Fertile Growth at Inverness Medical Innovations

The Waltham, Massachusetts based medical diagnostics products researcher, developer, manufacturer, and marketer Inverness Medical Innovations Inc. (IMA) is a spin-off in our Clear Spin-Off Index [CLRSO].

Founded in 2001, IMA primarily offers consumer pregnancy and fertility/ovulation tests and rapid point-of-care diagnostics. Originally spun-off from Inverness Medical Technology, Inc., in November 2001, the company has been growing its business through a number of acquisitions.

Products
IMA is the leading provider of home pregnancy tests and fertility and ovulation monitoring products in the world. These products, both professional and over the counter, monitor women’s fertility and serve as a tool for testing conception and monitoring ovulation, providing a natural form of contraception. Through their professional diagnostics branch, the company also provides laboratory and healthcare professionals with products that analyze patients’ body fluids or tissues in women's health, infectious disease, cardiovascular disease, and drug abuse. Among other products, IMA also produces a large array of nutritional supplements and vitamins in the U.S.

With 2,360 employees, IMA has research and development facilities in the U.S., the UK, Germany, Denmark and Israel, and manufacturing sites in the UK, China, Japan and the U.S. It already enjoys a strong $1.60 billion market capitalization paired with revenues of $533.81 million in the past year. Although their gross profit has been steadily on the rise, averaging about 19% per year over the last three reported calendar years, it has been offset in 2005 by the closing of a manufacturing facility, recall of a product, and growing investment in R&D and marketing.

These costs include the acquisition of Italian diagnostics distributor Promesan S.r.l., a consumer diagnostics joint venture with Proctor & Gamble Company (PG), and the acquisition of the rapid diagnostics business of ACON Laboratories over the past twelve months. Although the figures show that operations are at a net loss, IMA has since rebounded and reported positive operating income for the past quarter ending September 30, 2006.

Financials
The company also has interesting fundamentals. Over the past year, revenue for the company grew at a clip of 34.85%, with one-year net income growth an impressive 40.58%. Looking most recently, its most recent quarterly revenue grew at 36.30%, which trounces the industry average of 8.80%. As the firm focuses on the top line growth, it has raised additional capital as recently as 2/1/07, when it raised $273.6 million in a share offering. This usually has a stock drop as it dilutes shareholder. However, the stock rose that day and has been rising since around January 22, when it bottomed again at $37.65 and closed Monday at $42.81.

As the firm has grown, profitability has not been ignored with a trailing 12 month gross margin of 40.31% and operating margin of 2.92%, just behind the industry averages of 46.14% and 6.08%.

Despite its growth, IMA may still be trading at a discount compared to its peers. An additional fundamental data point to examine that may be revealing of its fair market value is its price to book (P/B) value of 2.30, which is less than half of the industry average of 5.09. Given these data points, our multifactor model suggests that this spin-off has the potential to start showing profits while growing. We believe that will be reflected in its stock price.

Disclosure: Inverness Medical Innovations Inc. [IMA] is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF [AMEX:CSD]. Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF: CSD. He does not directly own shares in [IMA].

IMA 1-yr chart