Small-cap med-tech stock AngioDynamics (ANGO) continues to offer the sort of patience-testing value opportunity that drives many investors away in frustration. That said, a rebound in the company's laser-based varicose vein treatment and synergies from the Navilyst deal do give patient investors a little encouragement for the short-term.
Fiscal Q4 Results A Bid Of A Muddle
AngioDynamics ended its fiscal year with a mixed performance, with encouraging news at the top line but some clear work to be done on expenses.
Revenue rose 3% as reported, or 10% on an adjusted organic basis (excluding the Navilyst acquisition and prior year sales of LC Beads). Vascular sales were up 23% on a reported basis, or 10% organic, while oncology/surgery sales plunged 39% as reported.
Margins weren't great. As-reported gross margin fell nearly four points from last year, and while adjusted margins were stronger (58.1% excluding quality control remediation efforts and 59.7% excluding that and Navilyst costs), they were still below most sell-side expectations. Likewise, the company saw relatively minimal operating leverage. Consequently, the company produced a larger operating loss and less than 3% growth in adjusted EBTIDA.
Something To Build On For 2013?
There were aspects of AngioDynamics' quarterly results that I found encouraging. Sales of VenaCure EVLT systems were up 17% and system placements lay the groundwork for eventual higher-margin disposables sales (roughly $300 per procedure). We'll need to hear from Covidien (COV) to see where the market leader in vein ablation is at, and there is a risk that sales reps pushed hard to close sales before the end of the fiscal year, but this is positive all the same.
Elsewhere, the company also announced 54% growth in NanoKnife. This really is not a "ready for primetime" product line yet, but growth is growth.
All in all, the guidance from AngioDynamics management was pretty constructive for 2013 and beyond. Certainly there are risks in achieving those numbers, and a lot rests with successful integration of Navilyst
Bard (BCR) is no pushover in the vascular access market by any stretch, and it will take time (and FDA cooperation) before BioFlo can start moving share. The company has a 510(k) pending with the FDA, and BioFlo with PASV PICC) has shown nearly 50% lower occlusions relative to Bard's PowerPICC Solo 2 and more than a third less t-PA use, but Bard's nearly 70% share and wide product offering give it a lot of leverage. Luckily the company should have an easier time in fluid management (about 60% of Navilyst), where the company has 60% share and a wide lead on Merit Medical (MMSI).
Of NanoKnife And The FDA
Turning back to NanoKnife, it looks like management has reoriented its efforts to dedicate most of its assets and energies on getting an indication for pancreatic tumor ablation. This makes ample sense; not only is pancreatic cancer a better than $200 million opportunity, it's a field where drugs, radiation, and other methodologies have thus far failed to show much benefit. Moreover, this shift suggests a more disciplined outlook from management; trying to investigate a broader range of soft tissue tumors risked frittering away resources and delaying a strong marketable indication.
On a less positive note, the company still has work to do with the FDA on its quality control. Earlier this year the agency found repeat observations at its New York manufacturing facility and that spurred the company's "Quality Call to Action" program. While this is depressing margins here and now, it's not as though the company has a lot of choice - investors need only look at examples like Johnson & Johnson (JNJ), Genzyme, or Novartis (NVS) to see how quality control issues can linger.
The Bottom Line
I'm not going to get too excited about the near-term outlook for AngioDynamics. I am hopeful that the company may gain share in vein ablation, but Covidien is on point these days and no pushover with a market-leading product. Likewise, for all of the promise of the Navilyst deal, smooth integration and realization of synergies is very nearly a "must do" and beating Bard is no simple task.
The good news, though, is that it does not take ambitious free cash flow growth for this stock to work. If management can achieve mid single-digit revenue growth (believe their own expectations) and regain low-teens free cash flow conversion, fair value lies in the teens. Just don't expect it to happen in one or two quarters.