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Q2 2012 Financial Results

Corgenix Medical (OTCQB:CONX) reported financial results for the second fiscal quarter ending December 31, 2011, on February 14. Revenue came in about 7% less than our estimate, mostly due to a 19% miss in international sales. Despite the slightly softer than modeled revenue, the miss on the bottom line is relatively immaterial.

Management's revenue guidance for the full fiscal year was again incrementally adjusted down - some of which relates to sustained economic weakness in overseas markets and a slight delay in getting the two new joint-development products launched - the first of these products, an IT-format (automated) hyaluronic acid test, just now received CE Marking - it's expected to launch in Europe in the current quarter (fiscal Q3). This, along with the other joint-development product is expected to be a catalyst to driving CONx's top-line beginning in fiscal 2013.

While growth in the International business has yet to gain traction, North American revenue was up 22% in Q2 (although 4% below our estimate) and management indicated on the call that domestic sales should continue to be strong throughout the remainder of the year. Revenue guidance now stands at $9.7 million, down from the $10 million issued with Q1 results.

We have again made some minor adjustments to our model - we now look for revenue and net income for the full year of $9.7MM and $228k, compared to $9.9MM and $273k prior to Q2. Our longer-term estimates and outlook also remains largely unchanged.

Revenue

Q2 revenue was $2.07 million, up 16% y-o-y but about 7% less than our $2.22 million forecast. North America sales were $1.74 million, up 22% y-o-y but about 4% less than our $1.81 million forecast. International sales were $332k, down 10% and 19% below our $410k forecast. We continue to expect international sales to gain traction with the introduction of new products and bulk sales to ELITech - the front end of which should be more evident in 2013.

The miss in domestic sales relative to our estimate was mostly confined to lower than modeled Contract Manufacturing revenue - while this was up over 200% y-o-y, we were anticipating even stronger growth. Revenue in this segment is inherently choppy however and expected to meaningfully rebound in the next couple of quarters. Management indicated on the call that they expect much more in the way of capital contribution from this business in 2H 2012.

We've substantially increased our estimates for Contract Manufacturing for the remainder of the current year, which partially offsets our downward revision to International sales (due to product launch delays). AspirinWorks revenue came in at $166k - inline with our $174k estimate - management continues to expect revenue to roughly double in 2012 from the $406k in 2011 and be one of the major catalysts driving growth of North American sales (the $9.7MM revenue guidance for the full year assumes about $8.4MM coming from domestic sales - implying growth of about 30%).

International sales again disappointed as a result of market softness and delays in getting the two new ELITech joint-development products launched. CONX introduced the first of the two products, a hyaluronic acid test on the IT format, at the MEDICA conference in Germany - the test just received CE Marking and is expected to launch this quarter (fiscal Q3). The other joint-development product is still yet to be unveiled with no timeline for launch yet announced.

Our model assumes this product also launches before the current year-end (but with immaterial revenue contribution in 2012) - although we have no particular insight. We now look for International sales of $1.28 million in 2012, down from the $1.67 million we modeled prior to Q2 and about 12% lower than fiscal 2011. Our ramp in international revenue beginning in 2013 assumes a firming up in overseas economies and reflects a significant contribution from bulk sales to ELITech and new product launches (joint development products, AspirinWorks IT, infectious disease tests).

Net Income / EPS

Q2 net income and EPS came in at ($90k) and ($0.00), compared to our $8k and $0.00 estimates.

Cash

Corgenix exited Q2 with $811k in cash and equivalents, down from $1.4 million at 9/30/2011. The sequential decrease in cash balance was mostly a result of repayments on the revolver, partially offset by cash flow from operations of $124k. Cash flow from operating, investing and financing activities were $124k, ($10k), and ($738), respectively in the quarter. The balance on the revolver at the end of Q2 stood at just $6k, down from $822k at the end of Q1. We continue to believe Corgenix can generate positive cash from here on out - they should also have ample liquidity and borrowing capacity to meet any sporadic spikes in working capital needs (i.e. - inventory building, etc) to meet demand. Total debt at December 31, 2011 stood at $104k.

Outlook

Corgenix is in the midst of what we believe to be the front-end of a transition away from reliance on certain legacy vascular disease tests to a greater focus on faster-growth segments and products. The recent transfer of their international sales operation and consummation of the related amended co-development agreement with ELITech offers Corgenix additional opportunity to develop novel high-potential products and significantly expands their sales and distribution reach. While the domestic business will likely be the greatest initial beneficiary (via Contract R&D revenue), the ELITech partnerships should provide especially strong support for international sales growth over the longer-term (via new product launches and ELITech's sales network).

In addition, segments that have been productive and growing (such as AspirinWorks and Contract R&D) or at least have reasonable potential to make meaningful contributions in the future (such as Contract Manufacturing), will continue to be nurtured and expanded. The company already began adding headcount to its R&D and domestic sales teams in anticipation of new business and increased demand.

