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American Medical Systems Holdings Inc. / (AMMD – NASDAQ) / $21.76*Note to Readers: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 2Q10 Earnings Update
Prev. Ed.: July 9, 2010; Minor Changes (share price and broker material till June 23)
Brokers’ Recommendations: Positive: 55.6% (5 firms); Neutral: 44.4% (4); Negative: 0% Prev. Ed.: 7; 4; 1
Brokers’ Target Price: $25.44 (↑ $1.80 from last edition; 8 firms) Brokers’ Avg. Expected Return: 16.9%
*Note: Though dated August 20, 2010, share price and brokers’ material are as of August 5, 2010.
Note: A Flash Update was done on August 3; 2Q10 Earnings Update.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table.
Portfolio Manager Executive Summary
American Medical Systems Holdings, Inc. (AMMD) provides medical solutions to physicians treating men's and women's pelvic health conditions worldwide. It manufactures and markets surgical products to urologists, gynecologists, and urogynecologists for erectile restoration, benign prostatic hyperplasia (BPH), male urethral stricture, urinary and fecal incontinence, menorrhagia, and pelvic organ prolapse.
Of the nine firms covering the stock, five (55.6%) assigned positive ratings and four (44.4%) provided neutral ratings.
Buy or equivalent outlook (5/9 firms): Target prices range from $25.00-$30.00. These analysts with a bullish stance believe that the company has well-defined revenue and earnings growth prospects, attributable to its unique treatment for the growing number of men suffering from benign prostatic hyperplasia (BPH) and a full new product pipeline of devices to treat men’s and women’s pelvic disorders. The analysts are encouraged by American Medical System’s consistent performance in the tough economic environment. The analysts note that the company has been able to survive in the competitive environment as it has a dominant market share position in the erectile dysfunction and men’s and women’s incontinence business. Thus, these analysts remain encouraged by the expanding margins and an improved cost structure. In addition, they are pleased that the company has used its steady cash flow to pay down debt.
Neutral or equivalent outlook (4/9 firms): Target prices range from $22.00-$24.50 These analysts in general are optimistic, given debt paydown, expense controls, restructuring, international focus, and core business implantable growth. Management deserves credit for undertaking steps to control expenses, given weaker topline expectations, but core business deceleration makes multiple expansion challenging. While management's consistent operational execution and balance sheet management have been impressive, these analysts continue to believe that future leverage opportunities will be more difficult to come by in the absence of a more rapidly growing topline.
Overall Outlook: Overall, the analysts as well as management noted that the macro economic conditions, in Europe and US, are having some impact on procedures considered more elective in nature, particularly those involving capital equipment. However, the fundamentals of the business and the company’s ability to leverage resources, optimize balance sheet, and drive earnings and cash flow from operations would lead to improved performance.
August 20, 2010
Recent Events
On August 3, 2010, American Medical Systems reported its 2Q10 earnings results. Highlights are as follows:
· Revenue was $136.4 million in 2Q10, up 7.9% y/y (7.6% y/y on a constant currency basis).
· Adjusted net income was $24.5 million, or $0.31 per diluted share, in 2Q10, versus $21.6 million, or $0.29 per diluted share, in 2Q09. GAAP net income was $20.6 million, or $0.26 per diluted share, in 2Q10 versus $16.9 million, or $0.23 per diluted share, in 2Q09.
Overview
The key positive and negative arguments, as identified by analysts, are outlined below:
Key Positive Arguments / Key Negative Arguments· A history of innovation and continuing investment in research and development suggest AMMD will maintain its strong pipeline of new products with extensive patent protection.
· Given its strong fundamentals, solid balance sheet, and high cash flow, a number of analysts have a favorable outlook on the company The company has strong fundamentals, with a solid balance sheet, as well as high cash flow generation.
· American Medical Systems will benefit from the aged population of the US and Western Europe, as spending on health care and especially age-related ailments like incontinence increases. / · The company faces substantial competition from a number of companies that compete in both the device as well as pharmaceutical industries.
· It faces integration risks attributable to its numerous acquisitions.
· It faces challenges associated with the reimbursement and management of numerous distribution agreements in international markets.
· As major insurers and national health services try to control costs, AMMD could have difficulty securing reimbursement for its improved versions of existing products, which are sold at premium prices.
· The company’s lucrative female incontinence and pelvic organ prolapse businesses could face price and market share pressures from larger competitors like C.R. Bard (BCR) and Johnson & Johnson (JNJ).
