Sector Watch: Medical equipment stocks
Paging doctor profits: with medical equipment stocks up about 6.3% year-to-date versus a 10.9% decline for the S&P 1500, manufacturers Somanetics Corporation (Nasdaq:SMTS) and CryoLife, Inc. (NYSE:CRY) both have unusually clean bills of health in today’s market.
Somanetics Corporation manufactures and markets the INVOS System, a non-invasive monitoring device that measures the patient’s blood oxygen levels in the brain and muscles. Blood oxygen must be carefully controlled during surgeries since brain damage occurs quickly without sufficient oxygen. The INVOS device consists of a portable monitor and single-use disposable sensors. Somanetics has an installed base of over 2,000 monitors and sold more than 371,000 disposable sensors last year. The company markets its system through a direct sales force in the United States and independent distributors in Europe, Canada, the Middle East and South Africa
Surgeons and anesthesiologists use the INVOS System to take corrective action when oxygen imbalances are detected, thus improving patient outcomes and reducing care costs. Hospitals have a strong incentive to manage care costs since much of their reimbursement is based on fixed fees. By using the INVOS System to monitor patients during surgeries, hospitals can avoid unnecessary complications and lengthened hospital stays.
The INVOS System is already being used in adult and pediatric cardiac surgeries. Somanetics has also developed and begun marketing a smaller disposable sensor for use in neonatal applications. The neonatal device has already been installed in 33 U.S. hospitals and is attracting considerable attention; some 200 neonatal physicians attended a June seminar to learn about the neonatal system.
Somanetics has also received FDA clearance that expands applications for the INVOS System to monitoring any tissue, not just brain or muscle. This paves the way for additional applications for the system in neonatal and pediatric surgeries. In addition,
the company is targeting applications for its system in surgeries involving elderly and diabetic patients. Approximately 5 million surgeries are performed each year on elderly patients each year and the 24 million Americans afflicted with diabetes represent a large potential market because of their heightened risk of oxygen imbalances resulting from vascular disease.
Somanetics’ revenues rose 25% year over year during the first six months of FY 2008 to $21.4 million from $17.1 million. Net income was unchanged from the prior year six-month period at $4.1 million, or $0.28 per share, due to increased selling, general and administrative expenses. For full-year 2008, Somanetics anticipates revenues in a $46 million to $50 million range, up 20% to 30% from last year, and pre-tax income in a $15.3 million to $17.5 million range versus pre-tax income of $14.9 million last year. The company has also authorized $30 million in stock repurchases and repurchased stock valued at around $19 million so far in 2008.
Analysts think Somanetics can produce 31% growth next year and 25% average growth over the next five years. My $30 price target for Somanetics is 18% above the recent share price of $25.39.
CryoLife, Inc. is the market leader in processing and distributing implantable living tissues used in cardiac and vascular surgeries. The company uses proprietary freezing techniques to extend living tissue life beyond the very short time frames (eight hours or less) that have traditionally limited its usefulness. CryoLife participates in a $550 million annual market for heart valve replacements. Of the 102,000 heart valve replacement procedures performed last year, approximately 80,000, or 78%, involved living tissue heart valves extracted from pigs, cows and preserved human tissue.
In addition to distributing living tissue, CryoLife markets BioGlue Surgical Adhesive, an FDA- and CE-approved sealant used as an adjunct to sutures and staples for closing surgical wounds. The U.S. market for surgical adhesives is estimated at approximately $280 million. CryoLife markets BioGlue in over 70 countries.
In early 2008, the company secured FDA clearance for the CryoValve SG pulmonary human heart valve, which is used to replace diseased, damaged or malfunctioning heart valves. Product shipments commenced late in the first quarter. In addition, CryoLife is developing BioDisc for spinal disc repair, BioFoam for repairing abdominal aortic aneurysms and severe wounds, and ProPatch for rotator cuff repair.
During the first six months of FY 2008, CryoLife’s revenues increased 11% year over year to $52.7 million from $47.5 million, and net earnings jumped 158% year over year to $6.7 million, or $0.24 per share, from $2.6 million, or $0.10 per share. The new CryoValve SG pulmonary heart valve line contributed $1.6 million to first-half FY 2008 revenues while BioGlue represented $24.9 million of six-month revenues.
CryoLife expects full-year FY 2008 revenues to fall in a $102 million to $107 million range, up at least 11% from sales of $94.8 million last year. Revenue estimates don’t include anticipated Department of Defense funding of around $800,000 for BioFoam’s development. Consensus analyst estimates suggest that CryoLife will grow 54% this year and 30% annually over the longer-term. My $18 price target for CryoLife is 19% higher than Tuesday’s closing price of $15.11.
