China Medical Embraces Molecular Diagnostics (CMED, rated BUY)
China Medical Embraces Molecular Diagnostics China Medical (CMED) offers a compelling value since losing about 60% of its market value in the past year, with shares trading very close to August 2005 IPO levels at the close today of under 18 bucks. CMED is also included in the ETF Innovators [ETFI] Preventive Medicine Index and is one of my nine defensive stock picks for 2009. CMED reported its quarterly results last week and announced the sale of it High Intensity Focused Ultrasound tumor therapy system business [HIFU] to a major shareholder, Chengxuan International (which is owned by the Chairman & CEO of CMED), for $53.5M. The deal is expected to close by year-end and positions CMED as a pure-play in the higher margin + higher growth business of In-Vitro Diagnostics [IVD]. The sale of high-priced HIFU equipment occurs at lower margins and is not as predictable as the Company's molecular diagnostics business, which is poised for significant growth thanks to the recent acquisition of the human papillomavirus [HPV] DNA Biosensor Chip for cervical cancer detection and the Surface Plasmon Resonance [SPR] Analysis System. The acquisition provides CMED with a molecular diagnostics platform for HPV, including strains that cause cervical cancer, which is an estimated $700M market in China alone. CMED already has plans to expand the use of the SPR System beyond just cervical cancer, with potential clinical diagnostic applications that include the detection of biomarkers for infectious diseases, cancer, cardiovascular disorders, and immune system disorders. A recent report by the World Health Organization estimates that cancer will overtake heart disease as the top cause of death in the world by 2010, which is part of an overall trend that predicts global cancer cases and deaths will more than double by 2030. The Company's results for the second fiscal quarter included revenue of $42.8M and net income of $17.3M, up 35% and 52%, respectively, from the year-ago period. ECLIA diagnostic system sales were $18M, FISH diagnostic system sales were $10.6M, and HIFU sales were $14.2M. Although the sale of the HIFU business occurred at less than 1X sales, the growth of just 5.5% from the year-ago period is much less than the Company's other segments with ECLIA sales up 32% from the year-ago period. Gross margin rose to 73.2% for 2QFY08 from just 61.5% in the year-ago period due to a shift in the sales mix toward higher margin, recurring ECLIA reagent kits and FISH probes – with the trend toward higher margins expected to continue with the recently announced sale of the HIFU business. As of the end of September, CMED had a cash balance of $398M with accounts receivable up by about 8% to $48M. CMED provided guidance for FY08 (which ends March 31, 2009) excluding the HIFU business which included a revenue range of $121.5M-$123.4M (representing growth of 50.7%-53.1% from the year-ago period) and the Company will provide earnings guidance after the HIFU sale closes along with 3Q results. The $568M market cap for CMED is less than half of the $1.2B value placed on another molecular diagnostics company, Sequenom (SQNM), which has major potential in the area of non-invasive, prenatal diagnostics for conditions such as Down syndrome. While HIFU sales accounted for just one-third of total 2Q revenue, CMED has lost more than one-half of its market value over the past three months despite the fact it will receive $53.5M for the division. CMED warrants a return to higher share prices and a market cap over a billion dollars with its recent decision to become a pure-play molecular diagnostics company with a near-term focus on the detection of HPV and cervical cancer – resulting in a more predictable stream of high-margin + higher growth sales from ECLIA reagent kits and FISH probes.