Shares Of Given Imaging Undervalued With Recent Approvals And Pending Colon Pill

| About: Medtronic plc (MDT)

Shares of medical company Given Imaging (GIVN) traded up 7% on Tuesday after the approval of the company's PillCam SB3 in the United States. That approval, along with a recent deal in Japan, and several upcoming FDA decisions, shares of Given Imaging have plenty more room to run.

On Tuesday, the FDA issued 501 (NYSE:K) clearance on the new PillCam SB3. The device has huge upside and is a great upgrade from the previous PillCam SB2. The new pill capsule has 30% higher image resolution, an adaptive frame rate technology, and improved processing engine. The new device will also be used for detecting several diseases. The PillCam SB3 will be used to detect and monitor small bowel abnormalities, obscure gastrointestinal bleeding, and iron deficiency anemia.

Chief executive officer Homi Shamir had this to say of the pill's approval, "We believe PillCam SB3 will both enhance the clinical experience for our large base of existing U.S. customers and expand the market for this product among new physicians who have not been performing PillCam procedures." Essentially Shamir is saying this pill works better and covers more areas. This therefore should create new revenue streams from different sectors for Given Imaging.

Back in July, the Japanese Pharmaceutical & Medical Devices Agency approved the PillCam Colon, a device used by medical professionals in replace of the colonoscopy. This approval is huge for Given Imaging, since Japan remains the world's second-largest healthcare market. According to this Reuters article, Given's base of 1000 physician offices in Japan could grow to 10,000 offices. Total PillCam Colon sales could hit 1 million units sold. Reimbursement from Japan is expected to start in the first half of 2014.

The approval of the PillCam Colon in Japan now makes the device available in parts of Europe, Latin America, Canada, and Japan. The PillCam Colon is currently under the FDA approval process. The device is expected to be approved in the fourth quarter of 2013.

This pending approval is a huge catalyst for Given Imaging going forward. The 7% share price increase today will be copied and likely surpassed on the heels of a PillCam Colon approval in the United States. This New York Times article points out the ridiculously high costs of colonoscopies in the United States. The test has an average cost of $1185 versus the $100s charged in other countries. The operation has been moved from doctor's offices to hospital to capture additional revenue for doctors and hospitals.

The PillCam Colon could change all of this, as it would provide another option for patients and doctors. There are an average of 10 million colonoscopies performed in the United States every year. This creates a huge market for Given Imaging. The colonoscopy is the most expensive screening test Americans routinely undergo. The industry racks up $10 billion in annual costs, thanks to higher costs and higher volume of patients undergoing the test. If Given can capture a fraction of the colonoscopy industry, it could equal its current annual revenue from the PillCam Colon alone.

Last week, Given Imaging reported record second-quarter revenue. Total revenue increased 11% to $49.5 million. Given also saw record sales of its PillCam SB capsules with a total of 62,700. Earnings per share grew 35% in the quarter to $0.22. Gross margin also increased to 78.3% in the second quarter, a small gain from last year's 78.2%.

In the second quarter, total revenue broke down by region as follows:

  • Americas: $30.7 million, +8%
  • EMEA: $12.5 million, +18%
  • APAC: $6.3 million, +15%

PillCam sales broke down as follows:

  • Americas: 36,000, -2%
  • EMEA: 17,500, +13%
  • APAC: 9,300, +30%

Total PillCam sales increased 6% in the second quarter from the prior year. The impressive gain of 30% in the APAC region is set to grow further once the PillCam Colon begins seeing revenue in Japan.

Shamir had this to say of second-quarter earnings and the future, "Looking ahead, we expect the recent and significant regulatory milestone the clearance of PillCam Colon in Japan as well as the pending FDA decisions regarding PillCam SB3 and PillCam Colon to enable us to accelerate growth in 2014 and beyond."

The PillCam SB platform has been huge for Given Imaging. Since the launch of the original device in 2001, over 2 million pills have been swallowed by people around the world. The device was originally used to help doctors visually see the small bowel in patients. The device has since been expanded into uses for the esophagus and colon as well.

Shares of Given Imaging appear to be undervalued on a price-to-earnings basis. At Tuesday's closing price of $17.39, shares trade at 31 times fiscal 2013 estimates of $0.55. Shares trade at 20 times fiscal 2014 estimates of $0.88. However, Given Imaging currently has a cash base equal to $3.27 per share and reasonable debt of $68,000. When cash is taken out of the equation, shares trade at 26 and 16 times fiscal 2013 and fiscal 2014 estimates respectively. Analysts expect Given to post revenue gains of 7.3% and 12.4% in fiscal 2013 and fiscal 2014. This seems conservative with the approval in Japan and pending approval in the United States. I expect to see Given or analysts raise guidance, which should trickle down to stronger earnings per share.

Even with Tuesday's approval, shares of Given trade below their 52-week high ($19.48). The company has a $552 million market capitalization and trades well below prices in the $30s and $40s it once saw. I believe the PillCam story is not over. After Given receives FDA approval for the colon pill in the U.S., shares will hit new 52-week highs. I also expect Given to go after different areas of the body and expand its already successful capsule endoscopy technology.

Buy shares of Given Imaging to capture the potential revenue gains from Japan, new medical areas, and the potential FDA approval for the colon test in the U.S. The company has huge growth coming and shares trade at extreme discounts to value and growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GIVN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.