Providing an attractive investment
given it's typically defensive and non-cyclical nature
Gerard Klauer Mattison
Senior Equity Analyst
Interview conducted by:
Bio of Analyst
Andreas J. Dirnagl is a Senior Vice President and research
analyst at Gerard Klauer Mattison. Before joining the firm in 1998, Mr. Dimagl was a vice
president - investment banking in the Healthcare Group with Deutsche Morgan Grenfell.
Prior to that, he worked in Eurobond underwriting in London with Deutsche Morgan Grenfell
and as a client relationship manager with Deutsche Bank in New York. Mr. Dimagl earned an
MBA from New York University and a BS in Business Administration from Georgetown
Gerard Klauer Mattison & Co.
Gerard Klauer Mattison (GKM) is
an equity research and investment banking firm, serving the institutional
marketplace. With over 20 senior, published analysts, the GKM Equity Research
department covers more than 200 public companies, with a principal focus on the
technology/telecommunications, media/entertainment, healthcare, energy and consumer
industries. GKM offers its investment banking clients the benefits of its
award-winning research coverage, coupled with the depth of the firm's industry contacts
and knowledge base. GKM has raised over $4.7 billion in public offerings and private
placements, and advised in over $3.0 billion of mergers and acquisitions, bankruptcies and
Gerard Klauer Mattison Asset
Management, comprising GKM Advisers, Inc., GKM Private Client Services, GKM Venture
Partners, L.P., and Pattern Recognition Fund, L.P., has over $600 million in assets under
management through its hedge funds and traditional money management services.
Founded in 1989, GKM remains privately held. The firm is
headquartered in New York City, with offices in Boston, Chicago, Los Angeles, San
Francisco, and Tel Aviv.
CEOCFOinterviews - Mr. Dirnagl, please
tell us the sectors that you cover?
Mr. Dirnagl: "I
cover the Healthcare Services space for the firm, which includes areas such as the acute
care hospital sector as well as the renal dialysis sector; the assisted living sector and
some selected medical technology."
What trends are driving investors towards these spaces?
Mr. Dirnagl: "There are differing investment and
thesis for the particular areas that we cover. In
general, healthcare services, particularly in the sort of markets that weve been
seeing over the past couple of weeks and months are traditionally considered a very
defensive non-cyclical sector. They tend to
be safe havens for investors in times of economic uncertainty, and economic recession,
usually characterized by things such as falling interest rates, and rising inflation
fears. Certainly some of the tech gloom and doom that weve been seeing over the past
few months means that investors are shifting their money out of those sectors, and again
are just looking for defensive non-cyclical areas. Unfortunately,
people will continue to get sick, no matter what the economy is like, and that continues
to benefit companies such as hospital companies, and renal dialysis companies. There is also the medical technology side, which
is very similar, in that it is healthcare oriented. Perhaps not as much driven by some of
the negative market sentiment, is the fact that there are many companies out there with
innovative medical technology that have very good growth prospects going forward. This is
based on general Healthcare trends, including things such as the aging of the US
population. The baby boom
population is now beginning to hit their 50s, and its traditionally in the
50s and 60s, where people tend to require a lot of medical intervention or a
lot of their healthcare needs. In fact, about
80% of a persons lifetime healthcare expenditures will be spent in the last few years of
their lives. Moreover, these few broad trends are driving investors towards these
CEOCFOinterviews Which of the
companies that you cover would you describe as trendsetters.
Mr. Dirnagl: "We
have a couple, one of which is a Hospital Company under coverage called Universal
Health Services (NYSE: UHS), which is one of our favorite picks in that space, and we are
giving them a buy rating. They focus on acute
care hospitals, in what we call tweener markets, in which we normally divide
hospital companies into urban/suburban providers or rural providers. Universal Health
focuses on those in-between markets. They are
in places like Las Vegas, Nevada, in McAllen, Texas, and many of the border communities of
Mexico down in Texas. They are also in
places like D.C., and Puerto Rico. Those
areas are characterized as having double the national population growth and a hospital
company whose local facility usually has a dominant, number one position or a strong
number two position. Universal Health Services is also making a number of acquisitions,
which we think will help fuel growth in the future.
other side, a company that we like is CardioDynamics International Corp. (NASD: CDIC). They are a company in the medical technology
field, which we believe have a very innovative and new paradigm for hemodynamic
monitoring, which is the monitoring of certain heart functions. These are heart functions, which cant be
monitored without an extremely costly and very invasive procedure, which requires a couple
of days hospital stay. Their main product is the BioZ System. This is a
machine that performs a test to monitor the six main hemodynamic functions, using just
more than a few sensors and electrodes to the body and can be done in about ten minutes at
a much lower cost than the other option, which requires a lengthy hospital stay."
