Valley’s Best Gainer Jumps 118%

WOODLAND HILLS —  Syncor International Corp. has seemingly emerged from nowhere to become the top-gaining Valley-based stock for the second quarter ended June 30.

Shares of the company, which specializes in high-tech medical services and products, zoomed more than 118% to finish the quarter at $72.

At the same time, Syncor is drawing some glowing reviews from Wall Street, which not so long ago was skeptical about the company’s prospects for growth.

Syncor, with $520 million in annual sales for the year ended Dec. 31, operates three business units. These include a pharmacy services division that dispenses radioactive drugs and isotopes to hospitals and clinics in the United States, a diagnostic imaging division that operates 33 centers under the name Comprehensive Medical Imaging Inc., and an overseas unit that provides pharmacy services as well as many other medical services outside the United States.

Syncor has long been a leader in the pharmacy services industry, in which it specializes in radiopharmaceuticals--radioactive isotopes and drugs that are used in the diagnosis and treatment of a host of diseases and conditions.

The most common use for the company’s pharmacy products is in a test that cardiologists use to determine how well the heart is functioning, according to Robert Funari, Syncor’s chief executive.

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But Syncor’s very success in radiopharmaceuticals could be a chief reason that investors until recently viewed the company as a steady, but not spectacular performer.

“Most people believed this was a company that, although it dominated its radiopharmaceutical business with a 52% market share in the United States, its revenue and profit growth inevitably would slow because of its dominant position. People didn’t see where else the company would derive profits,” said Larry Smith, an analyst with Sutro & Co. in New York.

But Smith said investors’ perspective began to change when Syncor in late April reported that profit had risen 49% to $7.5 million for the first quarter ended March 31, far outpacing analysts’ expectations.

What’s more, Smith said, Syncor turned from a steady plodder to a rising star in the minds of investors not just by turning a tidy profit, but also by demonstrating that it could make a profit in the medical imaging business, and by expanding into overseas markets. He has raised his estimate of the company’s earnings per share for 2000 from $1.87 to $2.17. For 2001, he raised his estimate from $2.17 to $2.82.

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Making a success of the medical imaging business was especially impressive, Smith said, because Wall Street was extremely skeptical when Syncor expanded into imaging.

“The medical imaging business has a horrible, horrible reputation on Wall Street. People thought that was a mistake,” Smith said.

Like Smith, analyst Larry Marsh of Lehman Bros. in New York said he is “very high” on Syncor. Lehman raised its earnings per share estimate to $2.13 from $2.10 and its 2001 estimate to $2.78 from $2.60.

Marsh said the combination of Syncor’s dominance in radiopharmaceuticals, the expansion of its medical imaging operations and overseas business “should translate into much greater earnings’ potential over the next three years.

Despite the optimistic outlook for the future, Funari believes Syncor’s stock languished until recently, in part, because Wall Street was justifiably skeptical of the company’s potential to make money in medical imaging, a fragmented industry in which no one company claims a large market share and in which a number of firms have failed in attempts to consolidate the business.

Showing that it could succeed in medical imaging no doubt helped Syncor’s stock, but Funari believes the company’s share price also has benefited from the flow of funds out of dot-com companies, from the return-to-favor of health industry stocks in general, and from the announcement of an agreement between Syncor and GE.

Under that agreement, GE will distribute Syncor isotopes and Syncor will buy GE equipment used in providing a growing type of medical imaging called PET (positron emission tomography) scans.

Explaining that he expects revenue and profits will continue to grow in all three divisions at Syncor, Funari recently told Wall Street that the company expects annual earnings to grow to $2.80 per share in 2001, $3.75 in 2002 and $5 per share in 2003.

Those projections may sound bold, Funari acknowledged, but he said Syncor sees big potential for growth in the medical imaging and overseas divisions.

The U.S. pharmacy services business accounts for 86% of the company’s revenue and is growing at about 12% a year, while medical imaging represents about 10% of revenue and is growing by 40% to 50% per year. The overseas unit accounts for the remaining 4% of revenue, but is growing by 70% to 80% per year, Funari said.

“Less than 5% of our revenue today comes from overseas markets, yet the overseas markets for medical imaging and pharmaceutical services are larger, in aggregate, than the market here in the U.S., so we see tremendous opportunities to expand the company overseas,” Funari said.

Meanwhile, in the medical imaging business, Funari said Syncor has succeeded where others have failed by concentrating on specific geographic areas (among them Phoenix, the Inland Empire and southern Florida), paying considerably less for acquisitions than predecessors did, maintaining tight financial controls, investing heavily in computer technology like the $6-million billing and scheduling system slated for implementation this year, and expanding the range of services the company offers to the 3,600 hospitals with which it has relationships.

One of the most promising areas of growth Funari sees is in PET scans, a means of scanning the inside of a human body. Funari said PET scans today are used primarily for early detection of cancer, although the technology is expected to have further applications in the future.

PET scans provide some advantages over other types of imaging, like CT and MRI scans, because a PET scan can show the presence of cancer cells before they have developed into a tumor that will show up on other scans.

PET scans also may have the potential for early detection of diseases such as Alzheimer’s and Parkinson’s too, Funari said, although he cautioned that effective treatments must be developed for those diseases before such scans would have practical value.

The PET technology also has some unusual applications. Defense attorneys for Cary Stayner, accused of last year’s Yosemite slayings, recently said they may have a PET scan performed to determine whether Stayner suffers a brain abnormality that would explain his behavior.

Although analysts and Funari say that such esoteric applications have little commercial significance, they indicate the broad range of potential future applications for the technology.

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With its strategy working and analysts issuing glowing reports, does Syncor have any cause for worry?

“There’s always a question what the role of government is going to be in health care,” Funari said. “Government tends to influence economics in health care by setting reimbursement policies, and what the government is going to do is always a wild card.”

The other big unknown in his industry is technology, Funari said.

“We have seen some profound changes in technology in the last 20 years, and you can never predict when a shift in technology will occur that will redefine an industry,” he said.

“All you can do is try to anticipate it and adapt to it when it occurs.”

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Syncor International Corp.

Shares in this Woodland Hills-based biotech company rose 118% in the second quarter as the company began getting strong reviews on Wall Street.

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April 3 $30.44

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June 30 $72.00

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Source: Bridge Information Systems