This is one stock that gets me a queasy when I talk about it. Let's face it, catheters are not ideal dining room dinner conversation, but this is one great stock. Rochester Medical makes silicone-based catheters coated with a drug to help prevent infections and the company is growing significant market share with their new products.I first bought ROCM in March for about $17.00 and watched it soar until $23.00 when I took half off the table until it fell back to $21.00 where I added again and rode it all the way to near it's peak (where I sold half again at $28.50). I then rode the remaining stock all the way down a very steep cliff adding all the way down using wide spacing.
I would have been a little worried if the fundamentals weren't so great. As of today, my average cost basis is $17.26 with some stock having been purchased as low as $14.00 per share. While I haven't really made much money on ROCM yet, I am confident that patience will reward me.
So why am I so up on ROCM? Well let's start with the earnings. They have tripled earnings in the last year (excluding the one-time lawsuit awards). They are also debt free ($38 million cash on hand) because they won a major lawsuit (partial award so far) that they filed against Novation, Bard, Premier, and Tyco (Covidien). These four large companies are basically the "Four Families" of the medical mafia that conspired for a number of years to keep ROCM's new catheter products from being sold in hospitals and other medical facilities covered by their contracts. Premier, Novation and Bard have all settled and have agreed to give Rochester the contacts it needs to sell to hospitals and the benefits of these contracts have not even been realized yet. The Covidien part of the lawsuit is still on-going with a trial date set for February.
Sales last quarter were at a record $8.4 million and the only thing keeping them from selling more product is the lack of a larger qualified sales force. This is something that they are working on and they have told investors on their conference calls that they are actively looking to acquire a compatible company with an existing sales channel to jump start sales growth.
Clinical evidence suggests that patients that use ROCM's silicone-based catheters reduce their chance of infection by at least 60 percent by using anti-infectives, which increases patient comfort, saves health care practitioners' time and saves more than $500 per patient stay in additional treatment costs. This is a story that makes sense to me. Who wouldn't want that?
They have overseas penetration (pardon the pun), especially in the U.K. and may significantly benefit from proposed changes in Medicare that dictate how often catheters can be changed for hospital patients. Infection rates from catheters for patients in the US is higher than in Europe, because of outdated rules that only pay for one catheter change a week instead of daily changes in Europe. If this were to change, then the floodgates will open.
Their Gross Margin is outstanding at 53% and will improve even more with increased sales. The stock is currently fairly priced given their current earnings, however, the Street is anticipating future results and the stock will likely trade at a premium multiple for the next few years in anticipation of three events: 1) A successful lawsuit settlement with Covidien, 2) better than 15% organic revenue growth as the contracts kick-in, and 3) a potential acquisition that would be accreditive immediately.
The company just picked up it's first analyst, so I also expect some additional institutional sponsorship in the stock. Technically, they are forming a new base within the $17-19.00 range and have been very quiet lately with any announcements as their fiscal year just ended. I expect good things out of ROCM in the near future and look forward to their 10-K in Deccember.
There are two things that you need to be warned about with this stock. The first is that the lawsuit may end poorly with Covidien. A "win" is probably at least partially priced in already, given the track record with the other firms so a loss may affect the stock price significantly. The second concern is that the stock is thinly traded and has a short following. This can mean volatility, making trading the stock unpredictable.
2 comments:
Michael Murphy, one of the leading tech gurus of our time, describes his current strong bullishness on ROCM this way (he has $40 target for this one): Which One Did You Pick?
1. The profitable medical technology company that revolutionized a 50-year-old industry is a real company, and it is a great story. Jim, the CEO, has no medical training, but he is a life-long tinkerer. He was developing software at IBM when his older brother, who ran a urology device company, complained about the latex catheters he was selling…they had pinhole leaks. A messy fault in a urinary catheter.
So in 1979, Jim and his younger brother, Phil, started mixing latex formulations in Jim's kitchen and curing them in his oven. When they solved the pinhole leaks problem, they co-founded a private company, built it up and sold it. A sweet deal, but not the end of the story.
Latex can cause serious allergic reactions, especially in human tissue that is exposed to it constantly over a long period of time…such as the urinary tract in a person in long-term care. So, Jim and Phil started another company in 1988 to make catheters out of silicone, went public in 1991 and raised a total of $40 million to develop and introduce their superior product. They turned profitable in 2003 and have reported 18 profitable quarters out of the last 19.
Catheters are lubricated and inserted through the urethra, and then a small balloon is inflated to hold it in place (see the picture above, after inflation). Most latex catheters are made by gluing the balloon to the catheter tube. Company #1 figured out how to make the tube and balloon together, so there is a smooth transition and no joint that can fail. Doctors and nurses love their silicone catheters, yet not a single Wall Street analyst publishes estimates or recommends the stock! The whole company is valued at well under $200 million and the stock is down over 50% from its all-time high, set earlier this year.
