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Andy Batts
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I am an independent analyst offering in-depth research and analysis for undervalued stocks with significant upside potential. I also offer extensive healthcare stock analysis in light of technological advancements.
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  • Gilead To Scale New Highs Driven By Sovaldi Sales

    Gilead Sciences' (NASDAQ:GILD) prescription medicine Sovaldi (sofosbuvir) received FDA approval in last December for the treatment of chronic hepatitis C. In the first quarter of 2014, Sovaldi U.S. sales reached $2.1 billion, fueled by strong patient demand and increased inventory in order to support the demand, Gilead said.

    In the last twelve months GILD rose 43.4%, supported by 48.9% earnings growth and 28% sales growth. However, I believe that GILD has ~40% upside left from the current level around $90 in the next one year.

    GILD Chart

    GILD data by YCharts

    The Potential of Sovaldi

    Sovaldi is predicted to grow by leaps and bounds. Market research firm EvaluatePharma forecast that Sovaldi sales will reach $8.02 billion by 2020, a whopping increase from 2013's $139 million. Gilead said that since launch, approximately 30,000 patients have begun treatment for hepatitis C with Sovaldi. In the U.S., the sales of Sovaldi are rising led by increasing prescriptions of hepatologists and gastroenterologists. Gilead added further:

    This leaves us optimistic about the opportunity that lies ahead. In fact, with an estimated 1.7 million diagnosed patients in the U.S. and around 400,000 under treated care, we have to take just a small fraction of those who can benefit from treatments in the future.

    Sell side analysts are also feeling upbeat on Gilead, with the company heading into earnings on July 23. UBS analyst Matthew Roden said:

    In the large caps, estimates look beatable across the board, none more than GILD, where we are now 26% ahead of consensus (we raise our PT to $115)…Based on strong Rx trends for Gilead's Sovaldi, we increase our 2Q sales est. by $1.3bn to $3.25bn (that's not a misprint), $650m above consensus.

    Why Sovaldi Has Such Massive Potential?

    Sovaldi's has such massive sales potential primarily because its interferon-free therapy substantially reduces the side effects associated with the use of interferon. Sofosbuvir (Sovaldi's generic name) is the first drug that demonstrated safety and efficacy to treat certain types of hepatitis C ("HCV") infection without co-administering interferon. In combination with other with other antiviral medicines, such as peginterferon alfa and ribavirin, Sofosbuvir can effectively cure hepatitis C in 90% of patients.

    Competitive Landscape

    Aside from Sovaldi, the FDA has also recently approved Olysio (simeprevir), developed by Janssen Therapeutics, a unit of Johnson & Johnson (NYSE:JNJ), to treat chronic HCV infection. Treatment with Olysio can also cure hepatitis C when used in combination with peginterferon alfa and ribavirin. However, the difference between Sovaldi and Olysio is that Olysio a protease inhibitor that blocks a specific protein needed by the hepatitis C virus to replicate, where as Sovaldi works by inhibiting the RNA polymerase that the hepatitis C virus uses to replicate its RNA.

    For the past few years, the standard-of-care treatment for hepatitis C has been a regimen of one out of two protease inhibitors, viz., Vertex's (NASDAQ:VRTX) Incivek (boceprevir) and Merck's (NYSE:MRK) Victrelis (telaprevir), paired with interferon and ribavirin. However, Sovaldi and Olysio have been evolving as new standard-of-care. Although Olysio is also a protease inhibitor that might need interferon for better results, some experts believe that Olysio might someday free some patients from having to rely on interferon.

    Sovaldi's competitive advantage over Olysio is that Sovaldi is interferon-free and its side effect analysis suggests that Sovaldi is safer than rivals. Despite Sovaldi is hugely expensive, the cost being $1,000 a day, I believe that the medicine will continue to see increasing uptake since its use will save plenty of money in the long run by reducing the need for liver transplants.

    Sovaldi sales could taper-off going ahead as other hepatitis C drugs enter the market. AbbVie (NYSE:ABBV), Bristol-Myers Squibb (NYSE:BMY) and privately-held Boehringer Ingelheim are on pace to launch their own hepatitis C drugs over the next two years.

    Gilead's Upside Potential

    Gilead is trading at an EV/Revenue of 9.5x (trailing 12-month basis) and an EV/Revenue of 5.9x (forward basis). Consensus expectation is that the company's revenue will reach $25.29 billion within the next fiscal year. I expect that Gilead's stock is heading towards $125 (~40% upside), at which it would trade at an EV/Revenue of ~7.5x (forward basis).

