IRADIMED CORP IRMD
November 29, 2017 - 9:11am EST by
ahnuld
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 $M): -25 EBIT 3 7
TEV ($): 115 TEV/EBIT 45 15

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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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