If you picked Company #1, I can certainly understand why. Revolutionary new technology, solidly profitable, undiscovered by Wall Street, a tempting takeover target selling at a dirt-cheap 50% off its highs…what's not to like? Read on to see if you picked right.
2. The young company with a new invention that was frozen out of the market because its two biggest competitors leaned on the two biggest distributors is also a real company, and another great story. Company #2 had completely new, disruptive technology in a business dominated by Tyco and CR Bard. The sales channel for this business involves national distributors, the two largest being Premier and Novation. Both companies distribute CR Bard products, and Novation distributes Tyco products. Neither company would distribute this new invention, blocking Company #2 from 80% of the U.S. market.
Exasperated, the company hired Mark Lanier, the litigator who won the $253 million Vioxx judgment against Merck. In March 2004, Lanier filed suit against CR Bard, Tyco, Premier and Novation. In November 2006, CR Bard and Premier settled for $58 million, and Premier agreed to distribute Company #2's products. Tyco and Novation have not settled yet, but I expect a settlement announcement any day.
If you picked Company #2, I can certainly understand why. A new invention, a $58 million settlement with another settlement on the way, finally getting national distribution on its products…again, what's not to like? Read on to see if you picked right.
3. The company that applied the multi-billion dollar drug-eluting stent idea that has revolutionized heart surgery in an entirely different market is a real company with yet another great story. First of all, a drug-eluting stent…what the heck is that? It's the geek name for the most advanced version of the little wire mesh tube that doctors put in an artery after they have moved the plaque away in a balloon angioplasty operation. (I'm a geek; I admit it. I love this stuff.) Without a stent, the artery tends to get blocked up again about 30% of the time. In a drug-eluting stent, the mesh is covered with a drug that helps keep the artery open.
Company #3 wanted to solve a problem. About 10% of all hospital-treated patients suffer from hospital-acquired infections-that's over two million people a year! Hospital-acquired infections are the fourth-largest cause of death in developed countries, right behind heart disease, cancer and stroke. These infections show up in the:
Even using the most advanced products in Company #3's area, patients accounted for 38% of all hospital-acquired infections, caused in large part by the product itself. What if they incorporated an antimicrobial drug into the product? They searched for the right drug, did their trials and took it to the FDA, which approved it in 1998. It's no wonder it got approved: A Johns Hopkins study showed that the drug-eluting product caused chronic infection rates to fall 70%. Other studies showed even better infection-fighting results.
When you realize that the annual cost of U.S. hospital infections is close to $30 billion, and that 90,000 Americans die each year from healthcare-associated infections, you can almost hear the sigh of relief from Medicare, Blue Cross and the others that pay the bills.
In fact, Medicare just announced that after October 1, 2008, they will not reimburse hospitals for the cost of treating catheter-associated urinary tract infections. "Taxpayers spend billions of dollars every year covering the cost of patient infections," said the head of Consumers Union's Stop Hospital Infections campaign. "Restricting Medicare payments for medical errors such as hospital infections will help insure that the health care taxpayers pay for is safe and effective."
I'll tell you one thing it will insure—it will insure that every hospital quickly moves 100% to antimicrobial-eluting catheters that are reimbursed, made by Company #3.
If you picked Company #3, I can certainly understand why. A patented new product with no competition that can save the health care system $8.4 billion a year and over 25,000 lives…a coming change in Medicare that essentially mandates the use of their product…what would that be worth in an acquisition by Johnson & Johnson? Or even CR Bard? Read on to see if you picked right.
These Three Interesting Situations Add Up To
One Explosive Stock Opportunity Because…
They Are All The Same Company!
And That Is The Stock I Want You To Buy Today
Look At My Record To See Why You Should Listen to Me… And
Get Ready To Take Action!
7 Stocks Sold in the Last 4 Months: Average Gain 115%
You're probably thinking: "Sounds great, Mike, but how do I know that you know what you're talking about?...Can you really identify emerging medical device companies and other cutting-edge technology stocks that can make me much wealthier?"
I give you two pieces of evidence for your consideration:
First, the independent Hulbert Financial Digest has given one of my portfolios the top ranking for the last 12 month returns. This top performer was up an incredible 263% in the last 12 months. That isn't my number, it is Hulbert's, and he's proud of his record and reputation as a watchdog of the investment advisory industry.
Second, let me tell you about the last 7 stocks I've recommended my New World Investor subscribers sell. On average, my subscribers captured a 115% gain in each one.
Gilead LEAPs +206% 18 months
@Road +98% 20 months
Holly Corp. +70% 11 months
Burst.com +105% 9 months
Omniture +227% 9 months
Royal Dutch +35% 13 months
Huaneng Power +63% 22 months
So when I tell you that ROCM has a good chance to double in the next 6 months, and I back that up with my money-back guarantee if it doesn't, you know I'm standing behind my prediction.
