Quite symbolically, Oridion Systems (SWX: ORIDN), which develops systems for the measurement of carbon dioxide in human breath, is headquartered at the Har Hotzvim industrial park in Jerusalem, just the place where one breathe crystal clear mountain air. Like Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), one of whose plants is also located at Har Hotzvim and in contrast to some of its start-up neighbors, Oridion is not a young company; it has just celebrated its 20th anniversary. It is also marking its seventh year as a public company, and its move to profitability after nearly a decade of posting operating losses.
Oridion ended the first three quarters of 2006 with revenue of $24.9 million, an increase of 22%; a growth rate that has remained unchanged for five years. It moved to profitability in 2005 with an operating profit of $470,000, and it posted an operating profit of $2.4 million, and a net profit of $2.2 million in the first three quarters of 2006 (excluding a loss of on the Breath ID program, which has since been shelved).
Naturally, investors on the Swiss Stock Exchange have not been indifferent to the improvement in Oridion’s results, and over the past year the stock has climbed 60% to become one of the top Israeli stocks in Europe. The company promises, or at least believes, that the improvement will continue into 2007. “We’ll grow by at least 20% in 2007 too,” says company CFO Walter Tabachnik in an interview with “Globes.”
Oridion, which now employs 114 people, is a considered a global leader in capnography - the measurement and status determination of carbon dioxide levels in human breath. “The level of carbon dioxide in breath is the first sign of respiratory problems, especially in the case of patients that have just undergone surgery and have been moved to recovery rooms,” explains Tabachnik, and quotes a study conducted in the US, which claims that on average, 195,000 patients a year die a year as result of medical errors, one of which is the inability by medical teams to monitor patients’ breathing. Tabachnik claims that there is a six-hour window in which to treat patients with problematic levels of carbon dioxide in their breath, following which their lives could be at risk.
Globes: What are the company’s growth engines?
Tabachnik: “In the long-term the growth engine will be the increase in respiratory problems in the Western world, against the backdrop of, among other things, increasing pollution and the ageing of the population. In the short-term, we will have two growth engines. One is the increase in awareness to patient safety. Thus, for example, if a patient, who falls asleep with his head slumped at an angle that makes it difficult for him or her to breathe normally, is connected to a monitor that measures carbon dioxide levels, it would sound an alarm, as soon as it detected a problem. If not, by the time one of the nursing staff took notice and moves his or her head, he or she could die. The second growth engine is the creation of standards of care, or to put in differently, making the use of capnography equipment mandatory, rather than optional.”
Oridion’s products, from its in-house hardware to disposable products, are used primarily in casualty rooms, and recovery wards, to which patients are moved immediately after surgery. Tabachnik says the company does not have products for use in operating theaters, since the conditions there do not require the use of monitors to test carbon dioxide levels in patients’ breathing during surgery.
If so, which stages of patient care contain the most potential for further revenue growth?
“Up till now the bulk of our growth centered around three fields. The first of these is respiratory care, the second is emergency treatment, and the third is intensive care. From now on, we will be focusing on two fields that contain most of the potential for future growth. One is procedural sedation, and the other is pain management. We expect that our growth in both these fields will be higher than in the three others.
“Procedural sedation is needed mainly in outpatient clinics, in plastic surgery or other procedures, such as an examination using an endoscope. Quite frequently, patients that have been sedated are not regularly supervised by nurses, so the presence of a monitor to test the level of carbon dioxide in patients’ breath is important.
“In pain management, the patient has control over the dosage of the infusion administering the drug, which is usually a pain killer like morphine. The philosophy behind such a policy says that the patient knows how much of the drug he or she needs to relieve his or her pain. Similarly, in clinics where a small nursing team has to handle a lot of patients, it would be better if the patient regulates himself or herself, when necessary.”
But a patient’s judgment could be impaired, especially if he or she is under the influence of a sedative.
