Is Abiomed Stock A Buy?

The acquisition of external respiratory assistance device manufacturer Breethe, impressive revenue growth posted by Impella circulatory support devices in the latest quarter, and two emergency use authorizations (EUA) for Impella for the treatment of Covid-19 patients by FDA reverses a two-year downtrend for Abiomed.

Is Abiomed Stock A Buy? Abiomed [NASDAQ: ABMD] is a medical devices company that develops, manufactures, and markets cardiovascular products. 

The company develops and manufactures external and implantable circulatory support devices designed to assist and replace the pumping function of the heart, and enable the heart to rest by improving blood flow. 

The Danvers, Massachusetts-based company, established in 1981, has three additional offices, two in Germany and one in Tokyo.

From the world’s first total replacement heart to the world’s smallest heart pump (Impella), the company’s portfolio of heart recovery products and services offer healthcare professionals an array of choices across a broad clinical spectrum.

The company’s primary product, or rather family of products, is Impella, various versions of a tiny heart pump that offer blood flow support to patients.

Abiomed Impella line of products include:  Impella 2.5 catheter, Impella CP, Impella 5.0, Impella LD, Impella RP, Impella SmartAssist platform, and Impella Connect, a cloud-based technology that enables secure, cloud-based, and remote viewing of the Automated Impella Controller for physicians and hospital staffs.

In addition, the company engages in the development of Impella XR Sheath, Impella heart pump, Impella BTR, and Impella ECP pump that is designed for blood flow of greater than three liters per minute. Abiomed acquired Breethe, developer of a novel extracorporeal membrane oxygenation (ECMO) system in April this year.

Is Abiomed Stock A Buy?

Abiomed is a well-known manufacturer of cardiovascular products and circulatory support devices, including Impella heart pumps, the world’s smallest heart pump, and the Breethe cardiopulmonary system. 

It is worth mentioning here that the company may not be a household name, but if you suffer a heart attack or need a heart surgery, there’s a distinct probability that your doctor will use one of the company’s product during your treatment.

With the onset of Covid-19, all non-essential treatment was canceled as part of the effort to slow the spread of the virus and to free up medical resources to focus on coronavirus patients instead. The standard Impella user was told to hold tight and make do until Covid-19 was under control.

Abiomed was steadily growing over the years, before its health started to worsen in 2020. The coronavirus pandemic forced many patients to cancel all non-essential treatment. Non-critical cardiac care and surgeries were put off to slow the spread of the virus and free up medical resources for patients suffering from the deadly lung infection.

Patients requiring Impella devices were asked to have patience till the raging pandemic was brought a little under control, and some semblance of sanity was restored. All these factors, along with the rising competition in the market from other circulatory support devices manufacturers, also took a toll on Abiomed’s revenues.

Abiomed’s revenue dependence on Impella made it particularly vulnerable during the pandemic, sowing deep seeds of doubt in investors’ minds who started to wonder if the company’s fortune would take an even more dramatic turn for the worse in the near future.

Patient utilization of the device fell off a cliff in March as the attention shifted from treating non-critical patients to treating coronavirus patients.

With hospital doors closed for the overwhelming majority of non-Covid patients, the question foremost in everyone’s’ mind was how will the company generate revenue? Worst-case scenarios were being imagined which explains the massive 40% slide in stock price in a single month of March.

However, over the past 10 months, scientists have gained a far better understanding of the Covid-19 transmission, and with better knowledge, and promising vaccines just around the corner, economies have started to reopen, and doomsday predictions for the company seem to have now become a thing of the past.

Impella’s worldwide revenue in the latest quarter was up 29% to $199.7 million.  Impella’s revenue in the U.S. came up to $163.2 million, a sequential increase of 29% compared to the revenue of $126.2 million during Q1 fiscal year 2021. This bodes well for the company as it shows that growth and momentum has now started to move in the right direction.

The incessant downward pressure on the share price has been lifted to a larger extent also by the company’s recent acquisition of Breethe. This Maryland-based health startup manufactures external respiratory assistance devices that assist patients whose lungs can no longer provide them with sufficient oxygenation.

The device eliminates the need for oxygen tanks as it takes circulatory blood from the patient, removes carbon dioxide from it, adds oxygen and then sends the oxygenated blood back to the patient.

The company stated that the acquisition of the novel extracorporeal membrane oxygenation (ECMO) system would complement and expand its product portfolio to more comprehensively serve the needs of patients in need of oxygenation because of cardiogenic shock or respiratory failure due to conditions such as acute respiratory distress syndrome, H1N1, SARS and Covid-19, among others. 

It is being described as a masterstroke by the company because it means Abiomed now has a revenue-generating Covid-19 related product that’s obviously in hot demand.

