BULLS POINTS:
■ New market for re-usable key-hole products
■ Focuses on niche products
■ Diversification into new areas
■ Sound finances
BEAR POINTS:
■ Operates in crowded markets
■ Significant investment needed
Laparoscopy, or key hole surgery, has a surprisingly long history in medicine. The first procedure in humans was carried out in Sweden in 1902, but its use was limited until the invention of mini-cameras and closed-circuit television. Surgical Innovations (SI) is a Leeds-based company that has slowly built up a presence in the laparoscopic market, which is forecast to be worth around $9bn worldwide by 2015. SI's specialisation is equipment for chest surgery and the company has pioneered a system that combines disposable working parts with a re-usable handle that is specially fitted for each surgeon's hands.
| IC TIP RATING | |
|---|---|
| Tip style | Growth |
| Risk rating | High |
| Timescale | Long-term |
| What do these mean? Find out in our | |
There are obvious benefits on concentrating on such a niche from SI's point of view. First, hospitals on both sides of the Atlantic are trying to save money without compromising standards of healthcare, so there is an advantage to being first-to-market with a product that does not have to be thrown away after just one operation. Second, the need to replace the working parts after surgery creates a market for SI and should help to keep revenues ticking over.
That said, the laparoscopy market is a crowded one, and some companies have a market share of 80 per cent on individual devices, so SI will have to spend consistently on research and development (R&D) to stay in the game. Currently SI spends 25 per cent of its revenues on R&D, compared with an average of 14 per cent for the devices sector. However, that means it has control of its intellectual property and has avoided joint-development deals that can cause delays to a product's commercial launch.
| ORD PRICE: | 4.25p | MARKET VALUE: | £15.9m | |
| TOUCH: | 4.10-4.25p | 12M HIGH: | 4.88p | LOW:1.23p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 7 | |
| NET ASSET VALUE: | 2.5p | NET CASH: | £0.56m | |
| Year to 31 Dec 2009 | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 4.77 | 0.73 | 0.24 | nil |
| 2008 | 4.31 | 0.82 | 0.17 | nil |
| 2009 | 4.54 | 0.26 | 0.14 | nil |
| 2010* | 7.02 | 1.51 | 0.40 | nil |
| 2011* | 9.47 | 2.30 | 0.61 | nil |
| % change | +35 | +52 | +53 | - |
NMS: 20,000 Market makers: 8 BETA: 0.4 *Westhouse Securities forecasts | ||||
Diversification into other branches of surgery is the next step. Tools used in plastic surgery are particularly profitable, but the company also had a boost in its industrials division with a £616,000 order from Rolls-Royce for keyhole equipment. The engine maker uses keyhole cameras to see deep inside its engines to check for faults. The order also meant the company generated free cash of almost £0.9m in the first half of 2010.
SI's finances could withstand bolt-on acquisitions, but there are few companies in the UK that specialise in similar technology. Besides, SI expects its R&D spending to deliver new products. The company's existing manufacturing facilities can handle about £30m-worth of annual equipment sales, so there is some way to go before capacity becomes a problem. More likely, surplus cash will be used to beef up SI's marketing operations. But that means shareholders are unlikely to see a dividend for some years, even though the company's reserves have been restructured to make a pay out possible.
