Ev3 Sales Environment Challenges

Ev3 Inc. (EVVV) reported second-quarter revenue ahead of our estimate, and loss per share below our estimates. However, a challenging sales environment persists, related to disruptions in U.S. sales force integration belonging to the FoxHollow acquisition and inventory-build at customers. Merck (MRK - Analyst Report) cancelled its research collaboration contract, offset by higher product sales.

The company maintained its 2008 revenue and adjusted EPS outlook. We believe Ev3 will be able to slowly build momentum in the second half of 2008. We remain in-line with the management’s annual guidance, expecting the company to earn $0.04 adjusted EPS per share on $426 million in revenue. Our 2009 EPS expectation moves to $0.55 on $500 million in revenue.

The market is growing as there is an increasing demand for minimally invasive treatment of vascular diseases and disorders. Vascular disease and its pre-cursors affect over 90 million people in the United States and more than 1.0 billion people worldwide. Given the strong product offerings, Ev3 expects its neurovascular division to grow faster than the 20 percent overall expected market growth rate in 2008.

At the current price, EVVV trades at 2.9x 2008 revenues, at a 13 percent premium to comparables. Although making progress, we believe the company is appropriately valued at a 15 precent discount to the industry averages given the poor to-date execution and possible continued expected integration difficulties. Our target moves to $12.

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