Also, a research report published by Allied Market Research reveals that the global Congestive Heart Failure (CHF) Treatment Devices market is expected to register a CAGR of 5.5% from 2016 to 2022.

Factors bolstering the demand for such devices include technological advancements in CHF treatment devices, a lifestyle leading to growing cases of heart diseases and emphasis on early intervention to prevent heart failures. And companies like Abiomed possess the ability to take advantage of the precipitously increasing demand for heart devices.

Abiomed reported $1.36 earnings per share (EPS) for the quarter, topping consensus estimates of $0.87. The medical equipment provider had a revenue of $209.80 million for the quarter, a year over year increase of 2.3% compared to Q2 fiscal year 2020 despite the negative impact of Covid-19.

With Breethe well positioned to compensate for the lost revenue from Impella, and the latter bouncing back with the easing of Covid restrictions, Abiomed is busy scripting a serious comeback story.

Will Abiomed Stock Fall?

Despite Impella’s revenue gaining momentum and a strong show by the Breethe business line, there are still a few concerns that could drive up investors’ anxiety.

First, Abiomed has been consistently losing steam for some time when it comes to its revenue and earnings’ growth.  The latest quarterly report, where both revenue and earnings topped expectations, rekindles hope of recovery, though there are still apprehensions about the company’s ability to return to consistent expansion.

Second, the company’s gross margins have been retreating over the last few years, while its R&D expenditures continue to move north.

Both of these factors are direct results of intensifying competition in the market. Abiomed sees Abbott Laboratories [ABT] and Medtronic [MDT] as its closest competitors, and the manufacturer of cardiovascular products knows well that the competition is only going to get more ferocious in the near future.

However, fierce competition is not the sole factor driving up Abiomed’s growing R&D costs. Acute shortage of clinical trial participants is another major reason for its ballooning R&D budget.

Given the fact that the company’s products can only be tested on patients suffering from a heart attack, the company often fails to elicit response from enough volunteers to test its products.

The reality, however, is that the patients are not going to get well on their own. It means the company is poised to clock impressive growth once the restrictions are completely lifted and hospitals fully throw open their doors for patients who have put off procedures because of the pandemic.

Are Abiomed Competitors A Threat?

Companies in the sub-industry of “health care equipment” are considered alternatives and competitors to Abiomed, including Abbott Laboratories [ABT], Medtronic [MDT], Intuitive Surgical [ISRG], and Edwards Life sciences [EW], among others.

Medtronic is one of the world’s largest medical devices company. The American Irish-domiciled company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group and Diabetes Group. The global healthcare solutions company operates in approximately 160 countries and its products treat over 70 different health conditions.

Medtronic, like Abiomed, has witnessed its earnings and revenue weighed down by the coronavirus pandemic. However, as the economy reopens and doctors start to perform more procedures, Medtronic’s revenue and earnings have started to recover. 

The company performed well in its latest quarter with EPS of $1.02 against the consensus estimates of $0.80. The medical devices company earned $7.65 billion during the quarter, topping consensus estimates of $7.05 billion.

Historically, Medtronic’s diversification and global reach give it a level of stability you would typically associate with buy-and-forget stock type of investment, a fact corroborated by a 10% profit margin in each of the past 10 years.

Despite an unforeseen challenge posed this year by the pandemic, there’s little doubt about the company’s ability to overcome them.

The company offers a dividend yield of 2.3% and has raised its dividend payouts for 43 years in a row, which attests to its resilience and stability, despite challenging circumstances.

Also, Medtronic generates much higher revenue and earnings than Abiomed. Moreover, Medtronic’s lower price-to-earnings ratio, in comparison to Abiomed, indicates that it is currently the more affordable of the two stocks.

Abbott Laboratories is another of Abiomed’s major competitors. The globally diversified American multinational medical devices and healthcare company manufactures and sells a broad line of medical devices, pharmaceuticals, nutritional, diagnostics, and vascular products.

Abbott Laboratories has higher revenue and earnings than Abiomed. With a market cap of around $190 billion, Abbott Laboratories [ABT] occupies a place of pride amongst the big players in the healthcare segment.

The company, a known name in diagnostic systems, medical devices and pharmaceuticals, is, however, currently basking in the glory of its coronavirus-related products. During its third quarter ending September 30, Abbott reported earnings and revenue, both of which beat analysts’ expectations.

The healthcare product maker reported earnings per share of $0.98 on revenue of $8.85 billion, topping consensus estimates of EPS of $0.9 on revenue of $8.5 billion.

Big pharma companies like Abbott Laboratories are strongly positioned to keep performing well, thanks to its Covid-19 (and other) efforts. This fact is amply reflected in analysts’ optimism about the company as they expect Abbott to earn $1.35 a share on $9.96 billion in sales in the fourth quarter.

