Thursday, October 23, 1997

Imatron, Inc.
(Nasdaq: IMAT)
Phone: 415-583-9964
Website: http://www.imatron-web.com
Price (10/22/97): $3 7/32

HOW DID IT DOUBLE?

Imatron makes the Ultrafast CT scan, a medical imaging device that promises to improve the detection and monitoring of heart disease. On October 13, the stock doubled in a heartbeat to $5 5/16 on positive research findings. Even after profit-taking, the stock is well above its April low.

Imatron's wild ride actually began in May 1996 when the stock hit a high around $8 1/2 on the strength of a study showing that the non-invasive Ultrafast CT predicted heart troubles better than any traditional risk factor. Yet like other story stocks, Imatron got clipped in the mid-1996 correction.

Investors bid up the shares again in September in expectation of an American Heart Association (AHA) recommendation. The AHA panel said the Ultrafast CT could be used to help monitor heart disease or to determine if someone with chest pain needed hospitalization. Coming from a conservative body, that verdict may have been surprisingly positive, but investors were disappointed the AHA didn't go further.

The latest rally was sparked by new research findings reinforcing and extending the earlier reports. In early September, a paper in the AHA's Circulation said the $400 Ultrafast CT scan showed 95% sensitivity in detecting coronary artery obstructions, nearly as good as invasive and more expensive angiograms. An October report showed that the scan is "the single best predictor" of obstructions in people experiencing chest pain.

Then on October 13 the company said a Mayo Clinic study showed the scanner can quantify disease progression, suggesting it could play a key role in monitoring heart disease.

BUSINESS DESCRIPTION

Imatron designs and manufactures the Ultrafast CT scanner, its proprietary variation on Electron Beam Computed Tomography (EBCT) technology. EBCT measures coronary calcium, one component of the plaque build-up responsible for arteriosclerosis. The amount of coronary calcium correlates with narrowing of the arteries. The Ultrafast CT uses a high-speed electron beam to take a 3-D picture of the heart in one-twentieth of a second, much faster than conventional X-ray scanners.

The scans are used in over 35 research-quality sites in the U.S. and 84 worldwide. Siemens has exclusive rights to distribute the machine in the U.S., Canada, Europe, and India through March 31, 1998. Imatron also operates five HeartScan scanning and coronary risk-assessment centers in the U.S.

Imatron's five-year results reveal declining sales, an increasing number of new shares, and losses. Imatron has sold just 16 CT scanners in 1994 and just 10 in each of the past two years. The company recently attained authorization to double the number of shares outstanding. Insiders own just 3.7% of the stock.

FINANCIAL FACTS

Income Statement
12-month sales: $34.6 million
12-month income: ($7.3 million)
12-month EPS: ($0.09)
Profit Margin: N/A
Market Cap: $252.3 million

Balance Sheet
Cash & Securities: $20.5 million
Current Assets: $41.9 million
Current Liabilities: $10.2 million
Long-term Debt: $3.9 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 7.3

HOW COULD YOU HAVE FOUND THIS DOUBLE?

With 10 scanners sold during the first half of FY97, revenues are up 71% so far this year. Revenues from services are also up 24%. Still, the recent doubling followed the new clinical studies.

If you knew the widely covered Imatron story, you might have bet that the next spate of good news from the clinicians would create a new wave of investor enthusiasm. Yet this would have been a bet on the story, not the company.

WHERE TO FROM HERE?

Other than projecting a loss this year, our lone analyst doesn't give us much to go on. Interviews with doctors who have used the scanner suggest that the Ultrafast CT shows considerable promise as a screening test for people age 40 and older and could transform the detection and management of heart disease.

Yet the medical community has been slow to adopt the scanner. At $1.8 million a pop, they're pricey. Plus, some physicians think the device is too sensitive, detecting lesions that aren't clinically significant. They argue that without better indications for interpreting the test scores, the scan could lead to a plethora of unnecessary stress tests and cardiac catheterizations, with their attendant complications.

Imatron has shown little ability to make money. Backing out HeartScan's results, Imatron had a $0.67 million operating profit, or $0.01 per share for the second quarter despite selling five scanners. If scanner sales take off, Siemens has the right to manufacture the Ultrafast CT itself, casting doubt on the sustainability of Imatron's 36% gross margins from product sales. Service revenues have increased but offer gross margins of just 8.2%.

Then there's HeartScan, the subsidiary that CEO Lewis Meyer has called the "primary engine of long term company growth." A year ago, Imatron had expected to have 21 cardiac centers open by the end of 1997. That's not going to happen. The five that are currently open have done $1 million in revenue this year, losing $3.3 million along the way. Without doctors to recommend the scans and insurers to pay for them, demand is far below expectations.

Plus, Imatron owns just 49.5% of HeartScan. The remaining stake was sold to investors last year for $16 million. Even Imatron's current stake will probably be diluted as HeartScan requires more cash for expansion.

Despite its terrific technology and the stock's recent doubling, Imatron appears little changed from a year ago. It seems to be a great short when it spikes on positive news and, at best, a very speculative buy when the news fades and the stock sinks below $2.

- Louis Corrigan, TMFSeymor@aol.com

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