    GILD EV to Revenues (<a href=

    GILD EV to Revenues (NYSE:TTM) data by YCharts

    Conclusion

    There is a strong chance that hepatitis C patients that have not responded to interferon-based treatments will be cured with Sovaldi combination regimens. For most patients, Sovaldi-based treatment lasts for 12 weeks. Sovaldi is continuing to see rapid uptake among patients. Given the price of the medicine is $1,000 a day, Sovaldi alone can catapult Gilead's revenues to record levels within a short period of time.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: JNJ, GILD, long-ideas
    Jul 11 10:01 AM | Link | 1 Comment
  • CytoSorbents: An Overlooked Stock With Huge Upside And Upcoming Catalysts

    New Jersey-based CytoSorbents Corporation (OTCQB:CTSO) is a blood purification medical device company focused on controlling excessive, potentially deadly inflammation in the ICU. The company's flagship product CytoSorb, which is developed based on the company's patented biocompatible polymer beads technology, can be used for a diverse range of inflammatory conditions, including critical illnesses, cancer and cancer cachexia among many others. The unique technology has the ability to extract harmful substances directly from the blood stream. I believe that CTSO's current price doesn't adequately capture the market potential of CytoSorb.

    CTSO, which is currently trading at $0.24 with a market cap of ~$72 million, has huge upside potential. However, it's a micro-cap stock, and investors should note that there are risks inherent in micro-cap investing.

    Future Potential of CytoSorb

    CytoSorb is commercialized in the EU and received CE Mark approval in March of 2011, which helped the company sell the device into critical-care facilities across the EU as well as the majority of other international regions that accept European medical device approval, excluding the U.S. and Japan. Cytosorbents's unique technology facilitates physicians and healthcare professionals to extract toxic substances directly from the blood stream through a consumable plug-and-play blood purification cartridge.

    CytoSorb is used in clinical situations where cytokines, kind of proteins secreted by immune cells, are elevated. This can not only lead to deadly inflammation, but also multiple organ failure, immune dysfunction, and often death in common illnesses such as sepsis, trauma, burn injury, pancreatitis, and acute respiratory distress syndrome. Cytokines act as chemical messengers to coordinate appropriate immune responses. CytoSorb is the only device approved in the EU specifically as a cytokine filter.

    Immunotherapy is a multi-billion dollar market, which is Cytosorbents's opportunity. Although most areas of immunotherapy are saturated, such as vaccines or cancer immunotherapy, critical-care immunotherapy (the market that CytoSorb addresses) is a nascent market. To fight inflammation in the ICU critical-care physicians predominantly depend on steroids, which can be life-threatening despite having beneficial effects in the short-term. CytoSorb can fill this void and eventually become a dominant therapy in the ICU.

    (click to enlarge)

    Source: Company Presentation

    CytoSorb to Replace Current Standard Techniques

    In case of a systemic inflammatory response syndrome ("SIRS"), a cytokine storm (also known as cytokine cascade and hypercytokinemia) occurs that could be life-threatening and lowering the cytokine level is considered beneficial. CytoSorb is a hemoperfusion device with a built-in extracorporeal cytokine filter made of biocompatible highly porous polymer beads. The beads contain millions of pores and channels that can remove certain pro-inflammatory and anti-inflammatory cytokines (e.g., TNF-α, IL-1b, IL-10) along with some physiologic fluids from the blood without reducing immune function. The device works with most of the equipments used in standard hospital renal replacement therapy. A recent study has examined the efficacy of extracorporeal blood purification ("EBP") techniques over standard techniques for the purpose of cytokine reduction. The study concluded:

    Human clinical trials indicate that high cut-off hemofiltration techniques, and perhaps plasma filtration and extracorporeal liver support techniques are likely more efficient in removing cytokines than standard techniques.

    According to a clinical review, sepsis is the primary cause of death in the ICU. In general, more than 35% of patients that are admitted in hospitals either already have sepsis or develop it during their ICU stay. Hospital mortality rates are 27% and reaching 54% in the case of septic shock. CytoSorb has the ability to significant reduce the mortality rate in septic patients. CytoSorb's revenue generating opportunity from sepsis alone is huge. Moreover, other conditions where the device is effective, such as trauma, burn injury, pancreatitis etc. as stated above, could make this opportunity even larger. The review suggests that recent technological progresses will soon replace the current steroid-based standard of care.

