6 Medical Device Makers Poised for Growth

As the credit crunch continues, many companies supplying high-end, expensive medical equipment and machines have been hit hard on reduced earnings. Hospitals are finding it harder to borrow money for large purchases, especially on machines. It has become harder to justify spending a large sum of money (often in excess of a million dollars) on machines that, regardless of their medical advantage over older or traditional equipment, have not proven their economic viability.

The companies that are newer and are introducing their own versions of products or new types of equipment entirely have been hit the hardest. Despite the significant decline of many of these companies, this issue has stayed relatively untouched and unmentioned in the media. Companies that are poised to recover quickly all have similar qualities: balance sheets lacking long term debt with significant cash positions, have at least four quarters of profitability over the last six quarters, and an expensive product(s) that is gaining attention among the medical community but not necessarily widely adopted. Many of these companies have declined over 40% over the last 6 months.

A list of companies fitting this description are:

• Accuray (ARAY) – maker of the Cyberknife Radiation System (cancer) – $4.3 million
• Hansen Medical (HNSN) – maker of Sensei Robotic Catheter System (heart) – $500,000
• Intuitive Surgical (ISRG) – maker of Da Vinci Robot System (prostate) – $1.3 million
• Varian (VAR) – medical conglomerate – (cost dependent on system)
• Cynosure (CYNO) – maker of lasers for aesthetic treatments - (cost dependent on laser)
• Natus Medical (BABY) – maker of equipment for detection of potential issues with fetuses - (cost dependent on system)

Two companies especially deemed to rebound after the end of the credit crunch are the first two companies on the list, Accuray and Hansen Medical.

Accuray Incorporated produces the Cyberknife, the newest tool in fighting cancer. Of the current radiation systems, it is the only system capable of a 360 by 360 by 360 degree aimable radiation "laser," allowing for much more accurate placement of harmful radiation with lower doses. It is also the only system to be approved for extra-cranial use (use outside of the head), and it being looked toward specifically for lung cancer, with its X-sight lung tracking program, adjusting the placement of the radiation beams with the breathing of the patient.

It has been hit the hardest of all companies on the list, declining from a high of $27 to settle around $9. It has been hit hard due to the expense of the Cyberknife ($4.3 million). It has won several medical awards for innovation and pioneering and has an increasing presence both domestically and internationally. Of the radiation system makers, Accuray has had the most international purchases over the last six months. The Cyberknife system has been purchased by Stanford University, Georgetown University, and other prominent hospitals around the country. Hospitals across the country tend to advertise when they have bought one, as it is very popular.

Currently, it is still deemed "experimental" and is not covered by all insurance companies. However, this was not viewed to be a major problem as more are beginning coverage. Patients wanting Cyberknife treatments in Taiwan must pay out of pocket as it is not covered by Chinese national health care, either, but is still very popular for cancer treatment. Despite missing earnings three out of the four last quarters, it has remained profitable for 4 of the last 4 quarters.

Hansen Medical is run and founded by Dr. Fredrick Moll, who also started Intuitive Surgical, maker of the Da Vinci Sytem. Much like the Da Vinci system, the Sensei Robotic Catheter system uses robotics to enhance surgeons' ability to place catheters inside a patient's heart, while keeping the surgeon away from potential harmful radiation. Comparable to Cyberknife, this product has had enormous publicity among the medical community, and accordingly reached a high of $39, but has since rebounded to $18 from a low of $13. It has received FDA approval, as well as approval in Europe. Its only competitor is Stereotaxis, which uses magnets fields to achieve a similar control over catheters.

Among the medical community, it is believed that the Sensei system is better, as well as being cheaper. Hansen's system seems to have an edge as it can be deployed with any mapping, imaging, and catheter system currently on the market, and will likely be compatible with all future innovations in catheter based therapy. Investors also have speculated that Hansen Medical may takeover Stereotaxis to eliminate competition, much like Moll did for Intuitive Surgical's only competitor before it was profitable. Despite the promise of this company, it has not achieved profitability yet, but is included on this list because of sales growth of the company, topping 100% per annum.

Disclosure: None

Comments

[VLD]

Interesting Article. Not ssure that Hansen will out perform STXS but time will tell. Another one to watch is BSDM.

[Polaris]

Your article is very unbalanced - You have set up six companies for comment insinuating that they have all been damamged by the credit crisis. But only comment on two as possible rebound companies.

BUT there is no evidence that ISRG has been damaged in any way. The ISRG management are adamant that they have not seen any effect on their business from the credit crunch. They are still recruiting sales staff and the list of new surgeons adopting the daVinchi robot continiues to grow see the published international list of surgeons adapting this technique.

