Should You Buy Hansen?

I love a good growth story, and medical device maker Hansen Medical (Nasdaq: HNSN  ) fits the bill with its more than 200% price gain over the past year, making it one of the top performing small-cap stocks of 2007. When my colleague Brian Lawler penned "Get Rich With These Guys," he certainly nailed Hansen. Anyone who bought shares back in April is now very happy.

Investors in our CAPS community also love Hansen; it gets a four-star rating, thanks to the bulls trouncing the bears by an overwhelming 201-to-16 margin. This enthusiasm is certainly warranted, with the prestigious Cleveland Clinic recently naming Hansen's technology as the top medical innovation for 2008. This just added to the momentum from earlier in the year when Hansen signed a joint development and co-marketing agreement with highly regarded medical device firm St. Jude Medical (NYSE: STJ  ) .

Hansen also has a premier management pedigree with co-founder and CEO Dr. Frederic Moll. Prior to forming Hansen, Moll co-founded Rule Breakers superstar Intuitive Surgical (Nasdaq: ISRG  ) , a stock that is up 630% since David Gardner tagged it as a recommendation in the summer of 2005. Growth investors are no doubt hoping that Moll can deliver that magic a second time.

But with a huge run already behind the stock, is now the right time to buy Hansen?

Innovative robotics
Hansen comes through on my No. 1 criteria for a successful growth stock: innovation.

Hansen received its first FDA approval earlier this year for its Sensei robotic catheter system and Artisan control catheter. This is an important breakthrough, since this platform allows physicians to easily place catheters within the heart during electrophysiology procedures. This includes the treatment of arrhythmia, which is a condition in which the electrical activity of the heart causes it to beat faster or slower than normal. This is a large market; the American Heart Association estimates that 2.2 million Americans have the condition.

During one type of procedure to treat arrhythmia, a catheter is inserted into a blood vessel in the leg and pushed all the way up to the heart. When the catheter reaches the heart it can be used to treat arrhythmia via a technique called radiofrequency ablation. This carefully destroys the areas of the heart that were causing the irregular heartbeat.

As you might imagine, it would seem very difficult to control the catheter with any precision. Hansen's platform allows for precise three-dimensional control of the tip of the catheter within the heart. The physician can see exactly where they are going with the catheter, thanks to a three-dimensional image created on a monitor at the workstation they are sitting at. I'm not an electrophysiologist, but compared with the old technique, this seems like a major step forward. Hansen claims that the ease of performing the procedure with their system is going to break open the ablation market, much like Intuitive's daVinci Surgical System did with laparoscopic prostatectomy.

Steep price
The run in Hansen's stock has pushed the company to a lofty market cap pushing $850 million. That may not seem like a lot, but this is a company with only $2.4 million of revenue and a net loss of $31 million for the trailing 12 months ended June 30. To be fair, though, the company didn't receive its approval until May 3, so we need more time and information on the company's sales ramp to see how well the adoption of the technology is proceeding.

That's where the danger lies for investors. The market is clearly expecting good things out of the company over coming quarters and has priced that into the stock.

Hansen reports third-quarter earnings on Thursday and it has to show that it has been able to place devices and convince investors that future demand is strong. Stay tuned for our post-earnings evaluation.

Staying on the sidelines ... for now
Unless you're already a shareholder, I think the prudent move is to remain a bystander -- for now, anyways. I admit that Hansen has a top-notch management team, and I really think its technology is a disruptive innovation that will change the treatment of arrhythmia.

My only hesitation is the company's market cap, because I've seen too many high-growth companies with sexy technologies come crashing down to Earth when actual sales didn't align with the market's lofty, and perhaps unreasonable, expectations.

If you really want to own shares of Hansen, wait to see how the company's earnings release looks later this week to make sure that the hype and promise is followed up with actual sales.


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