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Abiomed Inc.’s (ABMD - Analyst Report) fiscal 2013-first-quarter earnings per share (EPS) of 5 cents (excluding legal expenses and the medical device excise tax) missed the Zacks Consensus Estimate by a penny and were lower than the year-ago earnings of 8 cents.

Including the special items, the Massachussets-based company registered a loss of $1.7 million or 4 cents per share in the quarter compared with a profit of $3.1 million or 8 cents in the year-ago period.

Revenue
 
Revenues for the first quarter climbed 10% year over year to $42.7 million, in line with the Zacks Consensus Estimate. This marked the 15th straight quarter, in which Abiomed recorded year-over-year double-digit growth. The improvement was led by solid sales of the Impella heart pumps and patient utilization of the Impella device in the quarter.
 
Globally, Impella revenues rose 12% to $38.7 million in the quarter. U.S. Impella revenues grew 7% to $35.4 million. ABMD opened 27 new U.S. sites for Impella 2.5 in the quarter to end with 775 customer sites. Moreover, 66 new hospitals adopted the latest Impella CP, with 172 customer sites in the U.S.
 
Margins
 
Gross margin declined 120 basis points (bps) to 79.6% from 80.8% a year ago. The company’s gross margin is sensitive to the number of console placed for new site openings, expanded use needs and AIC upgrades. In the quarter under review, 191 Impella consoles were placed against 163 in the previous year quarter.
 
Research and Development expenses (R&D) were up 9% to $7.3 million, primarily on account of expenses related to premarket approval (PMA) submission. Selling, general and administrative expenses (SG&A) increased 33% to $28 million. The company generated operating loss of $1.3 million compared to operating income of $3.6 million in the year-ago quarter.
 
Balance Sheet
 
Abiomed had cash, cash equivalents and short-term marketable securities of $88.0 million as of Jun 30, 2013, which was roughly flat when compared with the same as of Mar 31, 2013. The company had no debt and did not repurchase shares in the quarter.

Guidance
 
ABMD reiterated it revenue guidance for fiscal 2014. Management forecasts revenues to grow 14%–17% to $180–$185 million for the year. Global Impella sales are expected to increase by 20%.

However, the company lowered its operating margin forecast to the range of nil to 5% compared with the earlier guidance of 7%–8%.  The reduction is mainly due to higher costs related to legal issues, stock-based compensation expenses, regulatory submissions and pipeline development.
 
Recent Developments

Abiomed’s Impella achieved a landmark in the quarter with the device being used to treat 15,000 patients in the U.S. Moreover, positive data from the Protect II Cost Effectiveness Study has been published in the American Health & Drug Benefits Journal. Further, the company has received U.S. Food and Drug Administration (FDA) approval of PMA Shell for Modular Submission of the Impella 2.5.

Additionally, the U.S. District Court of Massachusetts dismissed a derivative lawsuit filed in Feb 2013. Moving ahead, in the international markets, the Netherland government has cleared new reimbursement coding and payment for the Impella, which allows medical centers to receive funding for the use of the technology.

Our Take

Although we are impressed with the bottom-line beat at ABMD, higher expenses are a cause of concern. The company’s engagement in a number of legal issues is increasing expenses and resulting in net loss. This has also driven management to lower its operating margin guidance, which is a risk to the bottom line. The company must control its expenses to enhance profitability and growth.

However, the company enjoys a strong demand for its Impella products. Impella utilization continues to grow at a healthy pace, as is evident from the increasing number of patients being treated with the device.

Abiomed has a Zacks Rank #3 (Hold). Currently, other medical stocks such as Mindray Medical International (MR - Analyst Report), Cyberonics (CYBX - Analyst Report) and Teleflex (TFX - Snapshot Report) are worth considering. All these stocks carry a Zacks Rank #2 (Buy).

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