CEOCFOinterviews Can you give us an
evaluation of their management team?
Mr. Dirnagl: "I think that the company
has an extremely strong management team., starting with
Michael Perry, their CEO. Mike has been a
successful person in the healthcare field. He
served as VP of operations for a company called Pyxis, which was a healthcare management
information systems company. Prior to that, he was in various manufacturing and finance
positions at Hewlett Packards medical products group, so he obviously has a lot of
experience in this industry, particularly in taking what are innovative technologies and
bringing them to the market. Mike is supported by a number of people, including Rhonda
Pederson, who is the President of CardioDynamics. She
has 15 years of experience in the industry, and was President and CEO of a company called
Culture Technology, Inc, which was a private Biotech company. Prior to that, she held a
number of positions, including companies such as American Home Products, in their medical
devices division and General Electric Medical Systems.
Finally, and probably worth mentioning is Dennis Hepp, who is the Chief Technology
Officer of the company. He has almost thirty years of experience in cardio vascular
medicine and the medical device industry. He
was previously with Medtronic, Inc. (NYSE: MDT), which is the industry leader in cardiac
products, and he holds a degree in Electrical Engineering.
Therefore, they have a broad management team that is very experienced in medical
devices and medical technology, and probably most importantly is experienced in bringing
new medical devices and technology into the market."
CEOCFOinterviews How long have you
been covering CardioDynamics?
Mr. Dirnagl: "Ive been covering
CardioDynamics a little over a year now."
CEOCFOinterviews What did you want to
see them accomplish over the past year, and have they met those goals?
Mr. Dirnagl: "Theyve done exactly
what they said they were going to do. The thrust of the company, and I think it is the
most important aspect, which is; when bringing a new medical technology or new medical
device to the field, the key to success from a financial point of view for a company
trying to do that is, physician adoption. That means that the company has to educate the
entire physician community, letting them know that there is a new option out there for the
treatment of various patients, and in the case of CardioDynamics, anything that requires
hemodynamic monitoring. The core of the
companies focus right now is in the congestive heart failure market, so theyve been
doing a very good job of getting out to such functions as the American Cardiology
conferences, and getting the real thought leaders in the Cardiology field to stand behind
their technology and to support what CardioDynamics is trying to do. They are undertaking a number of clinical studies
in which they are trying to show the efficacy of this product for various types of
patients. I think where the company has done a very good job, is where they continue to
look for ways to expand their potential market. They
currently focus on the congestive heart failure market, but over the past couple of
months, theyve been expanding that focus to include such things as the hypertension
market, which potentially dwarfs the congestive heart failure market. Theyve
recently announced a joint venture, alignment or agreement with the Heart Lung Associates
of America, to focus on the use of the product with renal dialysis patients, which is
another 300 thousand patient population in the United States.
financial point of view, the company has continued to grow sales at a pretty impressive
rate. Their most recent quarter showed 51%
increase in revenues year over year. There
was quite honestly a bit of a disappointment from an earning point of view back in the 4th
quarter, just a few months ago. We were looking for a loss of 3 cents for the quarter,
whereas the company posted a loss of 18 cents. It
really had a lot to do with the company investing in its future, specifically building up
its sales and marketing in its clinical and support areas, looking through their
list of customers. They along with a number of other companies had one customer in
particular that was more of an Internet related play, and therefore decided that the most
prudent thing to do would be to basically write off all of the inventory and accounts
receivable associated with that customer.
