As the coronavirus pandemic has progressed, healthcare companies engaged in the development and manufacturing of COVID-19 vaccines and therapeutics have become the darlings of the stock market. Shares of most of these companies have increased exponentially in 2020, with much of the gains driven by speculation.
Abiomed (ABMD) is the company behind Impella products, the only non-surgical heart pumps to be approved by the U.S. Food and Drug Administration (FDA). The company has differentiated itself from the pack by securing an emergency use authorization (EUA) from the FDA for one of its offerings, the Impella RP, to treat patients suffering from COVID-19-related heart failure or pulmonary embolism (blood clots in the lungs).This approval could partially help to offset the financial impact the company is experiencing because of a decline in elective procedures during the shelter-at-home restrictions.
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Abiomed has been among the better-performing S&P 500 healthcare companies in 2020. Although the stock had a rough time in 2019, it has recovered somewhat and is now up close to 53% year-to-date (YTD) . Here are some reasons why the stock could go even higher in the coming quarters.
Demand will improve
As the pandemic continues, more and more patients will come to decide that the risk of an untreated heart attack outweighs that of potentially contracting COVID-19. In fact, the pandemic may even boost Impella's sales.
In Q1, there were 10% more procedures using Impella products to treat acute myocardial infarction (AMI) events than there had been the year before. There has also been a gradual increase in the number of angioplasty procedures using Impella. This procedure is performed to widen blocked arteries and restore blood flow to the heart.
Given the ongoing situation with COVID-19, high-risk PCI procedures may be preferred over coronary artery bypass graft (CABG) treatment or open-heart surgery, because they're associated with a much shorter hospital stay. Abiomed estimates that almost 40% of high-risk PCI patients require urgent intervention, meaning their procedures cannot be deferred despite the pandemic.
Safety risks have been overstated
In February 2019, Abiomed received a warning letter from the FDA highlighting a higher mortality rate among patients treated with Impella RP in an interim post-approval study (PAS) than was reported in premarket clinical studies. This was followed by another FDA update in May 2019, highlighting the lower survival rate for Impella RP-treated patients in the interim PAS than those reported in premarket clinical studies.
However, the agency also noted that these patients would not have qualified for treatment with Impella RP under the criteria used in the premarket clinical studies. Another FDA update in December 2019 showed that the survival rate in the PAS was similar to those seen in premarket studies when Impella RP was used to treat patients who met the latter's eligibility criteria. This demonstrated that the actual problem was less about the Impella device itself and more about its use among ineligible patients.
Abiomed's shares received another blow in November, when the American Heart Association (AHA) reported that Impella devices may lead to higher bleeding rates and more in-hospital deaths (and are costlier) than treatment with an intra-aortic balloon pump (IABP). Abiomed came out with its own analysis and highlighted the inconsistencies and poor quality of data used by the AHA to draw conclusions from the two large observational studies.
Its meaningful innovations continue
In April, Abiomed announced the acquisition of Breethe in a deal that added extracorporeal membrane oxygenation (ECMO) systems to the company's portfolio. ECMO is used when the lungs are unable to oxygenate the body, including during complications associated with COVID-19.
Management is focused on transitioning to "Abiomed 2.0" in fiscal 2021, with a plan to launch more effective, safer, and connected products. So far, this initiative has included technology called Impella Connect, which helps the company's personnel to supervise Impella consoles remotely and to virtually interact with physicians.
In July, the FDA approved one-way digital data streaming from the Impella Connect console to HIPAA-compliant secure servers. The company plans to deploy artificial intelligence capabilities on this data to provide insights for enabling physicians to make educated estimates about the health of the patients.
Financials are improving and the balance sheet is solid
In the first quarter, Abiomed's revenue was down 21% YOY to $165 million, largely because of a dramatic decline in patients in April after shelter-in-place restrictions and limitations on hospital procedures swept the nation. However, the revenue numbers picked up month-over-month in May and June. In fact, the company was back to 4% YOY global revenue growth in June (partly thanks to deferred demand from April and May) and to 8% in July, driven by the favorable exchange rate and improving sales mix. This is especially impressive considering that patient utilization in the U.S. was down 4% YOY in July after the resurgence of the coronavirus in certain areas.
Abiomed boasts a robust balance sheet, with a $600 million cash balance and zero debt as of the end of June. This solid financial backdrop should allow for plenty of flexibility for research and development and commercialization purposes, even in more difficult times.
The premium valuation is justified
Abiomed is trading at a price-to-sales (P/S) multiple (calculated by dividing share price by sales earned over the past 12 months) of only 14.7. Peers such as Edwards Lifesciences (EW -0.98%), Stryker (SYK 0.43%), and Boston Scientific (BSX -1.11%) are trading at P/S multiples of 11.4, 5.6, and 5.4, respectively.
Although Abiomed is more expensive than its peer group, this premium is justified. The company's target patient population is largely made up of people who are unable to defer procedures for a significant time, despite the risks posed by the pandemic.
The complete dependence of Abiomed on the Impella line of devices is both a blessing and a curse. The company is not subject to revenue drag seen by peers who offer devices used for less urgent procedures. That said, Abiomed is also exposed to significant risk arising from ober-reliance on a single product line. However, based on its risk-reward proposition, the company still looks like a smart buy for healthcare investors with above-average risk appetite.
