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We recently downgraded health care technologies company Abiomed Inc. (ABMD - Analyst Report) from ‘Outperform’ to ‘Neutral’.

Since our ‘Outperform’ recommendation two months back, Abiomed’s shares are hovering around its 52-week high level combined with a five-year high P/B ratio of 7.7. Given its stretched valuation, we believe upward potential of the stock is limited at present and hence revert to a ‘Neutral’ recommendation. However, the stock carries a short-term Zacks #2 Rank (Buy rating).

Abiomed’s fourth quarter fiscal 2012 adjusted (excluding one-time items except stock-based compensation expenses) earnings per share of 7 cents beat the Zacks Consensus Estimate of 6 cents per share. Revenues soared 31% year over year to $37.3 million (a quarterly record), beating the Zacks Consensus Estimate of $35 million.

The company is enjoying strong demand for its Impella products. The company opened 26 new U.S. Impella 2.5 sites in the fourth quarter, to end with a total of 631 customer sites. Moreover, the company intends to foray into the Japanese market with its Impella products in 2013. Based on these tailwinds, the company expects global Impella sales to rise by roughly 30% in fiscal 2013. 

Abiomed recently announced CE Mark approval for its new “Impella cVAD” in the European Union, where it is expected to become commercially available in early fiscal 2013. In June 2012, the company also received the Canadian approval to launch cVAD. These achievements will further boost the company’s presence in the international medical devices market. We note that Impella cVAD is not commercially available in the U.S. The company expects to receive 510(k) approval for the product by the second half of fiscal 2013.

However, due to the new technology of the Impella products (especially cVAD), we remain concerned about its adoption by cardiovascular surgeons and interventional cardiologists who hold a significant position in selecting medical devices. Moreover, clinicians have to be trained to use the product efficiently to avoid misuse. Failure to do so can result in unsatisfactory outcomes and may eventually lead to a drop in demand.

In addition, Abiomed faces the risk of third-party reimbursement for its devices. The company’s products are reimbursed by the Center for Medicare and Medicaid (CMS) and commercial payers. Any reimbursement cuts in the future will negatively impact sales of Abiomed’s products and subsequently the company’s top line.

While we are upbeat about the prospects of Impella, we remain cautious about the intensely competitive environment. Abiomed faces competition from organizations developing permanent heart assist products including Thoratec Corporation (THOR - Analyst Report) Jarvik Heart, World Heart Corporation and MicroMed Technology.
 

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