Healthcare is a little strange insofar as companies and analysts often correctly identify promising markets, but real commercial acceptance and usage takes quite a bit longer than most expect. In the case of AtriCure (ATRC), investors have long pondered the multi-billion dollar potential of an effective atrial fibrillation therapy, but the company had a long road to FDA approval and still has to sell and train a sometimes surprisingly stubborn medical community.
While the road ahead for AtriCure is still long (and uphill), the market potential here is such that successful marketing efforts could make this a very interesting stock in the coming years.
Finally Ready For Primetime
While AtriCure has had versions of its ablation system on the market for quite a few years now, the company did not have FDA approval to market the product for atrial fibrillation. Off-label usage of approved devices and drugs has been an open secret in medicine for at least two decades, but AtriCure went a little too far and was arguably the first company to get publicly smacked down by the FDA and DOJ (in 2008) as part of its ongoing effort to curb off-label marketing and promotion.
All of this changed at the end of 2011, though, as the company got approval for its Synergy Ablation System for the treatment of persistent atrial fibrillation (a-fib) concomitant with open heart surgery. This is the first, and only, surgical ablation system approved by the FDA, as well as the only approved device with a label for persistent a-fib.
This isn't the company's only a-fib play, however. AtriCure also got approval back in 2010 for its AtriClip left atrial appendage exclusion system. Left atrial appendage occlusion/exclusion is an emergent therapy for a-fib, as this is the place where most of the blood clots that make a-fib so dangerous arise.
The Road To Better Adoption Is Going To Get Bumpy
AtriCure now has the approvals it needs to start building a strong a-fib treatment franchise, but success is still far from automatic. Investors are often surprised at how stubborn and resistant to change doctors can be, not to mention the extent to which money and self-interest can impact treatment.
In the case of surgical ablation, for instance, only about one-quarter of current open heart procedures in the U.S. see concomitant ablation, as many surgeons believe that it's too complicated and adds too much procedure time. What's more, AtriCure is going to face an uphill battle in convincing electrophysiologists (EPS) to refer patients to surgery.
Right now a-fib is often treated first by drugs (which often do not work), then by cardioversion (shocking the heart) which also seldom solves the problem. At this point, most patients are treated by EPs who use catheters to ablate the heart and create small areas of scar tissue that can stop the aberrant electrical signals that cause a-fib.
Although Johnson & Johnson (JNJ) is the only company that I'm aware of that sells a catheter with specific labeling for a-fib, Medtronic (MDT), St. Jude (STJ), Boston Scientific (BSX), and Bard (BCR) catheters are all used off-label. These procedures are not often successful (success rates of 80% are boasted, but reality is often sub-50%), but the EP can do them multiple times and ring the register each time.
By comparison, a referral to a surgeon doesn't help out the EP, so patient control and market creation are going to be issues for AtriCure, even though cure rates are often well above 80% with experienced doctors. There is a lot of scientific support for the AtriCure procedure, and recent Heart Rhythm Society guidelines definitely support it, so the hope is that data can win out over time.
A Real Market Awaits
With each surgical ablation procedure carrying a roughly $3,000 ASP, the addressable market for surgical ablation is probably in the range of $200 million to $400 million. In addition to this is another $200 million to $400 million in potential sales from the AtriClip in open surgical procedures.
If this were all that there were to the a-fib market, I'm not sure AtriCure would be worth much of a look. True, $400 million to $800 million in addressable market isn't bad against a market cap of $165 million, but Medtronic is not too far behind with its CardioBlate surgical ablation product and Medtronic, St. Jude, and Boston Scientific are all well into development of less-invasive LAA occlusion devices.
What will make (or break) this stock is the opportunity for minimally invasive usage. Both the Synergy ablation and AtriClip can be administered via minimally invasive approaches and this could dramatically expand the addressable market to those people with a-fib who don't need open heart surgery. Said differently, there are close to 3 million people in the U.S. with a-fib, but fewer than 100,000 open heart procedures per year.
This is going to take time to develop (the company is just starting studies), but if the company can get FDA approval to market a minimally invasive ablation and/or LAA exclusion device, the addressable market could be three times larger or more.
Patience Can Prevail
Clearly AtriCure is not going to become a company with several hundred millions of dollars in revenue overnight. This company spent about $40 million on SG&A last year and it takes money (and time) to train surgeons and build market awareness of Synergy and AtriClip, and don't forget that companies like Johnson & Johnson are going to look to preserve their own interests as well.
That said, the scientific literature is on board with what AtriCure offers and new studies like ABLATE and DEEP (which is a study of a minimally invasive approach) can pay off down the line. And while this is admittedly speculative and arguably off-topic, I'm curious if Intuitive Surgical's (ISRG) DaVinci surgical robot could facilitate minimally invasive ablation or LAA intervention.
Frankly, if AtriCure sees real market penetration I don't think it's going to be public for very long after - Medtronic probably wouldn't buy it, but other interventional companies like Boston Scientific, St. Jude, or J&J certainly could. On the basis of what I think could be multiple millions of dollars of revenue and strong free cash flows, I believe fair value on these shares is in the mid-teens ($14 to $16), with real upside into the high teens if there's faster progress with minimally invasive approaches.