Lately, Abiomed (NASDAQ:ABMD) investors have seen their shares bounce around like a kid on a trampoline, mainly because the company is at an unpredictable crossroads.
The shares are trading at a high multiple of around 36 times trailing earnings. The recent stock price of around $96 may be too low or way too high, depending on the outcome of two main developments that will play out over the rest of the year.
If you're one of the lucky investors who wisely bought into Abiomed and its transcatheter heart pumps about a year and a half ago, now might be a good time to take just a little bit of your profits off the table. At least this way you can enjoy the ride without becoming a candidate for one of its truly incredible devices.
The rest of the year will be a nervous wait-and-see period for this stock. Allow me to explain and warn investors against some potentially money-losing mistakes.
Mistake 1: Buy now
One of the Affordable Care Act's provisions aimed to improve effectiveness and curb costs by including increased funding of comparative effectiveness research.
One of the developments Abiomed investors need to look for is results from one of these comparative effectiveness studies currently under way. It's comparing an early Abiomed transcatheter heart pump, the Impella 2.5, against Thoratec's HeartMate PHP. The open-label study will be limited to temporary use during high-risk percutaneous heart surgeries. Given Abiomed's high valuation, results from this study could send the stock screaming in one direction or another. With Thoratec, and now its recent acquirer, St Jude Medical (NYSE:STJ) sponsoring the trial, I'd bet on "down," at least temporarily.
There are a several important points you should understand about the involved companies and devices under comparison before making any assumptions once the head-to-head trial data is released:
- The HeartMate PHP device required conditional approval specifically for this U.S.-based trial. Although the FDA hasn't yet approved it, this trial could change that situation.
- The Impella 2.5 is FDA approved for both this indicationand for emergency patients suffering cardiogenic shock following a heart attack or cardiac surgery.
- The HeartMate PHP slides in at about 4.3mm. Once in place, it expands to about 8mm at the aortic valve (see the preceding image).
- Abiomed's Impella 2.5 is much smaller, with a 3mm catheter and a 4mm diameter pump motor.
- There's a major difference in design. The HeartMate PHP keeps the aortic valve somewhat open, but the Impella pump remains in the aorta while a separate inlet valve draws blood from within the ventricle (see the following image).
Once the results of the trial (which is expected to finish in December) are released, perhaps the most important distinction to bear in mind is this: The Impella 2.5 is designed for maximum flow of 2.5 liters per minute, while the HeartMate PHP allows flow of up to 4 liters per minute.
An average, healthy, 60-year-old woman with a resting heart rate of 70 beats per minute pumps roughly 5.25 liters of blood through her left ventricle into her aorta each minute. Clearly, the HeartMate will provide patients in dire conditions with closer to normal healthy blood flow.
Also, this is an open-label trial. Physicians aware their patients might require more than 2.5 liters per minute of assistance will probably reach for the HeartMate PHP, making "randomization" of patients questionable.
Mistake 2: Sell if HeartMate PHP is non-inferior
The head-to-head trial with St. Jude's HeartMate PHP and Abiomed's Impella 2.5 may throw off numbers that suggest the Impella 2.5 is inferior, but I wouldn't be too hasty to dump Abiomed shares. The Impella 2.5 is inferior, by design. Here's the second recent development you need to keep in mind if the stock goes haywire.
Abiomed has an FDA-approved device with a flow rate of up to 5 liters per minute. The Impella 5.0 is similar to the 2.5 in design, with one minor difference: The pump in the aorta is about 7mm in diameter. That's about 1mm smaller than the HeartMate PHP pump that wedges the aortic valve open about 8mm.
In addition to the Impella 2.5 and 5.0, Abiomed has two more nuanced pumps approved by the FDA for post-heart attack or post-heart surgery patients suffering from poor blood flow.
These four devices had 501(k) "clearance" for years, but on March 21, the FDA decided it would give them premarket approval, medical-device lingo for FDA approval, without bringing in an advisory committee. That's a good sign the agency is confident these devices are both safe and effective in this broader population, and waiving the committee meeting sped up the process several months.
Even before the FDA bestowed premarket approval upon these four devices for a wider population, the company's sales and popularity popped last year. In the quarter ended Dec. 31, patient use rose 45% compared with the same period the year before.
Abiomed sales truly began rising in early 2015, when the Impella 2.5 became the first of its breed to receive a premarket authorization for use during high-risk percutaneous interventions. With the broader indication for four products, next year could be even better, making these shares ones that you want to hold onto.
What to look out for
Although I expect Abiomed's recent premarket approvals will boost sales at home, it is a small company. By market cap and sales staff, St. Jude Medical is relatively enormous, and it has a large direct sales force focused almost entirely on cardiology.
St. Jude also heavily upped its debt level to finance the $3.3 billion Thoratec acquisition, so I expect it will make every effort to include its new heart pumps into its sales pitches.
Thoratec's HeartMate 2 went through a Class 1 recall because of a defect that nearly resulted in a patient death and required emergency open-heart surgery. Whether that recall looms in the minds of healthcare professionals choosing heart pumps is hard to say. Abiomed has over 200 field representatives in the U.S., but St. Jude has about 18,000 employees worldwide. Not all of St Jude's employees are in sales, but it has built deep relationships with cardiologists over the years.
Abiomed's growth has well outpaced Thoratec over the past couple of years. Investors will want to keep an eye on whether it can continue doing so now that it's a St. Jude company.