VNUS Medical Technologies: In the right vein
The stock market may have lost its legs, but VNUS Medical Technologies Inc. (Nasdaq: VNUS) is just getting started. With a minimally invasive technology that reroutes deoxygenated blood to the heart for a refill, the company is putting a new twist on varicose vein treatment.
What’s got VNUS charged up is its primary product line, the VNUS Closure system for varicose veins. The system, which includes the fast-selling ClosureFAST radiofrequency catheter, treats venous reflux disease — a progressive condition caused by malfunctioning vein valves that block the blood’s paths from legs to heart.
By definition, Closure closes the diseased veins, usually in outpatient procedures that require only local anesthesia, and re-channels blood to healthy veins so it can travel on to the heart. This beats vein stripping (ouch!), the standard way to treat varicose veins, which rivals strip mining as a maximally invasive practice.
VNUS claims that 25 million Americans have venous insufficiency, and that 72% of women and 42% of men in the United States will experience varicose veins by the time they hit 60. That doesn’t take into account the international market, which VNUS is starting to minimally — but resolutely — invade. VNUS also makes medical devices for other peripheral vascular diseases, including devices for use in peripheral arterial bypass and arteriovenous graft procedures.
Investors may not like surprises, but make an exception for VNUS: its surprises have been a delight. Revenues in the fourth quarter ended Dec. 31 outpaced analyst expectations, gaining 54% from the year-ago period. For 2007, revenues increased 37% to $70.9 million. For 2008, the company expects 25% organic growth, with revenues at $82 million to $86 million.
VNUS turned the profitability corner in the fourth quarter, again surprising analysts with earnings per share of $0.05, compared with a net loss per share of $0.13 in the fourth quarter of 2006. Full-year 2008 net income is expected to range from approximately $3.3 million to $4.2 million, putting earnings at $0.19 to $0.24 per share. For 2009, analysts expect earnings to virtually double to $0.43 per share.
Shares settled Friday at $17.82 each, well above the 52-week low of $9.77 and near the high at $19.49 set Feb. 25; shares are up 20% this year. The San Jose, Calif.-based company, founded in 1995, has market capitalization of $278 million.
Thomas Gunderson at Piper Jaffray says ClosureFAST is “thumping competition, legal costs are declining, and gross margin is increasing.” The Closure procedure is becoming more widely accepted by vascular surgeons and vein specialists, and the market in the United States and overseas is underpenetrated.
“Other than some minor impact from co-pays, there appears to be little exposure to the general U.S. economic malaise,” said Gunderson after fourth-quarter results were posted in early February. He carries VNUS as a “buy” with an $18 target.
It’s not easy to find a negative word about VNUS. At Roth Capital Partners, analysts say ClosureFAST is proving to be a differentiating product for VNUS since its launch in the spring of 2007. “We believe the company will continue to grab market share (estimated at >55%) and benefit from the growth being obtained in the overall endovenous varicose vein treatment market,” said Matt Dolan in a February note. Dolan lists VNUS as a “buy” with a $19 target.
And William Blair & Company analyst Ben Andrew responded to fourth-quarter results by saying: “We believe VNUS is well positioned in the rapidly growing endovenous ablation market and may eventually dominate the space through its combination of superior, in our view, technology and profitability for the physician.” Andrew has an “outperform” rating.
Veins in Spain need a gentler touch, too. International sales reached 4% to 5% of the company’s total in the fourth quarter — at least quadrupling from the same period last year. These sales represent a long-term opportunity for VNUS, said Andrew, adding that there are more than 700,000 vein-stripping procedures performed outside the United States each year — more than three times the number within the United States.
There is a litigation caution flag, but it’s not likely to slow down VNUS. The company has a pending patent infringement lawsuit against Diomed Holdings, Inc. (AMEX: DIO), Vascular Solutions, Inc. (Nasdaq: VASC) and Angio-Dynamics, Inc. (Nasdaq: ANGO). (See SmallCapInvestor.com’s spotlight on Angio-Dynamics Feb. 8.)
The trial date is set for late June. If not a win-win situation, it seems VNUS has little to lose in the litigation. If the company is successful, it seals off competition from its three largest endovenous laser ablation competitors. If not, VNUS is already showing it can throttle rivals without the help of the law. Angio-Dynamics shares are down 47% this year, Diomed down 84% and Vascular Solutions down 8%.
VNUS is coursing straight into investors’ hearts. Dam the veins and full speed ahead.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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