Heart disease is the number one killer in the United States, far outpacing cancer, HIV, and accidents. In fact, heart disease kills more people each year than the next six causes of death, combined. CardioDynamics International (Nasdaq: CDIC), led by CEO Michael Perry, is working hard to help reduce those mortality rates through something called "impedance cardiography," the non-invasive monitoring of the heart's mechanical functions. The company's flagship product line, BioZ, is designed to measure the heart's mechanical functions without having to do invasive and more dangerous surgical procedures.
Each day, the heart pumps 1900 gallons of blood throughout the body. The heart's ability to pump that blood, and the ease with which the blood travels through your arteries is pretty important when it comes to keeping you vertical and in good health.
We've all heard horror stories of things like heart failure, quadruple bypass surgeries, blocked arteries, etc. Of course, we're all familiar with high blood pressure, a.k.a. hypertension. One of the major problems with heart disease is that it's difficult to isolate and diagnose before it gets serious. Obviously, we'd all like to know that problems are creeping up on us before they get out of control, right? CardioDynamics' BioZ family of solutions is designed to help doctors detect problems with your heart early on, perhaps long before you yourself would notice symptoms and complain about them.
How do doctor's currently assess heart performance? Well, first of all, they have to actually see you, so put down the nachos with extra cheddar and make sure you have that annual exam. Once they DO see you, a doctor will listen to your heart tones, observe your jugular venous pulse, and examine your abdomen for signs of excess fluid buildup. These small tests will hopefully clue the doctor into potential problems. The problem is that as well trained as your family doctor is, the methods are imperfect at best. This is where CardioDynamics' BioZ comes in.
The company's primary business objective is to make BioZ non-invasive heart monitoring a "standard of care." In the same way that women undergo a mammogram as a preventative measure to detect breast cancer, BioZ would be used as an early detection for things like hypertension (high blood pressure), blocked arteries, and a weak heart.
Through the use of electrical impulses, the BioZ will measure the amount of blood pumped by the heart each minute, the resistance the heart has to pump against (blocked arteries, clots, etc.), and the amount of overall fluid in the chest cavity. Being able to monitor these measurements, especially over several points in time, a doctor is able to see trends develop.
So, imagine that you have your first BioZ reading when you're 25, and every year after. Having some historical data that can be matched against current data, the doctor can objectively look and see if some bad trends are developing over time. The idea here is that the data will show deterioration of the heart's performance before it becomes too much of a problem. The hope is that treatment will be prescribed earlier, and BioZ will be able to accurately monitor the success of whatever treatment is prescribed.
As it stands now, the cardiologist community relies heavily on a surgical procedure called right heart catheterization (RHC) to be able to measure these heart outputs. The problem is that RHC is a surgical procedure that requires a catheter be placed into the heart muscle. Obviously, this is more dangerous than a non-surgical procedure. Aside from the general dangers of doing any surgery around the heart, there is also the risk of infection, irregular heartbeat, and in some cases, the patient dying. Because of these dangers, many doctors won't do the procedure until the case is so serious that the risk is warranted.
Dr. Bruce Weiss is the Director of Clinical Research at Virginia Commonwealth University. Here is what he has to say about BioZ:
Prior to this technology, we were unable to gather this patient data without putting patients at significant risk. So we used the pulmonary artery catheter only for the most critically ill patients. That means that we can only take care of them when they have deteriorated to such an extent that we are willing to accept the risk. Now, with noninvasive technology, nobody is going to have complications from this technology and we can apply it very early on in a disease. We can learn a lot about natural progression of a disease, and for an individual patient, we can intervene a lot earlier.
It should be noted that not all cardiologists agree with Dr. Weiss that RHC can only be done on the most critically ill. I've spoken with doctors that claim RHC is low-risk.
