'Significant Transition' at Urinalysis Company Pleases Investors

By LAURENCE DARMIENTO
Staff Reporter

Some end-of-year management changes at IRIS International Inc. have failed to scare off investors, who have pushed the company's stock up nearly three-fold over the past year to new highs in December.

Within the past two months, the Chatsworth-based manufacturer of automated urinalysis systems has seen a chief executive and a chief financial officer go packing right in the middle of a new product rollout.

Even so, the stock has been trading above $6 highs not seen since 1997, before missteps nearly took the company under.

"The company is in significant transition," said Cesar Garcia, the newly promoted chief executive.

The 24-year-old company, which recently changed its name from International Remote Imaging Systems Inc., makes high-end urinalysis machines costing $175,000. The machines are found in teaching hospitals and reference laboratories.

IRIS is in the midst of rolling out a new model of its analyzer that is smaller, $50,000 cheaper and more sophisticated, according to the company. Those improvements could better penetrate its target market of hospitals and labs.

The product was launched in August and 41 analyzers were delivered in the third quarter ended Sept. 30, compared with only 50 of the predecessor units sold in 2002. IRIS also turned a $128,000 profit for the quarter as well as completing a $1.7 million private placement that will help it fund its expansion.

Out of the blue

But on Nov. 18 came news that Kshitij Mohan, a former Food and Drug Administration official who was recruited last January, had resigned "to pursue other interests." Mohan was hired to replace chief executive John O'Malley, who is now chairman.

He was replaced by Garcia, the chief operating officer. Then early last month the company announced that CFO John Caloz, who had joined the company in 2001, had resigned.

O'Malley said it would be wrong to read anything into the changes, starting with the resignation of Mohan. "He has been living out of a suitcase for a long time," O'Malley said.

Mohan, reached at his home in Potomac, Md., said he had tried living by himself here while his wife and elderly mother remained behind, but found it difficult.

"This commute back and forth was getting to me," he said. "I was operating out of a little small apartment. I have a mother who lives with us who is somewhat frail and her entire medical support system is over there."

O'Malley declined to comment on the departure of Caloz, except to say that Garcia had the right to appoint managers he was comfortable with.

Caloz maintained his departure was coincidental to Mohan's and also the result of personal issues. "I just had some things in my life, and it would have been difficult for me to balance the two," he said.

The personnel changes also were followed by a decision of the board to reform its governance, including a vote to eliminate three-year staggered terms, abolish anti-takeover provisions in company by-laws and add another outside director.

In general, Wall Street investors dislike poison pills and by-laws that protect board members from being unseated. The poison pill was put in place following the acquisition of a genetic analysis business in the mid 1990s, which led to a series of quarterly losses stretching to 1999 and a stock price barely above $1. At the time, O'Malley said, there were rumblings that a foreign company was looking to buy up its stock on the cheap.

The governance reforms became more imperative following rounds of discussions with potential investors, including those that led to the October private placement. "It's clear the mood out there is one of 'Let's get everything up to date,'" O'Malley said.

Principals with two investor groups in the $1.7 million private placement, both based in New York, said they are comfortable with what has gone on at IRIS.

Philip Anderson, a principal with SIAR Capital, and Peter Salas, a principal at Dolphin Asset Management, said their firms invested in the company after becoming convinced IRIS was ready for multiple growth. The main competitor is Bayer AG, which domestically distributes an analyzer made by a Japanese company, Sysmex.

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