Summary


Business:

Manufacturer of medical test kits

Headquarters:

Los Angeles

CEO:

Michael Ziering

Market Cap:

$1.3 billion Dividend Yield: 0.51%

Total Liabilities:

$51.8 million P/E Ratio: 40.65

Long-Term Debt:

None

Health care is not always a sure bet these days, but the success at Diagnostic Products Corp. is evidence that a niche company can defy a down market.

An LABJ 200 standout, shares of the Los Angeles-based manufacturer of medical test kits have risen about 200 percent since early last year, as the company has consistently beaten the estimates of the handful of analysts who follow it.

After a two-for-one stock split aimed at increasing its relatively small float and improving liquidity, it was over $45 a share last week, well above the $22 pre-split price it stood at before the run-up.

The market cap has risen from under $400 million to over $1.3 billion, largely on the strength of sales to hospitals and medical labs of its Immulite 2000 system. This is an automated machine that can run over 200 tests per hour for diabetes, heart disease, prostate cancer and other diseases.

“Since the first quarter of 2000, this company has well exceeded anyone’s estimates,” said Robert Dunne, an analyst with Wasserstein Perella & Co. “They don’t offer tests for everything, but within their niche they have a broad menu. And they are totally state-of-the-art.”

Net income for the second quarter ended June 30 was $10 million (34 cents per diluted share), compared with $7 million (25 cents) in the like year-earlier quarter. Second quarter revenues were $72.8 million vs. $63.6 million a year ago.

Diagnostic Products holds only a small portion of the $20 billion market, which pits it against Roche Diagnostics, Abbott Laboratories and Bayer AG.

SG Cowen Securities Corp. sees the company as an acquisition prospect by a major industry player, although not at the hefty price tag the company would now command.

A decade ago, Diagnostic Products was a profitable manufacturer of reagents (the chemicals used to perform tests) for generic test machines that it did not make. But the tests were based on radioactive radioimmunoassay technology that the medical industry was moving away from, because of disposal and other problems.

So it moved into another new technology called chemiluminescence, and in 1992 it acquired a small New Jersey startup that had designed testing machines but had no manufacturing capability or reagents.

Along with their reagents Immulite 2000 and a first-generation machine called the Immulite-1, now account for 80 percent of sales.

Sales of the product line have been growing 20 percent annually, but Diagnostic Products Chief Executive Michael Ziering said that growth had been hidden by a steady decline in its formerly core radioimmunoassay business.

By the end of the 1990s, the Immulite line had grown so much and the radioimmunoassay line had shrunk enough that the company’s true potential became clearer. “Now we are to the point where a 10 percent drop of our RIA (line) only amounts to $3 million,” Ziering said.

The steady growth prompted SG Cowen to initiate coverage last September with a “strong buy” recommendation, prompting a boost in share price. Even after the long run, the company is still rated at least a “buy” by the three analysts who follow it.

Noted by the analysts is the classic “razor blade” aspect of the business model: the machines only work with company reagents, which cost between $1-$2 per test, meaning placing a machine at a site provides a long revenue trail.

“You get your machine in the door even if you have to give it away, especially if you can get a three or four year (service) contract,” Dunn said.

But they’re hardly giving away its machines. The 2000 sells for $125,000, while the first generation machine runs for $75,000, though it’s being sold at a 50 percent discount given the older nature of the technology, Ziering said.

Sales have increased domestically by managing to crack several large health care purchasing cooperatives. Ziering said improving such U.S. sales is a goal, especially given all the uncertainty over air delivery and overseas markets since Sept. 11.