Mentor Looks Better Than it Appears

On April 20th, Mentor (MNT), a market leader in breast aesthetics, revised its guidance for FY'07 ending March to the range of $300M-$302M from its earlier guidance of $305-$315M. In its press release, the company indicated that the Q4'07 performance was impacted by the slower than expected roll out of its high margin breast implant business and also guided lower for FY08. In the conference call that followed, the management indicated that the slowdown was temporary and they expected the growth rate in the next fiscal year to be consistent with the overall market rate.

As the management remained tight lipped about any further details on the Post Approval Study, analysts were quick to downgrade the company citing loss of market share to competitor, Allergan (AGN). The stock dropped 17% following the announcement. The analysts were well aware that the shortfall was owing to the differences in strategies in fulfilling post-approval studies required by the Food and Drug Administration. Mentor required every patient receiving silicone implants to enroll in its study, while Allergan took a voluntary approach. However, little did the analysts provide for a change in approach by MNT to something similar to the one adopted by AGN. Thats precisely what happened on 2nd May when MNT announced that FDA revised the study design to one that would allow women to choose if they wanted to enroll in post-approval studies or not.

I am not sure if the three month delay in approach would have done a considerable damage to MNT's long term prospects. MNT announced that they had enrolled around 4000 patients during the period. I am not aware what the comparable figure for Allergan is but I still believe the damage is probably limited to the loss of patients in those three months. Going forward the company must be able to recover market share and return to healthier growth rate as they had indicated in their conference call.

Obviously I do not expect the company to revise its guidance upwards now (though they have the opportunity to so when they announce the results formally on May 16th). I do not expect the analysts to do so either. Because a lot more has been written to cement the argument for a bear case. In reality, the fundamental outlook has changed with this move.

The technical case for MNT also remains strong. The healthcare and biotechnology sectors have really rallied over the last eight weeks. The market was probably getting a bit itchy to offload stocks that had the slightest whiff of fundamental weakness or overvaluation. How else can one explain the market's dumping stocks like Appleracorp-Applied Biosystems (ABI) and Allergan (AGN) immediately after the results (despite perfectly healthy results) only to recover back the very next day? I think the 17% drop in MNT was also a similar knee jerk reaction that did not build in a case for a change of approach by MNT. History showed that $38 was a strong area of the support which the stock has now bounced off. With the stock price move above the high of 20th April (when the stock dropped 17%), the stage seems to be set for a recovery rally up to $46.

MNT 1-yr chart

Disclosure: Neither Palma Research nor any of its analysts had a position in any of the stocks mentioned here at the time of submission