Gyrating markets giving you a big pain? Not to worry. The folks dealing on the corner of Wall and Broad in New York are ready to sell you plenty of shares of companies working on remedies to literally make you tingle.
One such outfit is Plano, Texas-based Advanced Neuromodulation Systems (NASDAQ:ANSI), which sports an approximately $720 million market cap. True, it suffered a downgrade today by UBS, which cited increasing competition from Boston Scientific (NYSE:BSX). But a recent conference call with analysts revealed that the company expects to continue to grow revenue about 20% a year, or in line with growth in the pain-relief segment of the electronic-stimulator market. On the call, the company reported that it observed no general discounting going on in its market segment -- something that might erode profit margins.
ANS operates in the emerging neurodevice segment of the neurotechnology industry, which includes treatments for everything from chronic backaches to obesity and incontinence. The science works through the delivery of a small amount of electrical current from an implanted device to the target nerve sites in the body to alleviate pain.
The global market for neurotechnology, which includes pharmaceuticals, is estimated at 1.5 billion people and $100 billion in sales annually, according to Research and Markets, the Dublin, Ireland-based research company. ANS figures its segment of the market is about $1 billion annually today but can easily become a multi-billion-dollar industry. Competitors include medical device giants, such as Medtronic (NYSE:MDT) and Boston Scientific, and smaller firms, such as Cyberonics (NASDAQ:CYBX).
Among ANS's products is an implantable device for neurostimulation of the spinal cord to alleviate chronic back pain and other pain, which accounted for $109 million in sales last year. In late April, the company garnered Food and Drug Administration approval to conduct a trial for its deep-brain neurostimulator to treat essential tremor and Parkinson's disease, which managed to send its shares back into the mid-$30 range. The company also will begin trials this quarter for a device to treat migraine headaches.
ANS also makes an implantable drug pump, which releases morphine, that has been approved for use outside the United States but is producing negligible sales to date. ANS also is examining other uses for its devices, including treatment of depression, obsessive-compulsive disorder, pelvic pain, obesity, tinnitus, angina, and traumatic brain injury. It's a virtual cornucopia of remedies that's enough to make a hypochondriac smile. To boot, its chief executive officer, Christopher Chavez, holds down the chairmanship of the Medical Device Manufacturers Association, so the industry gives the company a good deal of respect.
So far, ANS has been competing quite nicely with the big boys, which dominate the microelectronic market after having earned their stripes in the field of heart pacemakers. The company is a potential takeover prospect as well, if fellow traveler Cyberonics is any indication. Boston Scientific has an agreement to buy up to a 15% stake in Cyberonics, which makes a vagus-nerve-stimulation product to treat depression.
ANS sales have been growing at a swift 47% annual pace in the past three years, with revenue of $120.7 million in 2004. Earnings per share soared 103% a year on average in the same three-year period, coming in at $0.86 a share in 2004. In fiscal 2004, ended Dec. 31, ANS had a gross profit margin (total revenue minus the cost of goods sold) of 73% and an after-tax profit margin of 15%, both well above their five-year averages of 64% and 9.8%, respectively.
The device maker has no long-term debt and a current ratio (current assets minus current liabilities) of 18.8 to 1, meaning it's more than capable of paying its bills. The company also has seen a steady climb in free cash flow (net income plus amortization and depreciation minus capital expenditures) from $1.4 million in 2002 to $3.6 million in 2004.
ANS officials estimate that it has 23% of the spinal-cord-stimulation market, with Boston Scientific's Advanced Bionics division (purchased in 2004) holding down about 7%. Medtronic dominates the remaining 70% of the market.
Of course, ANS isn't expecting to keep up the torrid pace of sales growth and earnings. It expects that revenue this year will head higher by about 20%, the same rate that management sees in the overall spinal-cord-stimulation business for the foreseeable future. The industry is getting a boost from devices with a longer battery life -- it seems some people have an aversion to being cut open frequently to change batteries -- and its record so far on reliability and effectiveness.
The stock changes hands at about 38 times 2005 estimated earnings, compared with its estimated next five-year EPS growth rate of 26% annually, according to Zacks. Typically, I like to see the earnings multiple at or below the long-term growth rate to warrant a compelling value. But this is a young company in a young industry, which may easily grow into its earnings multiple. Also, this year's earnings don't include a one-time shot in the arm from the sale of ANS's stake in Cyberonics in the first quarter of the year, which will add a stimulating $2.54 a share to the 2005 bottom line.
To gain a further boost, ANS will need to have some of its experimental technology (for migraines or Parkinson's, perhaps) come on line. During the next five years, analysts reporting EPS numbers to Zacks think ANS can grow about 26% annually on average.
CEO Chavez isn't delusional when it comes to the competition, either. He knows Medtronic and Advanced Bionics hold a lot of the pricing cards in the industry, but so far he doesn't see any willingness from his competitors to start drilling holes in the bottom of the boat. At a recent analysts' conference, Chavez also conceded that St. Jude Medical (NYSE:STJ) and Johnson & Johnson (NYSE:JNJ) -- two major players in the cardiac pacemaker market -- have the bucks to enter the neurodevice segment anytime they please.
However, in my opinion, the gorillas aren't likely to move into the marketplace soon, given the long time frame for FDA approval, not to mention going around the myriad of patents held by current players. Still, if St. Jude and J&J want to play, who better to acquire for your team than ANS?
To read more about the medical device arena, check out:
- Stent Wars: Revenge of the Bypass
- A Second Opinion on Medtronic
- Stent Wars 2: The Market-Share Menace
Fool contributor T.G. Wolf has been a financial journalist for more than 20 years. He owns no stock in the companies mentioned in the article. The Fool has a disclosure policy.
