CardioNet Takes a Beating, But Keeps on Ticking

CardioNet (BEAT) is currently trading about 50% below its 50-day moving average at $6.27/share on 7/27/09 with value parameters that include a price/book ratio (PBR) of 0.95X, price/sales ratio (PSR) of 1.1X, and a trailing price/earnings (P/E) ratio of 19.5X with a market cap of about $150 million that includes over $50 million in cash and negligible debt.

In mid-July, shares of BEAT tanked after the Company withdrew its 2009 financial outlook following a major cut in the reimbursement rate by Pennsylvania Medicare carrier Highmark for the Company's mobile cardiac outpatient telemetry (MCOT) services. As of 9/1/09, Highmark's reimbursement rate for MCOT services will decrease to $754, compared to the previous rate of $1,123 per service.

CardioNet's MCOT is an ambulatory cardiac monitoring service that analyzes patients' heartbeats on a real-time basis and includes automatic arrhythmia detection and wireless ECG transmission. The technology benefits both patients and physicians by providing 24/7 monitoring throughout the year on a remote basis to aid in the correct diagnosis and treatment of arrhythmias that may otherwise not be detected through Holter monitors or other instruments.

Predictably, BEAT received a wave of downgrades from analysts given the uncertainties surrounding the Company's profitability and the prospect of reimbursement cuts from other third-party payers. Despite these uncertainties, BEAT trades at an enterprise value of about 100 million and a significant discount to other companies in the Health IT industry in terms of PBR and PSR with many of the companies trading at ratios above 3X for these parameters.

My Global Health IT Index tracks the performance of 65 companies which derive the majority of their revenue from the following activities: (1) the electronic transmission, storage, and processing of prescriptions (e-prescribing); (2) electronic storage and systems for healthcare facility operations and medical records; and (3) electronic systems, devices, and services for remote, real-time monitoring of patient health parameters (telemedicine).

Despite uncertainties over the prospects for major healthcare reform, increased spending on Health IT is widely recognized as an important feature to modernize medical records, measure healthcare outcomes, and improve/extend the reach of modern healthcare technology through remote patient monitoring and other related technologies.

The Health IT index has easily outpaced the overall market on a year-to-date basis (YTD), including some top YTD stock price gainers from the index such as Allscripts-Misys (MDRX) (+61%) (PBR = 3.4, PSR = 4.3), Eclipsys (ECLP) (+27%) (PBR = 2.5, PSR = 1.9), Cerner (CERN) (+68%) (PBR = 3.9, PSR = 3.2), Computer Programs & Systems (CPSI) (+38%) (PBR = 9.5, PSR = 3.3), Quality Systems (QSII) (+27%) (PBR = 10, PSR = 6.4), and Merge Healthcare (MRGE) (+191%) (PBR = 17, PSR = 3.6).

Despite the uncertainties surrounding the reimbursement cuts for the Company's MCOT service and its murky financial outlook for 2009, I own shares of BEAT due to its strong balance sheet, extremely oversold stock price, the long-term potential for either a return to earnings growth or an acquisition by a larger player in the Health IT industry, and overall favorable market conditions for the healthcare sector as large-scale reform is unlikely to occur with the trend of consolidation expected to continue.

I think a buyout of BEAT is most likely to occur from a larger player in the Health IT industry such as Philips (PHG) or GE Healthcare (GE) because of the following factors: (1) BEAT offers a specialized service for ambulatory monitoring of heart rhythms for the diagnosis of arrhythmias; (2) BEAT has an enterprise value of just $100 million, including $50 million in net cash as part of a strong balance sheet; and (3) a larger player in the industry is better able to absorb the reimbursement cuts since BEAT's MCOT offering would merely expand the acquiring company's product offerings.

Two other small-cap companies that I previously owned in the Health IT space include VisICU and Sunquest Information Systems, which were acquired by Philips and Misys (now MDRX). VisICU is most analogous to BEAT since it was acquired in early 2008 in less than two years from the Company's IPO during spring 2006. VisICU provided a specialized Health IT service that allowed for remote monitoring of patients in intensive care units (eICU) and also experienced a quick run-up in its share price following the Company's IPO, only to come crashing down into single digits before Philips acquired the company for $12/share or about $430 million in February 2008.

Disclosure: Long BEAT

Comments

[MoneyMachin...:]

Hey Mike, do you have anymore info for the upcoming clinical trial results?? thanks in advance.

Jul 27 07:38 PM

[ari5000:]

You do a FANTASTIC job reporting. thanks

Jul 27 08:26 PM

[IancoleTX:]

Hi Mike,

Nice find. Was wondering how great a possibility of further reimbursement cuts you feel there is, and whether the management would have any means of preventing them. Obviously you feel that valuation of the stock and buyout potential outweigh the chances, but just wanted to get your opinion.
Keep em coming man.

Thanks
Ian

Jul 27 10:01 PM

[DuckThis:]

Mike:
I follow your posts enjoy your insights anf due dillgence. Off the subject of this article how about your thoughts on biel. you spoke to this one breifly in June. I was on the conference call today and it all sounded goo, maybe too good. As I attempted to ask a question I was disconnected. I want a time frame on audited finanical statements. Not on my question for them but your thoughts would be useful.

Jul 28 10:52 PM

[Mike Havrilla:]

BIEL has experienced a huge run-up in share price on the pending 510(k) applications and new submissions expected to occur. Also, the FDA Panel recommendations to have stricter guidelines for Tylenol and combination pain drugs with acetaminophen will ultimately benefit BIEL. Not surprised to see the stock take a breather with next catalysts coming in the form of new 510(k) filings, marketing clearance for the pending submissions, and final FDA action on Tylenol


On Jul 28 10:52 PM DuckThis wrote:

> Mike:
> I follow your posts enjoy your insights anf due dillgence. Off the
> subject of this article how about your thoughts on biel. you spoke
> to this one breifly in June. I was on the conference call today and
> it all sounded goo, maybe too good. As I attempted to ask a question
> I was disconnected. I want a time frame on audited finanical statements.
> Not on my question for them but your thoughts would be useful.

Jul 29 09:38 AM

[IancoleTX:]

CardioNet beats earnings, .11 actual vs .05 expected

Aug 05 06:53 PM