HGR unknown

my view on this companies viability and risks

  1. 3,715 Posts.
    Hello all,

    I thought I would share my views and research for anyone interested - I have now done a fair bit of reading into the area! I have referenced articles I have purchased or read with links available.

    First of all, I agree with the sentiment today that China is a viable market.

    China appears to be committed to attempt of zero tolerance on drug users (http://tinyurl.com/3c7l3r), and has the political and police power to push through controls that could include Oraline IV. In the June announcement (http://tinyurl.com/28fx5b) the company stated a delay of 6-9 months in receiving significant order through - not that there was not going to be a sale. With the CEO (or was it the CFO?) going to China, this process is continuing, although it will be a licensing or joint venture rather than direct sales activity based around the report and the normal way the Chinese run things.

    The upside for HGR as I see it:
    1. FDA approval is very likely to go through. Time frame is unknown, and it does not appear likely that they would have been expedited based upon the requirements for them getting FDA approval in the first place (http://tinyurl.com/2lem77) although I think that it would potentially fall under the prerequisites for expedited review (section II B http://tinyurl.com/35tv32). This will lead to a jump in the share price as a level of comfort in the company is restored.

    2. Mexico is very likely to go through which will be a great boost to have real volume sales on the table.

    3. More US sales on the back of FDA approval.

    4. As I said, I think they will manage to engineer something for China.

    5. The rest of the world - drug testing is a large industry now, and will continue to get much larger, especially with an easy, reliable test using saliva rather than urine.

    6. There are no practical alternatives for many tests (such as DUID http://tinyurl.com/yoqw7f)

    7. Some promising trials with the Oraline product to document drug use (such as in programs meant to stop you using) (http://tinyurl.com/2qqu4h, http://tinyurl.com/2olb2d)

    Issues and risks:

    1. Oraline based testing provides some false positives (http://tinyurl.com/2vhg7w) especially with Marijuana (THC). The report is most negative about Oraline, even though it appears quite sensitive in a number of areas. From reading the report, it appears that the devices report True Positive, True Negative, False Positive and False Negative, with Oraline being more sensitive than expected. Oraline is certainly not the first to market, the first to receive FDA approval

    2. The overall market may not be mature enough (http://tinyurl.com/yoqw7f - page 43)

    3. Existing deals may fall through which would each be disastrous to the stock price.

    4. FDA approval may be rejected, delayed or more information or requirements may be pushed which again would be disastrous to the stock price.

    5. Orasure and probably others have already received FDA approval (510k) for at least some of their tests (http://tinyurl.com/2qgt4s). Interestingly, Orasure took from December 17 to March 5 to receive the approval.

    6. As mentioned above, the FDA request to file the 510k report was pretty scathing, including stating worries about the suitability of the Sun Bio labs for manufacturing sensitive equipment (http://tinyurl.com/2lem77).

    For a view of target share price as an order of magnitude, I would use these as indicative sales figures:

    China 1,000,000 (on a licensing basis)
    Mexico 400,000
    USA 1,000,000
    Rest of the world 1,000,000

    With an estimation of $1 profit per share, that would bring HGR to a $3.4 Million per year profit range within the next 1-3 years (blue sky view). This would lead to earnings per share of about 2 cents per year.

    Based upon the Ansell PE ratio of 18.5 (seeing as they are in the same sort of sector), this would lead to a target 3 year share price of 39 cents.

    I think that there is a lot of opportunity in this stock, but as mentioned above there are risks that stop major investors from hopping on board. If they can get FDA through, it then just comes down to how good their sales team is, as in my opinion, they don’t have world beating technology.

    However, the downside is to about 2 cents per share, and that compared to the possibility of growing to about 40 cents is certainly a good risk/return. Just don’t overload your portfolio with this one.

    I think I will buy in more next week.



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