Sunday, April 17, 2011

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Second Quarter Earnings
Vicor Technologies, Inc. (VCRT: 0.00 N/A N/A) reported earnings for the second quarter ending June 30, 2010 on August 16, 2010. Results were disappointing with revenue and system placements both well below our forecast.
Vicor generated $8k in total revenue compared to our $202k forecast. The company did not break out instrument and testing revenue. However, based on the 75% gross margin, we suspect that all of the quarterly revenue was generated from testing with no system placements made during the quarter.  We were looking for $150k in product revenue and $52k from testing. 
EPS came in at ($0.05) versus our estimate of ($0.06). The difference was mostly a result of $118k (7%) of lower than forecasted operating expenses, partially offset by the lower gross profit in the quarter.
While second quarter results were disappointing, there are some bright spots. Foremost is that it appears testing revenue continues to flow, albeit at a much lower rate than we had expected up to this point.
As we explain in our 23-page report (for access see below), revenue from testing, as opposed system sales, is what will be the long-term driver of growth for Vicor. Somewhat more anecdotally, feedback from physicians that are now using the machine is positive. We believe both of these bode well for Vicor’s long-term prospects.
Vicor noted in their 10-Q that they have sold 37 PD2i Analyzers through August 13, 2010, compared to our previous forecast of 48 through June 30th. 25 of these units have been placed with Vicor’s distributors which use them for demonstration purposes, the other 12 are now in service with physicians.
Based on anecdotal information and discussions with management, we believe that system sales have been slower than expected due to an insufficient sized sales force as well as potential changes to Medicare reimbursement — the latter which may make physicians reluctant to purchase the machine until there is more visibility on how this could affect testing reimbursement. Vicor is in the midst of hiring a national sales manager in order to supplement the sales efforts of the company’s distributors.
This should expand the sales reach to new territories and venues (i.e. – family practices, endocrinologist, etc.). We also believe Vicor is considering discounting the sales price of the machines, which is reflected in our updated financial model.
Until there is more visibility on if, or how, changes to Medicare reimbursement may impact reimbursement of the CPT codes used for reimbursement of testing with the PD2i Analyzer, this may continue to constrain the rate of system placements. 
Cash used in operations was $1.1 million and $2.8 million through the first three and six months of the year, respectively. Vicor raised an additional $2.7 million during the most recent quarter through the sale of 8% subordinated convertible bonds. All of the 8% senior converts were converted to common stock during the second quarter.  Cash balance at June 30, 2010 stood at $1.3 million. We forecast quarterly cash burn for the remainder of the year to be similar to that of the second quarter ($1.7 million).
Due to the slower than anticipated system sales, we now believe a secondary common stock offering is unlikely until sometime in 2011 and expect Vicor to finance near-term operations through additional sales of convertible bonds and/or preferred stock.
We have made significant changes to our model based on the lower unit placement rate (which in-turn has impacted our testing revenue forecast). We now look for a total of 55 units placed through the end of the current year (drastically reduced from our 253 unit forecast). Testing revenue, which we previously had coming in at $663k, has been reduced to $51k.
We model EPS of ($0.20) for the full-year 2010, down from our prior estimate of ($0.16). While we have also significantly pushed back our estimated time until Vicor can reach a break-even unit placement rate (~500) and become cash flow positive (from 2011 to 2013), we believe the company can continue to raise additional financing until this happens.
Despite the relatively poor placement rate to-date, we remain positive on Vicor’s long-term prospects. We believe physicians that have purchased the Analyzer are finding utility for it and the economics from physician’s standpoint are where they need to be. There remains tremendous interest in the technology, which was recently highlighted by the PD2i being chosen for a prestigious poster session at the 2010 Heart Brain Summit.
We also expect sales to benefit as new indications come on-line — such as the recently-filed claim for cardiac death and a yet-to-be filed claim for trauma. Additionally, unit placements should benefit from an overseas launch, expected sometime later this year or early next.
We have also lowered our longer-term financial forecast for Vicor as well as our price target. We now look for 2013 EPS of $0.07, down from $0.17 previously. Our new near-term price target is $1.07, based on 25x 2013 EPS, discounted back at an annual rate of 15%. We continue to believe the shares are undervalued (currently by 70%) and we are maintaining our Outperform rating on Vicor.

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