I believe the BBRS report is causing the increase today.
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SABRATEK CORPORATION
Clarifying Issues Related to Amended Class Action Suit; Buy
Wade H. King, M.D. (415) 693-3434 wade_king@rsco.com
Amrit Nagpal (415) 248-4325 amrit_nagpal@rsco.com
BancBoston Robertson Stephens BancBoston Robertson Stephens
Sabratek Corp. SBTK $19.63 6/25/99
Industry: Medical Devices Wade H. King, M.D. (415) 693 3434
CHANGE IN YES/NO WAS IS Amrit Nagpal (415) 248 4325
Rating: No BUY
...EPS 1998A Actual $0.70 FY Dec. 1998A 1999E 2000E
...EPS 1999E No $0.70 EPS: 1Q $0.17 $0.07 A
...EPS 2000E No $1.35 2Q $0.20 $0.07
52-Wk Range $34-13 3Q $0.23 $0.20
Shares Out (millions) 11.6 4Q $0.10 $0.36
Market Cap ($mil) $228 Year $0.70 $0.70 $1.35
Avg Daily Trading Vol (000) 726 P/E 28.0x 28.2x 14.5x
3/99 Bk Value/Sh $5.04 Revs(MM) 1998A 1999E 2000E
3/99 LT Debt/Total Cap 37% 1Q $15.2 $13.6 A
Tech. Value (Mkt.Cap-Cash) $210 2Q $16.3 $15.3
Price/Bk Value 3.9x 3Q $18.8 $21.2
3/99 Cash/Sh $1.56 4Q $16.6 $26.9
Div/Yld nil Year $66.9 $77.0 $117.0
3-Year Sec Growth Rate 30% MktVl/Rev 3.4x 3.0x 2.0x
Key Points:
· Recently, an amendment was filed to the class action lawsuit that has been pending against Sabratek since January 1999. The amendment includes a variety of accounting fraud accusations. These allegations focus primarily on revenue recognition and inventory management issues. The class action lawsuit amendment also contains references to the company “parking” inventory with distributors. Sabratek has stated that the accusations are without merit, and the company will defend itself vigorously.
· The lawsuit amendment cites alleged examples of consignment sales, suggesting that Sabratek sold pumps to distributors and recognized the associated revenue, while promising that the merchandise could be returned. In fact, we believe that Sabratek has never taken back a normally functioning pump from a distributor, as this clearly violates company policy.
· Sabratek does recognize revenue once product has been shipped to a distributor. Upon shipment, title for products is fully transferred to the distributor, afterwhich Sabratek assumes no further selling responsibility, and returns are not an issue as a matter of policy. These are among the reasons that the company's stocking distributors receive favorable discounts on pump sales. Stocking distributors account for as much as 50% of Sabratek's pump sales.
· Since the recent allegations, we have renewed our conversations with numerous distributors and suppliers about their respective dealings with Sabratek. With the exception of comments from only one distributor, feedback on dealings with Sabratek has been universally favorable. Interestingly, this lone exception has continued to order pumps and accessories from Sabratek.
· The lawsuit amendment also alleges that Sabratek shipped raw material inventory back to suppliers in order to artificially decrease its reported inventory levels. As mentioned earlier, our conversations with suppliers refute these claims. In addition, we believe that multiple raw materials figures cited in the amended claims were substantially overstated.
· We have also spoken with Sabratek's auditors and believe that they are working with the company diligently to evaluate any and all of the recent allegations. In our opinion, suggestions that Sabratek's auditors will rescind their opinion on the company's financial statements are erroneous. If Sabratek chooses to go to trial regarding the allegations, we expect the company to be vindicated. As always, we cannot predict with certainty the outcome of any legal proceedings.
· Sabratek's informatics platform of products and services should coalesce with the acquisition of MOON and GDS in the middle of the year. The MOON system was tested in a Florida beta-site hospital for two years, involving over 200 physicians and approximately 15,000 patients. The system is currently undergoing software enhancements reflecting input from the beta-site
experience.