As usual Seeking Aplha appears to have its own agenda.

This article is NOT a professional report. If you are going to list ISRG as one of your targets you should present the facts as reported by the ISRG to preserve balance and honest reporting.

[phil_vardena]

You say that "HNSN has received FDA approval". That's true for mapping, but not true for anything else. The use of Sensei as a tool for cardiac ablation is "off label" and open to lawsuits.

Also your statement "Among the medical community, it is believed that the Sensei system is better, as well as being cheaper" is ambiguous. "Medical community". Look, the HRS 2008 starts in a few days. 90% of core abstracts revolve around the use of Remote Magnetical Navigation devices, which means Niobe, which means Stereotaxis. Is the Sensei better? Simple math doesn't say so.

Adverse effects with Stereotasis' Niobe represents less than 0.1% of 15,000 procedures.
Sensei gets something north of 6%. Is the Sensei better? I wouldn't undergo a procedure with Sensei even if well paid!

Regards,
phil

[Vince]

seeking alpha has no agenda, this is a multi-author blog. Mr. Sidwell might, but don't blame the Colosseum for the speaker.

[ThomasSidwell]

Polaris: ISRG is included in the list not because of necessarily a lack of sales growth or profitability, but rather because I believe that they should do EVEN BETTER as the cruch lessens. You cannot deny that ISRG is $80 off of its high. I have no financial interest in any of these companies, and infer rather you do from your incredibly hostile post.

phil_vardena: I don't know how to address your comments as outright like polaris. I do not know how many of the core abstracts truely relate to the Niobe system and how many of them are good. Undeniably Stereotaxis trails Hansen overall in production and approval currently, whether or not you believe they have a better product. Nevertheless, the market certainly like Hansen much more than Stereotaxis, and it is poised for profitability considerably sooner than Stereotaxis. As I said in the Article, I think that Stereotaxis remains an attractive buyout for Hansen should competition increase, and if their product is better, of which I, nor the medical community is 100% convinced, they will combine with Hansen. Something you are also overlooking is the overall connections and leadership of Dr. Moll in this field. Again, I have no financial interest in Hansen.

[Polaris]

Yes I have a large holding and back this up with leap call options. I have held this poition for over four years and have done remarkablely well. I am quite prepared to wait for the valuation to rectify itself.

I am however very concerened about the lack of professional standards amongst some analysts and the accuracy of their reports as these reports are picked up by the press and just reiterated without verifictaion.

A number of analysts Micheal Matson and Amit Hasan have even issued inacurate and irresponsible reports just before earnings - it seems purley to gain publicity, without any regard for the effect on the company or shareholders' investment.

I am concened that the one analyst quite unjustifiably did imply even after the last CC that the company has reduced its forecast. This is not true as the company actually increase its forecast for Q2. But the press and the talking heads on CNBC reiterated the claim without question. This totally unfounded statement is still reiterated on the Seeking Alpha board today.

Your article gives the impression that the company is suffering from the credit crunch by including it in the list of damaged companies. You do not correct that impression in the article. Just leave the suggestion hanging in mid air.

Perhaps I am asking too much of these analysts. I hold a BSc MBA PhD. I would never have been allowed to get away with the sloppy reporting that is prevalent today.

Investment,particualrl... in the present environment, is too important to be treated so casually.

[Polaris]

Just for the record the report on Seeking Alpha "Best and Worst Performing Stocks this earning season " shows ISRG as reducing guidance.

This Is NOT ture - it increased guidance. Please get the facts right before you publish

[crabcake]

Thomas,

Point 1. Fred Moll left Intuitive Surgical in shambles, they almost had to claim bankruptcy. It wasn't until Lonnie Smith stepped in and redirected their target market that they became successful. How much research did you do?

Point 2. Have you read the recent clinician reports on Hansen? Look up Natale (a former Hansen supporter). There is a serious disconnect in wall street and the clinicians. Stereotaxis's backlog has shown tremendous growth without their irrigated catheter. If it had not been for JNJ's delay they would be trading much higher.

Point 3. Lonnie Smith and Bevil Hogg among others have repeatedly stated that they are not seeing any credit crisis in their markets, so how do you argue? ISRG sold over 70 systems at a million a pop. So I ask how can you argue this? Where are you getting your information?

One last point, you said, " do not know how many of the core abstracts truely relate to the Niobe system and how many of them are good"

Then please tell us readers how you can make such biased statements directed towards Hansen and you have no idea how the medical community is responding to their system. I guess you haven't noticed that they aren't being utilized. Do a quick check on the Cleveland Clinic. Niobe being utilized 100% of the time....

