Endosonics Featured in Article
The Wall Street Journal -- May 28, 1997
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Heard in California --
EndoSonics Investors, Take Heart:
Analysts See Healthier Days Ahead
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EndoSonics may finally get investors' hearts beating.
The Rancho Cordova company is the maker of a medical
device that allows doctors to look at diseased arteries
from the inside out. It's called an intravascular ultrasound,
or IVUS, and until recently it was considered too expensive
to use for many examinations.
"It was a triumph of technology, but didn't meet a
market need," says Kendrick Kam, co-manager of the
Technology Value Fund in San Jose.
But now, thanks to emerging ways to clear clogged
arteries, EndoSonics's IVUS technology is often
considered essential to certain treatments of diseased
blood vessels. The company's earnings are beginning
to come to life as a result. And so will its stock, say
three analysts who each rate EndoSonics a "strong
buy."
One of those analysts, Phillip Nalbone of Volpe,
Welty & Co. in San Francisco, says EndoSonics has
dropped $3 in the past three months, to about $10,
because "investors have really turned a cold
shoulder" to medical-device stocks with small market
capitalizations in favor of more established issues.
But they'll be back, Mr. Nalbone figures, as
companies like EndoSonics begin to move their
products and earn profits. "It will take a couple of
quarters before" the small-cap market "turns
around," he says. "But I think EndoSonics will be in
great shape," says Mr. Nalbone, who predicts that its
shares will hit $21 over the next 12 months.
Another bull, analyst Arch Smith of Piper Jaffray in
Minneapolis, pegs his 12-month target at $16.
The trick for EndoSonics is to maintain its current
momentum. Although it came later than some
investors had hoped, the company last month
reported its initial quarterly profit, four cents a
share, for this year's first quarter.
And there should be many more moneymaking
quarters ahead, the bullish analysts say. As IVUS
continues to gain acceptance among both doctors and
insurance companies, EndoSonics's sales are surging.
In the first quarter, the company's revenue climbed
12% to $6.3 million as IVUS sales jumped 74%.
What's more, EndoSonics has signed up with Johnson
& Johnson to let the medical giant sell its wares,
cutting the company's overhead while simultaneously
bulking up its marketing muscle. With most of the
development costs behind the company, much of the
burgeoning revenue growth will now fall to the
bottom line, says Mr. Kam, whose firm owns about
275,000 shares.
"Now that the company has broken into profitability,
additional sales growth will become largely profits,"
says Mr. Kam, who has accumulated about
three-fourths of his position over the past 45 days.
There are, of course, risks. For one thing, EndoSonics
doesn't have a history of profitability to reassure
investors. Furthermore, a competitive technology
could conceivably knock IVUS out of favor. And the
company is also banking on squeezing future earnings
growth out of its acquisition of Santa Rosa-based
Cardiometrics -- a transaction that hasn't yet closed.
The first breakthrough for IVUS came in tandem with
an increased use of stents -- tiny scaffoldings
implanted inside vessels that allow blood to flow. It
was widely accepted by the medical community that
an imaging catheter, such as the market-leading
IVUS, was needed to make sure that clots wouldn't
form around the stents, analysts say.
As it turns out, medical researchers are discovering
that stents have some drawbacks regarding clot
formation. But that shouldn't hurt EndoSonics,
because newer, nonstent solutions to artery problems
require ultrasound to be used even more, analysts
say.
Further promising to give EndoSonics a boost is its
agreement to buy Cardiometrics for about $60 million
in stock and cash. Cardiometrics had a loss of $2.2
million in 1996 on revenue of $14 million. The deal
brings together two technologies that are now critical
to treating cardiovascular disease, analysts say.
While EndoSonics's core IVUS product is considered
by many experts to be the best technology for
providing pictures of what's going on inside an artery,
Cardiometrics has developed a system that allows
doctors to measure the velocity of blood flow.
And just as EndoSonics has already combined IVUS
with the therapeutic balloon used in angioplasty -- a
single step that saves time and money -- the company
plans to do the same with Cardiometrics's system. The
two technologies will be used simultaneously before
and during various procedures to help open plugged
arteries.
"It makes overwhelming sense," says EndoSonics
President and Chief Executive Officer Reinhard
Warnking, who was just on a road show with analysts
and investors pitching the acquisition, whose terms
were revised last week. "This is an ideal fit."
Under the revised terms, in which EndoSonics agreed
to increase the value of its offer to $7.86 a share
from $7.58, the acquisition would drain some of the
company's cash. But it will still have plenty of
cushion left with $17.4 million in cash on hand,
analysts say. And in return, Cardiometrics
management has given up its option to walk away
from the deal (though it still requires shareholder
approval).
While the purchase will cause some mild dilution in
EndoSonics's per-share earnings during 1997, Mr.
Nalbone predicts that the cost savings resulting from
the combined companies will "significantly" add to
the bottom line in 1998 -- even before taking into
account the benefits of the two technologies being
brought together.
"This should really be a standout stock when that
happens," Mr. Nalbone says.
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EndoSonics
Nasdaq symbol: ESON
Business: Develops, makes and sells ultrasound
devices that provide images from inside of arteries
Corporate headquarters: Rancho Cordova
Latest year 1996 1995
Revenue: $24,373,000 $16,175,000
Earnings: 7,163,000 -10,472,000
Per-share earnings: -0.53 -1.01
First quarter (March 31)
Per-share earnings: 0.04 -0.09
Trailing P/E: NA Dividend yield: Nil |
