Atrion: Focused and Well Managed

Quick - Which one of these medical products companies has produced the best return on investment over the last 5 years: Johnson & Johnson (JNJ), Medtronic (MDT), Stryker Medical (SYK), Becton Dickinson (BD) or Atrion (ATRI)? If you picked any of the first four large companies, you would be wrong. The winner is Atrion, which has increased its share price by about 95% over that 5 year time period. Atrion is a shining example of how a small, focused company with a high attention to cost management can outperform much larger and more powerful players.

To see how Atrion has done this, let’s take a look at what lies behind the share price appreciation. Atrion has increased sales at about a 6.5% clip growing from roughly $60 million to just short of $90 million over the last 5 years, a steady but not spectacular performance. But cash flow has increased at 13.5%, earnings at 25.5% and net profit margin has grown from 7.8% in 2003 to about 14.8% in 2007. These results have been achieved by moving to higher margin products while maintaining effective cost controls.

Atrion has three basic business segments: cardiovascular, fluid delivery and opthalmics.

In the cardiovascular market, Atrion introduced the MPS® Myocardial Protection System, providing the surgeon with flexibility to continually change the mix, temperature, flow rate and precise quantities of medications delivered to the patient during open-heart surgery. A second generation of MPS®, introduced in 2005 as MPS2® provides several new functions including cyclic flow capability. In fluid delivery, Atrion's proprietary line of needle-free valves marketed through the Halkey-Roberts subsidiary eliminates the use of needles in many routine procedures, thus protecting medical personnel against exposure to infection through accidental needle-sticks. Other new products from Halkey-Roberts include a new line of products for balloon catheter inflation. In opthalmics the company is a leading manufacturer of soft contact lens disinfectant cases. It also makes the LacriCATH™ balloon catheter used in procedures to treat blockages of the tear duct. A number of the core cardiovascualr and fluid delivery products were acquired in 1997 from Quest Medical for about $24.5 million. Atrion has done a fine job of building upon these core products over the past decade, staying on the forefront of technology and manufacturing in its targeted markets.

The guiding light in Atrion management has been Emil Battat, who has served as CEO since 1998. Battat now 70 years old holds degrees in science/engineering from MIT as well as an MBA from Harvard. While Atrion is quiet about discussing details of internal functions (ATRI does not list anyone as heading up R&D specifically), it is pretty clear that Battat’s strong technical and business skills have been a major force in moving the company forward over the last decade. His son, David, appears to be the likely successor to CEO. David Battat, a lawyer by training, ran the Halkey-Roberts subsidiary, before being promoted to President and COO in 2006. One uncertainty is whether or not the son can fill the critical roles of his father. Atrion brought in Ronald Spalding in 2006. Spalding does have an engineering background and valuable experience at Abbott and Guidant.

Atrion has a strong balance sheet with essentially no debt and cash and equivalents standing at about $13.8 million. Atrion took on about $11million in long term debt in 2006 in order to build a new state of the art manufacturing facility, but has now rapidly paid all of that off.

Insiders own over 23% of the outstanding shares with E. Battat owning over 11%. There have been no significant insider sales in recent periods. I like this level of insider ownership, since it acts to align shareholder and management interests.

In its most recent quarterly report of November 6, ATRI reported a 10% increase in revenues and a 16% increase in diluted EPS excluding a special net benefit that occurred in 3Q 2007 that resulted from a favorable dispute settlement. ATRI saw double digit increases in revenues in all product areas except the ophthalmic line.

Looking forward, Atrion has appears to be focusing on R&D in the inflation and ophthalmic areas to create new products. Like all medical device companies, it is likely to see new cost pressures resulting from the economic slowdown as well as possible efforts by the new administration in Washington to curtail medical spending. Despite this, the company appears to be on track for 2008 earnings of over $7.50/share. With the stock price currently around $98/share (down from a high of $130), this corresponds to a forward p/e under 13. At the current price, ATRI appears to be good value despite the economic headwinds.

Atrion has been a core holding in accounts managed by Freedom Mountain Investments. It is a clear example of a very well managed nimble small cap company outperforming the giants in its industry.

Disclosure: Author owns ATRI in individual and managed accounts (with FMI).