Value Investors Club / IRADIMED CORP (IRMD)

Description

Opportunity:

Iradimed (IRMD) is a niche microcap medical device company that recently got approval for its second

product where it is set to take significant market share and expand the addressable market. The

potential impact of this second device on IRMDs financials is misunderstood by the market and I believe

the CEO/Founder of the company will eventually sell IRMD to Philips for a takeout close to $30 per share

offering a 125% bluesky return over the next 2 years. The downside is protected by the base business.

IRMD was written up in March 2017 by user mm202 and that is probably also worth a read. Despite the

stock being up from that point I think the story has been derisked enough to merit a new writeup.

Overview:

IRMD was founded by Roger Susi in 2004. Before that Susi founded Invivo research in 1979. Susi has

spent his entire career focused onthe design of MRI compatible medical devices and is an innovator in

his field. His main products developed at Invivo were the world’s first MRI compatible patient vital signs

monitor followed by the first MRI compatible wireless patient vital signs monitor. He took the company

public in 1994 and scaled revenues up to $58 million by 2004 at which time Invivo was bought out by

what is now a subsidisary of Philips for $152 million.

During his final days at Invivo, Susi had been exploring the development of an MRI compatible IV pump.

After the acquisition when Susi left he was given permission to pursue the work on his own and he

founded IRMD with some of his old team. Since then they have put together successive generations of

this IV pump and IPOed as a single product company in 2014.

Product 1:

The MRI compatible IV pump is necessary to continuously dose patients during the MRI scan. Patients

on critical medication or patients who need to be constantly sedated (often children who can become

claustrophobic during a scan) are the most obvious use cases. Some workarounds exist, such as running

long IV lines to the pump outside the room or using shielded box around the IV pump but both can lead

to safety issues.

Iradimed IV pump

The product is sold into a few differentdepartments such as radiology, anesthesiology and

critical care. IRMD assumes the market requires about 1.6 pumps per MRI scanner. Since IRDM

focuses primarily on the US market, the TAM is about 22,000 pumps. IRMD has sold about 4,100

pumps already. ASPs of the pump have been trending higher as the company’s salesforce has

done a better job of selling ancilliary products recently and sits around $35,000 per device. This

leads to a small TAM of $770 million over the products lifetime, making this a niche product.

However, there is a strong usables component to the model by selling the IV lines. According to

IRMD’s historical experience, each installed pump should generate approximately $1800 per

year in usables sales. Both the pumps themselves and the usables generate about 80% gross

margins.

Boom and bust:

Bayer was the only competitor selling another MRI compatible pump, however in 2012 they were hit

with an FDA recall. Bayer decided they would discontinue the device, and by mid 2015 discontinued

support. This created a vacuum in the space as hospitals which had already bought the Bayer device

now needed to replace those devices with the IRMD product. IRMD saw sales boom during this period

from 418 in 2013 to a peak of 956 in 2015. The IRMD salesforce simply had to pick up the phone and

take orders down from incoming calls. The share price peaked just over $30 in November 2015. Soon

thereafter problems started to emerge.

IRMD benefitted from this product recall but cracks started to show as 2016 wore on. The salesforce had

become inefficient and didn’t know how to hunt. IRMD was simply filling old backlog. The stock plummeted to a low of 9$ in 2016 as management warned investors and took targets down. The stock eventually bottomed in early 2017 at a low of 8$ and management admitted they were retooling the

sales force.

We have seen some optimistic signs that this salesforce retooling is beginning to work, with

management claiming on the last call that stripping out backlog sales, IV pumps grew 20% and they

think they can continue that pace going forward. 2017 is likely to be the bottom for the pump business.

They are on track to deliver 400 pumps for the year and I have them modeled to grow that to 490 next year.

This from a high of 956 in 2015 and 837 in2016. On this single product in this trough year IRMD should still generate positive net income.

Product 2:

For the past 5 years IRMD has been working on their second product, an MRI compatible vital signs

monitor. This product just received 510k clearance on October 26th. Remember this was Susi’s first

product in the field and the competing vital signs monitor now produced by Philips is indeed the same

one designed by Susi. Small incremental changes have been made by Philips and the interface is nicer

but in general it is very similar to what Susi designed 30 years ago. The Philips monitor weights 90

pounds and sits on a cart. Generally it stays inside the MRI room and hospitals will buy 1 per MRI device.

Often when a patient is going for an MRI they will be off monitor during the prep and transfer to the

MRI room.

The new monitor by IRMD is vastly superior and expands the market. It only weights 10 pounds and is

completely portable, meaning it can be used from the pre MRI setup through transportation and all the

way through to the post MRI recovery area. It hooks on to the side of the bed. See below for pictures of

each product:

Philips Product

Iradimed product

Philips just released their latest iteration in 2016 so it is unlikely they will have any updates for the

foreseeable future. Because IRMD’s product is transportable, it should expand the addressable market. The current market

is one of these monitors per MRI machine. This works out to a TAM of 1000-1200 per year which is

almost all replacement. However IRMD can now sell into other departments such as anesthesiology and

radiology and increase the ratio to 2 monitors per device or greater.

