I dont know this one has been posted or not. I think it is interesting.
Posted 4/17/98
Archived 4/24/98
Company Focus
Is Arterial Vascular's Heart Pure?
The maker of life-saving cardiological stents has produced
pulse-pounding returns for investors -- and a recent acquisition could
keep it healthy.
By George S. Mack
Eighteen months ago, Arterial Vascular Engineering, Inc. (AVEI) was a
relatively small company making an innovative gizmo to help
cardiologists prop up narrowing coronary arteries without invasive
surgery. Now a $2.3-billion star in the medical-products industry, that
device has propped up the firm's share price; it has gained 345% in the
past 12 months.
If you've owned shares, it's been a heart-stopping ride because the
company basically has had just one product. That apparently hasn't
been a problem so far, as the company announced stunning
third-quarter 1998 earnings on Thursday that were sharply higher than
analysts' estimates and up 445% over the same period a year ago. But
this week, the firm also announced the acquisition of $62-million World
Medical Manufacturing Corp., which makes a complementary device.
Does the purchase unblock the future for Arterial? Let's take a look after
first examining the company's main line of work.
Highlighted
Companies
3 Yrs. Vs. S&P
Arterial Vascular
Boston Scientific
Guidant
Johnson & Johnson
To start, here's some quick background that you probably don't want to
hear: Lack of exercise, a high-fat diet, smoking and aging can cause
layers of cholesterol and other fatty substances to attach to the inside
lining of the arteries that supply blood to the heart. This is a serious
disease called atherosclerosis, and it's very common throughout the
world.
Those deposits of gunk narrow the space in which blood carries oxygen
to the heart. And because the heart is a muscle that works 24 hours a
day, it needs lots of fresh oxygenated blood from the lungs. Shutoff of
that blood supply, or "ischemia," can lead to chest pain called angina
pectoris. Left untreated, lack of oxygen to the pump can result in the
death of heart tissue itself, a condition called "myocardial infarction." If
you've ever seen anyone suffer an MI, you know why it's more widely
called a heart attack.
Today, cardiologists can use Arterial's products to treat that narrowed
region of the heart in an outpatient catheter lab with a minimum of
cutting. Here's how it works:
With mild sedation, a conscious patient lies back, and a catheter
is guided from the femoral artery (located in the upper thigh) all
the way up through the aorta to the heart and into the diseased
and narrowed portion of a coronary artery.
In a procedure called "angioplasty," a balloon on the catheter is
then inflated to open up the diseased area.
Arterial's wire-mesh tubular "stent" -- a device made of
surgical-grade stainless steel -- is then guided into the same
location, expanded by a balloon and fixed or implanted in the
desired location.
The formerly narrowed artery is now propped open with the stent,
thereby allowing blood to travel freely to oxygenate the heart
muscle.
Just a few years ago, many patients who are now helped by stent
implants would have been sent to hospitals for coronary-artery bypass
surgery. Many others would have had balloon angioplasty alone without
the stent. Of those, 30% to 50% would see their arteries re-narrow three
to 12 months after treatment. Now, suitable patients can enjoy the
benefits of minimally invasive treatment that's longer-lasting and more
akin to a cure.
Details
Company Facts
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At the end of March, Arterial introduced its third-generation stent, called
the "gfx," at the American College of Cardiology's annual scientific
meeting in Atlanta. "Everybody knows the product is great. It's had
phenomenal acceptance in Europe -- grabbing and holding market
share," says Sanjiv Arora, an analyst at regional brokerage Dain
Rauscher. "It's going to do as well in the U.S.," he says.
Phenomenal Growth
Arora, who rates the company a "strong buy," cautions that the stock is
not for the weak of heart because price competition in the field is
coming. Guidant Corp. (GDT) and Boston Scientific Corp. (BSX) -- two
major players in the field -- have similar products and have announced
plans to bundle their wares to doctors at a discount.
With a target price of $54 over the next 12 to 18 months, Arora sees
Arterial earning $1.11 per share this year (FY June 1998) followed in
1999 by $1.66 per share -- a forward price-earnings multiple of about 24,
which is cheaper than its stent-making peers.
Most analysts are estimating a 1998 U.S. stent market at about $1.2 to
$1.3 billion with a worldwide estimate of $1.9 billion.
What has caused such phenomenal growth from just $700 million in
1997? Clearly, it's been the introduction of second-generation stents,
which allow cardiologists to more aggressively treat diseases that were
previously not manageable with conservative catheter-based therapies.
Being able to place these devices in lesions where the older Johnson &
Johnson (JNJ) stents would not go is the key to the market's exploding
growth. It is estimated that J&J will end up with a 10% market share this
year, whereas just two years ago in 1996, it had share greater than
90%.
Most analysts are
estimating a 1998
U.S. stent market at
about $1.2 to $1.3
billion with a
worldwide estimate
of $1.9 billion.
David A. Gruber, analyst at Vector Securities International, said he
believes another important factor in the growth of the overall market is
the increasing practice of placing more than one of the new stents in a
single patient. Second- and third-generation stents are longer and more
flexible and capable of getting into more sharply curved and smaller
vessels farther into the vascular tree.
