Abiomed: Room To Run

| About: ABIOMED, Inc. (ABMD)

Summary

Abiomed is positioned for substantial long-term growth.

Impella’s expanded use should result in growth acceleration in fiscal 2017 and beyond.

The company projects annual revenues for fiscal 2021 (calendar 2020) in the $1.2 billion to $1.8 billion range.

The market is pricing in the growth on the low side of the projected revenue range, but the bullish case and strong momentum could still take the stock higher.

Image source: Massdevice.com

Abiomed (NASDAQ:ABMD) is up 4% year-to-date, which is a solid accomplishment considering the situation in the healthcare sector. The company has enjoyed a strong run over the last three years and the current valuation is pricing in a very bright future. The company has a large market to penetrate into in the following years, especially considering the expanded use of Impella in the last few quarters. The international expansion is also in early stages and the company's projections for Impella's revenues in 2020 imply significant growth over the next four years. The valuation is a bit on the high side, but the strong momentum could drive the share price higher over the next 6 to 12 months and the upside potential is still significant based on the bullish case.

Impella is positioned for substantial long-term growth

Abiomed is commercializing a range of Impella products, which "are used in the cardiac catheterization lab (or cath lab) by interventional cardiologists, the electrophysiology lab, the hybrid lab and in the heart surgery suite by heart surgeons." The company believes that "heart recovery is the optimal clinical outcome for patients experiencing heart failure because it enables patients to go home with their own native heart and restores their quality of life." This rationale is supported by the significant growth over the last few years. The company's quarterly revenues have increased in double-digits for 25 quarters in a row.

The company is selling the following products:

  • Impella 2.5 was cleared by the FDA in 2008 for partial circulatory support for up to six hours.
  • Impella CP, which provides more blood flow than Impella 2.5 (around one liter per minute more) and is used by either interventional cardiologists in the cath lab or by heart surgeons.
  • Impella 5.0 and Impella LD are "percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite to support the patients who require higher levels of circulatory support as compared to Impella 2.5."
  • Impella RP is "a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure."

In fiscal Q3 2016 (calendar Q4 2015), the penetration rates for these products were:

  • 1,020 of approximately 1,400 targeted hospital sites - 73% for Impella 2.5. This product accounted for 31% of total revenues in Q4.
  • 788 sites, or 56% for Impella CP and 60% of revenues.
  • 401 sites, or 29% for Impella 5.0 and 6% of revenues.
  • 71 sites, or 5% for Impella RP. The company is gating the RP product due to its focus on rigorous training and sharing of best practices to create training centers that will support the full launch. Impella RP accounted for 3% of total revenues in the latest quarter.

In March 2015, Abiomed received Pre-Market Approval, or PMA, for Impella 2.5 during elective and urgent high-risk PCI procedures. The company believes that only 5% of the high-risk 121,000 patient population is being treated with Impella, which leaves room for substantial growth in the following years.

In August 2015, the company submitted a PMA supplement for emergency patients for cardiogenic shock for all of its left-sided products. Based on the interaction with the FDA, management estimates that the approval could come ahead of the August 2016 timeline.

The adoption and utilization of these products, as well as their expanded use, should drive substantial long-term growth for Abiomed.

The expansion in Japan is on track as well. The company expects to receive approval there by June and to have reimbursement approval within four months (by October). I am not expecting much from Japan in the near-term since the company is going to establish training centers first and since the commercial launch will be limited to the top 150 to 200 sites. The company also plans to expand to the rest of Asia once it finishes building the infrastructure in Japan. Japan is estimated to have around 50,000 patients a year that are eligible for Impella and the expansion to the rest of Asia in the following years should also lead to strong growth towards the end of this decade.

Abiomed shared its revenue projections for fiscal 2021 (calendar 2020) last year: $1.2 billion to $1.8 billion with a GAAP operating margin north of 30%. The goal compares very favorably to the expected fiscal 2016 sales of $326 million with just one quarter left. The growth should be driven by increased market penetration of the current product portfolio as well as the before-mentioned expanded use, and by new products:

  • Impella ECP - a pump designed for blood flow of fewer than three liters per minute.
  • Next generation Impella CP - an enhanced CP pump with an increased flow of 4.5 liters per minute with smart sensor technology.
  • Next generation Impella 5.0 - the Impella 5.5, designed for the flow of 5.5 liters per minute.
  • Impella Bridge to Recovery or BTR - which is similar to Impella 5.5 and is being developed to allow patients to be discharged from the hospital with a wearable driver.

A lot of the growth is already priced in, but the bullish scenario and strong momentum could drive the stock higher in the following months

It is a bit surprising to see Abiomed trading at 12x its fiscal 2016 revenues given the very negative sector sentiment. A lot of the growth seems priced in at this point, but the stock does have additional upside based on both the base case and the bullish case. The company's calendar 2020 projections are the starting point for my model and I used a 15% discount rate and a net margin of 25% given the guidance for 30%+ operating margin in four years (it should be around 17% in fiscal 2016). The multiple of 30 is a bit on the high side, but may prove to be conservative, since the company has a long runway for growth beyond 2020.

Low estimate High estimate
Fiscal 2021 Sales 1,200 1,800
Net Income 300 450
Multiple 30 30
Future value 9,000 13,500
Shares outstanding 48 48
Future EPS 6.25 9.38
Discount factor 0.53 0.53
Present value 4,798 7,198
Price target 99.97 149.95
12-month price target 114.96 172.44
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Source: Author's calculations

The base case leaves room for just a few percent upside while the bullish case could drive the stock more than 50% higher in the following months. The analyst estimates are all over the place, with a range of $90 to $145, and the range is very close to my base and bullish case price target range. This is the present value scenario and the 12-month price target would be 15% higher - $115 for the base case and around $172 for the bullish case scenario.

On the technical side, Abiomed is showing significant relative strength. The stock is up 4% year-to-date and is not far from its all-time highs. Both achievements are remarkable considering the negative sector sentiment. The strong performance points to accumulation and if the sentiment improves going forward, the momentum could continue to push its share price higher in the following months and drive it closer to the upper end of the price target range.

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Source: Stockcharts.com

Risks

The valuation is the main risk for the thesis at the moment. If the company fails to grow revenues towards the low end of its projections by 2020, its share price will offer limited upside at best. Regulatory setbacks could also negatively affect the share price.

Conclusion

Abiomed is well positioned for substantial long-term growth. Higher penetration rates of marketed products and solid adoption of products in development should drive annual revenues past $1 billion by 2020 and the company could be worth much more than it is today in three to four years. The stock has outperformed the sector this year and is exhibiting strong momentum. If the sentiment improves, the stock should perform well in the following months.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABMD 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.

Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.