· We believe that MOON represents a very significant financial opportunity for the company. The recent WebMD-Healtheon (HLTH $84-7/8) transaction highlights the extraordinary valuations associated with successful ventures in this space. We believe that Sabratek is conducting discussions with multiple, high profile potential partners who have significant interests in Sabratek's informatics platform of products and Internet medium services.
· By the end of 1999, we look for shares of Sabratek to trade at $34, which is 25x our 2000 EPS estimate of $1.35. This offers investors at current levels the opportunity for approximately 75% ROI. Our rating on Sabratek is a Buy.
INVESTMENT IMPACT: Neutral. Sabratek management has stated that the recently amended accusations in the class action lawsuit filed against the company are totally without merit. Our due diligence uncovers essentially one distributor with negative comments about the company, and it is unclear whether his claims can be substantiated. We believe that suggestions that Sabratek's auditor is about to rescind its opinion on the company's financial statements are erroneous. Sabratek plans to defend itself vigorously against all the recent allegations.
Sabratek's informatics platform of products and services should coalesce with the acquisition of MOON and GDS in the middle of this year. We believe that MOON represents a very significant financial opportunity for the company. The recent WebMD-Healtheon transaction highlights the extraordinary valuations associated with successful ventures in this space. We believe that Sabratek is conducting discussions with multiple, high profile potential partners who have significant interests in Sabratek's informatics platform of products and Internet medium services.
INVESTMENT RECOMMENDATION: Buy. Our year-end 1999 price target for shares of Sabratek is $34. This is 25x our 2000 EPS estimate of $1.35. Currently, Sabratek is trading at less than 15x our 2000 EPS estimate of $1.35. In our opinion, investors at current prices have the opportunity for approximately 75% ROI to our price target.
THE COMPANY AND INVESTMENT THESIS: Sabratek was founded in 1990 and is based in Skokie, Illinois. The company develops, manufactures, and markets a number of therapeutic and diagnostic products designed for use in the alternate site healthcare market. This market includes long-term care facilities, doctor's offices, outpatient centers, and the home, among others. Sabratek's principal products include infusion pumps for the delivery of therapeutic agents, along with diagnostic and information systems for data capture, patient monitoring, and remote therapy adjustment. The company's hardware and software systems are designed to provide infusion therapy in a simple, easily monitored, and cost effective manner. Sabratek aims to be the comprehensive solution provider to the alternate site healthcare market. The company's goal is to create a Virtual Hospital Room, enabling doctors to maintain a high level of vigilance on patients at alternate site facilities. By mid-year, we expect Sabratek to close on its acquisition of both Moon Communications and GDS. Sabratek is currently upgrading software related to the MOON system, which is designed to collect, analyze, and relay clinical data created at the alternate site to physicians. This system should decrease the required number of alternate site visits by nurses and physicians, and would thereby substantially reduce overall expenses.
In our opinion, Sabratek represents a unique opportunity to invest in a company dedicated to providing cost-effective solutions to the alternate site health care market. We believe that Sabratek's infusion devices and related information management systems have the potential to become standards of care in the alternate site market. Additionally, the company's mission to create a Virtual Hospital Room presents a compelling opportunity for Sabratek to integrate all of its products and services under a single umbrella, amidst a competitive but fragmented alternative site care environment.
INVESTMENT RISKS: Among the risks are issues related to intense competition from large companies, product liability, patent litigation, pricing pressure, and regulatory concerns. Additionally, reimbursement risk, especially abroad, is a concern for any medical products company. We expect Sabratek to acquire both Moon Communications and GDS Technologies during 1999. However, there can be no assurance that either of these acquisitions will be consummated according to our projections.
Sabratek has been issued FDA warning letters on two separate occasions in the past two years regarding its Rocap manufacturing facilities. Recently, the company voluntarily withdrew its ROCAP product line for approximately six months. It is always possible that the FDA could choose to take further action regarding the company's products. In 1999 a class action lawsuit was filed against the company. We cannot predict with certainty the outcome of any such legal proceedings. |