Somanetics Corporation manufactures and markets the INVOS System, a non-invasive monitoring device that measures the patient’s blood oxygen levels in the brain and muscles. Blood oxygen must be carefully controlled during surgeries since brain damage occurs quickly without sufficient oxygen. The INVOS device consists of a portable monitor and single-use disposable sensors. Somanetics has an installed base of over 2,000 monitors and sold more than 371,000 disposable sensors last year. The company markets its system through a direct sales force in the United States and independent distributors in Europe, Canada, the Middle East and South Africa
Surgeons and anesthesiologists use the INVOS System to take corrective action when oxygen imbalances are detected, thus improving patient outcomes and reducing care costs. Hospitals have a strong incentive to manage care costs since much of their reimbursement is based on fixed fees. By using the INVOS System to monitor patients during surgeries, hospitals can avoid unnecessary complications and lengthened hospital stays.
The INVOS System is already being used in adult and pediatric cardiac surgeries. Somanetics has also developed and begun marketing a smaller disposable sensor for use in neonatal applications. The neonatal device has already been installed in 33 U.S. hospitals and is attracting considerable attention; some 200 neonatal physicians attended a June seminar to learn about the neonatal system.
Somanetics has also received FDA clearance that expands applications for the INVOS System to monitoring any tissue, not just brain or muscle. This paves the way for additional applications for the system in neonatal and pediatric surgeries. In addition,
the company is targeting applications for its system in surgeries involving elderly and diabetic patients. Approximately 5 million surgeries are performed each year on elderly patients each year and the 24 million Americans afflicted with diabetes represent a large potential market because of their heightened risk of oxygen imbalances resulting from vascular disease.
Somanetics’ revenues rose 25% year over year during the first six months of FY 2008 to $21.4 million from $17.1 million. Net income was unchanged from the prior year six-month period at $4.1 million, or $0.28 per share, due to increased selling, general and administrative expenses. For full-year 2008, Somanetics anticipates revenues in a $46 million to $50 million range, up 20% to 30% from last year, and pre-tax income in a $15.3 million to $17.5 million range versus pre-tax income of $14.9 million last year. The company has also authorized $30 million in stock repurchases and repurchased stock valued at around $19 million so far in 2008.
Analysts think Somanetics can produce 31% growth next year and 25% average growth over the next five years. My $30 price target for Somanetics is 18% above the recent share price of $25.39.
CryoLife, Inc. is the market leader in processing and distributing implantable living tissues used in cardiac and vascular surgeries. The company uses proprietary freezing techniques to extend living tissue life beyond the very short time frames (eight hours or less) that have traditionally limited its usefulness. CryoLife participates in a $550 million annual market for heart valve replacements. Of the 102,000 heart valve replacement procedures performed last year, approximately 80,000, or 78%, involved living tissue heart valves extracted from pigs, cows and preserved human tissue.
In addition to distributing living tissue, CryoLife markets BioGlue Surgical Adhesive, an FDA- and CE-approved sealant used as an adjunct to sutures and staples for closing surgical wounds. The U.S. market for surgical adhesives is estimated at approximately $280 million. CryoLife markets BioGlue in over 70 countries.
In early 2008, the company secured FDA clearance for the CryoValve SG pulmonary human heart valve, which is used to replace diseased, damaged or malfunctioning heart valves. Product shipments commenced late in the first quarter. In addition, CryoLife is developing BioDisc for spinal disc repair, BioFoam for repairing abdominal aortic aneurysms and severe wounds, and ProPatch for rotator cuff repair.
During the first six months of FY 2008, CryoLife’s revenues increased 11% year over year to $52.7 million from $47.5 million, and net earnings jumped 158% year over year to $6.7 million, or $0.24 per share, from $2.6 million, or $0.10 per share. The new CryoValve SG pulmonary heart valve line contributed $1.6 million to first-half FY 2008 revenues while BioGlue represented $24.9 million of six-month revenues.
CryoLife expects full-year FY 2008 revenues to fall in a $102 million to $107 million range, up at least 11% from sales of $94.8 million last year. Revenue estimates don’t include anticipated Department of Defense funding of around $800,000 for BioFoam’s development. Consensus analyst estimates suggest that CryoLife will grow 54% this year and 30% annually over the longer-term. My $18 price target for CryoLife is 19% higher than Tuesday’s closing price of $15.11.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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