Synovis Life Technologies: A cure for your portfolio?
Investing in companies that make medical devices can be risky, to say the least. In a highly competitive industry in which the prototypical business model involves years of painstaking research and development (not to mention the time-consuming process of obtaining FDA approval) before translating into revenues, winners have to overcome competitive threats, pricing pressures, and quality issues.
According to industry experts at Standard & Poor’s, when evaluating a medical device company's competitive position, it's crucial to examine its track record of product innovation and its market share over time. With that criteria in mind, if any stock in the medical-device group qualifies as a strong holding in the Street's eyes, it's Synovis Life Technologies Inc. (Nasdaq: SYNO). The St. Paul, Minn.-based medical device company shows exceptional annual growth in research and development, and it has a dominant position in its two core market segments: devices used in surgical and interventional treatment of diseases.
The surgical end of the business creates tools for surgeons and hospitals, devices for microsurgery, and implantable biomaterial products (which aid tissue repair and regeneration). The interventional end develops and manufactures components used in minimally invasive devices for cardiac, vascular, neuro, and other surgeries—selling primarily to other medical device companies that use them in the manufacture of their own products.
At first blush, Synovis appears overmatched compared with its peers: healthcare powerhouses Johnson & Johnson, Inc. (NYSE: JNJ), Boston Scientific Corp. (NYSE: BSX) and Medtronic, Inc. (NYSE: MDT). But thanks to a pipeline of products that have propelled sales, the company continues to post impressive profits in the face of formidable competition.
Synovis reported third-quarter results on August 29 that topped expectations. The company had strong sales in both sides of the business, resulting in surgical revenue surging 35% to $9.9 million, from $7.3 million, and a 45% revenue boost in the interventional business, which rose to $8.3 million, up from $5.7 million a year earlier. Third-quarter revenue was up 39% to $18.2 million, from $13.1 million a year earlier (analysts were expecting revenue of $16.7 million).
Said president and chief executive officer Richard Kramp: "We are very pleased that both business units delivered robust revenue growth and solid operating performance, resulting in much higher profits in this fiscal third quarter."
Kramp and company weren’t the only ones who were pleased.
In a September 3 research note, analysts at Feltl & Company noted that Synovis posted its third-quarter EPS and revenues well above estimates due to robust momentum in the surgical business and a better-than-anticipated sequential increase in the interventional business. Feltl expects ongoing expansion in Synovis’ core surgical business over the next few quarters. The fiscal year 2008 EPS estimate has been raised to $0.40 from $0.32. On September 3, Feltl analysts maintained their "buy" rating on Synovis, while raising their target price to $22.50 from $20. Other sector watchers are more bullish, looking for further upticks as Synovis continues to capitalize on its rich product pipeline.
Synovis' Peri-Strip product is used to close the stomach lining after it has been reduced by gastric bypass surgery, a treatment for chronic obesity. It is estimated that during 2007, more than 140,000 patients will undergo gastric bypass surgery, a more than 600% increase over the last decade. Revenue from Peri-Strips (PSD) rose to $3.5 million in the third quarter, up 33% over $2.6 million a year earlier. The number of such surgeries across the country is part of trend that is showing no signs of slowing, and with more and more surgeons using Peri-Strip, continued gains are likely.
Another product that holds great promise for Synovis is Veritas, used for complex ventral hernia repair, which was introduced late in the first fiscal quarter.
Third-quarter sales in this market doubled sequentially from the second quarter, “and we have achieved an annualized run rate in excess of $1 million only six months after product launch," said Kramp in a news release after announcing earnings. Synovis plans to add by the end of fiscal 2007 as many as a dozen direct sales representatives to its current staff of 24 to help push Veritas.
In an August 29 conference call with analysts and shareholders, Kramp stated the obvious: "Synovis is a strong company with an exciting future." With a string of record-breaking quarters under its belt, a commitment to actively expanding in surgical markets and an eye toward continued innovation, few can argue with his assessment. This stock may just become the cure for your portfolio.
Synovis shares, which have leaped about 60% since early August, closed at $19.12 on Wednesday, with a 52-week trading range of $6.88 to $19.74.