Okay, assuming you agree that BioZ sounds interesting as a technology and that it has potential as a preventative solution for heart disease, where do we go from here? Let's look at some of the major hurdles the company has to overcome in order for this to be successful. It already has FDA approval to market the product and Medicare is on board with reimbursing doctors who perform these tests. Those are two of the biggest hurdles to overcome. Aside from these obstacles, the company describes its major challenges as follows:
- Producing more clinical research that shows patient outcomes and the cost-effectiveness of doing this relative to other methods.
- Reimbursement for as many indications as possible.
- Educating the medical community that may not be so receptive to the message that their tried and true procedures aren't as good as they think.
The company continues to fund research from independent organizations to show how effective BioZ is as a potential standard of care. The company has made great strides with Medicare to get approval for many indications, and most of the major insurers have followed suit. The biggest task is educating the medical community and getting primary care physicians to purchase the machine, which runs about $28,000. The company has focused much of its efforts on building a quality sales force.
Business model
The company makes money in the typical razor and blade fashion. They sell the machines to doctors and also the sensors that are used for each procedure. The machines cost around $28,000 and the sensors are between $5 and $8 per procedure. The company projects that if a primary care physician does just one procedure per day, the doctor will break even on the cost of the machine. Five procedures each day will result in $200,000 in net income over the next two years for the practice.
CardioDynamics' sales force is targeting the individual practices of family practitioners as well as small hospitals with under 100 beds. The company also has a major distribution agreement with GE Medical. GE Medical is building the BioZ monitor into its larger Solar systems offering. GE has over 30,000 Solar systems in use and as of last quarter had implemented the BioZ monitor in just 220 of them.
Potential vs. current reality
The company claims that the total market penetration for BioZ could be 100 million procedures annually. For those of you slow on the math, that's $500-$800 million in revenue from sensors alone, never mind machine sales. Before you get too excited, please realize that the company has been averaging only $4 million in quarterly sales recently. Total market penetration, if it ever even happens, is a looooooong way away.
CardioDynamics' best opportunities now are to get BioZ in as many of GE's Solar systems as possible, and sell the heck out of it to primary care physicians. CEO Michael Perry told me that they feel comfortable that their current sales force of 50 representatives will allow them to see economies of scale in fiscal 2002. As shareholders or potential shareholders, we should expect some fairly rapid growth in revenue for 2002, otherwise I'd be very concerned.
The numbers
The company has just over $17 million in trailing revenue and has a market cap of $287 million. They also recently turned their first quarterly profit of just $50,000. That's not exactly cheap, but I believe the market is pricing in its expectation for fairly rapid sales growth in the coming year. We should get a glimpse of how things are ramping up when the company reports its results in a few weeks.
In addition to sales and earnings growth, the company hasn't reached any economies of scale in SG&A, which has stayed in lock step with revenue growth. One would hope that revenue growth would start to quickly exceed that of SG&A so that we can see some margin expansion. On the balance sheet, the company has $6.8 million in cash, with very little debt. While the company turned its first profit last quarter, they have yet to achieve cash flow positive, which should be their next major goal. They burned through $540,000 last quarter, which is down from $1.6 million in May. This is good, but we need to see positive cash flow so that they don't need to rely on any further financing.
What to look for
In the coming year, you'll need to closely monitor quarterly reports and news releases. Specifically, I'd be looking for the following in 2002, else I'd be disappointed:
- Rapid sales expansion -- the company is happy with the size of its sales force and says they are ready to rock and roll. Let's see how they do.
- Expanding gross margins, continued profitability.
- Cash flow positive.
- Increasing numbers of BioZ units being implemented in GE Solar systems.
- Some new, significant distribution agreement.
- More clinical research showing positive patient outcomes and cost effectiveness.
- Acceptence of BioZ as part of the hypertension guidelines that the industry looks to when treating high blood pressure
If the company can achieve all of these, then my guess is that a $287 million market cap is too low and that 2002 will be a great year for shareholders. I'll be keeping a close eye on CDIC in the coming year and I invite you to do so as well.
Industry Focus 2002
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David Forrest doesn't own shares of CDIC or GE, but he does like nachos with extra cheddar and he may need BioZ sooner than he thinks. The Motley Fool is investors writing for investors.
