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Short Iradimed: Don't Underestimate Lingering FDA Risk To The Company's Single-Product Growth Story

By True Intrinsic Value :

Please also see the below article from the New York Times:

FDA Steps Up Oversight of Infusion Pumps

Business

Iradimed ( IRMD ) is a single product medical device company focused on non-magnetic intravenous (IV) infusion pump systems which allow for the administration of medication to patients during the course of an MRI procedure. Today, the company generates all of its revenue from a single product.

FDA Issues and Developments

In September 2014, shortly after going public in July 2014, Iradimed received a warning letter from the FDA regarding its failure to file an updated 510(k) when the company updated the code in its software for the IV pump. According to a press release put out by the company:

The FDA also requested the company stop shipping its pump in the United States at the time of the letter. The company eventually filed a submission for pre-market notification under section 510(k) in an effort to gain approval to resume domestic pump shipments.

On December 22, 2014, the company began to resume pumps sales in the United States as the FDA reviewed its 510(k) submission.

Current Situation

Today, the company has yet to fully clear the warning letter it received well over a year ago from the FDA. Management has underestimated the amount of time that it would take to clear the letter on a number of different occasions.

On the company's most recent Q3 earnings call, management stated that it believes it should receive final clearance in the first quarter of 2016. Given its repeated misjudgments on the timing of this clearance, we do not believe that management has much credibility in being able to judge when the letter will actually be cleared.

If the letter is not cleared in the first half of 2016, it could materially delay the launch of any new products from the company, specifically a monitoring device it has been developing, which unlike its current product faces direct competition from InVivo ( NVIV ). Investors are carelessly ignoring that this product cannot be sold until the warning letter is cleared. If the company cannot launch a new device, then it could materially reduce the amount of revenue the company is capable of generating in future periods, thus making it significantly less attractive on a price-to-sales basis, particularly if management were to eventually sell the company to a strategic acquirer.

Additionally and more importantly, if the FDA is ultimately not satisfied with the due diligence the company conducts on Iradimed's MRI infusion pump and its compliance procedures, the FDA ultimately reserves the right to block future shipments or even request a recall of Iradimed's products in the field. As we have witnessed previously, the FDA has begun aggressively sanctioning infusion pumps given the inherent safety issues with products in this market.

In November of 2014, the FDA issued a third product recall of the Hospira (HSP) GemStar infusion pumps. As a result of product recalls and poor safety issues, the FDA required Hospira to retire its GemStar and Symbiq pumps at a cost of more than $300 million to the company. In addition Medrad, an Iradimed competitor, also ran into multiple issues with the FDA including at least two product recalls. Ultimately, given the difficulties with the FDA, Medrad chose to withdraw from the infusion pump market.

Additionally, Baxter ( BAX ) was forced to recall the Sigma Spectrum Infusion Pump in February 2014 after receiving 3,500 reports of a system error malfunction. The recalled infusion pumps were distributed between February 20, 2013, and January 15, 2014. Baxter initiated the recall in February. The FDA has designated the action a Class I recall, the most serious type. Additionally, the FDA made a further infusion pump recall on October 31, 2013, when it made Abbott ( ABT ) recall its Acclaim Infusion Pumps and Hospira recall its Acclaim Encore Infusion Pumps.

In Q4 of 2013, Medrad issued a major recall based on software errors within the pump in addition to tubing failures. The software errors have resulted in the pump inadvertently shutting down, inaccurate flow rates and broken tubing, all of which are potential risks to the patient.

On March 21, 2014, the FDA released a report of medical device recalls from 2003 and 2012. The FDA found the total overall count of medical device events increased 97%.

(click to enlarge)

The agency says it has received reports of 710 patient deaths linked to problems with the devices, though FDA officials say they think the number may be significantly higher. Some of those deaths involved patients who suffered drug overdoses accidentally, either because a hospital worker entered incorrect dosage data into a pump or because the device's software malfunctioned. There are an estimated two million infusion pumps used in hospital and clinical settings and hundreds of thousands more used by patients in their homes. The pumps use a variety of designs to intravenously deliver food, fluids and drugs like pain medications , insulin and cancer treatments.

The pump-related initiative comes as the Obama administration tries to reinvigorate the FDA after years of criticism by lawmakers and others that it was a rubber stamp for industry. The FDA Center for Devices and Radiological Health, which oversees scores of critical products like heart implants, imaging equipment and infusion pumps, has come under particular scrutiny.

A few years ago, for example, several top scientists at the center contended in letters to lawmakers that their superiors had ignored both their recommendations and policy guidelines in approving the sale of devices. Along with reports of 710 deaths, the center also received more than 10,000 complaints annually about infusion pumps from 2005 to 2009. In that same time frame, manufacturers of infusion pumps issued 79 recalls, among the highest for any medical device.

Infusion pumps normally use software to automatically control both the rate and volume of a medication's flow. To set a pump for an individual patient's needs, a doctor, a nurse or other healthcare worker enters information by using the buttons on a pump's keypad, which resembles that of a phone.

Jeffrey E. Shuren became the director of the Center for Devices and Radiological Health at the FDA in January 2010.

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Jeffrey Shuren, the director of the Center for Devices and Radiological Health at the Food and Drug Administration. From 2005 to 2009, more than 10,000 complaints were received annually by the FDA about the pumps. Credit: Daniel Rosenbaum for The New York Times

Conclusion

In addition to the lingering FDA issues discussed above, the temporary halt in shipments in late 2014 also created a significant backlog in orders from customers. Although the company has been able to work this level down over 2015, the magnitude of backlog remains significant and has created customer frustration and the risk of canceling orders. Customers can simply revert back to running long lines, which is far less costly that ordering a $25k machine from IRMD.

Furthermore, the working down of this US-focused backlog has resulted in abnormally high margins for the company as a whole given the higher margins in the US from selling direct vs. selling through distributors internationally. We expect that once the backlog it worked down to a normal level margins will compress as the US to international revenue mix is normalized. We believe that this could impact margins by 100 bps in 2016 along with another 100 bps burden from increased regulatory, compliance, and legal costs.

For a company trading at 22x 2016 EV/EBITDA and over 8x 2016 EV/Sales, we believe the market is not pricing in this lingering regulatory risk.

Additionally, after the share price's significant run over 300% in the last 12-month period, the CEO has now filed to sell 1 million shares, roughly 15% of his total holdings. This clearly reinforces the unattractiveness of the stock's valuation at these levels. In addition, it also further illustrates management's desire to take substantial profits off the table prior to any word back from the FDA in early 2016.

We would advise investors to consider shorting the stock at these levels given the hefty valuation and the potential for further intervention in the company's operations by the FDA, which could result in material downside at the current stock price above $31. Given the significant potential downside risk to Iradimed given the outstanding issues with the FDA that have yet to be resolved, we consider the company to be un-investable today and would put fair value at little more than the cash on the company's balance sheet.

See also Wide Moat Business Type Series: Airports on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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