Heska gets stock value boost

FORT COLLINS — Somebody out there thinks a great deal of Heska Corp.

The people running Heska would like to know whom. But for the time being, they’re just happy knowing that someone’s paying attention.

On April 21, 665,100 shares of Heska stock were traded on the Nasdaq SmallCap, or nearly 13 times the company’s average trading volume over the previous three months.

On that day, Heska stock bolted upward by 37 cents a share – a 32 percent increase in value in one day — to $1.51. The company’s market capitalization jumped $17.7 million in one session.

The stock price had leveled off to $1.25 at the time this edition of The Northern Colorado Business Report went to print. But considering where Heska’s been in the past year, the recent surge in investor confidence is compelling.

The company that makes diagnostic products for veterinarians had seemingly gone to the dogs.

Last fall, the price of Heska shares was idling so low that Heska accepted relegation from Nasdaq’s National Market to its SmallCap Market. Its status on the SmallCap Market was also tenuous. By Dec. 24, Heska’s stock price dipped to 30 cents a share, well below the $1 minimum that’s expected for a Nasdaq company.

Furthermore, the Wall Street brokerage that was providing research reports on Heska dropped its coverage of the company.

Curiously, about the time Heska was running afoul of Nasdaq, the company was reporting its first profitable month and first profitable quarter in company history.

Still, there was little market momentum until February, when the stock bounced from 74 cents per share on Feb. 6 to $1 on Feb. 7.

Steady recovery

Since then, the company’s market recovery — punctuated by April 21 — has been steady. On April 30, Heska shares closed above $1 for the 10th consecutive trading day, a milestone that clears Heska from Nasdaq’s endangered list.

Bob Grieve, Heska’s chairman and CEO, confessed he had no clear explanation for the company’s turnaround, just as he couldn’t explain the descent last year in spite of positive financial numbers.

“It’s been my view for some time that stock-price results will lag operational results,” Grieve said. “We’ve had pretty good operational results for some time, not the least of which was our first full quarter of profitability in the fourth quarter (of 2002).”

Grieve also thinks the recent 10k filing, which is the annual disclosure required by the Securities and Exchange Commission, may be fueling some of the gains in the last month.

“I would guess investors have gotten into that and been reading it a bit,” Grieve said. “They would have seen some interesting stuff.”

For instance, they would have seen that Heska has settled out of court on a patent-infringement case with rival Synbiotics. As a result of the settlement, Heska gets to keep rights to its canine heartworm diagnostic product, which was disputed in the Synbiotics case.

“It’s a significant product for us,” Grieve said.

Secondly, Heska restructured its revolving line of credit agreement with Wells Fargo, extending the maturation date from the end of 2003 to the end of 2006 while increasing the total credit facility to $11 million.

The company also announced that it would release three new products this year that could have an impact on revenues.

Without Wall Street coverage, Grieve said, “There’s no one out there reporting this information ? The astute and diligent investors are finding these things on their own.”

Internal investment helped

Investors may have also been cheered by the actions of Jason Napolitano, Heska’s chief financial officer.

Since November 2002, Napolitano has snapped up 150,500 shares for himself on the open market. He bought 100,500 of those shares when the price was 40 cents or less. Based on Heska’s $1.50 price on May 5, Napolitano had realized about $110,000 in paper gains on those 100,500 shares.

Napolitano said it was simply a matter of putting his money where his mouth has been.

“I felt that I’m speaking the truth here — if nobody’s going to listen, then I’ll buy quite a bit at these levels,” he said.

Napolitano explained that Heska’s three principal rivals in the animal diagnostics arena all trade around two times their revenue per share.

“And we’re better,” he said. “There were times when we were trading at point-4 or point-5 times our revenue.”

The higher price should attract more institutional investors to Heska, which in turn could create more interest from others, Napolitano said.

“Until recently, even small institutionals had a real hard time accumulating enough stock to make a difference in their portfolio,” he said.

Still, outsiders are right to be skeptical of Heska, said one veteran observer of the animal-health-care market.

Bob Fountain, a former executive with Pfizer Animal Health and now an industry consultant, applauded Heska for its perseverance.

“A lot of people have been waiting for them to sink and implode,” Fountain said. “It’s not over for them yet, but I think they are go’ng to survive.”

However, Heska has challenges because one of its leading competitors has tied up product-distribution channels.

IDEX, which holds 80 percent of the animal-diagnostics market, has secured “all of the really good veterinary distributors,” Fountain said. That means Heska is left with “tier 2 distributors.”

“Having said that, Heska has just appointed one of the best sales managers in the industry,” Fountain said, referring to Bert Honsch, who joined the company earlier this year. Honsch, who previously worked for pharmaceutical powerhouse Novartis, joined Heska in December 2002.

Fountain also credited Heska for developing proprietary niches in certain markets that IDEX can’t match.

“Once this thing gets on its legs and can stand on its own, I feel somebody will come and grab them up,” Fountain said. “A lot of companies would love to be in diagnostics.”

Meanwhile, Heska’s management is itching to diagnose who provided Heska with a red-letter day on April 21.

“I don’t know — I may never know,” Napolitano said. “We’ll get a report on activity in this quarter probably sometime in August. But if it’s a hedge fund or some unregulated buyer, we may never know who that heavy buyer was.”

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