Based in Minnetonka, Minnesota, American Medical Systems Holdings, Inc. (AMMD) engages in the development and delivery of medical solutions to patients and physicians. It provides various solutions, including an artificial urinary sphincter, In-Fast, SPARC, Monarc, BioArc sling systems, and Acticon Neosphincter to restore male and female urinary continence and fecal continence, and also treatments for vaginal prolapse and menorrhagia.
American Medical Systems also offers a range of solutions for erectile restoration and urethral stricture, TherMatrx Dose Optimized therapy for in-office benign prostatic hyperplasia (BPH), detrusor external sphincter dyssynergia treatment, and prostate treatments. The company distributes its products through direct sales force, independent sales representatives, and independent distributors to physician customers, including urologists, gynecologists, and urogynecologists in the United States, Canada, Australia, Brazil, Europe, Europe, and Asia. Further information on the company is available at: www.americanmedicalsystems.com.
Note: AMMD’s fiscal year coincides with the calendar year.
August 20, 2010
Revenue
American Medical Systems reported revenue of $136.4 million in 2Q10 (in line with the company’s guidance of $135 million to $139 million), up 8% y/y (up 9% in organic or constant currency basis). As per the Zacks Digest model, total revenue in 2Q10 was in line with the company’s report.
Domestic revenue increased 10% y/y to $95.5 million (excluding HerOption, which has been discontinued) and international sales were up 6.8% (up 5.9% in constant currency). While its international business was adversely affected by the weaker economic environment and austerity measures in Europe, management noted that sales grew in the double digits in Germany and Spain.
Provided below is a summary of revenue as compiled by Zacks Digest:
($ in million) / 1Q09A / 2009A / 1Q10A / 2Q10A / 3Q10E / 4Q10E / 2010E / 2011E / 2012EDigest High / $126.4 / $519.3 / $135.0 / $136.4 / $131.4↓ / $154.1↓ / $555.7↓ / $600.1↓ / $639.2↑
Digest Low / $126.4 / $519.0 / $134.9 / $136.4 / $128.5↑ / $148.8↑ / $548.8↑ / $581.5↑ / $627.2↓
Digest Average / $126.4 / $519.2 / $134.9 / $136.4 / $130.3↑ / $152.4↓ / $553.5↓ / $592.0↑ / $633.2↓
Digest YOY Growth / -2.6% / 3.5% / 9.1% / 7.9% / 5.7% / 4.4% / 6.6% / 6.9% / 342.1%
Digest Sequential Growth / 2.2% / -7.6% / 1.1% / -4.5% / 17.0%
Outlook: American Medical Systems released 3Q10 guidance and reaffirmed its FY10 outlook. For 3Q10, the company expects total revenue between $128 million and $132 million. For FY10, the company continues to expect total revenue in the range of $544 million to $560 million.
The company operates in three segments: Men's Health, BPH Therapy, and Women's Health.
Men’s Health (46% of total revenue in 2Q10)
The Men’s Health business comprises erectile restoration, male continence, and prostate treatments. The products include AMS 700 MS, an inflatable prostheses, the InhibiZone antibiotic treatment to address the risk of surgical infections, Tactile Pump and Momentary Squeeze Pump; AdVance Male Sling for the treatment of mild-to-moderate male stress urinary incontinence; InVance sling system, a less-invasive procedure for men with moderate incontinence; GreenLight HPS lasers and fibers for the treatment of obstructive benign prostatic hyperplasia; StoneLight laser and SureFlex fiber optics for the treatment of urinary stones and UroLume endoprosthesis stents.
Men’s Health sales (excluding BPH therapy) were $61.4 million in 2Q10, up 7.7% y/y. Growth in this segment was balanced between erectile dysfunction (ED) and male continence products, both of which registered high single-digit growth in 2Q10. Growth in ED sales moderated from the recent double-digit level due to the anniversary of the InhibiZone anti-infection coating, which was a catalyst in the prior four quarters. Male continence products showed improved sales in 2Q10, with management attributing the pickup to improved surgical techniques and the positive impact of company-sponsored community health lectures.
The Zacks Digest Men’s Health revenue in 2Q10 was in line with the company’s report.
Looking ahead, management expects to dedicate new resources to accelerating growth in the male continence business and expects a return to low double-digit growth within 4-6 quarters.
