Seeking Alpha: Philips Looks To Long-Time Laggard Volcano To Perk Up Its Healthcare Biz

It took a long time, but Volcano (NASDAQ:VOLC) finally found its buyer. Now the question is whether Philips (NYSE:PHG) can generate the growth and profits from Volcano's platform of technologies in intravascular imaging and therapeutics that Volcano's management never could. Investing more resources into image-guided therapeutics is not a bad call on the surface, but Philips must prove that it has moved past its legacy of below-average (if not outright poor) deal integration and must prove that the potential synergies between these two cath lab companies can win out over competitive threats from the likes of Boston Scientific (NYSE:BSX) and St. Jude Medical (NYSE:STJ).

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Philips Looks To Long-Time Laggard Volcano To Perk Up Its Healthcare Biz

Seeking Alpha: Can A More Realistic Volcano Perform Better?

Following Volcano (VOLC) has been a frustrating exercise for many years. Despite strong clinical data supporting the company's core IVUS and FFR platforms, the company has struggled to live up to its own growth expectations and management has stubbornly thrown good money after bad with M&A and R&D spending on projects with unclear (at best) paths to management's growth expectations.

Maybe this is the turn. Missing top-line expectations for the sixth time in seven quarters isn't exactly good news, and neither is the present state of stent procedure volume. On the other hand, abandoning the OCT, FL-ICE, FL-IVUS boosts the probability that management is now looking at its real business prospects in a more rational way and may become more disciplined with its spending priorities. Unfortunately, while I do not ignore the possibility that Volcano could still attract a bid, I don't see a lot of internal value in these shares.

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Can A More Realistic Volcano Perform Better?

MassDevice: The Bulls May Have Run A Little Too Far With St. Jude Medical

Combine a bull market with increasing optimism that major med-tech markets are stabilizing, and it's not so hard to see why stocks like St. Jude Medical (NYSE:STJ) have seen solid runs and enjoy pretty favorable valuations today. In the case of St. Jude, while I have generally been on the side arguing that the Street was not giving the company enough credit for its long-term prospects, the move into the mid-$40s for the stock argues that the Street has in fact come up to speed.

With that in mind, St. Jude is going to need to start outperforming to drive a significantly higher multiple and share price.

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http://www.massdevice.com/blogs/massdevice/bulls-may-have-run-little-too-far-with-st-jude-medical

Seeking Alpha: St. Jude's Rally Has Taken Away The Easy Money

It was relatively easy to like St. Jude Medical (STJ) in the low-to-mid $30s, but a sustained rally since late November has taken away a lot of this company's relative discount. Now St. Jude faces many of the same problems as most other large med-tech companies - stressed and slow-growing major markets and potentially abundant competition in emerging higher-growth markets. Although these shares are not especially expensive, investors should temper their expectations at these prices.

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St. Jude's Rally Has Taken Away The Easy Money

Seeking Alpha: A Greater Focus On Outcomes Could Be Explosive For Volcano

It's difficult to call a stock with an EV/EBITDA ratio in the 20's and more than a dozen active sell-side analysts "undiscovered", but I'm surprised at the relative level of chatter about Volcano (VOLC) in comparison to names like Intuitive Surgical (ISRG), MAKO Surgical (MAKO), or Abiomed (ABMD). While Volcano arguably suffers from the fact that its addressed markets have been around quite a bit longer, I believe growth-oriented investors ought to take another look at some of the possibilities of Volcano finding a new level of market acceptance and growth in the coming years.

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A Greater Focus On Outcomes Could Be Explosive For Volcano

Seeking Alpha: Stagnant Performance, FDA Issues Thump St. Jude

There's a gray area between not overreacting to one or two quarters of underwhelming performance and willingly ignoring emerging bad news about a company. That seems particularly relevant now with St. Jude Medical (STJ), as the company has once again left investors wanting more after earnings. While I am inclined to attribute the sluggish financial performance to a broad weaker-than-expected recovery in med-tech, the greater FDA scrutiny from the company's lead issues is a more troubling development for the next year or so.

