Biosite (BSTE 67) is making a tangible contribution to the efficiency of medical care, both for the financial benefit of hospitals and for the health benefit of patients. The company’s products focus on the unmet need for rapid diagnosis of serious diseases. The company’s diagnostic test for heart failure, called the Triage® BNP test, has taken hospital emergency departments by storm. It helps emergency physicians diagnose heart failure in fifteen minutes, in time to treat patients fighting for their lives. Legacy diagnostic tools take up to six hours, delaying the administration of tPA to dissolve blockages in arteries that supply the heart with blood. Biosite’s test is done in a small machine at the point of care, bypassing a one to two hour trip to the hospital’s lab. The time difference can mean the difference between life and death for heart muscle tissue, and possibly the patient.
Correct heart attack diagnoses made on a timely basis save health systems money by reducing unnecessary hospitalizations. A study by UCSD cardiologist Alan Maisel used Biosite’s cardiac panel to screen 1,586 patients presenting with difficulty breathing. About half did not actually have congestive heart failure. The study states, “The negative predictive value of B-type natriuretic peptide at levels of less than 50 pg per milliliter was 96 percent.”[1] This means that the test helps doctors sort out the patients really at risk from those who can be sent home. The BNP test has been credited with reducing cardiac unit admissions by 40%. The annual estimated cost of unnecessary admissions to cardiac units is over $10 billion.
Biosite’s current product line consists of tests for shortness of breath, chest pain, pulmonary embolism, parasitic diseases, and drugs of abuse. The common themes among these tests are: 1) the speed and clarity of diagnosis is critical for the patient, 2) they can be done at the point of care, and 3) they address health problems that cost our health system billions of dollars. Although tests from competing companies exist, laboratory processing is required, placing diagnosis time out of the physician’s control. This contributes to the chronic problem of overcrowding in hospital emergency departments.
Biosite’s significant new product development budget focuses on disease categories poorly served by existing technologies, such as stroke, sepsis, congestive heart failure, acute cardiac syndrome, kidney failure, and cancer. This pipeline covers the prevalent reasons that people visit the emergency department: stomach pain, chest pain, fever, shortness of breath, and headache. Biosite is developing multi-marker tests that simultaneously recognize multiple aspects of a disease, increasing test accuracy and permitting the doctor to evaluate disease progression.
Strong growth drivers are in place. The potential revenue opportunity from tests that could be introduced in the next year or two for stroke, abdominal pain, and sepsis is substantial. Further out, the predictive kidney failure test has high diagnostic potential. Also, the FDA has approved a significant widening of usage for the Triage BNP test. The test can now be used to help physicians predict the risk of mortality or rehospitalization in heart failure patients. Plus, the test is now approved for use in outpatient clinics and doctor’s offices, a much larger potential market than hospitals alone. Finally, Biosite is ramping international sales, with a goal of 30% revenue contribution from non- U.S. markets in five to seven years.
Biosite
is similar to a pharmaceutical company, in that a lengthy product development
process is followed by lengthy clinical studies to obtain FDA approval. Once these hurdles are vaulted, profit
margins are high. Also, the investment
of installing its test machine, the Triage MeterPlus, into over half of U.S.
hospitals has already been made.
Therefore, profit leverage is high - each dollar of incremental revenues
drives profits harder. Analyst
consensus estimates for 2005 through 2009 are $2.90, $3.17, $3.65, $4.19, and
$4.82, respectively. However, my
analysis shows the potential exists to beat these estimates, supporting an
intrinsic value estimate somewhat above the current share price.
Intuit (INTU 44) has gained great substance as a company over the 7 years that I have been visiting it. From a scrambling software company existing under the ominous shadow of Microsoft, and, in fact, saved by the Justice Department from acquisition by Microsoft, it has built itself into an indispensable partner of many small businesses, consumers, and downtrodden taxpayers.
Intuit’s products can be grouped into three families, QuickBooks, TurboTax, and Quicken. These products all use one code base, one database, and one user interface. This creates great economies of scale, permitting time-to-market and development costs unrivalled by competitors.
In
2004, Intuit suffered a growth slump.
Management responded by directing each division of the company to go
back to its product development roots.
Numerous new products were developed and a reacceleration of growth in
2005 is the result. The company has
achieved this by truly adhering to the cliché, “listening to the
customer.” Intuit calls this CDI,
“Customer Driven Innovation.” The
QuickBooks division felt the consumer needed an easy-to-use start-up version of
QuickBooks. QuickBooks Simple Start
sparked the largest new customer increase in Intuit history, with 485,000 new
users in fiscal 2005. QuickBooks
Payroll Services has grown from start-up to $200 million of annual revenues by
making it easy for small businesses to outsource payroll. Intuit now has more payroll customers than
any other payroll service, with 906,000 payroll customers versus 522,000 for
Paychex and 435,000 for ADP.
The
TurboTax division launched SnapTax (renamed from TurboTax Simple and Know It)
last year, targeted at the 41 million tax filers who still self-prepare a
1040EZ or 1040A. The number of tax
returns prepared on software last tax season increased 13%, almost entirely
driven by SnapTax.
The Quicken division has introduced Quicken Rental Property Manager and Quicken Medical Expense Manager. These two fields are confusing and paper intensive for consumers, and lack software that is affordable by consumers.
The company continually works to make its software easier to use for chores that the customer seldom wants to do. I personally have found Intuit very responsive to my complaints and suggestions concerning the functionality of QuickBooks and the QuickBooks Payroll Service.
Intuit’s products typically have huge user bases. They also have upscale competition, presenting an opportunity to disrupt higher priced alternatives. QuickBooks, in particular, has become more powerful over time, while maintaining its ease of use. Just as QuickBooks Simple Start expanded the user base down to the smallest businesses, QuickBooks Enterprise Solutions pushes QuickBooks up-market to medium sized businesses of up to 250 employees. It is deceptively powerful and much less expensive than its fragmented upscale competition. It also serves as an entrée to larger customers for the QuickBooks Payroll Service.
Intuit is a highly profitable business that dominates its various markets. Intuit’s products are blessed with reliable demand and recurring sales. Eighty percent of new sales of Intuit products occur because of word of mouth. The business is an exceptional producer of cash, because minimal capital investment is required to grow revenues and earnings. Free cash flow production is substantial – about $2.00 per share currently. The company is actively using its cash production and $1 billion cash horde to repurchase stock, already having reduced diluted share count from 218 million to 188 million over the past three years. Revenues and earnings per share grew at a compounded annual rate of 28% over the past seven years. Management’s long-term growth objectives remain double-digit revenue growth from existing core businesses, accompanied by 15-20% earnings per share growth. Analyst consensus earnings estimates for the next five years, fiscal 2006 through 2010, are $2.28, $2.54, $2.92, $3.36, and $3.86. This imputes an intrinsic value estimate around $45 per share.
Steven L. Ré, CFA October
18, 2005
This report contains the current opinions of the author and such opinions are subject to change without notice. It has been distributed for information purposes only and is not to be construed as a recommendation to purchase or sell securities. The information contained herein is from sources deemed reliable but is not guaranteed. It should not be assumed that investments in any of the above-mentioned securities will be profitable, and past performance is no guarantee of future results. Earnings projections often miss, and markets go up and down. The employees and families of Quality Growth Management, Inc. may own the above-mentioned securities in their own accounts, and may trade them at any time without notice.
[1] Maisel, M.D., Alan, et al, Rapid Measurement of B-Type Natriuretic Peptide in the Emergency Diagnosis of Heart Failure, N Engl J Med 2002; 347:161-167, Jul 18, 2002.