ABMD : a look at the market and the numbers

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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.

Revenue: $285-295M
GM%: 83-85%
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…

  1. The manufacturing CapEx expenditure in FY2016 will not be recurring.

  2. I’d have to think that top line growth will exceed current guidance by a lot.

  3. 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.

Chris

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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.

Do you have a citation to support this? My impression is that the primary obstacle is more the anesthesia risk.

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Do you have a citation to support this?

I heard this on the last conference call (for the quarter ending 3/31/15). Have a listen and see if you hear it how I heard it.

Chris

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When it comes to tickers, I much prefer EW (in which I have a full investment) because it satisfies my craving for fundamentals.

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I’ll let a doc weigh in since it is an impression rather than an area of my personal professional competence.

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Strelna,
What more can you tell us about EW?

Here’s what I found after a few minutes of reading.
They have three products lines, one of which is growing incredibly rapidly. The other two appear to be languishing.

If management guidance is correct, they will grow earnings about 25% this year on revenue growth of 10% or so. I’m using the high end of guidance.

What can you tell us about the addressable market and competition for their Transcatheter segment (high growth)? Does EW have a competitive advantage?

How about the other two segments that are languishing?

I’m hoping you can help answer some of these questions before digging further.

Thanks,
AJ

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Hi Chris, I think you are looking at the quarterly earnings (as that is about what they made last quarter). We should look at the TTM. The most recent Non-GAAP EPS (TTM) is $1.08, so the P/E is in the 70’s. I guess we will see what the next earnings look like.

Just my thoughts… Brian

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Strelna,

I took a bit closer look at EW.
I found the current TTM EPS as $4.11.
Last year’s EPS was $3.29.
Growth rate is 24.9%.
Current PE is 37.02.

1YRPEG is 1.49.

On the surface, it is slightly rich for its growth rate. However, as I mentioned earlier, the Transcatheter segment is growing like a weed. 25% internationally and 62% domestically (YoY)if I recall from the press release.

It looks like Transcath accounts for roughly 1/3 of their sales.

I’m still interested in the questions I wrote in my prior post about the market for EW products and competition. I’m also interested in future prospects for the other two product lines. What can we expect to happen to these? They appear to be a drag on growth.

Thanks,
A.J.

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I’ll let a doc weigh in since it is an impression rather than an area of my personal professional competence.

Maybe you could listen to the conference call as suggested by Gaucho. I would be very interested in your opinion.

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I think you are looking at the quarterly earnings (as that is about what they made last quarter). We should look at the TTM. The most recent Non-GAAP EPS (TTM) is $1.08, so the P/E is in the 70’s. I guess we will see what the next earnings look like.

Gary,

No, I was taking management’s estimate of FY16 sales and applying all their guidance to project FY16 EPS. I could be wrong on taxes which may make EPS higher…but even if I double the FY16 EPS, it’s only 68 cents.

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Point being, that someone from the company can make an offhand remark which sounds reasonable in the context, but one needs professional competence in the field to recognize whether the remark is justified, reasonable, what percentage, etc. I have both personal experience and a fair amount of anecdotal experience to suggest that a very frequent issue with patients which are old or in frail health are high risk for any kind of surgery which involves full anesthesia. The “heart isn’t strong enough” sounds a bit like a prior century observation … it is hard for me to imagine that a heart which was managing to keep a person going through daily living, albeit not generously, would find a little itty-bitty supplemental pump to be a meaningful assist in the midst of the impact of surgery and, especially, anesthesia. Could be, there is a class of patients who qualify, but without some other input I am hardly going to assume that it is 50% of the patients not currently considered operable … more like 0.5%.

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Based on the above, here’s what we can calculate to FY2016:
Revenue: $290
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 their margins and the growth ahead, I would have to look ahead 2-3 years to justify paying this price. 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.

Hi Chris, I just can’t resist replying. ABMD is a hard stock to get a grip on because you have to search out stuff on the SEC filings, and I may have it all wrong, but it’s just a 5% position. (I don’t have to be right on my 5% positions as long as I’m right on my big positions. If it falls 20% that’s a 1% loss which I can shrug off).

I think you are not taking into account stock-based compensation. For the year ending March, they had $28.765 million in GAAP net before taxes and $16.520 in SBC. Adding them together and dividing by the year end number of shares and I get roughly $1.06 for the year untaxed. Even allowing 40% taxes, which sounds high for me, they would have had 64 cents LAST year in TAXED income, which is about double what you figured for THIS coming year. This year, with much larger sales, hopefully they’d rise to close to a dollar fully taxed. Still very expensive. (By the way, taking the midpoint of the company’s revenue projections is bound to be way underestimating. No CFO projects estimates that he doesn’t expect to beat handily. It’s the estimates game.)

You are right. It doesn’t fit my criteria, but I’m willing to ride it a little while and see what happens. At worst, it will be a lesson for me, but it’s already gone up $12 or so from when I bought it, so a 20% drop wouldn’t really be much of a loss. I guess I’m banking on the expanded FDA indications and the dropping of the DOJ suit as game changing developments.

I think you think that I never make mistakes so you must be missing something. I make mistakes regularly, and this may be one. I just try to keep my overall portfolio moving up. I’m willing to give this a little chance, but I may be wrong. They may announce weak earnings and the price may drop $15. We’ll see.
Best.
Saul

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A.J. - I cannot answer your questions because, while I run my screens and tick off my due diligence list and eagerly read the news, my focus is completely on a company’s figures, past and anticipated. I suppose I am a quant. It is slightly reprehensible but my habit of investing does not allow me the time for a fuller understanding of my holdings.

