ATS Medical Profits by Late ཅ

ATS Medical, Inc. (ATSI) has the goal of becoming the #1 mechanical valve company in the world and has about 20% worldwide market share on a procedure basis. While mechanical heart valves are still growing in international markets, this product is declining in the U.S. markets in favor of the tissue valve.  We believe overseas markets will eventually adopt this trend.

Expanding their offering of complimentary products has fueled growth. And, the acquisition of 3F Therapeutics may bring ATSI into the tissue valve market, leveraging its current infrastructure, and turning profitable by the end of fiscal 2009.

The company has converted from purchased heart valve components to self-manufactured components that are expected to increase gross margin to 62% in 2008 and 64% in 2009. ATS Medical has acquiring complementary products beyond the mechanical heart valve market to help diversify the product and revenue risk.

While we like the outlook for ATSI, we remain cautious on higher required R&D expenses, marketing and selling costs that will continue to run higher than management expectations in order to support product development and product launch activities and execution risk in moving into the tissue valve market. Hence, we expected continued losses, albeit small, through 2009.

At our current estimates, ATSI trades at 1.6x expected 2009 revenues, a roughly 30% discount to the 2009 industry mean, a roughly 36% discount to the average of comparables, and 27% discount to the industry median. Despite tissue valve and other market opportunities, we believe a discount is warranted until profitability is fully attained. At roughly 2.7x 2009 revenues, a 24% discount to the industry mean and 2% premium to comparables, we maintain the current price/sales valuation. Our target price moves to $3.00. Our recommendation remains Hold.

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