Emageon's Mature Hospital Market
Emageon, Inc. (EMAG) operates in a mature large hospital picture archiving and communications system (PACS) market. The company might not grow successfully because of the superior financial resources, technical expertise, marketing, distribution, and support capabilities of its competitors.
The overall strategic direction of the company is uncertain. A new Strategic Alternatives Committee has a broad mandate to pursue all strategic alternatives including sale of the company. Last April, the prior committee had recommended Emageon to continue as an independent company and focus on improving its core products and services.
As the company depends on a small number of customers for a large portion of sales, the loss of any one can adversely affect its financial results. A trend towards perpetual licenses could cause greater volatility in Emageon's operating results, as revenue from the software license fee and certain implementation fees are generally all recognized in the month system acceptance is achieved. Quarterly revenue could fluctuate solely due to the timing of achieving system acceptances.
Emageon expects to reignite growth in the replacement market that is expected to begin its replacement cycle in 2009. In a mature large hospital PACS market, the company needs to execute on initiatives to compete successfully in the replacement market and eventually may need to complete suitable acquisitions to resume a strong growth rate.
At its current price of $2.01 per share, EMAG is trading at 0.5x our current fiscal year revenue estimate of $88 million, which is at a discount to the 1.6x group average multiple, 2.4x industry mean multiple, and 2.0 industry median multiple. We believe the stock is appropriately valued at this stage as most of Emageon's declining sales bookings and revenue expectations have been factored in. Our price target moves to $2.05.
Abbott Labs Pipeline Strong
We believe Abbott Laboratories, Inc. (ABT) will deliver double-digit EPS growth through the end of 2012, driven by strong sales of the anti-inflammatory for rheumatoid arthritis and psoriasis, Humira, and the company's rapidly growing vascular business. Several new drug applications have recently been filed with the Food and Drug Administration (FDA), which should accelerate sales in the pharmaceutical business.
We believe ABT possesses a low-risk profile and will continue to trade at an industry premium. Accordingly, we reiterate our Buy recommendation with a price target of $65.
Even, XIENCE, the company's new stent, should command significant market share thanks to the very positive SPIRIT II and III clinical trial data. This, in addition to recent stabilization in PCI procedure trends and further DES penetration, should be significant catalysts to drive the vascular business.
The acquisition of Kos Pharmaceuticals will allow Abbott to leverage the Niaspan (helps lower LDL / raise HDL cholesterol) and Simcor compounds with potential combinations with TriCor (cholesterol drug) and AstraZeneca Plc's (AZN) Crestor to help drive earnings accretion in 2008 and beyond.
Finally, the divestiture of the TAP JV, sheds Prevacid, and allows Abbott to focus on higher growth businesses including its oncology and lipid platforms.
Abbott currently trades at 17.5x our 2008 EPS estimate of $3.29. While considerably more expensive than the industry average of 13.6x, we believe the premium is warranted. Abbott offers potentially the strongest combination of growth and relative risk in all of the large-cap pharma space.