Also, I do not use PEG because it seems to me only suitable for small and microcaps in which I rarely invest. Naturally that does not prevent an open-mouthed amazement and appreciation of Saul’s results - even if I would not sleep so easy o’nights with quite such a concentration of technology (> 50%?) in a such a very small basket (8 holdings comprise ~ 90%?) of stocks!

I admire people with intestinal fortitude!

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A couple things regarding the potential market for Impella. I’ll leave the talk about financials to those who are more knowledgeable than me. Just trying to contribute something to the board, which has provided me much more.

When a patient comes in with an ongoing or impending heart attack, the options for treatment are generally medical (lower blood pressure, nitroglycerin, blood thinners), interventional (percutaneous coronary intervention [PCI]), or surgical (coronary bypass). The interventional techniques are relatively new for cardiologists (last 20-30 years) but certainly growing to the point that cardiothoracic surgery is a significantly shrinking field. Why? Because when someone comes in with a heart attack, the primary doctor calls a cardiologist to evaluate them. The cardiologists are the ones who perform PCI but they do not do surgery. PCI is reimbursed well. Take a look at the highest paid physicians and see who tops the list.

Currently ABMD markets for their FDA approved indication, which is PCI in high risk patients (basically moderate to severe heart failure). These are patients who are “not a candidate” for CABG. Well you know who clears patients with heart problems for surgery? Yes, the cardiologists. Severe heart failure patients are at risk of not making it through general anesthesia, which is not always needed for PCI. But you could see here how, as long as outcomes are equal, one might stretch the “high risk” category to do less open heart surgery and more stenting. In the end, if a doctor says a patient could have his or her chest cut open and the heart stopped for surgery, or have a couple 1/2 inch incisions in the thighs, what do you think most patients choose?

To add to the question you also need to consider what other applications the device might have. A quick search on PubMed would show what doctors are thinking about, and you’ll see that the device is used for all sorts of “off-label” uses. Note that this is also true of many devices, not just the Impella. It just depends on what sticks and what doesn’t, what can get reimbursed, improved outcomes, etc. My guess (totally without research) is that the device will eventually be used for support during acute cardiogenic shock (heart failure). ABMD may need to make a smaller version to improve safety but acute heart failure really is a difficult thing to treat right now. You have to give fluids to make sure the heart is stretched enough to pump effectively, but not so much that it’s stretched too much. Decrease blood pressure enough to make it easy to pump, but not so much that the brain/kidneys don’t get enough oxygen. Give too much fluid and it builds up in the lungs. You can place an intra-aortic balloon pump but those are kind of old fashioned, difficult to place and properly position, difficult to control. Most patients aren’t healthy enough to survive extracorporeal bypass.

The Impella could potentially support left ventricular function until the underlying problem can be overcome. Currently it’s basically doing that for heart failure due to a heart attack, you could potentially use it for heart failure due to toxic or metabolic disturbances (in combination with dialysis), infections, trauma (hemorrhage), etc. Or it could be used to stabilize someone in a small community hospital for transport to a place that can perform surgery.

I don’t know what the numbers are in terms of a total potential market, but it’s much higher than ABMD executives can say right now because they are bound by FDA approval. There may be bumps in the road but I think if executed properly the device could continue to grow.

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IRDoc,

I totally agree with indication creep - this is overwhelming the norm in medicine (cough, tpa, cough)…

That said, the only time I can see the Impella used is intra-op and short term post op after cardiac surgery - after valve replacements, CABG, stenting, etc. One potential growth is that the number of cardiac arrests going directly to cath lab should increase, and with it, the number of impella’s used. I suspect few cardiac arrest patients are getting emergent caths (as is the current recommendation by AHA), but it likely only represents a small segment of market growth for the impella anyway.

As for the other indications IRDoc mentioned…
The problem in sepsis is third spacing and venodilation, so I do not see this working for infections causing hypotension that are not named endocarditis or pericardial tamponade.

As for toxic or metabolic disturbances, the answer is ecmo or dialysis. At that point, its up to an intensivist to decide, I think the critical care world will lean towards ECMO eventually. An intensivist that chooses a cardiac procedure such as an Impella over emergent dialysis or ECMO for a massive overdose (or toxic / metabolic disturbance) should have their head checked.

In trauma, there is REBOA, TXA, massive transfusion protocols, and the IR suite / OR. I can not see a hypotensive/crashing trauma patient getting impella placed while awaiting to “fix” the causative problem! Any trauma surgeon that opts for an Impella over the OR should also have their head checked.

Thus, the Impella device is likely limited by the overall number of patients getting cardiac surgery. With that said, I doubt ABMD has expanded to all the cardiac surgical centers that could potentially use their product and that they have a long way to . As IRDoc pointed out, that number will likely grow over time. I just do not see it expanding beyond acute cardiac disease, though that does not mean they can not exponentially grow with their current indications.

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Wow IRDoc and Fuma,

It’s really great to have knowledgeable people chiming in with thoughts from the field, even if they don’t completely agree. Thanks for your contributions, which help to make this board the place it is!

Saul

For Knowledgebase for this board
please go to Post #9939.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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