Be Selective with Medical Device Companies

Includes: BLUD, BSMD, CPHD
by: Zacks Investment Research

With earnings season beginning to wind down in the medical devices and supplies industry, we figured it would be a good time to check in with Zacks senior analyst Tom Park. We were looking to see if there are any attractive buys among his coverage.

What was the last research report you issued, and what was your rating on the company?

Cepheid (NASDAQ:CPHD) is a molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for genetic analysis in the clinical molecular diagnostic, industrial, and biothreat markets. We currently rate shares of Cepheid a Hold.

CPHD reported Q2 EPS that were lower than our estimate by $0.06 on revenue that also was below our forecast. The revenue and EPS results were also below consensus. We lowered our FY08/FY09 revenue estimates and FY08/FY09 EPS estimates.

Where are most of your concerns regarding the company going forward?

Expansion efforts may prove more expensive than the company currently anticipates, and the company may not succeed in increasing revenue to offset higher expenses. Although clinical product sales are accelerating, industrial product sales may be at risk from decreases in government research funding.

Then again, after initially launching in Europe, the company has been successfully expanding in the U.S. clinical market. The company in the first half of 2008 extended its market reach in North America with licenses in Canada and registrations in Mexico for tests on its GeneXpert system.

Which other companies have you reported on recently?

BioSphere Medical (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.

And how do you rate BioSphere shares at this time?

We rate the shares a Hold. BioSphere reported Q2 EPS that were lower than our estimate by a penny on roughly in-line revenue. We again lowered our FY08/FY09 EPS estimates. The execution of BSMD’s growth strategy has been driving sales growth in the high double digits over the past several years. But at this early stage of growth, BSMD is required to make significant investments to establish sales and marketing capabilities and develop and expand its product pipeline.

Initiatives are fully underway to try to revive growth in the U.S. uterine fibroid embolization [UFE] market. These initiatives include an expansion of the U.S. sales force. Our price target is based on a price-to-revenue multiple of roughly 2.1x 2009 revenue estimate.

Any Buys or Sells in your coverage recently?

Yes, we currently have a Buy rating on Immucor (NASDAQ:BLUD), with a $35 target price. Immucor develops, manufactures, and sells a complete line of automated systems and reagents used in a number of tests to detect certain properties of the cell and serum components of human blood prior to blood transfusion. The additional worldwide placements of Galileo continue to help drive Immucor’s growth, and instrument placements are expected to be further driven by the successful launch of Echo.

Is this Buy recommendation based on an attractive valuation?

Not necessarily. The strong earnings growth has been driven by double-digit sales growth, gross margin expansion, and operating cost control. Although under pressure from the Echo launch, gross margins are expected to eventually regain momentum. Our price target is based on roughly 37x FY09 EPS estimate. This is at a premium to the group multiple of roughly 28x.

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