I’ve now spent a little more time looking at ABMD. I’ve looked through the last 10K and listened to the last conference call.
Market and Other Relevant Information:
Their products are essentially catheter devices that assist in heart function during heart surgeries.
Most of their revenue comes from their Impella products.
90% of sale are in the US.
90% of their revenues are consumables.
Hospitals use a consumable for a surgery and the consumables are a one-time use (disposable).
Overall gross margin is over 80% and the company expects gross margin of 83-85% in FY2016.
Company is selling in the US and Europe (Germany). Approval in Japan should happen in the beginning of 2016.
Company sees the market opportunity of $2B in the US, Germany, and Japan. Last year, ABMD has sales of about $230M and they guided $290M at the top end of their range for FY2016.
In the US there are between 25,000 and 30,000 heart surgeries (of the type that their product can support) each year. A very important point is that there are many potential heart surgeries that are not performed due to the risk to the patient; some people’s hearts are not strong enough to handle surgery without extreme risk of death in the OR. ABMD’s product could make surgery possible because their device is providing the pumping action of the heart during the surgery. How big is this market? I might be very large…perhaps over 1M patients in the US (note this is a guess and it’s not an annual number).
Their annual report states that 25,000 patients have been treated with Impella. I am assuming that this a cumulative number and the product was first introduced in 2008.
ABMD is working on making use of Impella the standard of care during many heart surgeries.
Thus, it appears that the prospects for future revenue growth look very, very bright particularly since the use of the product for their main target indications just received FDA approval in 2015 and the company was unable to market the product for the main target applications.
A look at FY2016 Guidance
Management provided guidance for FY2016
Here are the input important factors to consider.
R&D: 15% of revenue
SG&A: 53% of revenue
Manufacturing capacity increase: $15-20M
Tax rate going forward: 40%
The above is all from the CFO’s mouth on the last conf call.
I think we can expect dilution of an additional 2M shares to 46M.
Based on the above, here’s what we can calculate to FY2016:
Revenue: $290 COGS: $46.4 GM: $243.6 OPEX R&D: $43.5 SG&A: $153.7 MF CapX: $20 Op Inc: $26.4 Tax: $10.6 Net Inc: $15.8 Shares: 46 mil EPS: $0.344
Now I look at the stock price of $78. I compare this to the 34 cents in earnings per share and get a P/E of 226. As much as I like the market and they margins and the growth ahead, I would have to look ahead 2-3 years to justify paying this price. I’d have to think that…
The manufacturing CapEx expenditure in FY2016 will not be recurring.
I’d have to think that top line growth will exceed current guidance by a lot.
I’d have to believe that OpEx percentages will come down in future years (operational leverage).
I know Saul bought a 5% position but I’m just not sure what he sees that I’m missing. It just doesn’t seem like a “Saul stock” because the P/E is so high. Of course, I could be wrong, but being wrong about a company that I’m not invested in is just fine.