I have saved your article and look forward to responding when JNJ clears up their irrigated catheter issue. In my honest opinion, you have done a poor job researching your topic.

[Ratman]

Thomas, in your response to Phil, you have your companies mixed up. It is Hansen that trails Stereotaxis in approvals, systems placed, procedures, safety, efficacy and efficiency. (This is all without the Irrigated Catheter being available for STXS)

You mention Dr. Moll and his leadership, which is undeniable that he was a part of ISRG and he has a very impressive resume in robotics. Problem is in the EP lab, names like Pappone, Kuck, Haissaguerre, Natale and even Burkhardt all carry more more weight and prestige than his.

Pappone, Kuck and Haisaguerre have all made there choice, they all have labs containing a Stereotaxis Niobe. Natale, who has done a lot of the early work for Hansen getting its approval stated at the ACC his opinion on the Sensei's safety record which was less than stellar and it sounded like he was giving a recommendation not to use sensei unless you are one of the most skilled docs in the world.

As to profitability, at what margin and utilization rate does Hansen get to profitability? Giving away the razor in order to increase the usage of the blades is one thing when the razor only costs a couple dollars. But in a Medical equipment sector where game changing technologies sell at gross margins 50-60+ percent why is hansen only selling senseis for 20% tops. (Which is a guess since they lumped all revenue and COGS together, the assumption is the artisan sheath sells for GM closer to 70%, which would put the overall system GM closer to 10.)

So now that you have given away the Sensei, you need the sites to use them. The Cleveland Clinic, is the setting of a DB research note that states although on a CC Fred Moll said they were using the Sensei exclusively, it turns out the opposite is the case and that Cleveland Clinic may be in the market to add 2 additional Niobes. It is hard to be profitable if the device you gave to them for cost, is not being used.

[ThomasSidwell]

People seems to be misunderstanding me about the my inclusion of ISRG. I think it is a great company with a great product with a very bright future ahead of it as the leader in its field. Period. I am not suggesting that ISRG is in trouble of plummeting, losing its edge, or going into bankruptcy. If this were true, we would have seen it by now. If you look at the title of the article, it says 6 medical Device Makers Poised for GROWTH. I am completely aware of the success that ISRG has had in this tough market. I am saying that they will do EVEN BETTER as credit loosens. Is anyone going to argue with me here? As for people saying I am unaware that management has stated they have been unaffected by the credit crunch, I simply respond that you have to take everything with a grain of salt. Look at Tomotherapy (TOMO). Their management said the exact same thing two quarters ago, then completely blew it this quarter. I am not saying they are in the same boat at all, but Enron sure had confident management as well, no? BABY is not in an earnings crisis either, on the contrary, they just blew out estimates, but I included them for similar reasons. I think that they will do better as credit loosens, which is the main point of this article.

Stereotaxis: when I said that i "do not know how many of the core abstracts truely relate to the Niobe system and how many of them are good" I simply meant that I have not read them all nor done a calculation to reach 90%. My neighbor, as "convenient" as it sounds, is a cardiologist, and we were talking about it and he prefers Sensei because he feels he has more control over the system. As for giving systems away, Moll has taken the view that it is more important to get them into doctors hands (who can then decide to use them or not) and try to get a dominate position in the market before going after seemingly short sighted reward systems. Does anyone want to comment on the fact that Stereotaxis has never come close to meeting its negative earnings estimate, already less optimistic than Hansen's (which in fairness has had its misses too and are negative as well). I will also say Stereotaxis balance sheet is not terrible.

I will continue to hear arguments about why Stereotaxis is better than Hansen, as there are certainly pros and cons of each system. Can anyone other than myself (and the market) say anything good about Hansen, or is this board full of pumpers and bashers? Also it is a waste of everyone's time to get these posts about ISRG, as I think I have very clearly addressed this issue.

[crabcake]

Wow, now you are changing your point. I don't own ISRG, I think its fully valued short term. But they are selling as many systems as they want right now. It has nothing to do with credit issues. So your point doesn't make sense.

I am an open minded investor, and see no upside to Hansen unless they change their target market. And again, you are one of the typical Fred Moll worshippers that didn't do any research. He left ISRG in shambles, Lonnie Smith saved them. Hansen will have to change their target market just as ISRG did. So does your "neighbor" have access to a Niobe? How does he feel about a family member going under the knife with Sensei?

I don't care what position you have, or want to take. But its unfair to readers to have such limited knowledge of what you are talking about, but be so bold in your opinions. You made some extremely critical remarks in regards to STXS's market, none of which is even remotely close to being accurate.

[Polaris]

You are either incredibly devious or extremely dim witted

You open your argument by saying you will list companies damaged by the credit crisis and then select only two that will prosper.

