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Abiomed's Earnings In Line but Down Y/Y

Zacks Equity Research

Abiomed Inc. (ABMD) reported fiscal 2014 second-quarter earnings per share of 3 cents per share, down by a whopping 76.9% from the year-ago adjusted earnings of 15 cents per share. However, EPS was in line with the Zacks Consensus Estimate.

On a reported basis, the Massachusetts-based company registered a profit of $1.1 million, down 80% from the year-ago adjusted level of $6.1 million. Expenses associated with legal matters coupled with the newly implemented medical device excise tax significantly dampened bottom-line growth in the quarter.
Revenues for the fiscal second quarter surged 19% to $44.3 million, in line with the Zacks Consensus Estimate. This marked the 16th straight quarter of Abiomed’s year-over-year revenue growth in double digits. The improvement was led by record patient utilization of the Impella device in the quarter.
Globally, Impella revenues rose 23% to $40.2 million in the quarter. U.S. revenues for the device grew 21% to $37.0 million with a 24% year over year increase in usage. ABMD opened 30 new U.S. customer sites for Impella 2.5 in the quarter, taking the total count to 805 sites. Moreover, with 65 new hospitals having adopted the latest Impella CP, there are now 237 customer sites in the U.S.
Gross margin declined 120 basis points (bps) to 79.6% from 80.8% a year ago. The company’s gross margin is sensitive to the number of consoles placed for new site openings, expanded use needs, and AIC upgrades. In the quarter under review, 172 Impella consoles were placed against 114 in the prior-year quarter.
Research and Development expenses (R&D) were up 31.9% to $7.3 million, primarily on account of expenses related to regulatory filings in the U.S. and Japan as well as ongoing product development and clinical initiatives. Selling, general and administrative expenses (SG&A) increased 42.1% to $26.2 million due to expanded sales and marketing initiatives and customer support centers in the U.S.

Additionally, Abiomed incurred $1.9 million as legal expenses related to the Department of Justice (DoJ) subpoena and medical device tax of $0.7 million. As a result, operating income declined to $1.4 million in the reported quarter from $5.9 million in the comparable year-ago period. Operating margin plunged 1270 bps to 3.2% from 15.9% reported in the second quarter of fiscal 2013.
Balance Sheet
Abiomed had cash, cash equivalents, short and long-term marketable securities of $96.9 million as of Sep 30, 2013, up 10.0% from $88.1 million as of Mar 31, 2013. The company had no debt and did not repurchase shares in the quarter.

ABMD reiterated it revenue guidance for fiscal 2014. Management forecasts revenues to grow 14 to 17% to $180–$185 million for the year. Global Impella sales are expected to increase by 20% and reported operating margin is forecasted in the range of nil to 5%.
Recent Developments

Abiomed has enrolled more than 50% of the required patients in the RP Recover Right study. Hence, management expects HDE approval in February 2015.

The U.S. Department of Veterans Affairs has included Abiomed in its authorized Veteran's Administration (:VA) Federal Supply Schedule, providing the Impella platform to VA medical facilities, Department of Defense (DOD) hospitals and other federal agencies.

Our Take

Although we are impressed with the robust Impella utilization, higher expenses are a cause of concern. Abiomed’s engagement in legal issues is adversely affecting its operating margin. The company must control its expenses to enhance profitability and growth going forward.

However, ABMD continues to enjoy a strong demand for its Impella products. Impella utilization is growing at a healthy pace, as is evident from the increasing number of patients being treated with the device.

Abiomed currently has a Zacks Rank #3 (Hold). Some well-placed medical instruments stocks such as CryoLife Inc. (CRY), Natus Medical Inc. (BABY) and Cynosure, Inc. (CYNO) are worth considering. All of them carry a Zacks Rank #1 (Strong Buy).

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