Earnings are forecast to zoom ahead more than 40%, the biggest jump in at least seven years. Sales are expected to grow 20%, the biggest jump since the fourth quarter of 2017.

Intuitive Surgical [NASDAQ: ISRG] has been an exception amongst healthcare equipment companies as its stock has been performing really well despite the pandemic. The company, for the past five years, has been growing at a compound annual growth rate (CAGR) of 14.87%. The prime contributor to the company’s roaring success has been its da Vinci surgical system. 

Approved by the Food and Drug Administration in 2000, it allows surgeons to perform delicate and complex surgical procedures with precision and accuracy by providing surgeons 3D high-definition view of the surgical area.

And despite the hefty price tag (each costs around $4.6 million) Intuitive said that, in the past three years, the number of hospitals using five or more da Vinci systems at a single location has grown by more than 400%.

A report by Allied Market Research expects the robotic surgery market to be around $15 billion by 2027, and the leadership position of the da Vinci system puts it in a unique position to capitalize on this huge market prospects. However, irrespective of its first-mover status, it is facing increasing competition from Medtronic, which has been investing heavily in robotic surgery as well.

Is Abiomed Stock a Buy: The Bottom Line

Abiomed has been among the better performing S&P 500 healthcare companies in 2020. Although, the company had a rough 2019, its performance, despite the pandemic, has been rather promising in 2020. Abiomed’s Impella products are the only non-surgical heart pumps to get approval from the U.S. Food and Drug Administration (FDA).

More importantly, its Impella RP has secured an emergency use authorization (EUA) from the FDA for treating patients suffering from Covid-related heart failure or pulmonary embolism (blood clots in the lungs).

Demand on the rise

Patients in need of heart surgery cannot put it off indefinitely. Also, the hospitals cannot be expected to exclusively treat Covid patients. At some point of time, hospitals will have to throw open their doors for treating other ailments as well. This, in turn, means the demand for Abiomed’s products are going to rise again.

Even during the pandemic, the company’s Impella device sales are experiencing good growth because some coronavirus patients tend to develop heart complications as well.

The company’s banner product, Impella, has been witnessing growing usage in acute myocardial infarction (AMI). Moreover, there’s also a gradual increase in the number of angioplasty procedures using Impella as patients are showing a marked preference for them over open-heart surgery during the pandemic because the former requires a much shorter hospital stay.

Angioplasty is a procedure used to open clogged arteries to improve blood flow to your heart. Also, it is estimated that nearly half of high-risk angioplasty patients require urgent intervention, which means the patients cannot be told to wait out the pandemic.

Focus on growth and innovations

In April, Abiomed announced the acquisition of Breethe in a deal that stapled a revenue-generating product to the company’s portfolio. Breethe develops a portable extracorporeal membrane oxygenation (ECMO) that removes carbon dioxide and adds oxygen to a patient’s blood.

The company is focused on transitioning to “Abiomed 2.0” in fiscal 2021, where it plans to launch safer, more effective and technologically-advanced products. It recently won approval for digital transfer of data from an Impella Connect console to HIPAA-compliant central servers where doctors can derive more meaningful insights related to health of their patients through the help of artificial intelligence.

In June, the company won FDA’s approval for first-in-human study of one of the Impella heart pumps in high-risk percutaneous coronary intervention patients. The same month, the FDA approved another version of the pump for emergency use on patients experiencing heart complications owing to Covid infection.

Dependence on Impella device could be a concern

Abiomed’s Impella devices are tiny heart pumps that offer blood flow support to patients for short periods of time such as during heart surgery. The company, to a large extent, is dependent upon its Impella line of devices for the major portion of its revenue.

The company derived most of its $798.07 million in trailing 12-month revenue from its Impella devices, and these tiny heart pumps are expected to make up the lion’s share of its top line for the foreseeable future.

However, dependence on a single product line could be considered as both, a curse and a blessing. The device designed for urgent needs of the cardiovascular market has high inelasticity of demand which shields it from the vagaries of the market. On the other hand, over-reliance on a single device makes it more vulnerable as a competing product can easily threaten its lifeline. 

To sum it all up, despite the present challenges being faced by the company and its clinical trial problems adding to its woes, Abiomed possesses the potential to reward its shareholders in the long run.

Abiomed boasts a robust balance sheet, with $600 million in cash and a negligible debt load of just over $12.12 million. Its financial strength could provide it the leeway to invest more in R&D to develop products across the entire care chain of heart recovery and circulatory support to beat competition. 

All in all, the company looks a promising buy for healthcare investors who do not mind taking on a bit of risk for higher rewards in the future. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.