Finally, from a positive trend point of view, the company has
what I believe is a very important relationship with GE Medical Systems, who is their
partner in terms of distribution of the BioZ System. They have not only
expanded that partnership in terms of its scope, i.e., into such places as Japan, but
theyve also expanded that partnership in terms of its scale. Most importantly, is an
announcement and a recent introduction of their new product, the "BioZ ICG
Module" which is designed to be used with GE Medical's "SolarT" monitoring
system, and will be a module that will simply plug in to existing monitoring systems in
hospitals, of which GE is the market leader. That, I think has a very large potential from
the point of view, that floor space is basically a very high commodity within a hospital
environment. The ability to be able to simply plug into an existing monitor system as
opposed to having to have yet another box within the hospital environment, particularly in
the ER section, could be very important and would most likely be a good driver of sales
CEOCFOinterviews What would you like
to see CardioDynamics accomplish over the next 6 months to a year
Mr. Dirnagl: "I think the biggest goal
that I would be posting for them is one that they have accepted, and that is, reaching
breakeven status, which we estimate is going to be sometime between the second and third
quarter this year (2001). The company has a
good cash position, and has more than enough cash to see it through to that breakeven, but
thats obviously an important turning point for an early stage company. Other than that, we want to see them very much
continue what theyve been doing now. We expect to see the benefits of some of these
investments that theyve made over the last couple of months, again particularly in
their sales, marketing and clinical support areas, begin to bear fruit in terms of
accelerating sales, not only of the actual product, which is the Bio-Z monitor, but also
with their disposable sensors. It is sort of the old razor blade verses razor financial
model, and the clinical support staff will go along way in terms of driving that
disposable sensor income as well. Finally,
what is important with any early stage company such as CardioDynamics is the continued
investment in research and development as weve highlighted before, particularly in
terms of trying to find new areas of applicability for the product."
What is your rating for CardioDynamics?
Mr. Dirnagl: "We rate them a buy.
Overall, what I would want to say about CardioDynamics is that from my point of view, this
is a typical early stage medical device company. It is probably even past early stage at
this point, where the key really is adoption. What we have seen repeatedly within the
Healthcare industry is that adoption is something that probably takes longer than what you
expected it to take, but once it takes off it really becomes an accepted standard, and
becomes broadly used among the industry. There
are many examples of this; in the past a company called Nellcor, which was acquired by
Puritan-Bennett which was in turn acquired by Mallinckrodt, started off very similarly in
terms of their technology, called pulse oximetry, which is the ability to read the
oxygenation of the blood. They had a slow start and then the technology exploded in terms
of its acceptance."
CEOCFOinterviews Do you see that
happening with CardioDynamics?
Mr. Dirnagl: "I do see that happening
with CardioDynamics. Quite honestly, from an investment point of view, the question is
when does that occur, and that is something that is very difficult to predict with any
clarity. However, with the company positioning itself very well in terms reaching
breakeven status, sometime mid this year, they continue to grow the company slowly until
the point where they really can take off in terms of their acceptance."
CEOCFOinterviews Is there another
sector that you would like to mention in closing?
"I would like to leave you with yet another sector which we cover, and that
is the renal dialysis sector. A company that
we like in that sector is a company called DeVita Inc. (NYSE: DVA), formally known as
Total Renal Care. They are a renal dialysis provider; they own and operate dialysis
clinics. Dialysis is basically the
substitution of artificial means for patients who have had kidney failure, i.e., its
a way to filter the toxins out of the blood. The Dialysis Industry as a whole is a pretty
good and stable business, with a 6 to 9% patient population growth, and very stable in
terms of predictability of revenue and cash flow, from the point of view that patients
have to come to you 3 times a week, or they die. The
company about two years ago at this point, faced a huge disappointment from the point of
view that they made a major acquisition and their administrative and back office functions
collapsed, causing cash flow to go negative and revenues to decline precipitously. A new
management team was put in place at the company with Kent Thirty, as the Chairman and CEO.
He has very good experience in the industry, and he has done an excellent job over the
past 12 months, in turning that company around on an administrative basis, and now he is
taking what we would consider a laser like intensity of his focus from the administrative
side, now that its fixed, and placing it on the operations side. Theirs, is another story
where we think the possibilities are very good, and that turning that company around,
putting it back into an acquisition mode and really focusing on operations could provide a
lot of upside from where we stand now."
CEOCFOinterviews What is the rating
that youre giving DeVita Inc.?
Mr. Dirnagl: "We rate them a
buy as well."
What final thoughts would you like to leave with investors?
Mr. Dirnagl: "In
times of economic and market uncertainty, healthcare provides for an attractive investment
given it's typically defensive and non-cyclical nature. Traditional areas such as
hospitals and dialysis providers can provide an attractive and highly visible earnings
stream, which should provide for good stock appreciation. Finally areas such as
medical devices and technology, particularly early-stage companies can provide for
dramatic upside as their products gain acceptance and increased usage in their respective