    What about FDA Approval?

    Until Cytosorbents obtains FDA approval for CytoSorb, expectations of the physician community will remain unfulfilled, primarily because the role of EBP techniques including hemofiltration and hemoperfusion in the management of sepsis and related conditions remains controversial. It is believed that although the use of EBP in SIRS/Sepsis has a biological rationale, suppression or elimination of cytokines could have serious negative consequences on immune surveillance and therefore the use of EBP should be investigated with appropriately designed and statistically powered randomized controlled trials (Grade D).

    However, since Cytosorbents received CE Mark for CytoSorb, I believe that the company will eventually win the FDA approval also. A year ago, FDA has granted the company an approval to begin a U.S.-based human pilot study using CytoSorb under IDE (Investigational Device Exemption). The study has been initiated to examine the safety and efficacy of the device in trauma patients with rhabdomyolysis. If the study becomes successful (the probability is high with CE Mark already in hand), the trauma and rhabdomyolysis application could lead to CytoSorb's approval in the U.S. The company has garnered more than $15 million in support from the U.S. Government and started to collaborate with groups such as Battelle Laboratories, Harvard's Wyss Institute, NxStage Medical (NASDAQ:NXTM), and Massachusetts Institute of Technology.

    Competitive Landscape

    Currently, the standard of care for hypercytokinemia is primarily steroids, such as mometasone furoate, hydrocortisone, betamethasone, dexamethasone, beclomethasone etc. Aside from steroids, vaccines are also used to activate the immune response by mimicking infections.

    Eli Lilly's (NYSE:LLY) Xigris (drotrecogin alfa [activated]) was one of the few drugs to fight sepsis with regulatory approval. However, the drug was withdrawn by the company following results of the PROWESS-SHOCK study which showed the study did not meet the primary endpoint of a statistically significant reduction in 28-day all-cause mortality in patients with septic shock.

    With almost no effective treatment options existing today, CytoSorbents has an enormous opportunity to build critical mass before other products come to market. However, investors should note that with a substantial patent portfolio, the company has made it difficult for other companies to enter the market very easily, which essentially implies that the barriers to entry are significant. Dr. Phillip Chan, CEO of CytoSorbents said:

    These awarded patents add to an already substantial patent portfolio that broadly covers the use of our biocompatible porous polymer beads to treat a variety of conditions and diseases. We continue to invest significantly in research and development, expanding the potential applications of our purification technology, and increasing our pipeline of licensable products. Our long-term goal is to maximize the value of our technology and create lasting shareholder value.

    Estimating CytoSorb's Total Addressable Market

    Since the use of EBP in SIRS/Sepsis is limited because it is controversial as mentioned above, indirect methods to either suppress or activate the immune response are the only treatment options physicians are left with.

    When physicians try to suppress the immune response employing the treatment of autoimmune diseases, Amgen's (NASDAQ:AMGN) Enbrel, AbbVie's (NYSE:ABBV) Humira, and Johnson & Johnson's (NYSE:JNJ) Remicade are the three widely used products that together generate $26 billion in worldwide revenue every year, which represents a $30+ billion market overall.

    In the absence of a specific treatment, top biotech companies including Sanofi (NYSE:SNY), Merck (NYSE:MRK), GlaxoSmithKline (NYSE:GSK), Pfizer (NYSE:PFE) and Novartis (NYSE:NVS) have developed vaccines in order to activate the immune system so that it can fight SIRS. The five top companies just mentioned together have $26 billion in vaccine revenue alone, which again is a $30+ billion revenue market overall.

    So on an average CytoSorb's TAM could be as high as $30 billion.

    Valuation and Price Target

    CTSO's Q1 2014 overall revenue was ~$1.1M, compared to Q1 2013 revenue of $371,000. Its Q1 2014 product sales from CytoSorb were $569,243, an increase of 223% over Q1 2013 product sales of $176,098. The company's Q1 2014 product gross margin was in excess of 60%.

    (click to enlarge)

    Source: Company Presentation

    If the company can generate revenue that is just 1% (yes, just 1%) of its estimated TAM, its yearly revenue will be $300 million, which represents 100x revenue compared to today's $3 million. The company has $11.2 million of cash and $1.7 million of debt on its balance sheet as of Q1 2014. Assuming that the company will eventually obtain FDA approval for CytoSorb, I expect that its global revenue (including the U.S. and Japan) from the product will reach $300 million.

