STJ ST. Jude Medical, Inc.

Recently, we reiterated our Neutral recommendation on Volcano Corporation (VOLC) with a target price of $30.00.

Volcano Corporation reported an EPS of 9 cents in the second quarter of fiscal 2011, way above the Zacks Consensus Estimate of 3 cents but a penny lower than the previous fiscal. Revenues increased 14.3% year over year to reach $84 million and were in line with the Zacks Consensus Estimate.

While revenues from Consoles declined 9% to $9.8 million, strong growth has been witnessed in IVUS, up 22% to $50 million and FM single-procedure disposables, up 54% to $16.6 million. The earthquake in Japan, earlier this year, had a negative impact of $2.5 million on revenues, offset by a foreign exchange benefit of $3.9 million.

Industrial segment recorded a 59% decline in revenues to $2.7 million due to the severe downturn in the telecom industry. However, a modest turnaround in this business is expected in the second half of this year.

Volcano Corporation has a strong portfolio, which should generate growth in the long term. Full market launch of the Vibe vascular imaging balloon catheter in Europe that commenced in 2010 has been progressing well. Although it is not yet approved in the US, the company is working hard to get approval (expected in 2012).

Volcano Corporation is in the process of rolling out Vibe in Japan and has recently secured reimbursement for the product. According to the company, reimbursement in Japan for Vibe is higher than IVUS.

The company is also progressing with respect to its pipeline and the first implant for FL.IVUS took place recently in Germany. Moreover, a limited market release of Impact Microcatheters in Europe is expected to begin by the end of the year.

Volcano continues to expand its presence in Japan through direct sales programs or introduction of new products. The company has witnessed an overall improvement in the macro environment in Japan with procedure activities gradually rebounding to the pre-earthquake levels.

With termination of distribution agreements with Goodman (July 2009) and Fukuda Denshi (effective since December 1, 2010), Volcano Corporation was able to address 95% of its business in Japan on a direct basis.

Besides, the company is in the process of completing the transition of its distribution agreement in Japan with Johnson & Johnson’s (JNJ) Cordis (representing 5% of total volume). With this transition, Volcano would address 100% of its business in Japan on a direct basis. We believe the transition to a direct sales force will boost top- and bottom-line growth in the long run as Japan is the largest IVUS market in the world.

However, the company operates in a highly competitive environment with the presence of players such as Boston Scientific Corporation (BSX) and St. Jude Medical (STJ). Moreover, for fiscal 2011, the company expects operating expenses to increase reflecting a rise in anticipated legal costs resulting from a new litigation filed by St Jude Medical during the second quarter and the unfavorable impact of foreign exchange.

 
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