Rising Tide Ups TRIB Price Target - Analyst Blog

Brian Marckx

Rising Tide Ups TRIB Price Target
 
Outlook
With the clinical lab coagulation divestiture completed, Trinity Biotech (TRIB) has shifted their energies towards growing the POC platform, with particular focus on infectious disease, HbA1c and coagulation, all of which have markets which we forecast to grow at 10% or better annually.  We expect the POC segment, which had contributed approximately 14% of total revenue prior to the coagulation divestiture, to make up 23% of revenue in 2011 (first full year without clinical lab coagulation business) and grow significantly faster than the clinical lab segment.  With greater exposure to the POC segment, Trinity will benefit from the ongoing fundamental growth of the POC testing market which is expected to grow by 30% from 2010 through 2014 as healthcare providers shift more testing from central labs to POC.   

Sales of the company's flagship POC product, UniGold HIV, which have struggled somewhat since 2009 due to credit concerns of a major customer in Africa, have begun to rebound throughout 2010, despite again halting shipments to this customer during Q3.  The product (along with Inverness' Determine test) continues to dominate the market in sub-Saharan Africa as it remains one of the best, or the best, quality product on the market.  This, combined with a greater demand and funding for rapid HIV testing in sub-Saharan Africa which continues to deal with the growing HIV epidemic, will provide substantial opportunity to grow the company's international HIV business.  We also believe U.S. sales of UniGold HIV, which have essentially quadrupled over the last four years, will remain strong.  Trinity, which holds over 20% of the HIV testing market, has enormous potential to leverage its distribution platform and leading brand name which, coupled with the greater demand for high-quality rapid testing and the impending launch of the HIV p24 antigen test, should afford it the opportunity to grow its HIV business at an annual rate of about 15% over the next several years.   

Tri-Stat's eventual launch will be another catalyst to revenue growth.  TRI-Stat will gain Trinity entry into the large and rapidly growing POC HbA1c testing market.  With approximately 23.6 million diabetics in the U.S., which is growing at about 1.6 million per year, the market offers enormous opportunity for Trinity to grow its POC diabetes business.  Trinity has had significant success with its high-accuracy PDQ instruments in the clinical lab setting, and with the same technology incorporated into the TRI-Stat product, we look for sales to ramp quickly upon launch.  

Infectious disease tests will also move to the POC platform where there is significant and growing demand.  A number of the tests should launch in the next 18 months which will contribute to what we expect to be strong double-digit revenue growth in POC beginning in 2011.  

Finally, Trinity will look to build coagulation testing in the POC setting.  While the company struggled to grow its clinical lab coagulation business, we believe there will be more opportunity in POC, which is a $300 million market growing at 11%.  By transferring intellectual property and know-how from its clinical lab coagulation business, we believe Trinity can rapidly develop several POC coagulation offerings and expect their D-dimer test to hit the market sometime in the third or fourth quarter of 2011.          

And while Trinity's main focus is on the faster growing and higher margin POC segment, the company's clinical lab business will remain a large and consistent contributor to revenue, cash flow and income.  The PDX instrument should provide an immediate and material contribution to revenue and earnings which we expect to significantly ramp, especially following the U.S. launch which could come towards the middle of 2011.  The product is also expected to be a big seller in China, where we think it could launch towards the end of 2011.  The PDX will also be submitted for approval in Brazil and could also potentially launch in 2011.  The company's infectious disease offerings will remain Trinity's broadest product range.  With their Lyme disease kits claiming as much as 90% share and with several new infectious disease product launches, the business should easily manage low-to-mid-single digit growth for the foreseeable future.    

Overall we expect the majority of long-term sales growth to come from the POC segment, although the clinical lab business will remain the largest contributor to sales for the foreseeable future.  For 2010 we look for sales of $89.3 million, which, pro forma for the coagulation divestiture ($73.6 million), represents roughly flat growth.  We forecast POC sales to fall 8% mostly as a result of the drop in African sales due to the credit issues related to the one customer as well as a weaker Lyme and flu season in 2010 compared to 2009.  Beginning in 2011 the POC business should experience rapid growth as several new products (i.e. – TRI-Stat, D-dimer, STD tests, etc.) begin making substantial contributions to revenue.  Gross margin should show significant improvement now with the coagulation business divested, which was not only a hindrance to sales growth, it contributed relatively little at the margin.  Operating expenses will also improve relative to sales, as Trinity sheds headcount, R&D and facilities expenses related to the coagulation business.  We expect operating margin to continue to improve into 2011 and beyond as the company shifts more resources towards POC and gains additional leverage in distribution, manufacturing and overhead.  Introduction of the high-margin PDX instrument should also help expand overall gross margins.  
 
Raising Price Target
            The recent expansion in valuations in the medical diagnostics space has prompted us to raise our price target on Trinity.  Our near-term target has moved from $8.55 to $9.90, based on 15x our 2011 EPS estimate of $0.662.  We are maintaining our Outperform rating.     

For a copy of the full research report, please email scr@zacks.com with TRIB as the subject.