Hanger Orthopedic Group: On the cutting edge
In a lethargic health sector, Hanger Orthopedic Group (NYSE: HGR) is a standout. With its innovative WalkAide—a device that helps stroke survivors and others walk—expected to advance through the repayment process within a year, sales and earnings are set to accelerate.
So far this year, shares of the Bethesda, Maryland-based company are up about 50%, compared with the health industry’s virtually flat performance. The $265-million-dollar company is the largest owner and operator of orthotic and prosthetic (O&P) patient-care centers at 621, making up about 22% of the $2.5 billion O&P patient-care market in the United States.
Hanger, founded in 1861, takes its name from James Edward Hanger, the first amputee of the Civil War. The story goes: As an 18-year-old, Hanger lost his leg in battle, went home to Virginia and whittled an artificial leg from barrel staves. His handiwork became known as the “Hanger Limb,” and he made a number of them for other Confederate amputees.
No more whittling now. O&P technologies—and the company—are on the cutting edge. Through its Innovative Neurotronics subsidiary, Hanger creates products—including the WalkAide—for those who have lost mobility because of strokes or other conditions, such as multiple sclerosis. Another subsidiary, Linkia, develops programs that manage O&P patient care for large private payors, and a third subsidiary acts as a distributor.
While Hanger’s results have been solid in the first two quarters of 2007, the shares promise much stronger growth in 2008, particularly in the second half of the year. That’s when the process to achieve government and insurance company reimbursement for WalkAide is expected to reach a positive outcome. The market then could become statistically staggering.
Indeed, Hanger officials, on the company’s second quarter conference call at the end of July, said the number of potential buyers could become almost unrealistic. Of the 500,000 stroke patients each year in the United States, 20% to 25% could benefit from a WalkAide. There also is what the company calls a legacy market of stroke survivors that numbers several hundred thousand. People with spinal injuries, brain injuries or many other conditions—including multiple sclerosis—also are candidates for a WalkAide.
Added to that are prospects for global sales. Hanger signed in July a rights agreement with Teijin Pharma Limited to market the WalkAide in Japan. Distribution partners are being sought in other countries, including Europe, Asia and the Middle East.
Hanger last year received FDA approval to sell the WalkAide and it has been on the market since May 2006. Hanger is now proceeding with clinical trials—expected to be complete at the end of this year—as part of the process of qualifying for reimbursement from insurance companies, Medicare and other government agencies.
The WalkAide addresses “foot drop,” a condition caused by weakness or paralysis of the muscles that lift the front part of the foot. This causes people to drag the toe of the shoe on the ground or slap the foot on the floor—a danger to tripping or losing balance. Users of WalkAide can walk faster, steadier and for longer distances with less fatigue. The device sends electrical signals to the peroneal nerve, which controls ankle and foot movement. With the use of sensor technology to analyze leg and foot movement, these signals activate muscles to raise a patient’s foot at the appropriate time during the gait cycle, resulting in safer steps.
Consisting of a battery-operated, single-channel electrical stimulator, two electrodes and electrode leads, the WalkAide is applied directly to a person’s leg; it is not implanted, nor do patients need to wear shoes to use it. It can be placed discretely under most clothing.
Selling for a cash discount price of $4,500—the going-rate without reimbursement—Hanger says the WalkAide is gaining traction in the marketplace. Officials expect a sales arc that reflects that of its microprocessor-controlled hydraulic knee: inroads into the marketplace, a period of attracting notoriety and then exponential growth once the reimbursement process is complete.
Advancing prosthetic technology, the microprocessor knee comes with a knee socket and leg, selling for $35,000. Common thought used to be that it was best to preserve as much of the patient’s leg as possible, often resulting in below-the-knee amputations. Now, above-knee amputations are often preferred because an artificial knee socket makes for a better fit and enhances mobility. Hanger has sold slightly more than 1,000 of these microprocessor knees and sales of the product were up almost 25% in the second quarter ended June 30.
About 40% of Hanger’s revenues come from government organizations, including Medicare, Medicaid and the Veteran’s Administration system, but reimbursement from large insurance networks also is critical. The U.S. population is aging: The growth rate of the over-65 age group is nearly triple that of the under-65 age group, and there is a direct correlation between age and the onset of diabetes and vascular disease, which is the leading cause of amputations, the company says. This population will increasingly seek O&P products, particularly with broader medical insurance coverage.
Since O&P technologies allow patients to become ambulatory more quickly, the early use of services and devices can save third-party payors a lot of money. By reducing the need for more expensive treatments later on and keeping patients more independent, the services should foster an increasingly favorable view toward reimbursement.
Although Hanger is an O&P leader, the WalkAide has direct competition from Bioness, a private company based in Valencia, Calif. Bioness is backed by Alfred Mann, who has financed many medical devices companies, including Pacesetter Inc. (now part of St. Jude), MiniMed Inc. (now part of Medtronic) and Advanced Bionics Corporation (a Boston Scientific Company). Bioness’ product contains a foot sensor—a small device placed in a patient’s shoe. Hanger points out the WalkAide, which the company indicates sells for less than Bioness’ invention, does not need to be placed in shoe—an advantage that allows the patient more freedom.
Competition aside, there are those who see the company’s reliance on government payments as a concern. Analyst Matthew Ripperger at Citigroup wrote after second quarter earnings were released that he was maintaining a “hold” rating on shares because of the company’s small size, government dependency and financial leverage. At the end of the second quarter, Hanger had long-term debt of $404 million.
For the second quarter, Hanger’s net sales were $160.4 million, up 5% from the previous year, and earnings were $0.17 per diluted share, turning around last year’s loss of $0.42 in the same period. Same-center sales were up 4.2%. For 2007, the average of five analyst estimates is for earnings of $0.61 per share, leaving shares near a P/E of 19; for 2008, analysts look for earnings of $0.72. Shares closed Monday at $11.17, pressing up against their 52-week high of $12.40.
With shares nearly double the 52-week low of $6.30, Hanger is proving it can rise above the health sector’s stupor and lead in a potentially burgeoning market. Next year at this time, it just may have lapped the field.