BPH Therapy (20% of total revenue in 2Q10)
The benign prostatic hyperplasia (BPH) therapy or Laser therapy (Greenlight) business sales were $29.2 million in 2Q10, up 3.9% y/y. Within this segment, laser therapy sales were up about 5% while TherMatrx sales declined about 3% y/y. Management was enthusiastic about the outlook of the GreenLight XPS console, which was launched on a limited basis in 2Q10 and the MoXy treatment fiber, which is scheduled to be launched later in 2H10. Management is hopeful that when released, the higher-margin MoXy disposable will more than offset the deterioration in margin on account of the Greenlight console.
The Zacks Digest BPH therapy sales in 2Q10 were in line with the company’s report.
On May 28, 2010, American Medical Systems announced the launch and immediate availability of its new GreenLight XPS (Xcelerated Performance System) for laser treatment of benign prostatic hyperplasia (BPH) or enlarged prostate. The new GreenLight XPS offers enhanced treatment efficiency with extended fiber longevity and improved coagulation capabilities over other laser therapy treatment systems.
Women’s Health (34% of total revenue in 2Q10)
The women’s healthcare business consists of AMS 800 urinary control system; Monarc, a treatment for stress incontinence; MiniArc Single-Incision Sling; Acticon neosphincter, which is used to treat severe fecal incontinence; Apogee system that is designed to repair vaginal vault prolapse; Perigee system, which targets repair of cystocele or the herniation of the bladder through the anterior wall of the vagina; InteXen, a biologic graft as an alternative to its synthetic mesh solutions; and Elevate transvaginal prolapse repair system.
The Women’s Health business (excluding the discontinued HerOption product line) increased 15.7% y/y to $44.5 million in 2Q10 with growth mostly coming from robust sales of pelvic floor repair products.
The Zacks Digest Women’s Health revenue in 2Q10 was $45.4 million versus $41.3 million in 2Q09.
Segment growth was driven by continued receptivenss of the market to the Elevate Anterior and Posterior product lines as well as pelvic floor sales, which was up over 20% y/y, in 2Q10. The company’s female incontinence products also demonstrated ongoing improvement in sales, generating growth at a high single-digit level. Within this category, MiniArc sales grew in the double digits, which was partially offset by lower sales of the previous generation Monarc and Sparc product lines.
Pipeline
As highlighted during the 1Q10 call, the primary strategic focus for the company in 2010 has been the development of products, with management balancing efforts between enhancing the company’s existing product platforms and developing novel products for new treatment areas. In addition to improving the cadence of new product introductions, resource productivity has also emerged as a key element of the company’s R&D strategy. The company has recently implemented an “innovation incubator” approach by which new technologies are evaluated on a “fast fail/succeed” basis in order to prevent the wasteful allocation of R&D resources. Under this approach, the company will make the decision to either greenlight or terminate a project much earlier in the development process, thereby avoiding the common pitfall of spending money on bad ideas. This approach has already been successfully piloted in the Women’s Health business and will be implemented across all product categories in the immediate future.
Next-generation GreenLight console and fiber: The company presented its new GreenLight XPS (Xcelerated Performance System) in June 2010. Interest in the new platform was strong with the key selling point being speed; the XPS has the capability to remove two times more tissue in the same amount of time as the old HPS (Hi-Performance System). The GreenLight platform is the market leader and has the greatest amount of supportive clinical data.
Moxy Fiber: The disposable fiber for the XPS platform was approved in June 2010 but a full launch is not expected until early 2011. The company is accumulating additional data before it executes the launch.
MiniArc Precise: The company received 510(k) clearance from the FDA for the new and improved version of MiniArc in June 2010. It started a limited rollout of this improved version of MiniArc in the US market. This device features a slimmer needle than its predecessor, and helps physicians to more precisely position the sling. A full launch is expected, in 2H10, in the US market.
AdVance XP: This longer version of the AdVance male continence sling offers better holding power and size to accommodate larger patients. The company began a limited launch in Europe at the end of 2Q10, and a full launch is planned in 3Q10. It is expected to be launched in the US in 4Q10.
AMS Conceal: The company recently obtained a supplementary PreMarket Approval (PMA) for an enhanced reservoir for its AMS-700 inflatable penile implant. Its low-profile design fits better in the abdomen, especially for patients who have undergone surgeries for prior implants. Management delayed the US launch to early 2011, from 4Q10, in order to allow its sales force to focus on the introduction of the Advance XP device.
GreenLight and Monarc: In its next step in Japan, American Medical Systems expects to receive two additional approvals (GreenLight, Monarc) expected in 1H11, followed by typical reimbursement determination in 6 to 9 months, leading to full commercialization by mid-2011. The company is planning to use a distributor in Japan, which will be overseen by a small regional management team (6-8 people).