IRadimed: Expansion Is The Word

Sep. 23, 2019 6:51 PM ETIRadimed Corporation (IRMD)11 Comments

Summary

  • IRadimed is a leader in developing innovative MRI (Magnetic Resonance Imaging) compatible medical devices and accessories.
  • Management expects growth to come from increasing penetration of hospitals, new products, geographic and channel expansion and a bigger, better-trained U.S. direct sales force.
  • We initiate a BUY rating.
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Investment Thesis

IRadimed (NASDAQ:IRMD) is a leader in developing innovative MRI (Magnetic Resonance Imaging) compatible medical devices and accessories. At present, the company’s product portfolio consists of: 1) the MRidium 3860+ MRI-Compatible IV Infusion Pump, a non-magnetic infusion pump designed for safe use during MRI procedures and FDA approved since 2009, and 2) the IRadimed 3880 MRI-Compatible Patient Vital Signs Monitor, a compact, lightweight monitor incorporating non-magnetic components that allows continuous monitoring of patient vital signs during MRI procedures. The monitor has been FDA approved since 2017. IRadimed’s worldwide installed base consists of more than 5,000 MRI-compatible IV infusion pump systems and more than 260 MRI-compatible patient monitors.

The company’s grew sales 32% in FY:18 to $30.4 million. Sales were a mix of 48% infusion pumps, 22% vital signs monitors, and 30% disposables and related services. Adjusted EPS more than doubled to $0.54 in FY:18 from $0.22 in FY:17. During H1:19, sales rose 22% year-over-year to $17.7 million and adjusted EPS improved 38% to $0.33.

IRadimed is guiding for at least 27% top-line growth in FY:19 and revenues ranging from $38.5 million to $39.5 million. The company projects adjusted EPS at least 30% higher year-over-year ranging from $0.70 to $0.74.

Management expects IRadimed’s growth to come from increasing penetration of hospitals, new products, geographic and channel expansion and a bigger, better-trained U.S. direct sales force. Our model forecasts FY:19 revenues up 27% year-over-year to $38.6 million and adjusted EPS up 34% to $0.72. Our FY:20 model conservatively estimates 22% growth in revenues to $47.08 million and 34% gains in adjusted EPS to $0.95. We initiate a BUY rating.

Business Overview

MRI Challenges

MRI is a widely-used medical imaging technology for visualizing vital organs, bodily functions and identifying blockages, abnormalities and growths. Generally considered safer than other scanning techniques, MRI is finding new applications in cardiac stress testing, intra-operative MRI surgeries and neurology. However, the powerful magnets used in MRI scanners can present challenges for hospitals and imaging centers. Most medical devices are made with magnetic components and may not function properly in the presence of a MRI scanner. There's also a risk that items containing ferrous metals may become projectiles due to the strong magnetic field produced by the MRI scanner, posing risks for the patient and staff. The presence of electronic instruments nearby also may negatively affect MRI imaging quality.

Hospitals sometimes avoid these risks by removing patients from infusion pumps and vital signs monitors during MRI procedures. However, this approach also is problematic. Critically ill patients should not be removed from IV medications for even a few minutes and may deteriorate rapidly if pain, cardiac distress, breathing problems or other adverse events go undetected by vital signs monitors. In addition, many patients, particularly children and infants, require continuous sedation to remain still during a MRI scan.

IRadimed’s MRI-compatible medical devices overcome these challenges. The company’s initial product was a MRI-compatible IV infusion pump. The MRidium 3860+ MRI-Compatible IV Infusion Pump features a patented, non-magnetic pump system specifically designed for safe operation during MRI procedures. The pump has a non-magnetic motor, non-ferrous parts and other special components that enable safe infusion of IV fluids during MRI scans. The system also has a non-magnetic pole, remote control, a Sidecar second channel and proprietary, single-use IV tubing.

IRadimed’s MRI-compatible infusion pump system recently retailed for approximately $35,300. The cost of the IRadimed MRI-compatible infusion pump is roughly four to five times the cost of a conventional infusion pump.

