In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss what went wrong for both of these companies and whether the businesses can recover.
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This video was recorded on May 8, 2019.
Shannon Jones: Let's kick things off with our first loser. It's a company called Abiomed, ticker ABMD. Brian, I can just say for this company, 2019 has not been very kind to this heart pump maker. Stock has been down about 20% since the start of the new year off of some safety concerns from the FDA. But when we're talking about earnings, it sounds like we're starting to see some of those concerns start to hit their top line.
Brian Feroldi: Yeah, and that's really shocking, because this is a company that has been an unbelievable performer for many years now. For those that need a refresher, Abiomed makes minimally invasive, temporary heart pumps that are put into a patient's body, either after they have a heart attack or before a high-risk surgery and it lowers their risk profile, and it helps them to recover faster. And these guys are basically the only company that does what they've done. And they have just grown at a blistering pace for many years. But in the most recent quarter, they just produced 19% revenue growth and 100% earnings growth, which sounds pretty good in the grand scheme of things, but this actually fell short of their guidance.
Jones: They were guiding for about 25% top line growth. A bit of a disappointment. As we briefly mentioned, there were some concerns back in February when the FDA sent out a warning letter, not a recall as some interpreted it to be, but a warning letter to physicians, basically stating that there were some concerns about the mortality rate associated with their bread and butter machine, the Impella. What can you tell us about that? How did you see that play out in earnings?
Feroldi: As you mentioned, the FDA did send out a letter to providers in February. Unfortunately, the media took note of this and they basically spread news that the Impella was under a recall over safety issues. That turned out to be not the case at all, that was a misinterpretation. But at that point, the company basically spent the last half of the first quarter on damage control. They basically said that they couldn't get their growth where they needed it to be in time. They're still actively working through that issue, and they have seen progress. But that was a major reason why this company failed to meet its guidance for the first time in as long as I've been covering the company.
Jones: Yeah, and it wasn't just the media. I can say that reading that safety letter from the FDA was a little confusing. They were quick to point out that there is a difference when you were looking at the studies that they use to get this approved vs. some of those post-marketing studies that they did. I think there was a 56% difference between survival rates, pretty significant. But the FDA then it came back at the end and said, "Despite that, we still think the Impella has a very favorable risk benefit profile." Basically telling physicians, "Don't stop prescribing it, but this is something you need to be mindful of, and something that we're watching." So I'm sure a lot of confusion just out there in the marketplace as prescribers are trying to figure out what to do with this type of information as they wait. But as you mentioned, Brian, this is a company that hasn't just been taking it. They have been trying to do much more of an education and awareness campaign, and really about helping physicians determine who's the right patient for this type of device. So while they don't know exactly why that difference is there, it was a relatively small sample size in the post-marketing study, the company does believe there's some confounding factors, particularly that the patient base in this post-marketing study was just slightly sicker than what they had in the initial study. So that's all to say, still a lot of question marks for this company. I think it'll take some time to play out. But how are you feeling overall about this company, Brian? I know you've been tracking and following this company for a while.
Feroldi: Yeah, I mean, personally I view this as more of a hiccup than anything else here. I think that this management team knows exactly what they need to do to get the growth story back on track. You mentioned the stock price movements over the last year to date. It hasn't been a pretty 2019. But this company has long traded at a very, very high multiple of earnings and sales. They were priced for continued growth and guidance increases. So the fact that they came out with an earnings report that was less than what the market was hoping for, I was actually surprised to see their stock didn't decline more based on this information. So that tells me that Wall Street still believes that this company has a substantial amount of growth left ahead of it. That's what I expect the company to still do moving forward.
Jones: Exactly. And they have a number of products that are in the pipeline. They've got the Impella 5.5, the Impella ECP and a BTR system as well as just additional enhancements. They're still trying to expand internationally as well. I do think that this is a blip in their long-term growth story, but we'll be sure to keep eyes on this one, for sure.