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Stagnant Performance, FDA Issues Thump St. Jude

Seeking Alpha: Med-Tech Due For More M&A

Buyouts have long been a staple feature of the med-tech landscape. While giants like Johnson & Johnson (JNJ), Medtronic (MDT), and Abbott Labs (ABT) are often knocked (and often unfairly) for their inability to innovate, they do excel at marketing. That creates a pretty steady conveyor belt where smaller, innovative companies create new devices that move the state of the art forward and large companies gobble them up to goose their own growth and leverage their existing production and sales infrastructures.

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Med-Tech Due For More M&A

Seeking Alpha: A Med-tech Shopping List For Japanese Companies

Outside of pharmaceuticals and "big iron" applications like imaging, Japanese companies haven't made much impression on the U.S. healthcare market. That may be changing, though. As Japan faces its own aging population and companies look to diversify from traditional industries, healthcare is becoming an increasingly popular sector in corporate Japan.

It's still too soon to call it a real trend, but Japanese companies have recently shown an inclination towards accelerating their diversification by buying established U.S. med-tech names. Asahi Kasei recently announced a $2 billion-plus deal for ZOLL Medical (ZOLL), while a few months earlier Fujifilm stepped up to buy SonoSite (SONO). Though not exactly comparable, Terumo (a Japanese healthcare and device company) acquired CaridianBCT for over $2 billion early in 2011 to strengthen its position in the global transfusion equipment market.

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A Med-Tech Shopping List For Japanese Companies

Seeking Alpha: Volcano Still Searching For The Sweet Spot

It's not often that you find a medical technology story where almost everybody agrees that product/technology in question improves outcomes and reduces costs over the long term, but few people want to use it anyway. That is, and has always been, the story with Volcano (VOLC) as this mid-cap imaging story tries to drive broader adoption of intravascular ultrasound (IVUS) and fractional flow reserve (FFR) products in the U.S. and Europe.

Q4 Results Show Ongoing Share Growth
The immediate takeaway from the Volcano fourth quarter is that it was a disappointment; management previously announced that sales were going to come in short of expectations and I believe this marked the first such disappointment in its public history. Looking closer, though, there were actually a lot of positives to take from the quarter.

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Volcano Still Searching For The Sweet Spot

Seeking Alpha: For St. Jude Bulls, It's A Question Of Faith

In the realm of healthcare stocks too cheap to ignore, there are a lot of different stories to suit individual investor tastes.

Covidien (COV) is the under-appreciated and overlooked story, Stryker (SYK) is the quality story, and Medtronic (MDT) is the "yeah, growth has slowed, but not that much" story. What about St. Jude Medical (STJ), then? St. Jude is the rebound and pipeline story, a story that arguably deliver better growth than the Street presently expects.

A So-So End To The Year, As Expected
St. Jude's growth in fourth quarter came in on the lower range with the likes of Johnson & Johnson (JNJ) as opposed to stronger stories like Covidien and Stryker. Reported sales rose 4%, but organic growth was more on the order of 1% for the December quarter.


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For St. Jude Bulls, It's A Question Of Faith

Investopedia: The Perpetual Boston Scientific Turnaround Story

I've stopped trying to count just how long Boston Scientific (NYSE:BSX) has been a "turnaround" story in the med-tech space, because frankly it feels like waiting for Godot. This company paid a huge amount of money to enter two markets right before major slowdowns and no combination of acquisitions, restructurings or buzzwords has managed to deliver any sort of exciting consistent free cash flow growth. 

A Second Quarter Worse Than Mediocre  
This has not been a great second quarter across the medical device space, as economic issues have kept patients away from their doctors and hospitals have pushed back hard on price inflation. Even against a backdrop of challenging volumes at rivals like Johnson & Johnson (NYSE:JNJ), Bard (NYSE:BCR), Stryker (NYSE:SYK) and St. Jude (NYSE:STJ), Boston Scientific did not stand out positively. 


Read the full piece below:
http://stocks.investopedia.com/stock-analysis/2011/The-Perpetual-Boston-Scientific-Turnaround-Story-BSX-JNJ-MDT-STJ-ABT-COV-VOLC0804.aspx

Investopedia: Can St. Jude Live Up To Newfound Expectations?

Investors run hot and cold on stocks all the time, but in all my time following St. Jude Medical (NYSE:STJ) I don't remember too many stretches where St. Jude was a favored name in the device space. That has all changed, though, and relatively quickly, as the company has managed to really sell Wall Street on the prospects for its deep pipeline. (For more on medical companies, check out Investing In Medical Equipment Companies.)

