We are initiating coverage of Vicor Technologies, Inc. (VCRT) with an Outperform rating and price target of $2.61.

Vicor, although finally generating revenue, faces significant challenges in remaining a going-concern and eventually becoming cash-flow positive. The company burned through $22.5 million of cash during the almost ten years of operating solely as a developmental company.

The balance sheet is in tough shape, with little cash, significant amounts of esoteric and short-term financing and carrying a negative net-worth of $6.61 million. The long-term viability of the company’s business model, while apparently currently sound, is largely predicated on theory, the effective application of which has yet to be determined.

Despite this, we believe Vicor represents an attractive investment opportunity. The PD2i® technology, developed by a highly experienced management team and decorated scientific advisory board, appears to be superior in accuracy and reliability relative to conventional heart rate variability analysis. We believe this, coupled with a tremendous desire in the clinical community for a functional technology for the prediction of future pathological events such as sudden cardiac death, will translate into significant interest in Vicor’s HRV technology from cardiologists, endocrinologists, electrophysiologists and other physicians.

The company made its initial sale in January 2010, during which time they also signed a distribution agreement covering three U.S. states. Initial indications point to a positive response from physicians which has us optimistic that this trend will continue and result in over 400 unit sales in 2010.

We expect sales growth to be moderate throughout the first half of 2010 as the company and its distributors roll out their initial sales campaigns. Going into the back half of the year, sales growth should benefit as the Analyzer gains FDA marketing clearance for additional indications. This, along with Vicor beefing up its in-house and external sales forces, should provide the catalysts necessary to significantly ramp sales in the third and fourth quarters of 2010.

We look for Vicor to file for the SCD and trauma indications during the second quarter, and with an expected 90-day approval period, we expect the company to be marketing for these applications by the third quarter 2010. These additional approvals will substantially enhance Vicor’s marketing message which should result in greater interest from physicians.

We estimate Analyzer unit sales will be approximately 440 in all of 2010, comprised of 110 units and 330 units through the first and second six months of the year, respectively. We expect the bulk of revenue in 2010 to come from product sales, but as the installed base grows so should the contribution from per-test revenue. We look for sales of $3.62 million in fiscal 2010, including $2.23 million in product sales and $1.39 million in per-test revenue.

We expect gross margins to show consistent sequential growth as high margin per-test revenue increases as a percent of total revenue. We look for operating expenses, which were $5.33 million in 2009, to spike to $6.65 million in 2010.

The balance sheet remains highly levered with little cash and with headcount additions, ongoing clinical trials and FDA filings occurring throughout 2010, operating expenses will materially increase. Cash flow from product sales and incremental per-test revenue will provide a partial offset to operating expense growth but will be insufficient to sustain operations past the second quarter.

The company will be looking to raise cash before the end of the first half of the year, and we think the most likely source is through a large equity offering. With the installed base beginning to grow and clear visibility of physician interest in the P2Di® technology, which should further accelerate as additional indications coming online in the third quarter, we believe there will be sufficient investor interest to raise as much as $6 million – $10 million in new common equity. We believe this would provide more than enough cash for the company to operate until it can become cash flow positive.

Our longer-term outlook assumes Vicor can achieve an installed base of approximately 1,290 units by year-end 2011 (440 units sold in 2010 and 850 units sold in 2011) and grow that base at an annual rate of about 60% through 2013. Revenue and profitability should increase exponentially from per-test revenue as the installed base grows.

Operating expenses, which are more correlated to product sales than per-test revenue, will fall as a percent of revenue as per-test revenue becomes a greater percent of total company sales. The result will be a rapid improvement in profitability and cash flow. We model Vicor to become cash flow positive by late-2011.   

For the full-year 2010 we look for Vicor to post a net loss of $7.21 million or $0.12 per share on revenue of $3.62 million. We think this grows to $26.73 million and net income of $4.22 million or $0.06/share in 2012.

Our valuation applies a multiple of 25x to expected 2013 EPS of $0.17 and discounts it back an annual rate of 15% to arrive at our $2.61 price target.
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