CONX: Attractive Entry Point. Initiating At Outperform
Brain Marckx, CFA
We have initiated coverage of Corgenix Medical ) with an Outperform rating and $0.50 per share price target. See below for access to our full 17-page report on the company which includes further discussion about the company, their products and various business segments, and our financial model and valuation methodology.
A pioneer in the field of antiphospholipid antibody detection, Corgenix Medical Corporation is credited with development of the first FDA-cleared assay for measuring anticardiolipin antibodies. The association of antiphospholipid antibodies with thrombosis (antiphospholipid syndrome is a coagulation disorder) encouraged the company to develop assays for other bleeding and clotting disorders. Corgenix has quickly become a renowned expert in the diagnosis and measurement of blood coagulation, vascular occlusion and thrombosis. They offer an array of in vitro diagnostic (IVD) testing products in the areas of liver diseases (fibrosis and cirrhosis), autoimmune disease (bone and joint disorders) and vascular disease, including the only non-blood based test for determining the effectiveness of aspirin, and have sold over 12 million tests to-date.
The company has remained competitive in an industry that has experienced substantial consolidation over the recent past by delivering high quality products and service in niche areas such as antiphospholipid syndrome and hemophilia. Over the course of history, sales and distribution have largely been handled in-house. Corgenix's considerable R&D, manufacturing and production capabilities have also afforded the award of several U.S. government contracts and grants as well as facilitated the consummation of partnerships with several leading IVD companies. And while certain products are experiencing rapid growth (i.e. - AspirinWorks), due to increased competition, some of Corgenix's initial areas of expertise now offer less upside opportunity. As a result, the company has begun a measured transition away from reliance on certain legacy tests to a greater focus on faster-growth products and segments. This includes leveraging key partnerships in the development of novel high-potential products and in the expansion of their sales and distribution reach. Corgenix will continue to leverage their R&D/manufacturing capabilities to facilitate product development as well as to attract valuable government grants and manufacturing contracts, all of which are expected to hold outsized opportunities for revenue growth.
Corgenix's total revenue fell about 4% from 2010 to $7.94 million in fiscal 2011 with EPS decreasing from ($0.00) to ($0.01) over the same period. This trend is not expected to repeat itself in 2012, however. Corgenix's recent restructurings, highlighted by the transfer of their international sales operation and consummation of a related amended co-development agreement with ELITech, along with key additions to the U.S. sales force, new product launches and additional product development contracts are expected to help jump-start revenue growth in 2012. Management's most recent guidance (provided on the Q4 earnings call on September 23, 2011) is for revenue of approximately $10 million in 2012, implying growth of 26% from 2011, with positive net income and cash flow.
Corgenix is in the midst of what we believe to be the front-end of a transition away from reliance on certain legacy vascular disease tests to a greater focus on faster-growth segments and products. The recent transfer of their international sales operation and consummation of the related amended co-development agreement with ELITech offers Corgenix additional opportunity to develop novel high-potential products and significantly expands their sales and distribution reach. While the domestic business will likely be the greatest initial beneficiary (via Contract R&D revenue), the ELITech partnerships should provide especially strong support for international sales growth over the longer-term (via new product launches and ELITech's sales network).
In addition, segments that have been productive and growing (such as AspirinWorks and Contract R&D) or at least have reasonable potential to make meaningful contributions in the future (such as Contract Manufacturing), will continue to be nurtured and expanded. The company has already begun adding headcount to its R&D and domestic sales teams in anticipation of new business and increased demand.