Implication? - the rest will not. Now most people will skim through your analysis and will simlpy take away that message.

That is very misleading or very devious journalism. I don't care which it is it is extremely unprofessional - my last word on the subject

[ThomasSidwell]

I have defended every argument reasonably, and just people throw back crap as paid bashers and pumpers.

crabcake: I have not changed my point at all, and any one who reads the title of the article can see that. Your most recent bash says absolutely nothing. ISRG wants to make as much money as possible, and by your reasoning, they are willfully holding back systems because they are selling as much as they want. Who exactly would Hansen change their "target market" to, children? I don't care that you call me a Moll disciple or that I have done no research, it means you have run out of even half cooked ideas.

Polaris: Basher. What more can I say. It seems that given the constant timing of your posts, you and crabcake are the same person. Also similarly, your post says nothing and makes personal attacks. I open my argument by saying companies in this field have been hit hard because of the credit crunch, but given their potential are very attractive now. Again, look at the title. I said 6 poised for growth, not 4 that won't and two that will.

I will not be responding to any more posts, as I am just repeating myself. Especially for this post, I did not do it for polaris or crabcake, but for the readers of the article and seeking alpha. Anyone interested in my track record can check my other articles on SA concerning Transmeridian and see how I correctly predicted both the takeover and the failure of the takeover due to the credit crunch.

-TS

[crabcake]

Basher? Pumper? What kind of nonsense is this? Please don't do articles if you can represent factual information. You did no research, refuse to acknowledge you are wrong, and its very apparent everyone else that has responded to you knows more on the subject matter.

Please spare us from your drivel in the future.

[crabcake]

And one more thing, "Among the medical community, it is believed that the Sensei system is better, as well as being cheaper."

You based this on your "neighbors" opinion, not the medical community. Cheaper? Really? The system is cheaper but the procedure cost are MUCH higher.

Insulting readers by calling them "Pumper" and "Bashers" is beyond childish and if you had facts to back up your statements this wouldn't have occured. Very irresponsible on your part, and I will be contacting your boss.

[User 192774]

What about VDTI and their VitalCare diabetes treatment. The company seems a mess right now but the iCAT treatment seems a promising part of the company.

[guliamo]

I have to ride with the others here.. what does ISRG have to do with the credit crunch?
If anything, the davinci robot saves hospitals money because it reduces recovery time, which frees up hospital beds faster... at $4,000 a night, a million dollars isn't that much.. I don't see the correlation really...

[medsalesKLS]

I am in medical sales, and don't compete directly with ISRG, but I keep scratching my head about the disconnect between analysts and the LT valuation. I see them from the OR floor, ad they have a good product for prostatectomy, and that's about it. A few GYNs have climbed on board for marketing purposes, along with the marketing departments of each facility that has bought one. Once the shine wears off, they will realize that they are paying thousands for procedures that reimburse hundreds, and that math won't work for long.

If you don't believe me, go talk with GYNs (by their own admission, their primary current focus) and ask them. A robotic option may one day be an answer, but not in this form and not with this company. Buyer beware.

[speculari]

Mr. Sidwell opened this particular article stating that these companies had at least 4 of their last 6 quarters showing profit. Hansen, according to my research (daily graphs online), has not made a profit in the last eight (8) quarters. In fact, they show seven (7) years of losses. What kind of emergence from this dismal record may we expect Mr. Sidwell? I don't think you would make in front of "Judge Judy" let alone this forum.

[speculari]

My comments should be corrected to ".... make it in front of "Judge Judy"... ". And additionally, the seven years refer to 5 years of actual or, reported losses; and 2 years of anticipated or, projected losses!

[elcalvo]

In response to MedsalesKLS, I'm not sure what you're selling or what OR's you've been in, but I can tell you from personal experience that ISRG's system is incredible. I can't speculate on the stock price ( I bought at 35 and sold at 110), but the system is being used for much more than simple prostatectomies. Try a cystoprostatectomy for starters (my procedure) and go on to some of the expanding uses in certain types of cardiac surgery. Every doctor I've spoken to is quite complimentary about the system and many wish they had the time for training so that they could join the crowd. I wish you well with whatever products you're peddling, but demeaning this one is ridiculous.
P.S. I am not a physician, just a user.

[medsalesKLS]

Was in another hospital today, and had a GYN tell me that he was not picking up robotics b/c the reimbursement is not there. As I said before - it is all economics, and you will see in a few months that once the shine wears off of the ISRG, it will sink like a rock. Go ahead and bash me or whatever, I am just the canary in the mine. Stay in here if you want to.

[j_remington]

comments by amateurs who know little about trading