Amid Buying Spree, Inverness to Sell More Stock—But Some Observers Skeptical

11/14/07

It’s been buy, buy, buy, for the last couple of years. Then last Thursday, Waltham, MA-based Inverness Medical Innovations (AMEX: IMA) announced it plans to sell 7 million new shares—the second such offering the company has made this year. (In January, Inverness sold 6.9 million shares at $39.65 apiece.) It’s all part of a plan to reach $3 billion in annual revenues within the next five years by focusing largely on “timely, data-driven” tests, CEO Ron Zwanziger told investors during the company’s October 31 earnings webcast.

In particular, Inverness wants to get more tests out of centralized labs and into doctors’ offices. It also wants to sell more diagnostics for home use, like the pregnancy and fertility-monitoring tests for which the company is already well known. The plan relies heavily on buying other diagnostics firms, distributors, and anyone else that can help Inverness expand its product offerings or its reach. In the last year alone, Inverness has bought about a dozen companies (see table on page 2).

It all sounds very intriguing, and investors must like it because the company’s stock has risen from about $25 in spring of 2005 to a recent high of $65. But the particulars don’t sit well with some observers.

In August, Motley Fool’s Brian Orelli commented that Inverness would no doubt grow, but, he mused, “The biggest question is whether it overpaid for that privilege.” After all, last spring Inverness paid a premium price of $1.6 billion for Biosite—a hot property in cardiac point-of-care (POC) testing that it snatched away from Beckman Coulter in a bidding war. Orelli warned investors to stay away from Inverness for a few more quarters.

Then early this month, David Trainer, president of independent research firm New Constructs, came out with a scathing report that placed Inverness among his company’s “dangerous” stock picks. “[Acquisition sprees] have been a popular strategy on Wall Street to make everyone a lot of money except investors,” Trainer says. “What I see with IMA is a bomb about to go off. You have a terribly unprofitable business with a valuation that is way beyond what the company can meet.”

Despite the question marks around Inverness, though, Zwanziger is painting a particularly rosy picture of his company’s outlook. During that last webcast he said, “We have never been better positioned for growth and profitability,” that management gets better at integrating new companies “with each new acquisition,” and that Inverness may reap maximal cost savings from its recent acquisitions by 2009—earlier than originally anticipated.

Much of that savings will come from having a consolidated sales force, which Zwanziger called the largest … Next Page »

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