    Yearly $300 million revenue could make CSTO a $1 billion company with an EV/Revenue of 3.5x (average multiple at which larger medical device companies trade), which translates into share price of $3.50 (assuming no share dilution). Although that's the long-term story, the possibility cannot be ruled out. CytoSorb is reimbursed in Germany/Austria at more than $500/cartridge. Depending on the application and devices used, revenue potential per patient is ~$1000-5000, or $3000 on an average. For yearly sales of $300 million, the company needs 100,000 yearly users, which is absolutely possible given the prevalence of cytokine storm among patients.

    For the medium-term I expect that being an early stage medical device company, CTSO's CytoSorb sales will maintain the existing growth rate of around 200% in the next two years. Currently CytoSorbents is generating most of its CytoSorb sales from direct sales initiatives in Germany and Austria and continuing German sales provide early indication for long-term adoption of the device.

    In FY14 I expect overall top line to be around $6 million, led by improved CytoSorb sales across Germany and Austria as well as additional sales realized due to increased distributor network. In FY15 I expect revenues to reach close to $12 million as a result of CTSO's direct sales initiatives with its sales force penetrating new hospitals and other care units within existing hospitals. Increased distributor sales across Europe, Asia and the Middle East will also help the company boost overall top line.

    Assuming FY15 revenue of $12 million, CTSO's FY15 enterprise value will be $240 million based on the current EV/Revenue of 20x, which translates into a share price of $0.83, almost in line with sell side estimates. The price target is achievable over the medium-term in the absence of any short interest.

    Upside Catalysts

    1. CytoSorb sales could be boosted if it is used in the treatment of patients infected with the deadly MERS (Middle East Respiratory Syndrome) coronavirus. As of May 2014, MERS cases have been reported in several countries, including Saudi Arabia, Malaysia, Jordan, Qatar, Egypt, the United Arab Emirates, Tunisia, Kuwait, Oman, Algeria, Bangladesh, the United Kingdom, and the United States, and the company has undertaken aggressive sales strategy via its direct sales team in Germany, as well as via its distributor networks in other parts of Europe, the Middle East, and Asia.

    2. CytoSorb is now being actively marketed in 18 countries around the world and CTSO is planning to continue its international expansion via independent distributors and/or strategic partners into many of the remaining 22 countries of the EU where commercialization hasn't yet started, which would provide additional catalysts to boost CTSO's sales and stock price. In the first quarter of 2014, the company raised $9.5 million for doubling the size of its internal sales force and doubling its distributor and corporate partnerships this year (see the image below). I expect the move to result in tremendous top line growth in the coming quarters of the current and next fiscal.

    (click to enlarge)

    Source: Company Presentation

    3. The company's goal is to up-list the stock to a national exchange later this year, which is expected to attract institutional investors to take position in CTSO. This will provide additional strength to the stock.

    4. CytoSorbents has a robust product pipeline based on its unique blood purification technology, protected by 32 issued U.S. patents and multiple applications pending. Its upcoming product called HemoDefend has chance to obtain regulatory approval in the near-term, which is a blood purification system that eliminates contaminants from blood. The company has been recently awarded a $203,000 Phase I SBIR contract from the National Heart, Lung and Blood Institute ("NHLBI"), a division of the National Institutes of Health ("NIH"), to further develop its HemoDefend technology for blood transfusions. In addition to HemoDefend, other products in the company's pipeline include ContrastSorb, DrugSorb, and BetaSorb.

    Bottom Line

    In the last 52-weeks CTSO has traded in the range between $0.08 and $0.35. I believe that the stock can rise anytime driven by good news and therefore recommend buying the stock at the current price.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: CTSO, long-ideas
    Jun 23 12:49 PM | Link | Comment!
  • Greatbatch: Competition And Debt To Drive The Stock Lower

    Greatbatch, Inc. (NYSE:GB) is a reputable company originally known for its pacemaker battery business. Wilson Greatbatch, co-inventor of the first successful implanted cardiac pacemaker, founded the company in 1970. He also invented a corrosion-free lithium battery to power the pacemaker he invented. A cardiac pacemaker is essentially a cardiac rhythm management ("CRM") tool that maintains the rhythm of millions of heartbeats. Subsequently Greatbatch, Inc. diversified its business in the areas of CRM, neuromodulation, vascular access, and orthopedics. After a meteoric rise last year, the shares of the company are currently hovering around $40. I believe that GB could have an immediate ~30% downside due largely to tough comps in the CRM and neuromodulation market in its Implantable Medical segment.