Philips prices the device in the $75,000-80,000 range. IRMD will target a lower ASP of $50,000-60,000.

There are some usables involved but less than in the pump business. Management stated on the last call

they expect to be selling at an annualized rate of $22 million within 2 years. This assumption works out

to 30% of the existing market and 100% of the expanded market. In reality I think this could be

conservative in the long run. With a clearly superior product and a lower selling point, there is no

rational reason for a purchasing department to buy the Philips product over the IRMD product.

The existing salesforce should become much more efficient by being able to sell 2 products. They will be

calling on the exact same departments as before for the IV pumps, so we shouldn’t expect to see a large

pickup in selling costs.

Patents:

I should start with the caveat that I am no patent expert and cannot opine on the strength or scope of

the claims in the patent filings. IRMD has patents on the IV pumps and a patent application in on the vital signs monitor. Roger Susi is

named as the inventor on all prior IRMD patents with the assignee being Iradimed corp.

The patents should offer some level of protection against Philips quickly copying the new monitor.

However, as with any medical device with 510k approval, clearly there are similar devices already in

existence and thus the claims are probably not as broad and encompassing as in other fields.

I take comfort in the fact that in general these are very niche fields that are unlikely to attract too much

competition purely due to economic issues. It has been years since Bayer left the MRI compatible pump

business and to my knowledge no one else has indicated an interest in designing a similar product.

Financial Model:

		Historical Year end Dec 31st					Forecast
		2012	2013	2014	2015	2016	2017	2018	2019	2020

Revenue
	IV Pumps	6,000,000	9,300,000	12,800,000	26,400,000	25,800,000	14,000,000	16,800,000	20,125,000	24,150,000
	Usables/Service	1,700,000	2,000,000	2,800,000	5,200,000	6,700,000	7,632,500	8,413,500	9,481,500	10,620,000
	Monitors						2,000,000	8,000,000	16,000,000	24,000,000
Total		7,685,061	11,340,097	15,653,057	31,593,720	32,496,548	23,632,500	33,213,500	45,606,500	58,770,000

COGS		2,125,921	2,853,385	3,404,400	5,840,407	6,154,836	5,671,800	7,971,240	9,121,300	11,754,000
Gross Profit		5,559,140	8,486,712	12,248,657	25,753,313	26,341,712	17,960,700	25,242,260	36,485,200	47,016,000

OpEx
	G&A	1,550,034	2,392,305	4,816,973	7,769,881	8,795,703	8,500,000	9,000,000	9,500,000	9,650,000
	Sales and Marketing	1,930,395	2,297,309	3,297,120	4,705,977	5,278,448	5,200,000	6,642,700	8,665,235	10,578,600
	R&D	654,070	1,009,872	1,068,674	1,764,306	1,347,507	1,700,000	2,200,000	2,500,000	2,500,000
Operating Income		1,424,641	2,787,226	3,065,890	11,513,149	10,920,054	2,560,700	7,399,560	15,819,965	24,287,400

Other		-7,424	3,458	48,549	-121,385	-32,680	0	0	0	0
EBT		1,432,065	2,783,768	3,017,341	11,634,534	10,952,734	2,560,700	7,399,560	15,819,965	24,287,400

Taxes		465,980	846,878	966,975	4,104,614	3,738,189	896,245	2,589,846	5,536,988	8,500,590
Net Income		966,085	1,936,890	2,050,366	7,529,920	7,214,545	1,664,455	4,809,714	10,282,977	15,786,810

EPS Basic		$0.14	$0.28	$0.23	$0.68	$0.67	$0.08	$0.45	$0.96	$1.48
EPS Diluted		$0.11	$0.22	$0.20	$0.60	$0.60



S/O Basic		7,000,000	7,000,000	8,743,461	11,003,272	10,818,427	10,664,132	10,664,132	10,664,132	10,664,132
S/O Diluted		8,462,240	8,624,314	10,219,143	12,556,887	11,989,681	11,710,377




Pumps Sold		278	418	536	956	837	400	480	575	690
ARPU		$21,583	$22,249	$23,881	$27,615	$30,824	35000	35000	35000	35000
Install Base Y/E		1347	1771	2300	3260	4100	4500	4980	5555	6245
Usables revs per installed			$1,283	$1,376	$1,871	$1,821	$1,775	$1,800	$1,800	$1,800




Sales Growth
	Systems		55.0%	37.6%	106.3%	-2.3%
	Usables		17.6%	40.0%	85.7%	28.8%



Gross Margin		72.3%	74.8%	78.3%	81.5%	81.1%	76.0%	76.0%	80.0%	80.0%
Sales and Marketing % of revs		25.1%	20.3%	21.1%	14.9%	16.2%	22.0%	20.0%	19.0%	18.0%
Tax rate		32.5%	30.4%	32.0%	35.3%	34.1%	35.0%	35.0%	35.0%	35.0%

As you can see from the data above, I am modeling a return in IV pump sales over the next few years to

a more historical level from the collapse in 2017. Towards the end of my forecast, sales in the pump

business are still below the peak of 2015 and 2016. Yes those sales figures were inflated by the backlog

of replacement orders, however it is worth pointing out the salesforce has expanded since then from 12

to 18 reps and IRMD is expected to increase this number by 10 over the forecast period. This implies 25

pump sales per rep per year in 2020 vs a peak of 80 per rep in 2015. I think there is upside to that

number but have kept pumps sales growth at 20% per year in line with managements guidance.