Of course, not every recommendation will work out so well as the ones in our recent winning streak. These are development-stage companies, many of them micro-caps, and some not even generating profits yet.
That's why you'll want to only play this game with an experienced guide, someone who knows the technology, the people and the risks involved. Someone like me.
Travel with me to Stewartville, Minnesota-a land of sky blue waters, friendly people, and medical device companies. I don't know what it is about Minnesota-maybe the teaching hospitals and universities, or maybe the l-o-n-g winter that keeps scientists in the lab-but in the 37 years that I've been following technology stocks, a string of great medical device companies have come from that state. Anthony (Jim) Conway and his brother Phil have built another winner in that fine tradition.
Imagine a company that comes into a 50-year-old industry and totally upends it by developing a silicon catheter to replace allergy-prone latex. That gets them profitable. Then they realize that they can take a widely-used, thoroughly understood antibacterial called nitrofurazone, put it into their catheters, patent the combination as Release-NF®, and save 25,000 Americans from dying every year, plus $8.4 billion in unnecessary hospital costs.
Then they discover the big dogs are freezing them out of the hospital market! But Jim Conway is a guy who does not give up. His brother Phil used to hunt with him, and says: "He doesn't let go of anything. He would get on a fox track and literally track it all day. And some of those days were below zero." In Minnesota, that can mean way below zero.
So the Conways set up booths at conventions and product shows for nurses and doctors, lugging in their own samples, banners and a glass display case. They picked up a handful of hospitals that make their own purchasing decisions and don't rely on companies like Premier and Novation.
Then they focused on the fragmented home care market, using their meager marketing budget for ads in magazines like Wheels and Spokes for people in wheelchairs. They made cold calls on rehab centers, and sweet-talked the nurses into trying the product, and then introduced it to patients for home use. Each patient only bought a few hundred dollars worth of catheters a year, but relentless effort drove sales up 123% between 2001 and 2002.
And then, fed up with CR Bard and Tyco, they hire one of the Top Gun litigators in the whole world, sue the b*st*rds…and win! Bard and Premier have paid up. Tyco spun out its healthcare group as Covidien, and any day now you will see an announcement that Covidien and Novation have also settled the suit. I'm looking for another $30 million to $60 million payday, plus a distribution deal with Novation.
I Want You To Buy Rochester Medical
Symbol: ROCM
Meet Michael Murphy
Michael is the editor of New World Investor, an investment advisory service with portfolios recently rated #1 and #2 for last 12 months' performance by the independent Hulbert Financial Digest.
He is one of the nation's leading experts in exciting technology industries. He began his career in the industry's infancy, first as COBOL programmer and mainframe systems analyst, then as the technology stock analyst for American Express in 1970, and later as the CEO of two software companies.
For the last 25 years Murphy has worked as an independent tech investment writer, where he has shared his stock recommendations and unique industry analysis with hundreds of thousands of individual investors. His former newsletter, Technology Investing, was rated America's top investment newsletter in 1999 by an independent industry watchdog.
In New World Investor, Murphy helps you to realize your financial goals by investing in the profitable opportunities from new technology MegaShifts.
Murphy is also a featured investment expert in the media, often quoted in The Wall Street Journal, Barron's, and Money, and makes frequent appearances on CNBC and CNNfn. He lives in California, where he raises children and rare breed animals on his permaculture farm and drives an electric pick-up truck, a memento from his successful world record runs for electric cars at the Bonneville Salt Flats.
"A near legend in Silicon Valley for his stock picking prowess." - Nation's Business
There, as promised, is the name and stock symbol of my next big winner. The distribution deal with Premier alone will make ROCM a leading supplier of urinary catheters to U.S. hospitals, attracting Wall Street coverage and institutional investors. I think ROCM can give you your first double in six to twelve months…followed by mind-blowing profits as ROCM management settles with Covidien and Novation…cashes in on the forthcoming change in Medicare reimbursement…captures the long-term care market in the U.S. and then takes the company into Europe and Asia…acquires some complementary products and companies with good, patented products and weak finances...or sells itself to any one of the dozens of medical device companies, hospital supply companies, or leveraged buyout funds clamoring to get into medical products for aging baby boomers.
Best of all, ROCM is selling today for less than $15 a share! You can buy hundreds of shares at that ridiculously low price. No, there are not hundreds of millions of shares outstanding, like some cheapo penny stock. ROCM has less than 12 million shares today, so it is still a microcap… unknown… undiscovered… unloved. But not for long!
You see, they will be reporting their September fourth-quarter results around the end of October. They will have a solid, full quarter of distribution through Premier. And they could settle the Covidien/Novation lawsuit any day. When that happens, the whole world will realize that there's a new kid in town!
Thanks handren. Your comment says it all. ROCM will be a solid performer in the future
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