    Why Did the Stock Rise?

    1. Despite being a debt-laden company (over $200 million long-term debt against current market cap of $980 million), over the last eighteen months the stock price of Greatbatch more than doubled itself based on its organic growth prospects. In June last year Greatbatch management announced a strategic initiative to realign its businesses to achieve 5% organic growth by combining its two separate reportable segments, viz. Greatbatch Medical and Electrochem Solutions into a single sales & marketing and operating group. The Electrochem segment designs, manufactures, and distributes primary and rechargeable batteries, and battery packs for demanding applications in the portable medical, energy, environmental monitoring, and security markets. The company expected to generate an annual savings of $7.0 to $7.7 million, following the realignment plan and evaluating the short-term benefit from the plan it raised its adjusted EPS guidance range to $2.00 - $2.05 from the previous range of $1.90 - $2.00.

    2. The company sought to transform itself into a producer of complete medical devices for Original Equipment Manufacturers (OEMs) from being a supplier of batteries, capacitors, and components used in implantable medical devices, since almost 75% of its revenues are derived from medical devices companies.

    3. The Street expected GB to post solid revenue growth in the CRM and neuromodulation business along with a smart recovery in its lagging orthopedic business. However, it forgot to recognize how a debt-laden company like GB would fund its R&D expenses and face fierce competition from established players like Medtronic (NYSE:MDT), Johnson & Johnson (NYSE:JNJ), St. Jude Medical (NYSE:STJ) and Boston Scientific (NYSE:BSX), to name a few.

    Encouraged by Greatbatch's efforts to realign its businesses and to transform itself into a pure play medical devices company, the Street started to believe that GB is worthy of a premium valuation compared to its peers. This, coupled with an overall bullish market sentiment pushed the stock unreasonably higher.

    GB Chart

    GB data by YCharts

    Unfortunately, Greatbatch management was not as optimistic as the Street and the company insiders continued to sell their stake in the company as the stock continued to rise. In the last one year insiders net sold 200,831 shares and in the last three months they net sold 70,557 shares.

    What Happened Next?

    In the second quarter of 2013, Greatbatch posted an adjusted EPS (excluding one-time expenses) of 56 cents (40 cents on non-adjusted basis), up 30% y-o-y and 27% q-o-q, and revenue of $171.3 million, up 3% y-o-y and 15% q-o-q. In the third quarter, the company posted an adjusted EPS of 57 cents (46 cents on non-adjusted basis), up 30% y-o-y but flat q-o-q, and revenue of $167.7 million, up 5% y-o-y but down 2% q-o-q. In both the quarters, revenue growth was primarily driven by an average 6-7% growth in the company's CRM and neuromodulation business, which accounts for almost half of its revenues. Improvement in the underlying market was responsible for this revenue growth, rather than the company's efforts to drive sales.

    Orthopedic revenue remained more or less flat due to a weak economic scenario. Vascular Access sales remained soft primarily due to lower introducer sales. Electrochem business, which accounts for almost 25% of its revenues, continued to remain volatile.

    Valuation

    Let me share the good news first, Greatbatch has a consensus rating of "buy" and an average price target of $44 by sell side analysts. The stock achieved that target in January. I believe that sell side analysts upgraded the stock to "buy" based on Price to Sales multiple. In terms of P/S, GB appears cheap relative to its peers.

    GB PS Ratio (NYSE:<a href='http://seekingalpha.com/symbol/ttm' title='Tata Motors Limited'>TTM</a>) Chart

    GB PS Ratio (TTM) data by YCharts

    Now the bad news, on January 6 the executive vice president of the company Mauricio Arellano sold 24,198 shares of Greatbatch stock at an average price of $43.61, for a total value of $1,055,274.78. Following the completion of the transaction, he now directly owns 3,782 shares in the company, valued at approximately $151,280.

    Why the company EVP sold his stake at $43.61 is completely understandable. From a discounted cash flow angle, a 15% CAGR cash flow growth for the next five years followed by a 5% CAGR perpetual growth discounted back at 11% would justify an intrinsic value of roughly $44. With huge debt on GB's balance sheet and fierce competitive pressure (I will discuss competition in the following paragraphs) I believe this kind of visibility is not there in Greatbatch's business. I would be comfortable with a 10% CAGR cash flow growth for the next three years, followed by a 4% CAGR long-term growth. If I discount it back at 11%, I get $27.85 as GB's immediate target price.