Usables become a larger percentage of total sales as the installed base grows and should be fairly predictable.

In line with management’s guidance of a $22 million runrate in monitor sales within 2 years, I have

them hitting this run rate at the end of 2019. Once monitor sales are ramped to a great volume (12 months) gross margins should regain the 80%

level they saw in 2015 and 2016 given the product mix. Sales and marketing will climb with the addition of 10 reps into the sales force over the next 2 years but

IRMD should still gain operating leverage as the reps are now selling two products into the samep urchasing departments instead of one. Tax reform would obviously be a plus as IRMD is a full tax payer.

Valuation:

IRMD is currently trading at 2.5x 2019 sales, 3.1x gross profit and 11x EV/EPS. The numbers built into my

2019 forecast are fairly reasonable based on management guidance and the stock trades cheaply on

these numbers alone.

I believe a takeout by Philips is the most likely outcome and would represent the bull case. Susi built and

sold his prior company before, therefore he is not the type to want to empire build. At 61 the timing is

right for him to be looking for an exit in 2 years. He owns 54% of the equity and could be looking at a

payday north of $100 million.

Screening for medical devicemanufacturer takeouts on factset, the EV/S multiple varies greatly

depending on growth rate in sales and ultimate market size. For companies with similar features as

IRMD the tighter range seems to be between 3-5x sales. On my 2020 estimates (assume a late 2019

takeout), IRMD would garner a $20 to $30 takeout price. This offer a return of 50% to 125% from todays

price. Please see the table below:

					Multiple
Takeout price			3.0x	3.5x	4.0x	4.5x	5.0x
		45mm	$16.51	$18.63	$20.75	$22.88	$25.00
		50mm	$17.92	$20.28	$22.64	$25.00	$27.36
	Sales	55mm	$19.34	$21.93	$24.53	$27.12	$29.72
	2020	60mm	$20.75	$23.58	$26.42	$29.25	$32.08
		65mm	$22.17	$25.24	$28.30	$31.37	$34.43

Philips currently has 90% marketshare in the MRI vital signs monitor segment and is likely to be earning

approximately $80mm in revenue this year, contributing an estimated $65mm in gross profit. Once they

see that share begin to erode I believe it is likely they will make their move. A $20 takeout price per

share equates to $172mm in cash outlay whereas a $30 takeout would mean $278mm.

As a standalone company, IRMD should be trading at $20 in 2 years time from todays price , or

approximately 50% higher. This is derived using a 4x trailing sales multiple and a 17x trailing earnings

multiple, reasonable metrics for a low capex business on a revenue growth trajectory.

Valuation Downside:

Assuming by 2020 monitor sales only ramp to $8mm per year and pump sales plateau at 480 units per

year next year and then flatline, IRMD should still be able to generate $35mm in sales and $0.50 in

earnings with $3.50 net cash per share. This is because by that point usables would have growth to

about 1/3 of revenue due to the installed base having grown over time. A reasonable downside scenario

would then be $8.50 which equates to 10x eps net of cash and 1.5x sales

Looking at a potential return of 125% in the bull case and a loss of 35% in the bear case makes IRMD a compelling investment opportunity.

Risks:

Vital signs monitor fails to gain traction: As outlined in the paragraph above investors purchasing shares

today would most likely face losses but they would be mitigated by the base business

Copycats: IRMD is protected by patents (and pending patents) however in medical devices that can only

offer so much safety. The markets that IRMD is targeting are niche enough that they are unlikely to

attract much competition however due to economics

FDA issues: IRMD has had FDA issues in the past and was forced to stop selling their IV pump for a

period of months in late 2014. The issue was resolved quickly and IRMD has passed future site

inspections, however the warning letter still remains open. In discussing the issue with management,

even they are unsure what they can do to get the warning letter closed. It has not impacted the

business.

Conclusion:

IRMD shares offer an attractive risk reward opportunity with a reasonable path forward towards an

eventual takeout. With their base business of IV pumps showing signs of recovering and the growing

revenue stream from the usables component as the installed base grows we have reasonable downside

protection. The introduction of the second major product provides significant upside. It is clearly a much

better product than the incumbent, will be priced lower, and expands the market. Management is

aligned through a controlling ownership in the business and has delivered for shareholders in the past.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Monitor sales take off

IV PUMP sales recover

Takeout by Philips or other medical device company

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			2017	2018
Price:	13.35	EPS	0.08	.45
Shares Out. (in M):	11	P/E	0	0
Market Cap (in $M):	140	P/FCF	0	0
Net Debt (in $M):	-25	EBIT	3	7
TEV (in $M):	115	TEV/EBIT	45	15