In 2017, IRadimed introduced its second product - the IRadimed 3880 MRI-Compatible Patient Vital Signs Monitoring System. This device also is made from non-magnetic components and enables continuous accurate monitoring of patient’s vital signs during MRI procedures. While there are other MRI-compatible monitors available in the U.S. market, the compact design and light weight of IRadimed’s product allows it to move with patients from the MRI scanner room to other hospital departments, eliminating the need for time-consuming equipment changeovers while enabling uninterrupted monitoring of patient vital signs.

IRadimed’s vital signs monitoring system includes a monitoring/remote station, with wireless communication capabilities that allow the monitor to be controlled from outside the MRI scanner room.

The company estimates a $2.2 billion worldwide market for MRI compatible medical equipment, with MRI-compatible pumps and monitors representing roughly $1.6 billion of market sales. Assuming unlimited resources and global reach, IRadimed estimates a total worldwide addressable market valued at approximately $4.6 billion, with pumps and monitors representing $3.3 billion of sales.

IRadimed markets its products primarily to hospitals, acute care facilities and imaging centers in the U.S. and abroad. Sales are made through a 28-person direct sales force in the U.S. and through a network of 40-plus independent distributors internationally. The company has distributor relationships in more than 50 countries. IRadimed is expanding its direct sales force in FY:19 and has plans to grow its sales team to 30 field sales reps in 2019. Their sales efforts will be augmented by six clinical support specialists.

IRadimed was founded by Roger Susi who serves as the company’s chairman and chief technology officer. He stepped down from the additional roles of president and CEO in August 2019. A pioneer in his field, Mr. Susi invented the first MRI-compatible patient monitoring system in 1986 and the first non-magnetic MRI-compatible IV infusion system in 2004. In addition to founding IRadimed, Mr. Susi founded another company, Invivo Research, and served as its president from 1979-98 and chairman from 1998-2000. Invivo Research later became publicly-traded Invivo Corporation and was acquired in 2004 by Intermagnetics General Corp, which in turn became part of publicly-traded Koninklijke Philips NV (PHG).

Company History

IRadimed introduced its first-generation MRI-compatible infusion pump in 2005 and its second-generation pump system in 2009. The second-generation product improved on the original by adding blood oxygen saturation monitoring and remote wireless monitoring capability. The company began developing a MRI-compatible vital signs monitoring system in 2014, launched the monitor internationally in 2016 and in the U.S. market in 2017. IRadimed began selling its MRI-compatible monitors in Japan in 2018.

Intellectual Property

Many of the company’s patents on its MRI-compatible medical devices were obtained by the company’s founder, Roger Susi, who then assigned the patents to IRadimed. The company has 12 issued U.S. patents and four issued foreign patents, with remaining patent lives ranging from four to 15 years. There are also a several U.S. patent applications pending.

The company’s technology patents broadly encompass applications involving strong magnetic fields and specifically include: 1) acquiring, filtering and processing the body’s electrical activity, 2) managing air and fluid’ flow using proprietary valve technologies, 3) moving pressurized air and fluid with non-magnetic motors, 4) highly specialized vital signs sensor and leads designs, and 5) exceptional electromagnetic interference and compatibility performance.

In addition to pumps and monitors, IRadimed believes there are applications for its MRI-compatible technology in ventilators, suction devices, robotic controls, interventional surgery, cardiac ablation guidance and hydraulic controls, suggesting a rich product development pipeline.

Sales Cycle

IRadimed estimates a typical selling cycle for its MRI-compatible medical devices is three and six months. The company’s principle customers are hospitals, acute care facilities and standalone imaging centers. Product orders and inquiries are handled by trained service representatives, who also communicate with customers after equipment shipments, installations and service repair calls.

GPO Sales

IRadimed estimates that approximately 95% of its sales are subject to the terms of agreements negotiated with healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations (“GPOs”). GPOs negotiate volume purchase price discounts for member hospitals, group practices, and clinics. Under these agreements, IRadimed surrenders a 3% fee to the GPO on product sales made to GPO members. A typical purchase order from a healthcare facility that is part of a GPO ranges between 1-3 infusion pumps and 1-2 monitors, but IRadimed has received some orders for 20 or more infusion pumps or monitors. Through these GPO agreements, IRadimed is able to reach more than 95% of U.S. hospitals.

