Stock of the Day
Jun 03, 1999
STOCK OF THE DAY: EndoSonics: Is it on the Road to Recovery?
by Glenn S. Curtis 6/3/99
Chances are, you or someone you know will suffer from some form of cardiovascular
disease.
Sure, improving one's diet can help prevent potentially fatal conditions such as the clogging of arteries. But as humans we are
dependent upon the development of new devices that will prevent our untimely demise.
EndoSonics (NASDAQ:ESON - news) , a maker of imaging systems and catheters to treat cardiovascular disease, provides
doctors with the necessary tools to ensure that people will live healthier, more vibrant lives. The company has carved out a
niche as a medical imaging company. This is key, because other makers of medical devices that treat cardiovascular disease,
such as Guidant (NYSE:GDT - news) and Medtronic (NYSE:MDT - news) , are much more dependent upon an angiogram (a
traditional but somewhat crude method of viewing the arteries) and the ability of the doctor to correctly place stents in a
patient's artery.
EndoSonics makes the job easier. It determines whether or not a stent is properly deployed in a patient's artery. This can mean
the difference between life and death.
Ironically, these days EndoSonics' reputation on Wall Street is sort of locked in a life and death struggle. Earlier this year, the
company voluntarily recalled its MegaSonics product, a combination imaging catheter and balloon approved in January. The
reason: Approximately 200 units did not meet "labeled performance claims." CFO Richard Fischer concedes that the product
was delayed about "three months and it cost the company about $200,000."
Although there had been no reports of patient injury traced to the product, the company did lose credibility among investors.
Moreover, the recall forced analysts to revise their estimates downward.
No surprise, the stock tanked on the news. After trading as high as $12.69, it sank as low as $4.25 in early April. Since then,
the stock has rebounded about 50% to $6.88.
One reason for the stock's turnaround: MegaSonics is back on the market and is likely to contribute from $2 to $4 million to
1999 revenue.
Another potential catalyst for EndoSonics: It recently signed a deal for European distribution of JOSONICS, a product it
jointly developed with Swedish-based JoMed. JOSONICS is a combination stent and balloon (provided by JoMed) and
imaging catheter (provided by EndoSonics) that can help doctors deploy a stent in hard to reach places.
The benefits of this product are simple. When used in conjunction with an angiogram, JOSONICS allows the doctor to know
whether the stent (a product used to widen a vessel or artery) is fully deployed. In turn this assures that the patient's artery is
opened enough so that blood may flow through unimpeded. JOSONICS will allow for better patient outcomes in difficult
procedures and less chance of restentosis (a re-occlusion, or blockage of the arterial wall).
Analysts figure that this agreement could kick in another $3 to $5 million to revenue.
Another pseudo-problem turned opportunity was the company's acquisition of Navius, a developer of angioplasty balloons and
stents that was acquired in August 1998. Wall Street had thought that Navius, which has about a $4 million revenue run rate
would get approval for their Vintage line of balloon catheters in Japan. Well it turns out the approval took longer than Wall
Street had thought. What else is new?
It finally did receive that approval and the company began introducing this product line in Japan this month. This development
will help to regain some lost investor confidence. Navius is expected to contribute about $4.5 million to the revenue line this
year, but the appreciable revenue growth will not be recognized until 2000.
Then there's EndoSonics' WaveWire product line (a product that measurers pressure in arteries), first introduced in 1998.
WaveWire helps to eliminate some of the subjectiveness usually encountered when reading an angiogram. Most investors had
thought that the product would experience a much more rapid revenue ramp. It didn't. As is the case with other medical
devices, physicians are not easily swayed into purchasing new equipment. However, WaveWire should generate around $5
million in revenue in 1999.
Despite some of the delays and minor disappointments, insiders appear convinced that the company is headed on the right
track. Insiders have purchased 7,000 shares since the beginning of the year at prices ranging from $5.13 to $9.25. Insider
activity was heavier in 1998, when execs purchased over 16,000 shares at similar prices.
EndoSonics is also in the process of repurchasing shares. To date the company has repurchased roughly 1.4 million of the
board's authorized 1.7 million shares.
And despite the recent rebound, the stock still seems appealing. The company is expected to earn $0.30 per share on revenue
of approximately $57 million for the year ending December 1999 and net $0.45 on $75 million in revenue in 2000. This means
that the stock now trades at less than 16 times next year's estimate.
From a balance sheet perspective the company appears in good shape. The company has roughly $1.27 per share in cash and
short-term investments and book value is $3.18 per diluted share.
As US Bancorp Piper Jaffray analyst Arch Smith put it, "Endosonics will have to literally show us the money, but at 1.5 times
sales, backing out cash, the stock sure is cheap especially when peer companies trade at 4 to 6 times sales."
Bottom Line:
If EndoSonics meets expectations for the next few quarters and doesn't throw any sudden surprises, it could win back investor
confidence.
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