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Starlims Technologies (LIMS) is a recent Oppenheimer-underwritten IPO that floated on the Nasdaq in late May. It is a small offering with a market cap of just under $100MM. It’s flying under the radar — like many Israeli smallcaps that eventually provide good returns for investors by growing quickly and getting scooped up by larger multinationals. So I decided to take a look under the hood. You can also take a look at their IPO registration documents.

The Business

STARLIMS competes in the Laboratory Information Management Systems market with over 20 years experience marketing in this space. Their software “manages the collection, processing, storage, retrieval and analysis of information generated in laboratories.”

The Solution

Importantly, their software “…improves the reliability of sampling processes, supports compliance with domestic and international regulations and industry standards, and provides comprehensive reporting, monitoring and analysis capabilities.” The software package comes off-the-shelf and is truly web-based, enabling global research organizations an effective way to manage distributed laboratories.

The Market

According to Frost and Sullivan report, suppliers of commercial LIMS had revenues of $440M in 2006 and the global market is expected to grow at a CAGR of 12% through 2010 where it’s expected to reach $700MM.

Trends

Globalization stretches the resources of many organization and results in labs being dispersed around the world. It’s extremely important to cohesively manage the analytical results pertaining to a singular product. The improvement in the connectivity between dispersed locations and the adoption of Internet technologies is driving demand. Old legacy systems are being transitioned over to more commercial LIMS systems. The need to comply with industry regulation and enforce traceability of laboratory tests is a key factor driving the demand for commercial LIMS implementations.

Competitive Advantages

* Experience: LIMS has been a pure-play for 20 years

* Web-based technologies: The LIMS solution addresses evolving market trends towards centralized LIMS solutions

* Regulatory Focus: LIMS solution is focused on providing customers a cogent way to comply with existing and emerging regulatory statutes

Growth Strategy

LIMS is pursuing 5 distinct paths for growth:

1. Expanding international sales: North American sales account for about 75% of sales. The company is investing in building out its capabilities outward.
2. Drilling down into core markets.
3. Expanding presence in the LIMS replacement market: Like any market, there is an upgrade cycle where home-grown/custom-designed systems become obsolete. In addition, several competitors are no longer supporting these legacy systems. LIMS believes this is a growth opportunity.
4. Continuing to address adjacent markets: STARLIMS plans to expand their product functionalities into complementary markets.
5. M&A: With no concrete plans tables, the company is looking to enhance value through acquisitions.

Competition

The LIMS market is highly competitive, consolidating and not dominated by any one player. According to an elusive Frost and Sullivan report (sorry, I couldn’t locate it to link to), the top 5 LIMS players account for 53% of the global market. Principal competition comes from Thermo Fisher Scientific (NYSE:TMO) and Applied Biosystems (NYSE:ABI).

Financial Performance/Valuation

During the past year, STARLIMS posted a 21% increase in revenues to $19.7 million and net income was $3.7 million. Looks like LIMS is getting market-share of a market estimated to grow at only 12%. On a price-to-sales and a price-to-book ratio, they are undervalued when compared to the industry and sector.

I generally like to see stronger market growth figures but looking at LIMS, what you have is a small and growing company with lots of industry knowledge and experience, leveraging natural and secular growth of the industry by gaining marketshare away from competitors and by providing a nifty web solution.

They report on August 13th. I’d wait on the sidelines as the company gets its publicly-traded legs and gets used to reporting to the Street. As the smoke settles, this might be an interesting play for small-cap investors looking at some of the best of Israeli technologies.

Disclosure: Author’s fund does not have a position in LIMS as of 8/01/07.

Source: Peeking Under the Covers at Starlims Technologies