Many of the company’s contract agreements with GPOs and integrated health delivery systems are dual source agreements. During Q2:19 IRadimed signed a sole source agreement for MRI-compatible monitors with one of the country’s largest Integrated Delivery Networks (IDNs). Approximately 50 hospitals belong to this IDN and the agreement is likely to begin generating orders in Q3:19. IRadimed believes this agreement may meaningfully boost sales of MRI-compatible vital signs monitors in H2:19.

Manufacturing and Suppliers

IRadimed assembles its products at its facility in Winter Springs, Florida, from components and sub-assemblies purchased from outside suppliers. The company’s manufacturing operations are ISO 13485 and MDSAP-certified.

Some of the raw materials and parts used in its devices are sourced from single suppliers. For example, the non-magnetic motor that drives the company’s infusion pumps is sole sourced from a Japanese manufacturer that has been supplying IRadimed with these motors since 2005. IRadimed recently negotiated a new exclusive agreement with this Japanese supplier that extends through 2024.

Employees

At year-end 2018, IRadimed had 95 full-time employees, including 36 in manufacturing and service, 38 in sales, marketing and customer support, seven in regulatory affairs, eight in finance and administration, and six in research and development.

Market Outlook

Orbis Research valued the worldwide market for conventional IV infusion pumps at $11.2 billion in 2016 and projected 6% per year industry growth through 2025. Thousands of infusion pumps are deployed at healthcare facilities worldwide for applications in chemotherapy, oncology, diabetes, analgesia/pain management, pediatrics/neonatology and hematology.

Most infusion pumps are manufactured from metals that could interfere with the safe operation of MRI scanners. Despite this safety threat, hospitals have few options available for patients requiring continuous IV infusion during a MRI scan. These options include:

(1) Refusing MRI scans to these patients;

(2) Attaching tubing extensions to the IV lines, which are tethered to a standard pump outside the MRI scanner room;

(3) Accepting the patient for scan, but stopping the flow of IV fluids during the procedure;

(4) Allowing gravity-controlled free drip of IV fluids; or

(5) Placing some kind of protective shield around the infusion pump.

There are also risks associated with putting a conventional infusion pump in the same room as the MRI scanner. The scanner’s powerful magnets can pull metal objects into the magnet bore or make them airborne projectiles. The magnetic field generated by the MRI scanner may cause electrical currents to pass through the cables, heating them to a temperature that could potentially burn healthcare workers or the patient. Device malfunctioning due to the harsh MR environment is common and low-quality MRI images can result from magnetic and RF interference.

Some hospitals avoid these issues by placing protective shielding around the infusion pumps, but this solution is also problematic. Shielding hinders the operator’s ability to monitor the pump and slows reaction time if alarms are triggered or pump flow rates need adjustment. Even with a shield, the pump must be kept at least five feet away from the scanner, necessitating the use of long IV lines.

IRadimed offers the only MRI-compatible infusion pump that can be safely placed anywhere in the MRI scanner room and won’t interfere with the MRI or ancillary equipment.

MRI-Compatible Infusion Pump Demand

Despite the advantages of MRI-compatible infusion pumps, this market remains in an early development stage. Approximately 50,000 MRI scanners were deployed globally in 2017, according to the Magnetic Resonance Organization, with the U.S., Europe and Japan representing the largest markets. Based on an installed base of 50,000 MRI scanners and assuming only one infusion pump per MRI scanner, IRadimed has penetrated only about 10% of this worldwide market.

IRadimed targets as customers a group of hospitals and other healthcare facilities that together represent approximately 11,250 of the 50,000 installed MRI scanners. Most of these facilities are candidates to purchase multiple MRI-compatible infusion pumps. The company estimates its sales opportunity at approximately 22,000 MRI-compatible infusion pump systems. At present, IRadimed’s installed base is approximately 5,000 pumps, suggesting penetration at approximately 23% of its target market.

MRI-Compatible Vital Signs Monitors

The market for MRI-compatible vital signs monitors is more mature than MRI-compatible infusion pumps and driven by the replacement cycle rather than new adoptions. IRadimed estimates that between 1,000 and 1,200 MRI-compatible vital signs monitors are sold globally each year. Approximately 70-80% of annual market demand is from the U.S. At present, the size and weight of competitors’ MRI-compliant vital signs monitors limits their usefulness to the MRI scanner room. However, IRadimed’s portable, lighter-weight monitors can be moved with the patient between hospital departments and allow uninterrupted monitoring of vital signs. The portability of these units enhances IRadimed’s sales opportunity and increases the likelihood of multi-unit sales, even at customer sites with only one installed MRI scanner.

