Volcano Poised at Neutral

Zacks

We have reaffirmed our Neutral recommendation on Volcano Corporation (VOLC) following its first-quarter 2012 results. However, the company’s revenues and earnings per share during the quarter lagged the Zacks Consensus Estimates.

The San Diego, California-based company engages in the development, manufacture, and commercialization of a broad suite of precision guided therapy tools including intravascular ultrasound (“IVUS”) and fractional flow reserve (“FFR”) products. These products improve the efficiency and efficacy of existing percutaneous interventional (“PCI”) procedures in the coronary or peripheral arteries. While FFR technology is used to determine whether or not a stent is necessary, IVUS is used to guide stent placement and optimization

We believe sales of IVUS products will continue to account for a significant portion of the company’s revenues going forward. While the IVUS penetration rate in Japan is quite high (more than 80%), the penetration rate in the US and Europe for similar procedures is relatively low. The low penetration rate in the US and Europe nevertheless provides scope for market share expansion.

Japan is a significant market for Volcano Corporation as it derives more than 30% of its revenues from this region. With the termination of several distribution agreements over the past few years, the company is now well placed to address 100% of business in Japan on a direct basis. With increasing market share in Japan, we are encouraged to note that management is expecting modest growth in PCI volumes and IVUS penetration in Japan during the current fiscal.

The company’s strong portfolio and pipeline development should generate growth in the long term. The company is in the process of rolling out Prestige Plus in US and Europe, the latest addition to its FFR product line. During the most recent quarter, Volcano initiated limited market release of the Valet Micro catheter in the US. While revenue contribution from the device will be nominal in the current fiscal, it is expected to pick up gradually.In addition, we have high hopes from the next-generation IVUS technology called FACT (Focused Acoustic Computed Tomography), the commercial launch of which is slated for 2013 in US and Europe and in Japan during 2014. Besides, the Forward-Looking IVUS (FL.IVUS) is scheduled to receive CE mark approval before year end.

However, hospital capital spending has been affected by the weak economic scenario. Moreover, the company has decided to convert to direct sales in Spain and other European countries gradually. We expect this move to negatively impact sales from Europe in the near term. The company also witnesses tough competition from players like Boston Scientific (BSX) and St Jude Medical (STJ).

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.

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