Taking a Smaller Gamble

i-STAT has a checkered past, but its medical device could attract investors looking for less risky bets.
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SAN FRANCISCO -- I gambled that the "macro" picture would settle into something resembling normalcy

Tuesday and would allow me to narrow the column's focus. Looks like I lost that bet -- as is often the case when I gamble -- unless a day when the

Nasdaq

falls 132 and the

Dow

rises 100 can be considered "normal."

All I'll say about the "big picture" for now is that it could have been worse for the Comp, given the

warning from

Motorola

(MOT)

and the downgrade of

Biogen

(BGEN)

.

The other "good" news (for those long) is nobody is in a big hurry to abandon stocks, preferring to rotate into the value names rather than seek alternative investment choices.

The story that follows is more of a "vulture" play than a value choice. But when investors tire of paper and other deep cyclicals, some will choose not to shift back into the suddenly grounded tech sector and might go looking for such situations -- if only because any potential fall is off a curb, rather than a cliff.

Part 1: A Checkered Past

While doing an

update on

Andrx

(ADRX)

a few weeks back, I (of course) queried

Petroscapital

partners Mark Lapolla and Clarke Adams about what else the hedge fund managers like.

Their answer is bound to be a controversial one:

i-STAT

(STAT)

.

The East Windsor, N.J.-based company produces a hand-held device that lets health care providers conduct a series of blood tests at a patient's bedside. The i-STAT system uses far less blood than traditional tests and produces results in approximately two minutes, generating cost savings of both the tangible and intangible variety when compared with traditional lab testing, according to its proponents. It's not quite like the sensors Dr. McCoy used to wave around on

Star Trek

, but it's a step in that direction.

Forgive the recap that follows, but the company's somewhat tainted history is important/instructive in understanding why Petroscapital's partners (among others) are bullish today, and why others say it's folly to invest in this stock.

i-STAT's hand-held blood-test device was first marketed in mid-1992 (or eons ago in stock market time). The company's stock meandered about in the mid-teens thereafter until mid-1995, when it rallied into the high 30s after

Hewlett-Packard

(HWP)

purchased more than 2 million shares (more on that in a minute).

The company sustained those levels until early 1996, when it received unwelcome attention after Daniel Frank, then a fund manager at

Fidelity Investments

, resigned amid revelations he'd made a charitable donation to a Boston hospital, which then used the funds to purchase i-STAT's blood analyzers. At the time, Fidelity was among i-STAT's biggest shareholders.

The

Securities and Exchange Commission

investigated the company's accounting practices around the same time, and i-STAT's stock promptly (and predictably) sank. After trading into the low teens the following July, the stock enjoyed a brief revival in the second half of 1996, but has mostly been dead money since. Tuesday, the stock fell 2.5% to 14 5/8, vs. a 52-week high of 19 3/8.

Over the years, the company also has suffered, foremost, from a reluctance of the medical community to embrace "point-of-care" testing. The much-heralded partnership with Hewlett-Packard -- whose leading position in the medical-monitor market was supposed to provide an entry for i-STAT's products -- proved a bust. Last month, H-P sold its i-STAT stake, with the bulk of the 2.14 million shares sold to

Cerberus Partners

, a New York-based limited partnership. Cerberus executives declined to comment.

To its critics, i-STAT is a

Roseanne Roseannadanna stock: "If it's not one thing, it's another. There's always something."

Indeed, problems with an adhesive used in the production of its cartridges forced the company to take a $900,000 charge in the fourth quarter of 1999, when i-STAT lost 13 cents a share. Analysts estimated the ultimate impact of the production snag was more like $1.8 million, which is significant for a company with revenues of $12.1 million in the quarter.

William Moffitt, i-STAT president and CEO, said the company validated a second source for the adhesive, and that the company is back to "full-scale" production. Still, he acknowledged the manufacturing glitch will hurt its first-quarter results as well.

"Generally, this is the kind of company you bet against," said a biotech investor who requested anonymity. "It's a sexy story that sounds great but just doesn't work. This company has to produce

cartridges in a cost-effective way, and has failed to do that in a decade."

The company had gross margins of 18.2% in the fourth quarter, which the source said was sadly low for a company that's been in business for 10 years and invested about $100 million in its manufacturing facilities. Bulls such as Lapolla counter that margins will be in the 30% range this year, now that production is back to full capacity.

The cynic, who has previously been short i-STAT but currently has no position, said the company is "old, tired and dead," noting Wall Street has basically abandoned it (only one analyst follows the stock). "How many more years are they going to say 'next year'?"

For the rest of the story (the bullish part), click here.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com .