CORPORATE FOCUS—Returning Attention to Core Business Aids Medical Firm

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Summary


Business:

Urinalysis systems and medical devices


Headquarters:

Chatsworth


CEO:

John O’Malley


Market Cap:

$27 million Dividend Yield: N/A*


Total Liabilities:

$11.4 million P/E Ratio: 12.8


Long-Term Debt:

$4.1 million

* International Remote Imaging Systems Inc. does not pay dividends.

It looks like investors finally have absolved International Remote Imaging Systems Inc. for the sin of straying from its core business.

After dipping to a 52-week low of $1 per share last November, the American Stock Exchange-listed issue rose to $3.20 last month, and has remained over $2.50 since then.

That’s a tidy profit for any short-term investor in the Chatsworth-based medical technology micro-cap. But it’s still a long way down from the $12 heights the company was trading at in 1996, before the ill effects of a near-disastrous acquisition became apparent.

A 22-year-old manufacturer of automated urinalysis systems, International Remote Imaging decided to expand in the mid-1990s with two separate acquisitions.

One, StatSpin Technologies, a maker of a line of small centrifuges, is now a Massachusetts subsidiary that accounted for more than one-fifth of IRI’s $28.6 million in revenues for the year ended Dec. 31. Centrifuges separate blood, urine and other specimens into components for manual analysis.

The other purchase didn’t work out so well. Perceptive Scientific Instruments, a genetic analysis business, failed to generate expected revenues, even though the company borrowed heavily to acquire it.


‘Almost took us under’

The result was a stock slide and a series of quarterly losses that stretched into the third quarter of 1999, when the company lost $1.4 million, culminating the worst period in its two-decade-long history.

“That almost took us under,” said Chief Executive John A. O’Malley.

IRI has been making amends ever since, including liquidating Perceptive Scientific’s U.K. assets last June and selling much of the U.S. assets a month later. (It retained about a dozen employees in Houston as a research arm.)

It also has used the cash flow from its profitable core urinalysis business and centrifugal subsidiary to pay down its long-term debt, which topped $10 million in 1996 but now stands at only $4.1 million.

The company is not followed by analysts, but these and other moves, including a hike in research and development and the hiring of an investor relations firm, have prompted recommendations from two stock-tip newsletters devoted to small-cap stocks.

Even so, the company faces a challenging future in the fast-changing, cost-conscious healthcare field.

Its core product line is a series of urinalysis machines that detect such abnormalities as the presence of high numbers of white blood cells, a sign of infection, or crystallized molecules, a potential sign of an improper medication dosage.

These machines not only automate a task that technicians using slides and microscopes have completed for decades, but also digitally store video images of the specimen for later viewing. The top-of-the-line Model 939UDx machine also is able to electronically transmit results without operator viewing.


Limited demand?

O’Malley claims International Remote Imaging’s system costs less per test than the traditional method, but at a price of up to $175,000 each, the system is not for all hospitals, or even all reference labs. The company has sold some 400 units over the past seven years, but they are much more likely to be found in large teaching hospitals than community or even urban hospitals.

IRI has upped research-and-development spending to $2.5 million in 2000 from $1.1 million in 1999, and O’Malley said he expects it to spend even more this year. That has cost the company some profitability, with net income dipping under $400,000 the last two quarters.

O’Malley won’t talk specifics, but concedes that in order to grow faster the company must lower the cost of its machines for smaller hospitals and labs. “The way to grow is to provide systems that are economically justifiable,” he said.

The company also wants to shrink the size of its machines (which are now 5-feet high and 5-feet in length) while expanding heavily into international markets, which has so far accounted for only a fraction of sales.

Domestically, however, IRI reported in its most recent 10-K that consolidation in the health care industry, including development of large purchasing alliances, has made it difficult to expand sales.

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