Immucor, Inc., (BLUD), develops, manufactures, and sells a complete line of automated systems and reagents used in a number of tests to detect certain properties of the cell and serum components of human blood prior to blood transfusion. Immucor's reagents are mainly used to determine blood group and blood type, to detect and identify blood group and platelet antibodies, and to conduct paternity testing and prenatal care. The company s principal customers are hospitals, clinical laboratories, and blood banks. In addition to the U.S., Immucor also operates in Canada, as well as in Japan and European countries such as Germany, Portugal, Italy, Spain, and Belgium. The company has over 5,500 customers worldwide. Immucor spends a significant amount on research and development (R&D), to improve existing products or to develop new ones, and continues to invest in its sales force, in order to gain market share. The company generates a majority of its revenue from the sale of reagent products. In fiscal 2007, net reagent sales and net instrument sales contributed 91% and 7%, respectively, to total net sales. Instrument revenue includes revenue from providing service. Under a development agreement that was finalized in June 2003, the company shipped its first human collagen raw material to Inamed Corporation in the fourth quarter of fiscal year 2004. Due to the closing of the Houston facility, Immucor has terminated the Inamed contract effective July 2008. Human collagen sales contributed the remaining 2% to total net sales.
A number of positive trends and developments make us optimistic about Immucor's growth. These trends and developments include an expanding gross margin, additional worldwide placements of Galileo, the launch of a third generation Galileo called Echo, and development of another version of Galileo. The details are as follows:
The company has completed within the past several fiscal years, or is in the process of completing, manufacturing initiatives to improve operating efficiencies and achieve cost savings. BLUD completed the consolidation of its red cell manufacturing facilities in the fiscal 2004 fourth quarter. The manufacturing operations of other reagent products were consolidated in 2006. BLUD has been benefiting from additional cost savings as a result of eliminating redundant products. The closing in December 2007 of a manufacturing facility in Houston and the recognition of deferred revenue, which carries no cost, were originally expected to primarily drive margins to 70% by the fiscal 2009 first quarter. The company already reached this gross margin goal in the fiscal 2007 fourth quarter. The Houston operations were consolidated into facilities in Norcross, Georgia and Halifax, Nova Scotia. The cost reduction from this consolidation is expected to be partially realized in the 2008 fiscal year and fully realized in fiscal 2009 and subsequent years.
In addition to these manufacturing efficiencies, a pricing strategy implementation in fiscal 2005 has been helping to improve gross margin. This pricing strategy is targeted at increasing prices on traditional reagents, as well as on Capture products, within a new three tier standardized pricing structure applicable to all customers who are not members of group purchasing organizations. This pricing strategy also involved the fiscal 2005 third quarter conversion of selling Capture products from kits to individual components.
The additional worldwide placements of Galileo continue to help drive Immucor's growth. Galileo is a second-generation, fully automatic, walk-away instrument for hospital bank transfusion laboratories, donor centers, and reference laboratories, and can process up to 224 different samples at one time. Immucor's first generation blood bank system is the ABS2000. Galileo is specifically targeted at the large-sized hospital market. The company received U.S. Food and Drug Administration (FDA) approval for Galileo on April 26, 2004. This instrument, which has received an overwhelming response in Europe, has been making a similar impact in the U.S. with its substantial boost to revenue and earnings from the growth in reagent sales. As expected the margins on the reagents (75%-80%) has been higher than those in Europe, due to the adoption of direct marketing in the U.S., instead of selling through distributors. International margins are expected to receive a boost from efforts at going direct in France by July 2008. On July 9, 2004, Immucor received clearance to market Galileo in Canada. In fiscal 2007, Immucor received 53 Galileo orders in Europe and 61 in North America. On July 1, 2004, the Japanese Ministry of Health approved the company's marketing registration for Galileo. Immucor is now marketing Galileo directly in Japan as a result of establishing Immucor-Kainos, Inc., a joint venture with Kainos Laboratories, in the middle of the fiscal 2006 first quarter. Immucor has been rebuilding its Japanese sales force and was not able to begin full operations of the business until the start of fiscal 2008.
The company continues to develop new instruments. On January 19, 2004, BLUD entered into an instrument purchase agreement with Bio-Tek Instruments, Inc., for the development of a third generation automated assay instrument named Galileo Echo (formally referred to as G3), to serve the small-to-medium accounts. Echo is over two times faster and provides more efficiency than the ABS2000, and is expected to appeal to customers throughout the world. Its European launch was delayed four quarters and the U.S. launch three quarters as BLUD has launched Echo in both Europe and the U.S. during the fiscal 2008 first quarter instead of the previously expected fiscal 2007 fourth quarter. This second delay is the result of the later than expected FDA and CE Mark approvals. The instrument is designed for service utilizing a "depot" approach (i.e., the customer delivers an instrument to the company depot for servicing, and receives a loaner instrument to use until servicing is complete) that should significantly reduce service costs, as opposed to sending repair personnel to customer sites. The company continues to progress in the development of another version of the second generation Galileo.