Explains Arora, "If you have angina or a heart attack, the first person
you see is the cardiologist, who is now able to retain more patients --
many of whom used to be referred to the surgeon." One thing's certain:
You get no argument from the patient who goes home in one day versus
one week or more. Also, there's no argument from the insurance
company, which would rather pay $23,000 for a catheter-based
treatment than close to $50,000 for bypass surgery.
Speaking from a technological perspective, Vector's David Gruber says:
"We consider their new 'gfx' stent to be the best stent in the world. It's a
workhorse -- easy to deploy with good radial strength." Gruber is
somewhat of a contrarian in his assessment of the competition. He
says bundling by competitors is not expected to be a problem -- at least
in 1998.
Analyst
Information
®Investor subscribers
can check out the
consensus estimates
for all analysts
covering Arterial.
With a "buy" rating and a target price of $45 by year-end, he believes
the company will earn $1.19 per share this year and $1.90 per share in
1999. However, investors have to be vigilant because conditions change
quickly in this industry. "All this is somewhat unpredictable," explains
Gruber, "because the onetime dominant competitor (J&J) has lost
market share while the market as a whole has grown 50%."
Acquisition of New Device
Gruber calls the acquisition of World Medical Manufacturing an
"excellent" move. The company makes devices used in the treatment of
patients with aortic aneurysm -- a weakened and puffed-out wall of the
great main artery trunk that supplies the whole body with oxygenated
blood. These walls sometimes rupture, but the bitter Catch-22 is that
the surgery to correct the problem is also chancy: People sometimes
die while undergoing the procedure. Therefore, most patients with
lesions smaller than 5 centimeters in diameter must endure "watchful
waiting," explains Gruber.
World Medical's aortic-aneurysm answer is somewhat similar to
Arterial's coronary-artery solution -- it's catheter-based and thus less
invasive and expected to be safer. This acquisition begins to answer
investors' biggest criticism of Arterial: its status as a one-product
company.
Estimated to grow into a $735-million market by 2002, World Medical's
stent grafts have been used in over 1,500 patients in Europe, and
because of its success, the company has come to be highly regarded.
Product approval in the United States is expected by 2000.
Insider Trading
®Investor subscribers
can check out
Arterial's SEC filings
of corporate insiders'
purchases and sales.
Smoke Signals from Insiders
Another warning sign for investors: Beginning with the dramatic rise in
share price last summer, insiders have been selling across the board.
Insider expert Craig Columbus of Disclosure Inc. says there have been
regular rounds of insider selling throughout the year. "I don't think you
can say there's been any great market-timing component to this
selling," he said. However, Columbus contends that the volume of
insider selling thus far in 1998 -- in terms of both number of shares and
dollar value -- is some of the heaviest the company has seen.
As of Feb. 13, 1998, insiders still held a large but dwindling portion of
company stock. Former chairman Bradly Jendersee held 6.2%; chief
financial officer John Miller owned 6.1% and vice president Robert D.
Lashinski held 5.2%. Director Simon Stertzer owned 6.7%; however,
from the beginning of this year through Feb. 17, Stertzer and his family
trusts sold more than a million shares amounting to $100 million.
The Fidelity funds complex filed a document with the U.S. Securities
and Exchange Commission in March declaring ownership of nearly 12%
of the company. Other statements filed by money managers this year
include Invesco/AIM with 5.8% and Husic Capital Management with
7.3%. Institutional ownership is said to be very high -- a source of
extraordinary downside volatility on any earnings disappointment or
other bad news.
Product pricing is
probably the single
biggest risk Arterial
faces. In Europe,
stent prices fell 50%
in 1996.
The Pricing Prognosis
Product pricing is probably the single biggest risk Arterial faces. In
Europe, stent prices fell 50% in 1996 -- from about $2,000 each to
$1,000 in just a six-month period. However, there were 40 different
devices in the European market at that time. Prices will fall in the United
States, but not that fast.
There is also a patent-infringement dispute between J&J and the other
players -- Guidant being first in line. A hearing was held during the first
week in March, and though no decision has been handed down as yet,
it's clear that any adverse action against Guidant would be perceived as
negative for Arterial.
Finally, it doesn't take a rocket scientist to understand that any
company holding up a trailing price multiple of nearly 100 is a candidate
for sharp declines and resulting chest pain.
International Outlook
Arterial Vascular is now manufacturing and selling peripheral stents in
other parts of the world for non-coronary use. Those applications include
liver, kidney and pelvic artery indications. Now doing business in over 40
countries, the company has expressed hope that that success abroad
will translate into the U.S. market as smoothly as the heart stents.
The best-case situation is that Arterial, with its outstanding reputation in
the stent market, reaps the full benefit of being a pure play in the field of
catheter-based vessel repair products -- or a takeover candidate. The
heart of the matter is whether or not the company is creative enough to
stay ahead of the curve and keep on delivering healthy, pulse-pounding
numbers. |
