Sailing effortlessly through rough seas against a stiff headwind, CardioNet Inc. (Nasdaq:BEAT) is like a fearless mariner following its own star. The company has successfully pioneered a new category of diagnostic device termed Mobile Cardiac Outpatient Telemetry, and it's going to be big.
In order to detect heart abnormalities, cardiologists subject patients to a battery of tests including a resting electrocardiogram [ECG] and stress test. An ECG records electrical signals emanating from the heart to identify abnormalities such as atrial fribulation and fluttering in heart rhythm. The ECG feedback helps diagnose heart damage, valve disorders and structural abnormalities, among other things.
Riding the wireless wave, CardioNet has developed a real-time, outpatient heart monitor, which is a quantum leap forward for the industry. The system monitors a patient during the course of his daily routine and, in case of an arrhythmic event, relays real time information to a central monitoring center.
Prior to the CardioNet System, doctors had only two options in outpatient heart monitoring. The first was an event-monitoring system (LOOPs), usually worn for 24 to 48 hours and activated when a patient senses an arrhythmic event. The second option was Holter monitoring, basically a cassette tape or digital recorder that continually records heart activity usually over a 24-hour period. The recordings are summarized and submitted to the patient's cardiologist sometime after the fact.
The potential market for CardioNet’s ECGs could be tremendous, considering an estimated 4 million Americans suffer from some sort of arrhythmia annually contributing to some 780,000 annual hospitalizations and 500,000 deaths.
The system has already received widespread acceptance. Since it received initial FDA approval in 2002, the company has lined up health systems payors encompassing as many as 74% of the U.S.-covered populations, some 176 million people, and that number is likely to increase based on findings published in the Journal of Cardiovascular Electrophysiology. In March 2007, the journal published the results of a 300-patient randomized study, which found CardioNet Mobile Cardiac Outpatient Telemetry to be nearly three times more effective at detecting clinically significant arrhythmias versus LOOP event monitors.
CardioNet began trading publicly on March 19, but against a strong market headwind, the price has risen a hair under 60% to $28.77 at Wednesday’s close. (The stock has traded as high as $30.40.) The company has set a revenue target of $117 million to $120 million for 2008 and CEO Arie Cohen sees “sustained revenue and earnings growth” based on increased market penetration and “opportunistic strategic acquisitions.”
CardioNet made what looks to be an outstanding acquisition earlier in the year when it bought PDS Heart, a maker of digital Holter- and LOOK-type monitors and distributor of a range of related products. The acquisition provides CardioNet with a potent sales force, 75-strong, which the company intends to grow to 89 by the end of 2008, with an in the Southeast, where there are many retirees. PDS Heart also offers a range of products, from monitors to defibrillators to attendant services, which CardioNet can sell off its own wagon.
Proof of life abounds: revenues in the first quarter were up 129.4% to $25.5 million versus a year ago. CardioNet is also in an excellent financial position, with $62 million in cash and $89.1 million in current assets versus a mere $19.4 million in total liabilities ($17.1 million current). The company also has $31.2 million in loss-carry forwards, which will make its near term extremely fruitful.
The company says that its system has been used to monitor 100,000 patients since 2002, when it received FDA approval for its first- and second-generation models. We think that the small cap may be able to serve many times that number each year. PDS Heart already monitors approximately 150,000 patients in 49 U.S. states; therefore, CardioNet is probably under-promising big time.
If you’re looking for a vehicle in which to sail against the prevailing winds and beat the current market doldrums, CardioNet, the brave mariner, might be your best mate.