The company clearly has Wall Street's attention. Now the question is whether it can deliver on those promises. St. Jude does indeed have a deep pipeline and a good chance of being one of the most dynamic med-tech companies in the next few years (at least in terms of product launches). With so little underlying growth in many of its core markets, though, the company definitely has some work cut out for itself.  

Q1 Results: Not As Good As They Seem  
St. Jude reported $1.38 billion in first quarter sales, and that was spot-on with analyst expectations. The company's stated growth rate of 9% looks pretty good (as does the currency-neutral rate of 7.7%), but the organic growth picture isn't so impressive. Organic growth for the first quarter was more on the order of 2%, or a bit more than 4% if the some year-ago CRM business is netted out. Now, low-single-digit organic growth is not that out of line with the rest of the medical device sector, but "matching the market" is not the expectations out there for this name. 

To read the full piece, please follow this link:
http://stocks.investopedia.com/stock-analysis/2011/Can-St.-Jude-Live-Up-To-Newfound-Expectations-STJ-MDT-BSX-EW-VOLC-ABT-SYK0425.aspx

Hottest Device Stocks Of 2010

2010 was a tough year for medical device stocks. Investors faced up to the reality that a popular myth - that people do not meaningfully change their health care consumption because of the economy - is just not true. Investors also had to digest the impact of a suddenly much more industry-unfriendly FDA, which is imposing new (and in many cases unspecified) standards regarding safety and the trade-off with efficacy.


All in all, the medical device industry lost about 5% in 2010, just barely missing the bottom 10 list of underperformers. In fact, in broad terms, banks (which includes many subcategories), biotechnology, solar and for-profit education were the only ones separating medical devices from the bottom.

That said, it was not all doom and gloom in the sector. In fact, many medical device companies not only outperformed the industry but did quite well in absolute terms. Here are some of the notable performers of the year. (For a quick refresher, check out A Checklist Of Successful Medical Technology Investment.)

Growth Is Growth
NxStage Medical (Nasdaq:NXTM) does not get all that much attention, but this company has brought to reality what many companies have tried (and failed) to develop for at least two decades - an at-home hemodialysis system that actually works in both a technical and practical sense. NxStage is not profitable yet, but the company is posting double-digit growth (annualizing over $100 million). On top of that, sell-side analyst interest is picking up, and institutional investors are becoming a bigger player in the stock. All of that has fueled a better than 200% jump in the stock over the last year.  

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http://stocks.investopedia.com/stock-analysis/2010/Dec---Hottest-Device-Stocks-Of-2010-NXTM-DXCM-EW-VOLC-HRC-VAR-BSX1220.aspx

NuVasive Stumbles, Investors Get A Concussion

All growth investors really want is a perfect record of unbroken, break-out growth. If companies do not deliver, the consequences are severe. NuVasive (Nasdaq:NUVA) had established itself over the past couple of years as one of the prime medical device growth stocks, at least in the orthopedics space, but now that record means very little and investors are facing a painful fall on Friday. 

The Quarter That Was
NuVasive reported 27% revenue growth in third quarter, delivering about $120 million in sales. Unfortunately, the company hosted a pretty upbeat analyst meeting a couple of weeks before the end of the quarter and it seems probable that the enthusiasm from that meeting had investors expecting more than bottom-of-the-range revenue performance.

Gross margin did slip a bit on an annual and sequential basis, but the company's reported operating income did jump 57% and the operating margin jumped by 150 basis points.

Unfortunately, the company's guidance was very problematic. Management took fourth quarter revenue guidance down by about 10% and to a level that suggests minimal sequential growth. More troubling still, it is starting to look like the company is going to be hard-pressed to meet the old level of growth expectations for 2011, and those analyst revisions could be pretty harsh. (For more, see 7-Hot Medical Device Ideas.)

