Wall Street Transcript publishes Emerging Medical Technology Issue

In a vital review of the medical device sector for investors and industry professionals, the Emerging Medical Technology 9-page issue from The Wall Street Transcript features Emerging Medical Technology Stocks. In an in-depth (3,800 words) Analyst Interview, Ryan Rauch, Vice President and Head of the Medical Device Research Team at Adams, Harkness & Hill, Inc., examines the outlook for the sector and shares specific stock recommendations.

Rauch explains, "As an emerging growth investment bank, we try to identify underfollowed, undervalued companies that have solid management teams and cutting edge technologies that address large potential patient populations that have not been identified by Wall Street. The reason for this is as smaller medical technology companies succeed, they are usually acquired by the larger players. Today, for the first time in my six years on Wall Street, micro-cap medical device companies without real revenues and earnings are synonymous with poor quality. Investors have to be careful investing in this space, but we believe there are many incredible values that have been created by the market's overall contraction and, more specifically, the weakness as of late in the micro cap medical device space. If investors take a longer-term view, we believe there is a lot of money to be made investing in emerging growth medical device stocks."

Rauch reports, "Vital Signs, which is a leader in single use, disposable anesthesia and respiratory markets and which just entered the obstructive sleep apnea market, is trading at 15 times 2002 estimates and a 40% discount to its 25% future growth rate. Driven by new product launches, we believe the company is experiencing a top- and bottom-line acceleration that is still not reflected in the price of the stock (although the stock is up over 33% year to date). We believe the stock will continue to trade higher as we remain extremely confident about our 2Q01 revenue and EPS estimates of $43 million (up 22%) and $0.50 per share (up 38%) that will be reported on May 7."

Rauch quotes, "Integra enjoys the third largest neurosurgical franchise in the country and has a growing LifeSciences division where they have partnered with many of the leading medical device companies. Stuart Essig, President & CEO, (who used to run Goldman's medical technology banking franchise), has done a superb job acquiring smaller companies, rationalizing the distribution efforts and synergistically combining them to drive top- and bottom-line growth. We continue to look for good things out of Integra going forward. The stock currently trades at around $16 per share and we rate the company a Buy with a $20 per share CY01 year-end price target."

Rauch highlights Conceptus, "One of our favorite companies is Conceptus, which is still two years away from FDA approval for their STOP device, a unique alternative to tubal ligation, as an alternative form of long-term contraception. Conceptus is unusual because of the compelling nature of its clinical data (outstanding preliminary Phase III results were just published), the extremely large patient population the product addresses, and the fact there is really no competition. Also, Conceptus is on the cusp of revenues as they are introducing the product in Australia and will begin addressing the European market early in 2002 (with an international partner announced later this year). We rate Conceptus a Buy with a CY01 year-end price target of $19 per share."

Rauch comments on Cytyc, "Cytyc (Buy rated, $27 CY01 year-end price target) has the leading technology to aid in the diagnosis of cervical cancer and continues to exceed expectations. We believe both of these companies are enjoying solid price movements, not merely because of their individual successes, but because of an overall "flight to quality" seen throughout the market."

Rauch reports, "For medical device investors, MiniMed should be a core holding. MiniMed is building a solid platform of diverse products to manage and treat diabetes, a $4 billion market opportunity. With insulin pump penetration (Minimed's core business) of only 13% and a global push to increase awareness of the benefits of intensive disease management, the market is poised for accelerating growth. Based on the combination of strength in the core business and its strong pipeline of products in development, we continue to believe that MiniMed shares should trade at a premium to the medical device universe. However, with heavily back-end loaded 2001 estimates and a delayed market launch of the consumer-use CGMS, we remain cautious about the company's current valuation (trading at 41 times CY02 EPS estimates)."

Rauch comments on PolyMedica Corporation, "PLMD is currently under one of the fiercest short attacks that I have ever been involved with in my six years in the industry (currently there are 8.6 million shares short with only 14 million shares outstanding). They are the largest direct-to-consumer supplier of diabetic supplies to the Medicare eligible senior patient population. The stock is extremely cheap, trading at 9 times our CY02 EPS estimate of $3.10 per share, a substantial discount to its historical and long-term growth rate of 30%+. Also, we believe the company will exceed our 4Q01 revenue and EPS estimates of $85.5 million and $0.59 per share, respectively, when they report in mid-May."

Rauch highlights Endocare, "The company just preannounced better than expected first quarter revenue. Revenue came in at $2.8 million, exceeding our estimate of $2.4 million. Endocare is the leader in cryotherapy to treat localized prostate cancer. The company has also leveraged their core technology into other disease states: BPH, metastatic bone, liver and lung cancer. The company has signed various alliances that should drive revenue growth going forward, and we believe there are a handful of catalysts on the horizon that should drive the stock higher in the near term."

Rauch continues, "The last stock that we would recommend for investors with a longer-term time horizon is ZOLL Medical, a leader in the external defibrillator market. ZOLL recently preannounced disappointing second quarter top- and bottom-line results, and the stock was subsequently cut in half. ZOLL trades at a $208 million market cap with $59 million in cash, no debt, and on a $100 - $120 million run rate in sales. We remind investors that the reasons behind the shortfall were 1) lack of a Canadian license, which accounted for approximately $2 million in the quarter (the company subsequently received approval on April 20); 2) an extension in the purchasing cycle due to poor economic conditions and consumer indecision, which led to a shortfall of 200 units in the quarter, or roughly $2 million in sales; and 3) weakness in the UK market where two orders in excess of $650,000 were delayed."

To obtain a copy of this 9-page Emerging Medical Technology Issue, call (212) 952-7433 or go to www.twst.com/info/info348.htm .

Source: The Wall Street Transcript -- www.twst.com

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