Despite ailing economy, some small caps gaining traction

By Larry Haimovitch

Medical Device Daily Contributing Writer

August 17, 2010

BOSTON — The 30th annual Global Growth Conference, which was sponsored by Canaccord Genuity (Vancouver, British Columbia) and held here last week, enjoyed record attendance. This is impressive, given the malaise in the economy in general and the poor performance of small cap growth equities in recent months.

Although many medical device firms have suffered as the economy has impacted demand for its products from hospitals and physicians, several companies are enjoying robust growth. Two of these presenting med-tech companies were Vascular Solutions (VASC; Minneapolis) and LeMaitre Vascular (LMAT; Burlington, Massachusetts).

Both companies are clearly thriving, beneficiaries of astute management leadership and well-crafted strategies to compete in their respective markets. These two companies are remarkably similar in several respects, both beneficiaries of key trends such as the aging population, increasing obesity and the resultant diabetes and the trend to less invasive procedures.

However, they serve different physician specialties. VASC is deeply entrenched in minimally invasive interventional medicine, serving interventional cardiologists, interventional radiologists and vascular surgeons who increasingly are performing interventional procedures.

Conversely, LMAT CEO George LeMaitre, Jr., the son of a vascular surgeon who founded the company 27 years ago, described LMAT as a "pure play in the peripheral vascular disease market" while marketing exclusively to the vascular surgeon. Like Root, he noted that vascular surgeons in the past several years have readily embraced less invasive endovascular technologies and procedures such as endovascular abdominal aortic aneurysm repair.

One of LeMaitre's slides showed that vascular surgeons now perform about 45% of all domestic peripheral vascular interventions. Their share has dramatically increased from about 25% just a decade ago.

Both companies can be aptly described as "niche players." VASC CEO Howard Root portrayed his company as participating in a unique space between single product small companies that lack distribution capabilities and large multinational companies that need to focus on large $1 billion or higher projects or markets to fuel their growth. He described these small markets as a "nuisance" for the big players.

This approach, combined with its domestic direct sales representation and aggressive new product introductions (over 50 since 2003, 12 in 2009 and 10 planned for 2010) and selective acquisitions, has been the catalyst to impressive gains. In the first half of 2010, VASC revenue grew about 15% over last year's first half and Root noted that 2010 will mark the tenth consecutive year of 10% or higher annual revenue increases.

Exemplifying its savvy with new products, the LP, or low profile version of its well-established Pronto thrombectomy catheter and the relatively new GuideLiner catheter both registered huge 50% or better first half gains.

Guideliner is a unique coaxial "mother and child" extension catheter that is designed to provide physicians with a tool to perform challenging interventions, such as navigating tortuous anatomy within the arterial system and safely delivering stents through tightly occluded coronary lesions. It is estimated that it could be used in 5% to 10% of all coronary stent placement cases.

Speaking at the May 2010 EuroPCR meeting, at a VASC sponsored symposia, a renowned interventional cardiologist stated that the GuideLiner "makes impossible cases possible."

It was internally developed, was launched in 3Q09 in the EU and 4Q09 in the U.S. and is already running at a $4 million annual rate. VASC has a patent pending on the device.

With very favorable physician responses to the clinical utility of the GuideLiner, management recently increased its estimate of the potential annual revenue to more than $30 million at full commercialization.

While internally generated products are the company's primary growth driver, acquisitions and licensing initiatives are also being vigorously pursued. This enables the company to further leverage its impressively large 89 person domestic direct sales team.

For example, the company currently has distribution agreements with three device manufacturers, which either lack sufficient scale to market their own products or are based overseas and lack a domestic presence.

In May 2010, VASC completed its first "tuck-in" acquisition with the purchase of the Escalon Medical (Wayne, Pennsylvania) SmartNeedle product line, for about $5.8 million in cash. SmartNeedle is a single-use vascular access needle that houses an ultrasonic probe, providing clinicians with auditory feedback that facilitates the needle placement within a vein or an artery. According to Root, the deal is immediately accretive, thus benefiting VASC's shareholders.

With its strong first half momentum, the company recently raised its revenue guidance for the full year to $78 to $80 million, implying a year over year gain of about 15%.

In concluding his formal remarks, Root said that "we are very well-positioned and I expect solid growth in the future."

LMAT is similarly registering excellent gains, with its first half revenue surging nearly 17% over last year. This was by far the best performance LMAT has reported since it became a public company in late-2006.

Like Vascular Solutions, LMAT relies heavily on its direct sales force, with 61 reps stationed in the U.S., Europe and Japan. CEO LeMaitre described his global direct sales team as "the heart and soul of our company."

Similar to VASC, LeMaitre has numerous product lines (14 in total) but all with a common customer, the vascular surgeon. "We have a great channel to these customers," said LeMaitre.

Like VASC, LeMaitre is also eager to either acquire or license new products or companies. Although it has been quiet on those fronts recently, historically LMAT has been very active with 11 deals (only one of which management would describe as a failure) closed in the past 13 years. Its acquisition team, led by veteran president and COO Dave Roberts, continues to actively evaluate deals globally.

The company, which has generated positive cash flow in the past several quarters, has plenty of cash to consummate acquisitions but remains very selective and valuation sensitive. In response to a question about using its stock for acquisitions, LeMaitre replied, "we think our stock is very undervalued and therefore we are a buyer, not a seller of our stock."

The company's directors initially approved an open market share buyback in July 2009 and significantly increased it in 2010. As of June 30, the company had re-purchased about $1.2 million of its shares at an average price of $4.70 in the open market. At this juncture, it has fulfilled just 24% of the total potential buyback and plans to continue its open market buying activity.

Similarly, Vascular Solutions has a share buyback in place, sharing LMAT's belief that it is a wise use of corporate funds to re-purchase company shares if they appear by the board and management to be undervalued.

Amongst all the med-tech companies that presented here, LMAT and VASC are enjoying significantly above average growth. Their niche strategies are quite similar and "flying below the radar screen" has enabled these companies to prosper in difficult times.

2010 Canaccord Genuity Global Growth Conference

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