    In terms of Price to FCF, GB is trading at 52x, which represents a huge premium compared to its competitors. At $27.85, it would trade at a Price/FCF of 36x, which is still a premium valuation but maybe acceptable given the size of the company.

    GB Price to Free Cash Flow (<a href='http://seekingalpha.com/symbol/ttm' title='Tata Motors Limited'>TTM</a>) Chart

    GB Price to Free Cash Flow (TTM) data by YCharts

    Competitive Landscape

    Greatbatch's CRM and neuromodulation business accounts for almost half of its revenues and Electrochem business accounts for approximately 25% of its revenues. CRM consists of three key areas:

    • Pacing systems
    • Implantable cardiac defibrillators (ICDs)
    • Automatic external defibrillators (AEDs)

    Initially the CRM products were primarily developed and marketed by a handful of global players for treating arrhythmias, specifically supraventricular arrhythmias ("SVA") and ventricular arrhythmias ("VA"). However, today a lot of companies develop these products aside from Greatbatch, such as Medtronic, St. Jude Medical, Boston Scientific, and Altera (NASDAQ:ALTR), to name a few that are listed and many others that are privately held. As a result, competition is intensifying.

    The different types of SVA are premature atrial contractions ("PAC"), supraventricular tachycardia ("SVT"), sick sinus syndrome ("SSS"), atrial fibrillation ("AFib") and atrial flutter ("AFL"). The different types of VA are premature ventricular complex ("PVC"), ventricular tachycardia ("VT") and ventricular fibrillation ("VF"). Greatbatch's broad range of CRM products is used in multiple applications that cover almost all types of SVA and VA. The company has a huge product line including catheters, leads, introducers, adapters, and delivery system products that are intended to be sold through the major OEM companies as additions to their product lines in the markets of CRM and neuromodulation. However, I feel that the company would lose significant market share going forward due to growing competition for its current products. Moreover, new product launches by major OEM companies are expected to render its existing product line partially invalid.

    Medtronic enjoys a leadership position in the $18 billion CRM market with 30% market share, which is well below its historical market share of 55% in 2008 due to growing competition. Let me illustrate the role of competition with an example. ICDs constitute a significant part of the CRM market and going forward growth in ICD sales is expected to be driven by the launch of new advanced Subcutaneous-ICDs (S-ICDs), which do not require a transvenous lead to connect ICD to the heart and are expected to replace conventional ICDs over the next couple of years. Boston Scientific has already launched the device in the United States leaving Medtronic behind and it has seen a strong traction. I believe that it's a matter of time Medtronic and St. Jude Medical will also join the S-ICD bandwagon.

    In October last year, St. Jude acquired Nanostim, the owner of the only leadless cardiac pacemaker to hit the market so far. Nanostim's leadless pacemaker just obtained a CE mark approval and started its trial for FDA approval. The deal has put St. Jude well ahead of its competitors, Medtronic and Boston Scientific, who are trying to catch up with similar products. But can Greatbatch also catch up with such innovation? How would it face this kind of competitive pressure with a monster debt on its balance sheet? How would it fund its R&D? I think these questions are needed to be answered before attaching a premium valuation to the company's stock.

    Greatbatch's Electrochem business is also reeling under competitive pressure and seeing weak environmental and military product sales due to reduced government funding on certain military and environmental projects.

    Catalysts to Drive the Stock Lower

    Based on the analysis presented above, I believe GB will see a significant drop in its stock price going ahead triggered be the following catalysts:

    • I believe that the most intense catalyst would be new product launches by competitors, because it would unnerve the Street and as a result the stock would fall.
    • Further insider selling of the company's stock could also trigger a sell-off in GB.
    • There is a strong chance that Greatbatch's fourth quarter 2013 earnings slated to be released later this month would disappoint investors and as a result the stock would correct.

    A Word of Caution

    The only risk associated with the bear thesis is that the company could be an acquisition target by a large corporation. In that case the stock may rise further.

    Conclusion

    Competition in the med-tech space is fierce and if a company fails to innovate, eventually it will be punished by investors. Everybody knows that Wilson Greatbatch was a great innovator, and I expect that his company will start innovating soon. Until that happens, the stock is a "sell" to me.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: GB, short-ideas
    Feb 07 3:35 PM | Link | Comment!
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