We model North America sales of $8.35 million in fiscal 2012, implying growth of almost 29% (+$1.87MM) from 2011. The major drivers being AspirinWorks (+$394k), Contract Manufacturing (+$944k) and Contract R&D (+$250k). AspirinWorks sales, which doubled in fiscal 2011, are (based on management's guidance) expected to (approximately) double again in 2012 as a result of additional customers adopting the test and existing customers placing more orders. While the automated version of the test could possibly make it to market during 2012, as the test may not launch until later in the year, we think little of the ~ $800k sales guidance is related to sales of this test. Meanwhile Contract R&D revenue should get a very meaningful boost from products being developed under the ELITech joint product development agreement as well as ongoing government sponsored infectious disease contracts. We expect Contract Manufacturing, which saw revenue dive 21% in fiscal 2011, to do an about-face in 2012 from increased business from current customers (BG Medicine) as well as contracts from new customers.
Going into 2013 through 2015 (the furthest out that we model), AspirinWorks should remain a significant catalyst to North America-related sales growth. Corgenix views AspirinWorks as a very high potential product and clearly believes that the tests (including the automated version) can become a major contributor to overall revenue over the next several years. We also look for consistent revenue growth from Contract R&D and Contract Manufacturing, both of which should directly benefit from Corgenix expanding their testing platforms (from almost exclusively ELISA to also focusing on immunoturbidimetry and lateral flow). The ELITech development agreement will continue to provide at least a base amount of Contract R&D revenue throughout the next few years. Corgenix will also hopefully be able to leverage their capabilities in infectious disease-related test development to secure additional government contracts (in areas such as infectious disease and bio-terrorism) to facilitate further growth of their Contract R&D business.
We model International sales of $1.73 million in fiscal 2012, implying growth of approximately 18% (+$267k) from 2011. This growth is mostly a function of a lack of disruption (that occurred in 2011) from the international business transition than it is from any fundamental growth in product demand. We do expect to see some contribution in 2012 from the two new products developed under the ELITech agreement that have been completed but not yet launched. These two tests, along with what we expect to be a fairly regular flow of new products coming out of the ELITech development agreement, is what we expect to be a major impetus for growth of international revenue over the next several years. ELITech's distribution network provides greater reach than did Corgenix UK, which should afford a steeper sales ramp of new products and increase potential peak revenue. We think the ELITech partnership could end up being a big winner for Corgenix and revive sales in the vascular disease and HA businesses as well as play a key role in building their budding infectious disease area - including sales of these tests as well as helping secure new R&D contracts.
Despite what we expect to be very robust sales growth in North America, we model international revenue growth to outpace that of domestic sales beginning in 2013, which largely reflects our expectation that new product launches begin to gain significant sales traction towards the back half of 2012 or early 2013.
We model $10.1 million in revenue in fiscal 2012 which is very much in-line with management's financial guidance ("sales approaching or exceeding $10 million, along with a positive bottom line, increased EBITDA and internally generated cash flow") which was provided on the Q4 earnings call (September 23, 2011).
Looking forward from 2012 we model revenue to grow at a CAGR of almost 14% through 2015, reflecting North America and International annual revenue growth of approximately 12% and 19%, respectively.
We think gross margin will continue to narrow during the current fiscal year due to a combination of continued strong growth in lower margin Contract R&D revenue and a full year of ELITech handling international sales (where as this was only about 9 months in fiscal 2011, following the October 2010 transition). We look for gross margin of 46% in 2012, down from 49.5% in 2011.
We look for gross margin to stabilize in 2013 at 46% and to continue to incrementally widen through 2015, mostly reflecting a reduced rate of growth of Contract R&D and Corgenix beginning to realize much more meaningful economies of scale from higher production volumes.
Income / EPS
We model net income of approximately $300k ($0.01 EPS) in 2012, an increase of over $700k from the ~ -$400k (-$0.01) posted in fiscal 2011. This reflects our ~27% estimated growth in revenue and incremental operating expense leverage, slightly offset by a 350 basis point contraction in gross margin.
We expect Corgenix to continue to gain leverage in operating expenses going forward and, coupled with strong revenue growth and incremental widening of gross margin, to result in EPS showing consistent year-over-year improvement. We look for EPS of $0.03 in 2015.
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