STJ ST. Jude Medical, Inc.

Recently, we reaffirmed our Neutral recommendation on Volcano Corporation (VOLC) with a target price of $32.00.

Volcano Corporation reported an EPS of 2 cents in the first quarter of fiscal 2011 compared to the year-ago quarter’s net loss of 8 cents per share. The earnings were better than the Zacks Consensus Estimate of a loss of 2 cents per share.

Revenues increased 22% year-over-year to reach $81 million during the quarter with strong growth in Intravascular Ultrasound (IVUS) and Functional Measurement (FM) single-procedure disposables. Revenues were higher than the Zacks Consensus Estimate of $80 million.

The company also announced a supply agreement with ev3, a Covidien (COV) company to use its IVUS technology in the latter’s plaque excisionsystems.

Volcano has a strong portfolio, which should generate growth for the company in the long term. Full market launch of the Vibe vascular imaging balloon catheter in Europe that commenced in 2010 has been progressing well.

Volcano has received encouraging feedback from clinicians regarding its efficacy and ease of use. Although it is not yet approved in the US, the company is working hard to get the product approved (expected in 2012).

During the quarter, the company recorded a 40% growth in IVUS disposable revenue in Japan, representing a full quarter after the Fukuda Denshi transition. Japan is the largest IVUS market in the world and we believe the transition to a direct sales force will boost top- and bottom-line growth in the long run.

olcano Corporation also experienced some product developments in Japan in the recent past. The company received clearance to market both, the Eagle Eye Platinum digital IVUS catheter and the PrimeWire Prestige FFR guide wire in Japan. Full market release of both products is expected in the second quarter. Moreover, the company is excited about the potential of Vibe in Japan

The recent natural disaster in Japan negatively impacted revenues by $1 million during the quarter. Volcano Corporation expects an additional impact of $4 million in the next two quarters with normalcy expected to set in by the fourth.

As a result, the company lowered its revenue and EPS guidance for 2011 by $5 million to $342–$347 million and by $0.03 to $0.19−$0.21, respectively. Although the company expects business to get back to its normal levels by the fourth quarter, any hiccup in the recovery process might lead the company to miss its guidance.

Moreover, Volcano Corporation faces intense competition for both its IVUS range of products and its FM products from players such as Boston Scientific (BSX) and St Jude Medical (STJ).

 
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