Recently, we reaffirmed our Neutral recommendation on Volcano Corporation (VOLC) with a target price of $25.00.
In the fourth quarter of fiscal 2010, Volcano reported break-even earnings on an adjusted basis compared to an EPS of 3 cents, according to the Zacks Consensus Estimate. Revenues increased 14.4% annually to reach $81.2 million during the quarter with strong growth in IVUS and FM single-procedure disposables. Revenues were higher than the Zacks Consensus Estimate of $78 million.
Apart from higher operating expenses, another factor that led to a decline in the company’s bottom line was higher interest expense, which was $1.9 million in the quarter compared to $1,000 in the year-ago period. This is due to the huge increase in its long-term debt level to $91.2 million in the quarter, compared to $0.1 million in the corresponding period of 2009.
Volcano derives a major part of its revenues from its IVUS product portfolio. IVUS technology is widely used for deciding the placement of stents in patients with coronary disease. While the IVUS penetration rate in Japan is quite high (more than 70%), the penetration rate in the US (16%) and Europe (5%) for the same type of procedure is relatively low.
The low penetration rate in the US and Europe provides better scope to increase its market share. Expansion of sales force (213 at the end of 2010 compared with 191 at the end of 2009) coupled with various clinician education and market development programs have helped the company increase its scope.
While the company has been taking several steps to drive growth, it will suffer a major blow due to the recent disaster in Japan. This is because Volcano derived 27% of its revenues during fiscal 2010 from this region. Moreover, the company faces tough competition from players like St. Jude Medical(STJ) and Boston Scientific Corporation (BSX).
However, we are also encouraged by Volcano’s development with respect to its pipeline. The company plans to begin clinical studies in the second quarter of 2011 to support the approval of the OCT system in the US, Europe and Japan with potential launch during 2012, beginning of 2012 and 2013, respectively.
Moreover, full market launch of the Vibe vascular imaging balloon catheter in Europe that commenced in 2010 has been progressing well. The company has received encouraging feedback from clinicians regarding its efficacy and ease of use. Although it is not yet approved in the US, the company is working to get the product approved in the US (expected in 2012).
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