North America

We model North America sales of $8.44 million in fiscal 2012, implying growth of 30% (+$2.0MM) from 2011. The major drivers being AspirinWorks (+$365k) and Contract Manufacturing (+$1.1MM). AspirinWorks sales, which doubled in fiscal 2011, are (based on management's guidance) expected to (approximately) double again in 2012 as a result of additional customers adopting the test and existing customers placing more orders. While the automated version of the test could possibly make it to the European market during 2012, as the test may not launch until later in the year, we think little of the ~ $800k sales guidance is related to sales of this test. We expect Contract Manufacturing, which saw revenue dive 21% in fiscal 2011, to do an about-face in 2012 from increased business from current customers (BG Medicine) as well as contracts from new customers - as noted, we expect to see this ramp in 2H.

Going into 2013 through 2015 (the furthest out that we model), AspirinWorks should remain a significant catalyst to North America-related sales growth. Corgenix views AspirinWorks as a very high potential product and clearly believes that the tests (including the automated version) can become a major contributor to overall revenue over the next several years. We also look for consistent revenue growth from Contract R&D and Contract Manufacturing, both of which should directly benefit from Corgenix expanding their testing platforms (from almost exclusively ELISA to also focusing on immunoturbidimetry and lateral flow).

The ELITech development agreement will continue to provide at least a base amount of Contract R&D revenue throughout the next few years. Corgenix will also hopefully be able to leverage their capabilities in infectious disease-related test development to secure additional government contracts (in areas such as infectious disease and bio-terrorism) to facilitate further growth of their Contract R&D business.

International

We model International sales of $1.28 million in fiscal 2012, implying contraction of approximately 12% (-$174k) from 2011. Up until Q2 2012 results we had modeled international sales to actually increase by about 15% but sustained economic weakness in overseas markets and delays in getting the two new joint development products launched prompted us to significantly trim current year revenue estimates. We now expect little contribution in 2012 from these two new products developed under the ELITech agreement. However, these two tests, along with what we expect to be a fairly regular flow of new products coming out of the ELITech development agreement, is what we expect to be a major impetus for growth of international revenue over the next several years.

The automated AspirinWorks test should also be a meaningful contributor. ELITech's distribution network provides greater reach than did Corgenix UK, which should afford a steeper sales ramp of new products and higher potential peak revenue. We think the ELITech partnership could end up being a big winner for Corgenix and revive sales in the vascular disease and HA businesses as well as play a key role in building their budding infectious disease area - including sales of these tests as well as helping secure new R&D contracts.

Despite what we expect to be very robust sales growth in North America, we model international revenue growth to outpace that of domestic sales beginning in 2013, which largely reflects our expectation that new product launches begin to gain significant sales traction in 2013.

Revenue

We model $9.7 million in revenue in fiscal 2012 and look for this to grow at a CAGR of about 14% through 2015, reflecting North America and International annual revenue growth of approximately 12% and 25%, respectively.

Income / EPS

We model net income of approximately $208k ($0.00 EPS) in 2012, an increase of over $600k from the ~ -$400k (-$0.01) posted in fiscal 2011. This reflects our ~23% estimated growth in revenue and incremental operating expense leverage, slightly offset by a 260 basis point contraction in gross margin.

We expect Corgenix to continue to gain leverage in operating expenses going forward and, coupled with strong revenue growth and incremental widening of gross margin, to result in EPS showing consistent year-over-year improvement. We look for EPS of $0.03 in 2015.

Valuation

Our comparable cohort used to value CONX consists of several companies in the medical diagnostic testing space, some of which are considered direct competitors to Corgenix. Our valuation methodology uses the average of four metrics; price-to-2015 estimated EPS, price-to-book value, price-to-sales (trailing 12 months), and enterprise value-to-sales (trailing 12 months).

Average valuation based on these four metrics is about $0.50/share which, based on CONX's current market price of approximately $0.15/share, indicates the stock is significantly undervalued. As such, we recommend accumulating the stock and are maintaining our Outperform rating on Corgenix.

TickerEst Long-term EPS growthImplied 2015 P/EPrice / Book ValuePrice / Sales (NYSE:TTM)EV / Sales
IVDNANA1.91.21.0
DIA.MI10.0%8.1NANA2.8
OSURNANA5.06.26.0
TRIB14.4%8.41.42.81.9
CEMI18.9%27.44.71.71.6
SRLS32.9%15.31.91.81.4
IDXX13.2%17.19.04.04.1
VIVO14.3%12.35.44.64.4
QDEL9.6%23.92.73.33.3
ABAX11.1%23.13.83.93.5
Average15.7%16.94.03.33.0
Value usingValue usingValue usingEV usingValue using
2015 Comp P/EComp Price/BookComp Price/SalesComp EV/SalesComp EV/SalesAVG
CONX$0.51$0.44$0.58$23.67$0.53$0.51
Source: Corgenix Earnings Miss Slightly, Outlook Largely Unchanged