Know Abiomed's Ifs, Ands, and Buts

Medical device maker Abiomed (NAS: ABMD) could be your next big winner. Note that I used the word "could." When something is a sure bet, we say that there are no ifs, ands, or buts about it. That's not the case with Abiomed. Here are several ifs, ands, and buts you should know about.

Abiomed's primary product is the Impella 2.5, a micro heart pump used to temporarily help patients' blood circulation. The company has experienced great success with the Impella 2.5, but its future success hinges upon how well several newer products fare.

Two of these products, the Impella 5.0 and Impella LD, are approved for use in more than 40 countries. However, the Impella 2.5 still drives most of the company's revenue.

Abiomed launched its latest iteration, the Impella cVAD, in December 2011. The company received the European CE mark in April. While it hasn't received FDA approval yet, Abiomed expects to clear that hurdle in time for a U.S. market rollout in the latter part of fiscal 2013.

Another product announcement also came in late 2011. Symphony is a cardiac implant designed to help patients with moderate heart failure have a better quality of life. Abiomed recently conducted its first human implant, but the device is not available for sale yet in the U.S.

If the Impella cVAD and Symphony gain approval and the transition from Impella 2.5 to 5.0 goes smoothly, Abiomed's future should be bright. There are at least a couple of "ands" to consider, though.

Even if we assume Abiomed gets the regulatory approvals for its new products, there is another governmental hurdle to overcome: reimbursement. There are two primary risks for the company related to reimbursement.

First, the Centers for Medicare and Medicaid Services (CMS) could reconsider reimbursement for Abiomed's Impella devices. Lazard downgraded the company from buy to neutral in May in large part because of concerns about potential CMS action.

Second, CMS could move Impella into a new diagnosis-related group (DRG). Payments to acute-care providers are determined by these DRGs. If Impella moved to a lower-paying DRG, that could be a disincentive for hospitals and surgeons to use the devices.

Another "and" is that Abiomed must beat its competition to be successful. Thoratec (NAS: THOR) announced earlier this year that it planned to seek FDA clearance for a percutaneous heart pump that would directly compete with Impella. Thoratec's Centrimag device already competes in the same market as Impella.

But with a P/E multiple in the high double digits, Abiomed still must pull off some incredible earnings growth to justify its stock price, even if it achieves everything already mentioned. Thoratec's P/E of 24 looks pretty cheap in comparison.

Other medical device companies with strong growth prospects show lower P/E multiples as well. Edwards Lifesciences (NYS: EW) , which makes heart valves, has a P/E around 47. The P/E for Medtronic (NYS: MDT) is below 12.

Granted, different P/E levels are probably warranted because each company's product makeup and prospects vary. However, the point remains that Abiomed sports a significantly higher P/E than many other major medical device companies and needs to exhibit earnings growth to support that higher multiple.

Over the past four fiscal years for Abiomed, only one (the year ending March 2012) reflected positive earnings. To be fair, the company has made significant progress. Net income in 2009 was a negative $31.6 million. Each subsequent year saw steady improvement.

Conjunction junction
How do all of these things connect?

Abiomed certainly shows great potential. The product pipeline looks strong. While there are no guarantees, my hunch is that the company will obtain the regulatory approvals needed. I also expect the overall market for heart devices to be large enough to support multiple competitors.

It wouldn't surprise me if a larger company bought Abiomed at a premium to its current value. There are at least a couple of potential suitors with the cash to easily handle an acquisition of Abiomed. Medtronic has cash and short-term equivalents of $2.59 billion. Johnson & Johnson (NYS: JNJ) sits on a larger cash stockpile of nearly $17 billion. While J&J's product mix doesn't currently include heart pumps, Abiomed could be a fit for the company's medical devices business segment.

Abiomed probably isn't the type of stock to put all of grandma's retirement account into, but it could be a good growth play as part of a well-balanced portfolio. An investment now would pay off big time if the company is acquired down the road. No ifs, ands, or buts about it.

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Fool contributorKeith Speightsowns no shares in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of and creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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