After Marketing Mishap, Abiomed Still Has A Heartbeat

| About: ABIOMED, Inc. (ABMD)
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For Abiomed (NASDAQ:ABMD), maker of the world's smallest heart pump, 2012 was a mixed bag. Despite putting out some solid financial numbers and achieving record usage of its Impella heart pump device, Abiomed's stock took a beating largely due to an FDA investigation into marketing of the Impella 2.5 heart pump. In a warning letter, the FDA admonished that in an advertisement in Cath Lab Digest, in an industry presentation and on it's own website, the company had made unsupported/unapproved claims that would need to be withdrawn or else require further clinical trials for their substantiation. Abiomed received a close-out letter from the FDA this February stating that the FDA's concerns appear to have been resolved by the company.

  • Last quarter Abiomed reported 19% revenue growth as compared to the same period in 2012, which was driven by strong Impella sales.
  • The company has started rolling out Impella CP, its next generation device, which is more powerful than the Impella 2.5.
  • Gross margins for the last quarter were 78.7% vs. 80.5% in 2012. The decline was attributed to costs associated with capacity expansion initiatives and startup of Impella CP productions, so therefore it seems reasonable to assume that the margins will get better as soon as those initiatives are completed.
  • This year the company is starting a clinical trial for a new device, the Impella RP, which is a breakthrough device that provides support for patients with right-side ventricular heart failure. If approved this device would serve a unique population with an unmet medical need. Abiomed aims to get a Humanitarian Device Exemption (HDE) for the Impella RP.
  • The company provided fiscal year 2013 guidance of $155M to $157M, which represents 23% to 24% annual growth.

The new Impella CP provides about 4.0 liters of blood per minute vs. only about 2.5 liters from the previous model. According to the surgeon who was the first in the nation to use the newer device, "increasing the blood flow to four liters is a major gain for patients with stressed or weakened circulation systems." In this case, the patient's heart was assisted by the pump while he underwent an angioplasty procedure, and since the pump is inserted via a catheter through the femoral artery, the operation avoids opening the chest and allows for a very rapid recovery. The 59-year-old thought it was "unfathomable" that he was feeling as energetic as he felt only 24-hours after a major heart procedure. In another recent breakthough case assisted by the Impella CP, surgeons repaired a hole in the heart and opened five blocked vessels in a complex procedure - two feats that had never been performed together in one patient. These anecdotes and many others illustrate the immense medical benefit that this device brings to market. Investors can be assured that the device is still being used very effectively for its original indications and any fears of its withdrawal from the market should be put to rest as long as Abiomed refrains from further inappropriate marketing.

Some other bullish developments include an insider purchase by a director of 100,000 shares on 2/25/2013 and some recent bullish analyst coverage, with a median analyst price target of $20 according to Yahoo Finance's statistics. From a technical standpoint the picture is also shaping up to be bullish with current price trading above both the 50 and 200-day moving averages, having just breached the latter. It is nearing $20, a round number price which for a stock is often somewhat of a line in the sand where momentum may be dampened or may accelerate and push on to new highs. The relatively high short interest of 8.8M shares (28% of the float) as of 2/28/2013, may provide fuel to feed the bulls' fire if ABMD moves above $20 and the short sellers get motivated to cover their positions.

While growth is projected to continue to be robust for Abiomed, investors should be cautious about the intense competition from other companies that make heart pump devices. Thoratec (NASDAQ:THOR) is the market leader in terms of sales and has a new device, the HeartMate PHP, which is currently in the clinical trial stage but may eventually end up competing with the Impella devices for the same surgical procedures. And Abiomed has, for the most part, all its eggs in one basket with Impella since it makes up the bulk of the company's revenues. But according to at least one surgeon, the Impella device is "creating a new standard" for cardiac care and Thoratec's device is largely unproven. Perhaps the prudent thing to do would be to split an investment between the two stocks in order to have exposure to the heart pump sector and incur less risk in the event of a news shock that hits an individual company. I should also add that both these stocks are priced for growth and perfection, so they should be treated as actively managed investments and watched closely with one eye on price and the other on news developments.

Disclosure: I am long ABMD. 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.