To read the full story, please go to:
http://stocks.investopedia.com/stock-analysis/2010/NuVasive-Stumbles-Investors-Get-A-Concussion-NUVA-SYK-MDT-EW-MASI-VOLC-IART1102.aspx

Boston Scientific Has A Long Road Back

Turnarounds are hard enough in the best of times, and when a company's core markets are in shaky condition it becomes all the more difficult. Even if med-tech player Boston Scientific (NYSE:BSX) is really into improving its operations, there are some significant headwinds pushing against it. Still, with a patient long-term approach to improving operations it may be possible for this company to unlock some value for its long-suffering shareholder base. 

The Quarter That Was
Boston Scientific delivered a mixed third quarter announcement - the company did well vis-a-vis analyst estimates (especially on the bottom line), but the fundamental performance was not all that strong. Consolidated revenue fell 5%, as the company balanced double-digit declines in stent revenue and high single-digit declines in cardiac rhythm management with modest growth in endosurgery and neuromodulation.

Turning to profitability, the company did manage to improve adjusted gross margin by more than a full point, and adjusted earnings grew a little bit over last year's level. 


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http://stocks.investopedia.com/stock-analysis/2010/Boston-Scientific-Has-A-Long-Road-Back-BSX-MDT-STJ-ABT-VOLC-ZMH-SYK1021.aspx

St. Jude Sews Up A Lucrative Niche

St. Jude Medical (NYSE:STJ) does not often do flashy deals, but the company has a solid track record of buying just-under-the-radar companies with strong positions in lucrative niche markets. St. Jude rolled out that formula again on Monday, announcing a cash and stock deal for AGA Medical (Nasdaq:AGAM) - a small-cap med-tech company with a great franchise in niche applications of cardiac structural repair and vascular abnormalities. 

The Deal
To bring AGA Medical into the fold, St. Jude is paying about $1.1 billion in a mix of cash and stock, and assuming over $200 million in AGA Medical debt. All told, St. Jude is facing a $1.3 billion price tag, while AGA Medical shareholders get about $20.80 per share divided equally between cash and stock. In order to neutralize the impact of these shares, St. Jude's board also authorized a share repurchase program of up to $600 million. (For more, see  The Wacky World Of Mergers And Acquisitions.)

Please click the link below for the full story:
http://stocks.investopedia.com/stock-analysis/2010/St.-Jude-Sews-Up-A-Lucrative-Niche-STJ-AGAM-MDT-EW-VOLC-COV1019.aspx

Is GE About To Stir Up The Medical Arena?

With the worst of the credit crunch over and plenty of cheap candidates, General Electric (NYSE:GE) may be about to become more active with acquisitions. With some oblique comments from a senior executive, it would seem that this American conglomerate is once again about to leverage its considerable capital resources. Investors may want to consider the sorts of companies that GE may be looking at as potential targets.

Sticking to the Knitting
Although GE is a frequently-mentioned name in the guessing game of healthcare acquisitions, the company is actually rather focused and consistent with its healthcare business. GE is a significant presence in the imaging, diagnostics, life sciences and healthcare IT spaces. By and large, the company steers away from interventional products, so the likelihood that GE would buy a company like Stryker (NYSE:SYK) is quite low.

Cancer Therapy
Although GE is not active in interventional medicine, Varian (NYSE:VAR) might be a logical way for the company to make that transition. An argument could be made that Varian's radiation therapy systems would be a natural extension of GE's diagnostic imaging products. Along similar lines, TomoTherapy (Nasdaq:TOMO) or Accuray (Nasdaq:ARAY) could get some consideration, though TOMO may be too small and Accuray too novel.


The link below will take you to the full article:
http://stocks.investopedia.com/stock-analysis/2010/Is-GE-About-To-Stir-Up-The-Medical-Arena-GE-VAR-VOLC-MASI-BRKR-TMO-ISRG1019.aspx

Johnson & Johnson and Boston Scientific - Could They? Should They?

I'm sure I'm not the only person thinking about whether or not Johnson & Johnson (NYSE: JNJ) and Boston Scientific (NYSE: BSX) might end up together. I think this subject was raised recently by a long-term correspondent of mine and it's been rattling around in my brain since.

JNJ has definitely been busy of late - acquiring Micrus and publicly entering into a mating dance with vaccine biotech Crucell (Nasdaq: CRXL). Likewise, BSX has been active as well - buying Asthmatx and reportedly talking about selling its neurostim and neurovascular businesses.

