Elbit Medical: A Biotech Entrepreneur that Deserves a Closer Look

Nov.15.06 | About: Elbit Imaging (EMITF)

Elbit Medical Imaging (NASDAQ:EMITF) published its Q2 report at the beginning of September, and the less said about it the better. The company’s loss grew, shareholder equity narrowed, and financing expenses increased substantially. But since that report was published, the stock has climbed 40%. I wrote at the time that the important thing about Elbit Medical’s Q2 report was the increase in revenue, since anyone who bothered to study the report in depth would notice that Q2 was still a “transition quarter.”

I would describe Elbit Medical as the ‘ETF for entrepreneurship.’ Anyone interesting in investing in entrepreneurship will find a fair deal in Elbit Medical, especially considering that this unusual ETF is headed by people such as chairman Motti Zisser, president Shimon Itzhaki, and his recently appointed deputy, Adv. Abraham (Rami) Goren.

Alongside its real estate development activity, which is already bearing fruit, Elbit Medical has two other arrowheads, both of which have tremendous value potential. One is the company’s technological holdings in InSightec Ltd. and Gamida-Cell Ltd., and the other is the company’s real estate project in India. Anyone who examines the latter more closely will see that this is Elbit Medical’s largest ever real estate project - much larger than its central European ones -- and based on a model that has been a success in Europe.

Elbit Medical is in the preliminary stages of construction of a series of commercial centers in South India (the most progressive region in the sub-continent). It has already set up a management infrastructure in each of the regions it has examined, with the model to be based on the one the company developed in Hungary and the Czech Republic. Elbit Medical has a team that locates sites for the centers, while Plaza Centers NV (PLAZ) will execute the project using the funds raised in its recent IPO.

Then there is Elbit Medical’s technology investments. At the beginning of the month, we saw two more signs of the potential in Elbit Medical’s technology holdings, this time from the two extremely interesting companies it controls. The first, InSightec, announced that the U.S. Food and Drug Administration [FDA] highlighted the company’s ExAblate 2000 system as “one of the 14 medically significant products it approved during fiscal 2005.” ExAblate is non-invasive surgery device to target and destroy uterine fibroids, and it has been used to treat more than 2,200 patients worldwide.

As far as I could ascertain, if Elbit Medical, which holds 52% of InSightec, decides to float the company in the U.S., London, and certainly in Japan (where most of its sales are at present), it will have a minimum value of $500 million. I believe it won’t be long before InSightec, which has made a breakthrough in the use of ultrasound energy to treat various kinds of growths, has a billion dollar value.

Elbit Medical’s other company, Gamida-Cell, has also just received an endorsement from the FDA on the design of the study for its product, StemEx, which treats hematological malignancies.

The conclusion from all this is that Elbit Medical, even though the dreams have yet to materialize, is grossly undervalued. Several factors are holding the stock back. First, Elbit Medical is an “oddball” with a potential that institutional investors, especially American ones, find difficult to comprehend. Its company structure is not a favorite with investors and analysts on Wall Street, in addition to which nearly all its business is located outside the U.S.

For the investor who lacks full information (which comes from serious analysts and no one else), Elbit Medical looks like some sort of business hybrid. The average investor finds it difficult to understand how things work at the company and see how it all adds up on the bottom line. Institutional investors need to be persuaded that Elbit Medical’s management can deliver on Wall Street the promise it represents on Main Street. I can say that at this point, things are progressing. More and more investors are beginning to realize where Zisser is headed and how he carries out his plans.

The second problem is that there is no one to explain and encourage people to take an interest in investing in Elbit Medical, since there is no coverage of the stock by analysts. No large investment manager in the U.S. will take a serious position in a company that does not have any analyst coverage. Many of them have bought Elbit Medical shares, but none has taken a serious long-term position.

Why is there no analyst coverage? I imagine it would be difficult to find an analyst who is able and willing to cover a company like Elbit Medical. The “important” analysts do not like investment or holding companies, and certainly not those they don’t quite understand. I would start off with “commissioned coverage.” By this I refer to investment houses (Dutton Associates, for example, which is known in Israel), that compile reviews for a fee, and then distribute them to private and institutional organizations.

The fact that the company is paying for the research does not make it “bought.” This is a legitimate method and it has developed considerably in the U.S. over the past five years. This development came about due to the lack of credibility of the big houses. Once a study or two like this reaches the market and creates interest, others will follow (investment managers at Goldman Sachs or Merrill Lynch also read reviews by Dutton and others. They don’t do it openly, but they read them nonetheless, since some of their good friends and colleagues left their jobs and are now working at these investment houses).

Another reason is Elbit Medical’s speculative image, and in particular, that of its founder, Motti Zisser. While this is nonsense of the first order, changing an image takes time. This is a matter that concerns Wall Street only, since Main Street already knows Motti Zisser. I believe all these problems will be resolved in time, and the stock will continue its journey north.

Incidentally, when it comes to the debate over whether the Republicans or Democrats are better for business, Elbit Imaging will stand to gain in specific areas from the recent mid-term elections won by the Democrats. This is because the Democrats will lift a lot of the restrictions on stem cell research, a development that will help companies like Gamida-Cell.

Elbit Medical 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.