Competitors

MRI-Compatible IV Infusion Pumps

At present, IRadimed has no direct competitors in the U.S. for its MRI- compatible infusion pumps. Bayer Radiology, formerly MEDRAD, offered a competing product several years ago, but removed the product from the market in 2013 and discontinued support for the product in 2015 due to ongoing regulatory issues. After Bayer removed its MRI-compatible pump from the U.S. market, IRadimed enjoyed a surge in 2015 and 2016 sales.

The company attributes lack of competition in MRI-compatible infusion pumps to industry regulatory barriers. The FDA process for securing approval for a new infusion pump takes years and requires extensive testing and documentation. The long development timeline and nascent stage of the MRI-compatible market discourages rivals from entering the market. IRadimed believes the field may eventually become more crowded as awareness of MRI-compatible technology grows and the market matures.

Outside the U.S., Iradimed competes with manufacturers of “shielded box” solutions. This approach entails placing a protective shield around a conventional infusion pump so that it can operate in the MRI scanner room. Shielded box manufacturers include B. Braun, Fresenius Kabi, MIPM Mammendorfer Institut für Physik und Medizin, Arcomed and CareFusion Corporation (now part of Becton Dickinson (BDX)). CareFusion also is a dominant player in the market for conventional IV infusion pumps.

Caesarea Medical Electronics still sells the MRI-compatible infusion pump (Continuum Pump System) overseas that Bayer Radiology withdrew from the U.S. market. B. Braun sells its SpaceStation MRI Trolley outside the U.S. and could potentially seek FDA approval for the product. The SpaceStation MRI Trolley allows conventional B. Braun infusion pumps to be used in an MRI environment.

IRadimed offers the only MRI-compatible vital signs monitor that can operate safely close to the bore of the MRI magnet. In addition, the company’s MRI-compatible infusion pump is the only pump FDA-approved to operate in close proximity to the patient (area shown in blue). Competitor pumps must be located further away from the MRI scanner, and some must operate outside the scanner room entirely.

Investment Risks

  • Seasonality. IRadimed’s business is seasonal. The company’s third quarter is typically its weakest due to this quarter coinciding with summer vacations in the U.S., Europe and Japan.
  • EC certificate lapse. In January 2019, IRadimed’s CE Mark on its MRI-compatible vital signs monitors expired. European regulators demanded additional documentation from the company as a condition for renewing its EC certificate. The temporary lapse in the EC certificate was not due to any safety concerns and only affected monitor shipments into EU countries. Shipments of other IRadimed products were unaffected, and monitors already in the field were not impacted. IRadimed has submitted the requested documentation to European authorities and anticipates resuming shipments of monitors into the EU market in Q4:19. The company estimates the sales impact of the temporary EC certificate lapse at less than 2% of FY:19 revenues.
  • FDA Warning Letter. The company received a FDA warning letter in 2014 advising IRadimed that modifications made to the software on its previously-cleared pumps would require new premarket notification submissions. The company was forced to immediately cease distributing its pumps in the U.S. market. In late 2014, IRadimed filed a new 510k submission for its pumps, which was accepted for review by the FDA in December 2014. The company resumed U.S. sales of its infusion pumps in January 2015 and IRadimed received FDA clearance of its 3,860-plus infusion pump system, including the modified software, in December 2016.
    • The FDA warning letter remains open in 2019 and the possibility exists than future modifications to the software that drives IRadimed’s MRI-compatible pumps and/or monitors could require a new FDA 510k submission.

Outlook

The company’s targets 26% CAGR in revenues through FY:23 and revenues reaching $124 million within five years. IRadimed expects a long-term sales mix of roughly 47% pumps, 28% monitors and 16% disposables. New products yet to be introduced such as the magnetic detection device and thermal management system are expected to contribute 8% of long-term revenue gains. At annual sales exceeding $124 million, IRadimed expects to achieve 80% gross margins.

We initiate a BUY rating.

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Disclosure: I am/we are long IRMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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