So maybe it's time for these two long-time rivals to get together. It would probably cost less than $12B for JNJ ... certainly not an impossible deal to contemplate. 

Why would JNJ do this? Well, it is pretty clear from the stagnant growth at JNJ that management needs to figure out some additional ways to grow and growth-through-acquisition is a tried-and-true (if qualitatively poor) way of growing. For BSX, it would be tantamount to a mercy killing for this long-underperforming company.

Beyond that, though, JNJ did once want to get into the CRM business (by buying Guidant) until BSX pushed the bidding up to a ridiculous level - a decision that has effectively crushed BSX ever since. Beyond that beyond, there are some other compelling reasons BSX could appeal to JNJ. It would potentially reinvigorate JNJ's drug-eluting stent business, even though both JNJ and BSX are losing the race against Abbott Labs (NYSE: ABT). I hope I don't sound too cynical, though, when I suggest that combining two has-beens seldom leads to a new leader...

Stents aside, BSX does have some solid business units that would not only round out JNJ's offerings, but could represent fix-er-up turnaround opportunities (the BSX IVUS business, which has been all but ceded to Volcano (Nasdaq: VOLC) comes to mind).

I don't believe that JNJ would the only suitor for BSX, were it to become clear that BSX was amenable to a sale. Covidien (NYSE: COV) could be a consideration and maybe Stryker (NYSE: SYK) would see that as a way of achieving some major diversification (although I highly, *highly* doubt that one).

Likewise, BSX would not be the only large target that JNJ could consider. Bard (NYSE: BCR), Becton Dickinson (NYSE: BDX), and CareFusion (NYSE: CFN) could all make sense (though BDX is quite a bit larger), as well as any number of fast-growing (and expensive) smaller companies like Nuvasive (Nasdaq: NUVA) or Thoratec (Nasdaq: THOR). Hell, even ZOLL (Nasdaq: ZOLL) could make sense and JNJ's salesforce could do amazing things with the LifeVest product.

Then again, maybe JNJ buys up a few more biotechs or takes a run at a big pharmaceutical company like Genzyme (Nasdaq: GENZ) or Lilly (NYSE: LLY). But then again, here is the precise problem playing the "who might buy who" game - once you get started, it's kinda hard to stop!

All in all, the safest bet to make in M&A speculation is that nothing happens. I think a JNJ-BSX deal *could* happen, and it probably would not be the worst deal that JNJ has made. But I'm still going to bet on the side that says JNJ won't be buying BSX any time soon.


Disclosure - I own shares of JNJ

Interesting Rumors Around Boston Scientific

It sounds like there are some interesting rumors bubbling up around Boston Scientific (NYSE: BSX) these days. With the stock in the toilet and little momentum in the business (but plenty of debt!) I am sure management is fielding quite a few "do something!" calls from our lovely and ever-so-patient friends in Hedge Fund-Land.

The first rumor is that BSX is about to sell its neurostim business to Stryker (NYSE: SYK). I saw this rumor in Bloomberg this morning, and talked with some friends in the industry. It all seems to make a fair bit of sense to us.

First, BSX has bigger fish to fry in its stent and CRM businesses, and has not really been doing all that great against Medtronic (NYSE: MDT) or St. Jude (NYSE: STJ) in that (neurostim) market. Like so many other niche businesses at BSX, this one too has suffered from neglect and under-investment.

For Stryker, this would offer another business platform and access to a market that has decent underlying growth. Now, I think the "synergy" that Bloomberg mentioned between Stryker's spine business and neurostim is a little silly (yes, back pain is a big indication for neurostim, but they do not go together quite so tightly), but the deal still makes sense. I happen to think that Stryker wants to add some more businesses to its portfolio, and most of the exciting ideas like Intuitive Surgical (Nasdaq: ISRG) or Nuvasive (Nasdaq: NUVA) are rather pricey.In buying BSX's neurostim business, Stryker could be getting an underappreciated fixer-upper that delivers good growth with just a little care and reinvestment.

Beyond the neurostim business, BSX is also apparently looking to jettison the neurovascular business. BSX has a very good franchise in treatments for cerebral aneurysms like embolization coils and they have been a major player for a number of years. This is interesting timing given that Johnson & Johnson (NYSE: JNJ) recently announced a deal for Micrus Endovascular (Nasdaq: MEND) - one of BSX's up-and-coming rivals.

