Medizone Intl. (fka MZEIQ)

[Whatisvalue]

Hi there Nancy – you write, “…after some basic research on HAI innovation, it appears there are numerous other companies with strong advancements in HAI prevention, far ahead of MZEI. To that point, is the MZEI technology truly "revolutionary", and if so why? i had mentioned in one of my earlier posts the mass success of xenex, that everyone just ignores.” See: http://www.medizoneint.com/2015/02/25/summary-of-published-comparative-effectiveness-of-asepticsure-versus-xenex/ Without doubt, it is the basic belief in the science that retains the interest of long-time shareholders. Many long-term shareholders share your concerns about managerial effectiveness, execution and lack of sales to date.

There is no doubt that Xenex has a commercial leg up on MZEI. I would hardly characterize Xenex’s several hundred hospitals served out of 5,500 in the US, after several years of marketing, as a “mass success” as you do. Nonetheless, the point of lack of MZEI’s commercial sales to date is duly noted as are the varied concerns with the spectrum of resources MZEI would need to fully execute the commercialization of AS versus a suitor doing so.

If someone could fulfill your request and prove that the company was going upwards, it wouldn’t be trading at $0.085. Irrespective of what someone might say to alter your view, you apparently think it’s not worth much more than $0.29. Be that as it may, using some known data, assumptions and reasonable market metrics, and only looking at the US healthcare market, it’s not too hard to get to the $5 number some have posited.

Annual HIA cost in the US: $35-45B
Assumed reduction in HAI cases with AS: 33%
Net financial benefit to US hospitals: $11.55B
Assumed market penetration over time: 20%
Benefit to MZEI customers: $2.31B
Assumed MZEI pricing 17% of benefit (1:6 ratio)
Assumed MZEI revenue: $385M
Assumed MZEI net margin: 25%
Assumed MZEI net earnings: $96.25M
Shares outstanding: 375M
EPS: $0.26
Assumed P/E: 20x
Price: $5.13

The direct healthcare cost of HAIs in the US is estimated to be $35.7B-$45B. See: http://www.cdc.gov/HAI/pdfs/hai/Scott_CostPaper.pdf Let’s be conservative and use the lower $35B number in our valuation model.

We have been told that the use of AS leaves the treated area 100% free of pathogens; it’s sterile. But, we can assume that bacteria and viruses will be re-introduced to the space over time. In the real world environment, how frequently does AS need to be applied to achieve a given level of maintained HAI reduction? We don’t know, but I anticipate that either trials or real world commercial applications will materially reduce the uncertainty of this variable. The CDC uses a 20-70% range for the amount of preventable infections. For now, let’s assume the use of AS can reduce HAIs by 1/3.

You rave about Xenex’s market acceptance. How much more will the market accept a superior product, once EPA affirms the application? I don’t know and neither does anyone else. For argument’s sake, let’s assume that over a period of a few years, MZEI/Suitor can gain 20% of the US hospital market.

Ed has long talked about pricing the AS technology with a 1:6-7 cost: benefit ratio. If the average hospital saves $2.1M a year by using AS [$35B/5,500*.33], is it unrealistic to price AS at $350,000 per hospital per year? That’s an ROI that any CFO would slobber over.

As I recall, the company has previously indicated the cost of the machines is 45-55% of the sale price. Use 50% for ease. I have little doubt that with ramped scale, these costs could come down. Take off all the items between the operating and net margin and assume the net margin is 25%.

The balance of the assumptions speak for themselves. Small changes in the assumptions can make pretty big valuation adjustments with the annual hospital savings being the material driver.

As Ben said, it’s not hard to get to a $5 valuation for the US healthcare sector and an even higher valuation shouldn’t be surprising after we have decent facility HAI reduction data. Add to this the value of healthcare sales around the world and the application of the technology to different patented purposes.

You ask about whom within MZEI has the strategic vision needed to sell. I think it’s very apparent that a sale is necessary to fully implement AS. The question you should be asking is the level of market acceptance necessary to convince various suitors of AS’ effectiveness and revenue potential, assuming FDA clearance. Having had conversations with potential suitors over the last year, Mr. Esposito, whom you discount, likely has a good handle on that metric. MZEI staff or the BOD won’t need to personally apply themselves to determining an asking price. To the extent the BOD/management is capable of incenting 2+ potential suitors to “bid” on MZEI, the MBA types in their M&A groups can generate the integrated financial models that result in a bid. At that point, all MZEI needs to do is assess the ‘reasonableness’ of the offer and say no, yes or counter. I have little doubt that MZEI will retain an investment bank to generate the ‘fairness opinion.’

For any of this to matter, you need to conclude that the company will receive EPA approval and they will begin to sell the product. If you don’t believe these two things, you should likely view the value to be less than today. In that instance, I’m sure you know what to do.