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Shares of Volcano Corporation (VOLC - Analyst Report) lost 7.5% as it released a disappointing fiscal 2014 guidance along with its preliminary result for the fourth quarter of 2013 yesterday. This precision-guided therapy tools provider for the diagnosis and treatment of coronary and peripheral vascular disease is slated to release its exhaustive fourth-quarter and fiscal 2013 results in late February.

A Look at Elementary Results for Q4

For the fourth quarter, Volcano estimates revenues of about $103.3 million, 1% higher (up 6% at constant exchange rate or CER) than the year-ago revenues of $102.5 million, but in line with the current Zacks Consensus Estimate. For full year 2013, revenues are likely to amount to $393.7 million, up 3% (up 8% at CER) from the year-ago figure. This preliminary fiscal number remained marginally ahead of the Zacks Consensus Estimate and was within the company-provided guidance.

Quarterly growth was led by a solid 15% increase in disposable revenues from peripheral IVUS (Intravascular Imaging) accompanied by share gain through penetration of the peripheral market and a great start with PioneerPlus Reentry catheter. Moreover, IVUS and FFR (Fractional Flow Reserve) businesses flourished well with a 20% increase in European revenues.  

However, these improvements were offset by lower-than-expected growth in FM business in the U.S. and Japan. Further, the ongoing weakness of the yen continued to affect the company’s business in Japan. In the quarter, currency headwind impacted IVUS and Functional Measurement (FM) revenues by 25%.

Revenues in the Medical segment increased 1% (up 6% at CER) in the fourth quarter to $100.8 million, based on a robust 10% (at CER) hike in FFR single-procedure disposable business along with a 5% increase in intravascular ultrasound (IVUS) single-procedure disposables.Total consoles sales remained unchanged year over year.

FFR disposable sales grew 4% at CER in the U.S., 16% in Europe and 13% in Japan and a substantial 47% in Rest of the world. On the other hand, console placement declined 12% in the U.S. and by 14% in Japan offset by 46% increase in Europe and 2% growth in the Rest of world, compared with the year-ago quarter.

IVUS single-procedure disposables franchise revenues increased 15% in the U.S., 19% in Europe, 28% in the Rest of world and declined 7% in Japan on a year-over-year basis. The Industrial segment recorded revenues of $2.5 million in the quarter, down 2% year over year.

According to the company, the U.S. business continued to be impacted by a decline in PCI volumes. Moreover, despite growth in FFR business in Japan, the company is not happy with the overall performance in this region.

Outlook

Volcano provided an updated fiscal 2014 guidance. For 2014, Volcano declined its revenues expectation to the range of 4% to 6% on a reported basis and 6% to 8% at CER, much below the earlier guided range of 9% to 11% on a reported basis and 8% to 10% at CER.

According to Volcano, this disappointing guidance reflects moderate growth in worldwide FM market, a greater-than-anticipated decline in PCI volumes in Japan and an impact of 300 basis points from currency exchange rates versus prior expectations.

Earlier during the company’s preliminary third-quarter 2013 earnings call, Volcano anticipated a 7.5% reduction in reimbursement for all of the company’s disposable products in Japan to be effective second quarter of 2014 onwards. The Zacks Consensus Estimate for 2014 revenues was $429 million.

Our Take

Amid a challenging macro-economic scenario, Volcano posted its preliminary result for the fourth quarter of 2013 along with a dismal 2014 guidance. Reimbursement reduction in Japan and soft PCI volume continues to pose challenges for the company going forward.

Favorable industry trends should lend positive momentum to Volcano. We are also encouraged by the FFR revenues which increased across all geographic regions. While we are impressed with the company’s pipeline development program, weaker guidance remains a major downside.

The stock currently carries a Zacks Rank #2 (Buy). Other medical stocks worth considering include Cepheid (CPHD - Analyst Report), CryoLife Inc. (CRY - Snapshot Report) and AngioDynamics Inc. (ANGO - Analyst Report). While both Cepheid and CryoLife carry a Zacks Rank #1 (Strong Buy), AngioDynamics holds the same Zacks Rank as Volcano.

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