“True, and most doctors claim that giving patients control over their own infusions would increase the risk to their life tenfold, not as a result of the actual risk of addiction, but because patients could forget when they last injected themselves. This situation is especially prevalent among elderly patients, in whom the drug also anesthetizes their respiratory system. They get drowsy and their heads can slump at an angle blocking their airway. So if they’re connected to a monitor it will sound an alarm the moment it detects any distress in their breathing. If not, their lives could be at risk, unless one of the nurses on duty comes over and moves their heads to allow them to breathe.”
Oridion sells its products through OEM agreements with giants such as Siemens AG (NYSE: SI; XETRA: SIE), Philips, Nellcor Puritan Bennett, and Draeger, as well as through its own distribution network. “At the beginning we also sold our low-cost disposable products through Philips and the others,” says Tabachnik. “However as time wore on, we realized that these companies were not making much of an effort to get our products on the market because of their low profit margin, so we decided to set up a distribution network of our own, largely for disposable products.” Oridion now has a network of 11 distribution companies in the US.
Will you consider making an acquisition at some point, or will you stick to organic growth?
“We might consider an acquisition, but not in the short-term. For the time being, we want to focus on maximizing the existing potential in organic growth engines. Should we decide to make an acquisition, we will definitely be looking for a new technology that can be tailored to our product range.”
We considered an offering on AIM a year ago
Oridion was the second Israeli company to list on the Swiss Stock Exchange. In April 2000, during the bubble period, it held an IPO at a share price of SF 29, and raised $76 million, including an offer for sale. In February 2001, the company’s parties at interest decided to capitalize on the stock’s positive momentum and made a further offer for sale which raised $120 million at a price of SF 46. Two other Israeli medical device companies are now also traded on the Swiss Stock Exchange, Card Guard AG (SWX:CARDG), and SHL Telemedicine (SWX: SHL).
Like many other companies floated during the bubble era, Oridion has seen its fair share of ups and downs in the seven years since it went public. The stock reached a high of SF 81.5, and then fell to a low of SF 1.2. It is currently trading at SF 10.6, reflecting a market cap of $95 million, after having gained 60% in 2006.
Given the positive momentum in the stock, did you not consider raising additional capital from the public, or perhaps an offering on London’s Alternative Investment Market (AIM)?
“Actually, we were in London a year ago. We talked to a Nominated Adviser (a bank or other advisory service that has been approved as an adviser by the stock market), but he told us that there was not much chance that an additional offering would give us a higher value or more marketability. Likewise, at that time there was a $100 million threshold, that is to say a public company would find it easier to make a further offering, in our case in London, if it had a market cap in excess of $100 million. The company’s market cap wasn’t that high back then so the option of an offering in London was not relevant.”
Oridion’s market cap is almost $100 million today.
“True, and the stock’s marketability has improved too. As a result we may soon have analyst coverage. Our stock has had no analyst coverage at all for many years and I was recently approached by two investment houses which would like to cover the company. I hope that they do initiate coverage and that this will cause more investment institutions - which choose stocks on the basis of their analyst coverage - to invest in us.”
One of the causes that prevented Oridion from recording profit for a number of years, was the loss it made on the investment of the development of the BreathID system. Designed to diagnose the bacteria Helicobacter Pylori, the main cause of stomach ulcers, by a non-invasive sampling of breath, BreathID was first launched in 2001. It then received US Food and Drug Administration (FDA) approval for marketing in the US at the end of 2002 but Oridion failed to translate this into actual revenue and the system began to weigh heavily on the company’s bottom line.
Last February, Oridion finally decided to abandon BreathID and sold its activity to a new company set up specifically for that purpose. The new company’s largest shareholder is Hadasit Bio Holdings Ltd. (TASE:HDST), the commercial arm of Hadassah Medical Center, and Oridion sold its activity to the new company in exchange for a 19.99% stake in it.
What made you finally abandon the development of BreathID?
“Mainly, the many requirements and approvals entailed in its development and marketing. BreathID is, in fact, more of pharmaceutical product than a medical device, and pharmaceuticals require a much greater financial investment.”
How much did you burn on the development and marketing of BreathID?
“$20-25 million.”
Published by Globes [online], Israel business news - www.globes.co.il - on January 21, 2007
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