After recommending IRMD as a short at the end of last year at $30 given valuation and the outstanding overhang from the FDA warning letter that has yet to be cleared, the stock dropped by over 50 percent despite the company continuing to grow organic revenue by 30 percent while maintaining 40 percent EBITDA margins.
We have closed our short position and are now long the stock. The thesis for our long position is as follows:
1. The Company continues to grow organic revenue 30 percent
2. The Company will launch a new monitoring product in 2H of 16
3. The FDA review process is in the final stages.
4. The stock trades for 8x our 2017 EV/EBITDA number while comparables trade for 12-14x and take outs go for 16-18x
5. Company continues to buyback stock
6. 6% FCF yield and 30% organic growth
7. CEO highly vested in success of company with 50 percent ownership
8. CEO sold his former monitoring co for $160m and new product is directly going after market share
of his former company so he knows the space extremely well
9. Stock is significantly under followed with Roth as only sell side analyst that took company public
10. Company has no competition in its market and has been able to take price overtime
11. 17% of shares are still short and days to cover is 10
While it is certainly a possibility that the FDA could place greater restrictions on Iradimed's ability to sell its pump products, we believe that the likelihood of that occurring is remote. The reason being that the FDA originally forced the Company to stop selling its pumps for 6 weeks after the Company made upgrades to its software without submitting a 510K. However, shortly thereafter, the FDA allowed the Company to resume shipping and for the last year, the Company has continued to ship products while it works with the FDA to remove the warning letter and gets it 510K approved. There have been zero product recalls nor have there been any safety incidents. Based on our knowledge talking to companies in the product space and regulators in this industry is that the FDA is more rigorously reviewing pump products, but that there has been no change to eliminating there usage in the field. From the hospitals and anesthesiologists we have spoken with they like the functionality of Iradimed's products and continue to use them in their regular day to day treatment of patients in the MRI and other hospital settings.
Next steps with the FDA:
Iradimed received on March 23, 2016 via email that its 510(k) application was denied with a finding of non-substantial equivalence. This finding was due to a lack of human factors data demonstrating that its Dose Errors Reduction System (DERS) was adequately validated and that it may resubmit a new 510(k) application with data showing our infusion pump to be substantially equivalent to similar devices in the market. Specifically, the agency stated that two of fifty-six test subjects in the Company's human factors tests unintentionally bypassed the DERS feature, thus avoiding the DERS hard dose limits that healthcare institutions can program into the Company's MRI compatible MRidium 3860+ infusion pumps. The Company intends to appeal this determination to a higher level within the agency. Since then, the Company has appealed this decision to the FDA and had an in person meeting with the FDA on April 23rd. It is our belief that the FDA wrongly interpreted the Human Factors test given that the DERS functionality was 100% accurate and instead two of the nurses (whom had no prior training on the DERS systems) accidentally Opted out of the System, which is something that cannot be controlled nor is required in a finding of substantial equivalence. Therefore, it is our belief that the appeal will be overturned. If the appeal is overturned, the stock should be re-valued quickly at over $30 per share representing 70% near term upside, which is why we would not want to be short in this situation.
Longer-term, assuming a positive outcome with the FDA, we believe Iradimed can generate $4 of Ebitda in 3-4 years, which would conservatively value the company at $60 given the 30% organic growth, new product launch and legal monopoly in its pump market with an increasing installed base.
Disclosure: I am/we are long IRMD.