What is BSX telegraphing here? Is the company saying, in effect, that only BSX's superior marketing abilities and long-term customer relationships were keeping them afloat and that MEND's products in the hands of JNJ's salesforce is too overwhelming to fight?

That is probably hyperbole, but it is an interesting development nonetheless. So who might buy this business? I would think Medtronic or St. Jude might give it a courtesy sniff, but I would expect the likes of Cook or Bard (NYSE: BCR) to be the more logical candidates right now. But who knows? Covidien (NYSE: COV) is out there buying every other damn thing, so maybe they will take a look too.

All in all, these are interesting developments at BSX. Does this mean the company is really circling the wagons and choosing to focus on major product categories like stents and CRM? Or is this just a process of cleaning out a few under-performing (but still marketable) businesses where a recovery is unlikely?

I am not sure yet, but I would keep a close eye too on whether they jettison the IVUS business. A sales of that business to a motivated buyer (like, say, GE (NYSE: GE) or Siemens (NYSE: SI)) would be bad news for Volcano (Nasdaq: VOLC). Volcano has great technology (the best, actually) and products, but they have clearly also benefited from BSX's unwillingness to support and develop the business any further. A sale to a new rival, then, would be a clear threat.

At the end of it all, though, I still would not be a buyer of BSX. But then, I am sort of accustomed to not liking BSX, so I do not pretend to be unbiased.

Disclosure - I own shares of JNJ

Volcano - A Stock I Would Love To Love

Another one of my former coverage names reported last week - cardiovascular imaging specialist Volcano (Nasdaq: VOLC). Even though I love almost everything about this name, you will see in the end that it is not a recommendation of mine.

So, how was the quarter?

Revenue jumped 36% to almost $74M, and that is a fine start. IVUS console revenue was up 16% to $11M, IVUS catheter revenue was up 29% to $41M, and FM revenue was up 49% to $11M. Also, the Axsun telecom business did pretty well too - "other" revenue climbed 93% to $4.3M

I do not have too much to complain about here, and my long-time readers will appreciate how rare that is. The company definitely had some juice in the gross margin line (due to higher catheter sales, as well as the sales transition in Japan), and operating results were quite good.

On top of that, it is a pretty attractive overall picture. The company continues to build its momentum against Boston Scientific (NYSE: BSX) in the IVUS space, and BSX is basically just managing that business like a declining cash cow; I really do not see any meaningful drive to innovate or reinvigorate its platform to compete with VOLC. On the FM side, doctors continue to adopt the procedure and although a lawsuit from St. Jude (NYSE: STJ) is a threat and a distraction, this is pretty typical for the medical technology industry (especially in the early sorting-out years of a sector).

Longer term, there is a lot to like here. The company is building a dominant IVUS business (somewhere north of 70% market share for new placements) and gaining share in the rapidly-growing FM market as well. Longer term, technologies like OCT (where St. Jude is also competing), forward-looking IVUS, image-guided therapy, and now intracardiac echo (which the company is gaining through another acquisition) should help boost that growth rate and make VOLC a significant player in invasive monitoring and imaging.

Now the bucket of cold water - I cannot get around the valuation. Even plugging in 20% revenue growth for five years and a FCF margin that moves up to 15% in 2015, I cannot get a price target much beyond $20.50.

Still, the stock is trading at an EV/revenue multiple of 4 and these stocks routinely trade in the 4x-8x range. Moreover, I would be amazed if this company does not get a takeout bid sometime in the next year or two (look at Abbott Labs (NYSE: ABT), Siemens (NYSE: SI), Philips (NYSE: PHG), GE (NYSE: GE), and maybe Medtronic (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), or Covidien (NYSE: COV)). So, investors who can stomach the risk could certainly take the position that institutional investors pretty much ignore cash flow analysis for med-tech stocks (which is true) and simply play the valuation ratio trade.

I do not have any problem with that ... but I do not think I will be joining them. I love Volcano as a company and it was a pleasure to follow them as an analyst. But since John Dahldorf (their CFO and a good guy) cannot write me a check and compensate me if the stock goes down, I think I will pass on it for now.

Disclosure - I own shares of JNJ