In November 2011 I wrote an article summarizing Vascular Solutions' (VASC) business model and predicting a one-year price target of $13.50. Eight months later the company appears to be on track with a current stock price of $13.00, an increase of 20.6% over the $10.78 price at the time I wrote the article.
With two recent developments - the acquisition of the split wrist product from Accumed and the launch of the Gel-Block Embolization product - management has shown that it is committed to the long-term growth strategy I described in my previous article. VASC has successfully carved out a niche by building a large channel. The company uses its debt-free balance sheet and strong free cash flow to acquire products that fall beneath the radar of larger players. These products are added to the sales reps' existing product bags with no need for additional headcount. At the same time, these products as well as new internally developed products give the company the scale to bring manufacturing operations in-house, lowering outsourcing and transportation costs and benefiting the bottom line.
The wrist splint product was acquired for $1.5 million. It currently has annual sales of around $500,000. VASC CEO Howard Root said that, "We believe we can significantly expand sales of the product through our 91-person U.S. direct sales force." VASC paid 3X revenue for the product but is therefore effectively paying a much lower multiple. This is an advantage that VASC can continue to realize with future tuck-in acquisitions.
The Gel-Block Embolization product is type of gelatin foam that can be delivered through a catheter tube. The foam blocks blood flow through a vein or artery that sustains tumors and other malformations. This process is designed to shrink tumors and/or to reduce the extent of blood loss that can occur during an operation to remove the tumor. According to Root:
For decades, interventional radiologists who wanted to use gelatin foam to embolize a vessel have had to follow the imprecise and time-consuming routine of cutting and forming their own pledgets [of gelatin foam].
The VASC version of the product offers three sizes of pledgets, saving radiologists the time it takes to create their own. The product does not compete with existing products like Boston Scientific's (BSX) coils which are used for the embolization of aneurysms. In the Q1 2012 earnings call, Root stated that the product is "our standard single kind of product. It's $1 million to $5 million potential, that kind of thing. It's not a home run by any means." Still, the addition of these types of small, specially designed products will continue to add to the company's free cash flow, fueling additional scale as well as acquisition and organic development opportunities.
These two recent developments are examples of VASC successful execution of its long-term strategy. Short-term investors may want to wait and hope for a dip in the stock price given the recent appreciation driven by what appears to be relatively small-impact announcements. The stock continues to look attractive for long-term investors seeking a solid company with steady year-over-year growth and significant potential upside coming from a couple higher-profile products under development.
Healthcare Reform Risk
It should also be noted that the Supreme Court's decision to uphold healthcare reform may hurt VASC. This is not something that I have a great insight into (commentary/clarification/estimates from readers is welcome) but the law contains a 2.3% tax on medical device revenue. In 2012, former president and CEO Jan Keltjens of VASC competitor AngioDynamics (ANGO) stated "We have not crunched the numbers, but it's going to put pressure on all spending areas of the company." One report suggests that the tax could cost ANGO $6 million in 2013 and amounts to a 15% tax on profits for most medical device manufacturers. Current ANGO president and CEO Joe DeVivo has called the tax "punitive." Obviously, such a tax could slow VASC's ability to pursue additional growth opportunities as aggressively in the future. However, the planned increase in the number of Americans with health insurance may result in more of the low-cost operations that much of VASC's business thrives on, potentially mitigating the risk. Now that the law has been upheld, it will be interesting from a new valuation perspective to see whether VASC management offers additional commentary on any potential impact to the company in the July 24th earnings call.
Disclosure: I am long VASC.