks the company can earn $0.10 a share next year and $0.24 in FY 2000. She rates the shares a buy and maintains a price target of $9 to $10 based upon a multiple of 37 - 40 times their FY estimate of $0.24.
That kind of projected multiple is not for the faint of heart, especially in this market, but we share the analyst's enthusiasm. For the short-term, though, the share price will remain event driven. An FDA approval of Oratest would send shares higher, and probably also invite additional coverage from Wall Street.
Bottom Line:
Over the longer haul, however, management will have to articulate a plan for yet further growth for the stock to move into double digits.
Analyst: Glenn Curtis
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