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Structure of the Diagnostic Substances Industry
Firms in the diagnostic substances industry make clinical diagnostic test kits for gastrointestinal, viral, respiratory and parasitic infections in humans and point-of-care veterinary diagnostic products for the companion animal veterinary, livestock and poultry markets. The global market for tests continues to expand as new disease states are identified and new therapies become available. There is also a trend toward more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or hours (as opposed to days). We like the group structure, though rivals are highly competitive.
Abaxis (ABAX)
Abaxis’ point-of-care veterinary products now extend to over 85% of target veterinary practices.
Abaxis develops and manufactures point-of-care blood analyzers which provide clinicians with rapid blood-constituent measurements for both humans and animals. The analyzers are designed to provide on-the-spot results. The company operates in two segments, Medical Market and Veterinary Market. It was founded in 1989 and is headquartered in Union City, California.
Abaxis has recently landed a major new Tier 1 distribution partner. Its point-of-care veterinary products now extend to over 85% of target veterinary practices–doubling its reach prior to the deal.
The firm believes that a key element of the health care system will be the availability of blood analysis systems in the patient-care setting that are easily and reliably operated by caregivers and that provide accurate, real time results to enable rapid clinical decisions. Abaxis is well-positioned to capitalize on this trend.
Abaxis has a number of on-going research and development initiatives underway that are expected to make significant contributions to future operational results, which include the development of electronic connectivity technology as well as a number of high sensitivity immunoassay projects that will expand its offerings to the veterinary and medical markets.
Competition in the human and veterinary diagnostic markets is intense, however. Its principal rivals in the point-of-care human diagnostic market are Alere, Abbott, and Johnson & Johnson.
Our published fair value estimate range for Abaxis is $34-$52 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Very Attractive.
IDEXX (IDXX)
Impressive momentum in IDEXX’s Companion Animal Group has led to multiple 2017 EPS guidance increases. Our mid-cycle assumptions do not allow for much room for error.
IDEXX is a leader in pet healthcare innovation, serving practicing veterinarians around the world with an integrated portfolio of diagnostic and information technology-based products and services. The company continues to experience momentum with instrument placements, and excitement surrounding its next generation catalyst analyzer, Catalyst One, is high.
Few other companies are generating the pace of organic growth like IDEXX. For example, the firm posted 10% organic expansion in the second quarter of 2017 thanks to strong growth in its Companion Animal Group (IDEXX VetLab consumables), which makes up more than 80% of revenue.
IDEXX believes it has potential for sustained annual earnings per share growth of 15%-20%+. It expects to achieve this through revenue growth of 9%-13%, operating margin expansion greater than 50 basis points, and 3%-4% incremental EPS growth due from capital allocation leverage. The Catalyst One is expected to support continued growth in recurring revenues.
IDEXX is expecting revenue to be between $1.95- $1.96 billion in 2017 and adjusted earnings per share to be in a range of $3.22-$3.26, or ~32%-34% growth over 2016. Though our estimates for 2017 are in line with company guidance, our mid-cycle assumptions do not allow for much room for error. Shares look pricey.
The firm competes with many companies ranging from large human pharmaceutical and medical diagnostics companies to small businesses focused on animal health. We believe competition is intensifying.
Our published fair value estimate range for IDEXX is $80-$133 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Very Attractive.
Meridian (VIVO)
Weakness in Meridian’s core diagnostics business in the US has impacted recent results, and slow organic growth could push it into action on the M&A front.
Meridian is a life science company with principal businesses in making clinical diagnostic test kits, bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, proteins and other biologicals. Diagnostic products represent ~75% of revenue. The company was founded in 1976 and is headquartered in Cincinnati, Ohio.
Shares of Meridian were punished in early 2017 after a downward revision to top- and bottom-line guidance and a reduction in its quarterly dividend. The company expects fiscal 2018 revenue to be in a range of $207-$212 million and earnings per share to be in a range of $0.59-$0.62.
Weakness in Meridian’s core diagnostics business in the US was a key factor in its downward guidance revision and dividend cut. Customer buying patterns and competitive market conditions contributed to the disappointing results, and the firm’s patents on its H. pylori products expired in the US in May 2016 and expire worldwide in 2017. More recent trends in its diagnostics business have been encouraging.
The global market for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. Meridian’s position has become less attractive with its recent patent expirations
Meridian has been active on the acquisition front of late in order to add growth and capabilities. The firm has the necessary structure, balance sheet, and market access to support and grow acquired companies. Slow organic growth could push the firm into action.
Our published fair value estimate range for Meridian is $10-$16 per share, with a Valuentum Buying Index rating of 7 and an Economic Castle rating of Attractive.
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Meridian cut its dividend in January 2017 as a result of weakness in its US diagnostics business and key patent losses. We don’t expect another cut, however.
Meridian’s operating income and net income hit near-term peaks in fiscal 2013, and the company is still working to surpass those highs. Revenue growth has been robust in recent years, and the company’s balance sheet had been debt free until the Magellan acquisition recently. Meridian’s diagnostic products are well-positioned in the areas of gastrointestinal, upper respiratory, serology, parasitology and fungal disease analysis. Fiscal 2015 marked its 25th consecutive year of paying a dividend, but the company cut its quarterly dividend after reassessing its fiscal 2017 outlook in January of the year. Capital spending is bu