GIVN Given Imaging Ltd. - Ordinary Shares (MM)

Volcano Corporation (VOLC) reported earnings per share ("EPS") of 4 cents in the fourth quarter of fiscal 2012. The reported result missed the Zacks Consensus Estimate by 5 cents as well as the year-ago EPS of 54 cents. However, if we adjust a portion of the company's deferred tax valuation allowance from both the periods, Volcano would incur a loss of 5 cents per share in the reported quarter compared with an adjusted EPS of 14 cents in the year-ago quarter. For the full year, EPS came in at 15 cents, missing the Zacks Consensus Estimate of 19 cents and down 78.6% year over year. The fiscal results included benefits from the company's deferred tax valuation allowance.

As per the company’s declaration in the J P Morgan Healthcare conference last month, revenues for the quarter climbed 10% year over year (up 12% at constant exchange rate or CER) to $102.5 million, almost in line with the Zacks Consensus Estimate. This resulted in total revenue of $381.9 million for the fiscal 2012, up 11% year over year (up 12% at CER), in line with the Zacks Consensus Estimate and within the company’s guided range of $380–$384 million.

Revenues in the Medical segment increased 10% (12% increase at CER) during the fourth quarter to $100 million with an 11% increase in disposable revenues at CER, based on a robust 45% hike in FFR (Fractional Flow Reserve) disposable business along with growth across all the key operating regions. The Industrial segment recorded revenues of $2.5 million in the fourth quarter, up 63% year over year.

Over the past few quarters, the company has been benefiting from a growing volume of data, depicting improved patient outcomes and economic benefits from the use of functional percutaneous interventional (“PCI”) as well as the use of intravascular guidance to optimize and confirm the therapy during the procedure.

The European market recorded a decline of 13% in intravascular ultrasound (IVUS) disposable sales, with the U.S. growing 2% and Japan declining 4%. However, in spite of this disappointing performance, Volcano believes that the recent acquisitions of Sync-RX and Crux Biomedical would boost growth. Sync-RX provides an advanced imaging technology, which will be incorporated into a multi-modality platform, whereas Crux offers a novel inferior vena cava (IVC) filter and related offerings. These acquisitions remain in line with the company’s strategy to move beyond intravascular imaging to a wide variety of diagnostic and therapeutic solutions for both coronary and peripheral applications.

The company is confident about the potential of the IVUS and FM (functional measurement) markets based on some favorable trends in the industry in the form of greater clinical and economic pressure to prove the benefits of PCI procedures. By the middle of the decade, the penetration rate of integrated consoles in cath labs is expected to reach 80% or more from the current level of just over 30%. Banking on its ability to continuously upgrade technology and reduce cost, the company is confident of reaping maximum advantage from this lucrative market. Volcano expects its core IVUS and FM businesses to grow over 20% annually coupled with additional revenues from its product pipeline.

Volcano Corporation recorded a 56 basis points (bps) contraction in gross margin to 66.7% in the quarter. However, with selling, general and administrative expenses increasing 14.2% to $45.8 million and a 16.8% increase in research and development (R&D) expenses to $14.9 million, the company recorded a drop of 280 basis points in operating margin to 7.5% (excluding amortization of intangibles).

Volcano exited the fiscal with cash, cash equivalents and short-term investments of $471.5 million compared with $219.3 million at the end of fiscal 2011. Full-year operating cash flow came at $49.8 million compared with $43.6 million for last year.

Outlook

Volcano Corporation provided its outlook for fiscal 2013. It expects revenues in the range of $422.0–$428.0 million (at CER). The Zacks Consensus Estimate of $427 million remains at the upper end of the guided range. In addition, the company expects adjusted EPS in the range of 16–20 cents in 2013. The Zacks Consensus Estimate of 35 cents is way above the expected range. Moreover, gross margin is expected to remain in the range of 65%–66% and operating expenses in the band of 61%–62% of revenues.

Recommendation

Volcano Corporation has a strong portfolio, which should ensure growth over the long term. Pipeline development is also progressing. Based on its direct sales program, the company is growing rapidly in Japan to capture 50% market share in the region. Given the termination of several distribution agreements over the past few years, the company is now well placed to address 100% of the business in Japan on a direct basis. Japan continues to be an important IVUS growth opportunity for the company, despite the high penetration level of nearly 80%.

However, capital spending by hospitals has been affected by the weak economy. This has affected PCI volumes in the U.S., Europe and Japan resulting in slower growth of the IVUS disposable business in the recent past. Moreover, unfavorable currency movement continues to be a major headwind for the company. Volcano faces tough competition from Boston Scientific Corporation (BSX) for the IVUS range of products.

The stock retains a Zacks Rank #3 (Hold). Other medical device stocks worth a look are Medical Action Industries Inc. (MDCI) and Given Imaging Ltd. (GIVN). All these stocks carry a Zacks Rank #1 (Strong Buy).

 
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