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Zacks senior medical devices and supplies industry analyst Tom Park was on hand recently to go over some of the smaller-cap medical devices companies currently under his coverage.

Which small-cap medical devices company report have you most recently updated?

AtriCure, Inc. (NASDAQ:ATRC) is a medical device company whose bipolar ablation system is a standard treatment alternative during open-heart surgical procedures to safely, rapidly and reliably create lesions in cardiac tissue to block the abnormal electrical impulses that cause atrial fibrillation [AF], a rapid, irregular quivering of the upper chambers of the heart. Some leading cardiothoracic surgeons have also begun using the system as a sole-therapy minimally invasive treatment for AF. The general commercial release of this system in the U.S. was in January 2003.

Sounds intriguing. How do things look for this company presently?

AtriCure’s business and future growth depend on the continued use of this bipolar ablation system in the treatment of AF, which is considered an off-label use of the system because the indications for which the system has received FDA approval are the ablation and coagulation of soft tissues during certain non-cardiac-related surgical procedures and the ablation of cardiac tissue.

In addition to the bipolar ablation system, AtriCure products include the Isolator pen, the Wolf dissector, and an ablation device that uses cryothermy, or extreme cold, to ablate tissues. The AtriCure bipolar ablation system consists of the ablation and sensing unit [ASU] and a series of uniquely designed disposable Isolator handpieces. The ASU is a compact power generator that uses AtriCure’s proprietary software and delivers bipolar radio-frequency energy.

The pen-shaped ablation device has been cleared by the FDA for the surgical ablation of cardiac tissue and for temporary pacing, sensing, stimulating, and recording during the evaluation of cardiac arrhythmias. The product is well suited to be used in connection with AtriCure’s system to create transmural lesions in difficult-to-reach cardiac tissue.

What’s your fundamental outlook for ATRC stock?

We previously lowered our FY08 revenue and EPS estimates to within the initial management guidance and initiated FY09 estimates. Strong demand for the off-label use of ATRC’s products from all three markets (domestic open-heart products, domestic MIS products & international) continues to drive revenue higher.

Our price target is based on a price-to-revenue multiple of roughly 3.1x FY08 revenue estimate. This is at a premium to the group average multiple of roughly 2.2x. The growth of this limited operating history company is uncertain as sales of the AtriCure bipolar ablation system account for the majority of revenue. Due to some uncertain variables, visibility on MIS growth is limited over the near term. Our price target remains at $13.00.

What other small-cap growth companies have you reported on recently?

In basically the same general market, Micrus Endovascular Corporation (MEND) develops, manufactures and markets both implantable and disposable medical devices used in the treatment of cerebral vascular diseases. These products are used by interventional neuroradiologists and neurosurgeons primarily to treat cerebral aneurysms responsible for hemorrhagic stroke.

Micrus in March 2006 launched the Pharos stent, the first of its line of products designed to treat ischemic disease. Hemorrhagic and ischemic strokes are both significant causes of death and disability worldwide. The company’s product lines in treating cerebral aneurysms consist of endovascular systems that enable a physician to gain access to the brain in a minimally invasive manner through the vessels of the arterial system.

Does this company consider itself an innovator in this field?

Micrus believes its products provide a safe and reliable alternative to more invasive neurosurgical procedures. The company’s proprietary three-dimensional, embolic coils are unique in that they automatically and rapidly deploy within an aneurysm, forming a scaffold that conforms to a wide diversity of aneurysm shapes and sizes.

MEND also supplies access devices and products including microcatheters and guidewires used to deliver microcoils and stents for the treatment of cerebral vascular disease. The company’s revenue is derived primarily from sales of microcoils.

What kind of earnings results are you expecting?

We expect MEND to report Q4 results around May 8. At the end of Q3, management again reiterated its previously announced fiscal 2008 revenue guidance that was revised downward based on product approval delays in China and Japan and sales weakness in North America. Our price target is based on a price-to-revenue multiple of roughly 2.4x calendar 2008 revenue estimate. Thus, our price target moves to $13.00.

Are there any other small medical devices companies worth mentioning?

BioSphere Medical, Inc. (BSMD) develops, manufactures and markets products for medical procedures using embolotherapy techniques. Embolotherapy is the therapeutic introduction of various biocompatible substances into a patient’s circulatory system to occlude a blood vessel, either to arrest or prevent hemorrhaging or to devitalize the structure or organ by occluding its blood supply.

Its core technologies are used to produce miniature spherical embolic particles, or microspheres, with unique properties for a variety of applications. In a typical embolotherapy procedure using BioSphere’s products, an interventional radiologist injects microspheres through a catheter into the blood vessels that feed these target areas. By selectively blocking the target tissue’s blood supply, the deprived tissue will either become destroyed or devitalized, designed to result in therapeutic benefit.

BioSphere’s product line includes four microsphere products, delivery systems and ancillary devices. In December 2007, the company received CE Mark approval to market this embolic for drug delivery. However, FDA regulations require that the company conduct clinical trials prior to seeking to claim the use of the QuadraSphere Microspheres for the treatment of a specific disease or condition.

How about where this stock’s value stands at present?

At its current price of $4.59 per share, BSMD is trading at 2.8x our current fiscal year revenue estimate of $30 million, which is at a premium to group average multiple of roughly 1.9x. The strong revenue growth over the past several years has been driven by the increased awareness and demand for its UFE procedure.

The long-term revenue growth remains uncertain as BSMD has yet to achieve widespread market acceptance of the Embosphere Microspheres or other products and the UFE procedure. Furthermore, BSMD began experiencing in the second quarter 2007 slower growth in the U.S. We believe BSMD is appropriately valued at a price-to-revenue multiple of roughly 3.2x 2008 revenue estimate. Thus, our price target remains at $5.25.

Tom Park is a senior analyst covering the medical devices and supplies industry for Zacks Equity Research.

Source: AtriCure, Micrus Endovascular, BioSphere: Strong Outlook with New Technologies