But let's turn our attention to the second company that really took a beating on earnings. This is a lesser known company, one called Intersect ENT, ticker XENT. Stock is down about 30% as of this morning, and it's not just about the bad earnings here, Brian. There's a lot going on with this stock. Before we get into earnings, though, I think it's important for our listeners to know exactly what it is this company does. Can you tell us what they actually do and how they make money?
Feroldi: Yeah, sure. So this is a company that is focused on ear, nose and throat market, that's the ENT in their name. And they basically make a family of products that treat chronic sinusitis, which is inflamed nasal passages. They make these devices that are inserted directly into the nasal passage and they keep it open, almost like a stent in an artery. While it's in there, it actually slowly delivers a steroid to the inflamed area, and the combination of having it opened up plus a steroid leads to long-lasting results. And some of their products are actually absorbed by the body over time, so it's just a minimally invasive procedure to get it in there and then it provides long-lasting relief.
This is a company that had been growing very rapidly over the last couple of years. They have a multi-billion market dollar opportunity ahead of them. So this is a company that I was following very closely and was very interested in. However, the results from this quarter, I think, really raised some question marks about the long-term potential of this business.
Jones: Yeah. The results and also a change in leadership that, honestly, Brian, has me scratching my head. Just looking at some of the headline figures, revenue grew 8%. Beat guidance. You also had some gross margin expansion as well. But operating expenses grew. I suspect this will also be a huge part of their story. Looking from the outside in, Brian, I see a company like this that has a device, and really devices, that really have an interesting mechanism of action and are pretty innovative. So it's a little surprising to me to not see growth figures in the way that I would expect for this quarter, and more importantly, knowing that they're going to have to beef up their commercial team, I do worry about expenses really overrunning and overtaking top line. What are your thoughts about that?
Feroldi: Yeah, I agree. I mean, this is a company that has long touted its market advantage, its innovative products, its huge opportunity. So to see revenue growth in the single digits is, to me, very disappointing. I mean, this is a company that should be posting at a minimum in the double digits. Their excuse on this call was that a new product launch called Sinuva, which they're just in the process of getting out there, has been off to a much slower start than what they originally focused on; and they invested heavily ahead of the launch here in an effort to drive growth. So as a result of their really poor first quarter results, not only did their net loss expand, but they cut their guidance for the year. They were previously calling for $123 million to $127 million. That was reduced down by $10 million to $113 million to $117 million.
But as we teased a little bit earlier, the big news to me here is that the longtime CEO, Lisa Earnhardt, announced that she was leaving the company after 11 years to take a leadership position at Abbott Laboratories. That really had me scratching my head. It's not often that you see the CEO of a supposedly high-growth, very innovative company choosing to enter middle management of an established medical device maker.
Jones: Exactly. It does not leave you with any sort of confidence in the management team at this point, particularly about the direction of this company. In listening to the conference call for earnings, they talked a lot about reimbursement issues, and really the inefficiency of trying to get their products reimbursed. A lot of the physicians' offices -- this is an outpatient procedure that's done -- are using this buy and bill system. There's some hurdle to get a lot of these doctors' offices to do the buy and bill. So the company now is really focused on beefing up its reimbursement specialists, as opposed to sales. They really want the salesforce to be focused on selling the benefits of this device and less on a lot of the back office, trying to get these patients started. So basically, they're calling it a reshuffle of their commercial team.
There's still some skepticism though, because these aren't necessarily new issues. Over the past nine months or so, they've been dealing with this reimbursement overhang. I think, in looking at where they're going and how they're trying to tackle the problem, and now with the CEO leaving, I'm not as confident that they've got a clear strategy outlined for the way forward.
Feroldi: Yep, I agree with you there. And it is possible that a new management team could come in and rejuvenate the business, make changes to the sales team, get the growth story back on track. But for me now, I have more questions than answers about this business. I used to be very excited about it, but the recent results out of this company really have me questioning the bull thesis for this stock.
Jones: Yeah. It's not just about getting past the approval line. It's also about commercial viability, something that we talk a lot about on this show.