As I pointed out in my article on Abbott (NYSE:ABT), I like the idea of point of care systems very much. I think companies engaged in developing and marketing this technology stand to benefit from what I believe will be an eventual global-scale de-centralization of medical practices, going from large medical centers, where everything is done, to doing more and more on the spot, at the doctor's office, including the all-important diagnostic part. In this respect I think Abaxis (NASDAQ:ABAX) with its Piccolo point of care product is a company worth keeping one's eye on as a long-term play in the health care sector.
I had the opportunity to be introduced to the Piccolo instrument in Istanbul in June at a conference I attended with my wife. For now, this is a great tool for smaller towns where only limited medical services are available and in general practitioner's offices. It gives practitioners the ability to provide information on many aspects of a patient's health within 12 minutes. It only requires 0.1 cc of blood, it is therefore useful in special situations such as when the patient is an infant and the ability to harvest blood samples is limited. Furthermore, the machine is self-calibrating, which means that it can adjust for certain interference from other factors, which improves its accuracy greatly and doctors can diagnose with confidence.
The current range of tests already makes the machine a very useful tool in determining the well-being of a patient on the spot. It can confirm or exclude the presence a wide variety of conditions. It can detect liver diseases such as hepatitis and cirrhosis. It can detect renal issues such as gout. It can detect metabolism disorders, such as diabetes and hypoglycemia. It can test for calcium, creatinine, and uric acid. All of these and more can be done thanks to their proprietary disk which currently has 13 reagents which can all be applied to the same sample introduced into the machine (link).
It is not yet at the point where it can replace a big hospital lab, where dozens of lab techs operate the diagnostic machines and pathologists as well as other specialists are on hand to interpret the results. It is technically capable of displacing the services of companies such as Labcorp (NYSE:LH). It is also a platform for what I see as an evolving practice of on-the-spot diagnosis, which will increasingly take over from large centralized laboratories, making the diagnostics part of the health care services more cost-effective and also cut down on diagnosis time. As the technology evolves, it will make more and more sense to make use of it.
The Piccolo device does have some competition in the field, mainly in the form of Abbot's (ABT) I Stat device. It is a popular item in hospitals and in other circumstances. The I Stat's main technical advantage is its size. It is a hand-held device, therefore hospital staff can carry it around with them, while the Piccolo device is more of a stationary device, which can be used on an office desk, or can be mounted on a cart.
Another major difference which I'm not certain whether it is an advantage or disadvantage for either side and in all circumstances, but I am inclined to lean towards the Piccolo device having an advantage from this perspective is the fact that the I Stat device from Abbot performs each test individually with cartridges that have only one reagent in them, while the disk that Piccolo uses can apply 13 reagents to the same sample. This means that one test is enough for a complete analysis, while with Abbot's device, a patient may be subjected to multiple sample collections, if it turns out that medical staff decides that the initial test performed was not enough. One definite advantage that the Piccolo device does have is its ability to self-calibrate, in other words to account for other factors, which makes it more accurate. I should point out that while both devices are point of care systems, they are not necessarily direct competitors in all circumstances. I think I Stat is likely to work better in a hospital setting, while the Piccolo system seems better adapted to a family doctor's office.
Aside from I Stat as a direct competitor, there is the main barrier which will likely continue to present a formidable challenge in the near term and that is physician habits. After decades of doing things a certain way, it is hard to convince doctors to adopt the practice of running a diagnostic machine in their office as opposed to sending samples to Labcorp and other labs. Despite the cost and time advantage the device presents, Abaxis CEO Clint Severson admitted that it is hard to convince doctors to switch. As a side note, if the tide will turn and more and more acceptance of the device will increase, it will not only mean a huge gain for Abaxis, but also a negative development for companies such as Labcorp. For Abaxis a complete breakthrough into the human diagnostic market can potentially mean as much as a ten-fold increase in its current sales volume, given that according to its own assessment the human diagnostics market for its products is potentially ten times larger than the veterinary market, while the bulk of its current sales comes from the veterinary side (link).
As of the last quarterly report, Abaxis is still a mainly veterinary supply business, with the Piccolo system only helping the health care side of the business provide $7.2 million for the quarter, which is 15% of total revenues. But while the veterinary side of the business grew its revenues by 8% compared to last year, the health care side grew by 20%. If the Piccolo diagnostic system continues to be a platform for further qualitative improvements as well as a continued increase in the range of tests available, I believe this rate of growth can be maintained and even accelerated.
In terms of the company's current valuation, and other financial vital statistics, it is relatively attractive in my view as a company worth keeping in mind as a long-term investment. Its P/E ratio is currently rather high at 66, but worth keeping an eye on the company as the ratio is forecast to greatly improve in the next few years (link). Operating costs are steady compared to last year, with only 1% growth compared to last year, while revenues are up by 10% for the same period. Net income went from $3.2 million to $4.7 million compared to corresponding quarter from last year.
While this company may not be the best bet at the moment given its valuation. Given its potential to grow in the very important diagnostics segment of health care worldwide, I believe it is a great potential investment target a few years down the road, especially if we are to have a recession driven market sell-off in the meantime and Abaxis is sold together with the rest of the market. If the technological direction continues on the same path and the product is constantly improved and continues to break in on the market, it can become a very hot stock down the line, with much potential for growth.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.