Heart disease has been the number one cause of death in the United States for over 80 years, claiming 630,000 people a year, about 6% more than #2 cancer, and a whopping 3 times the mortalities of the #3 killer, respiratory disease.

It is with this background fact that we introduce our focus stock for February, Quality Growth member Abiomed (ABMD).

So how does Abiomed advance the science of treating heart disease, and what are the prospects for its business? Let's take a look.

Assisting Heart Surgery

Abiomed is more or less a one-product company. It makes the Impella line of assistive heart pumps, devices that relieve the burden on the heart's function during surgery. Impella is guided up to the heart through an artery, then - using a fascinating system of mini-motors and pumps - it unloads blood from the left ventricle into the aorta, the same motion as normal heart function. The net effect is that blood pressure and flow is more easily maintained, lowering surgical complications and helping produce better outcomes for the patient.

Currently, Impella has FDA approval for 3 procedures: high-risk percutaneous coronary intervention (PCI, or angioplasty as is more commonly known), cardiogenic shock (a condition where the heart cannot pump enough blood following heart attack), and right-side heart failure procedures. Abiomed gets over 90% of its revenue from the United States, but also markets in Germany and, recently, began selling Impella devices in Japan.

The Growth Story

The growth story is what makes Abiomed an interesting business and, ultimately, a potentially interesting investment opportunity.

The company has put up some impressive growth since winning FDA approvals and securing reimbursement in 2015 and 2016. 3-year revenue growth rate has averaged about 35%, with no sign of slowing.

This could just be the beginning. In currently approved procedures alone, the company estimates the U.S. addressable market at about $5 billion, with another $2 billion opportunity from Germany and Japan, from a total patient market of roughly 300,000. At trailing twelve-month sales of $550 million, that represents a lot of potential for Abiomed to continue to grow. Impella is still only used in about 9% of PCI procedures in the U.S., 12% in Germany, and the firm just started selling in Japan a few months ago. Also - despite EU approvals - Abiomed has not even attempted yet to break into the wider European market outside of Germany. With virtually no direct competition at this point, the growth highway looks clear.

Longer-term, there is even more to the story. Abiomed has started a clinical study for the use of Impella to address ST-elevation myocardial infarction or STEMI. This is a very serious form of heart attack where a major artery is blocked, affecting close to 200,000 people annually. Finally, the company has plans for new devices to enter the left ventricular assist device (LVAD) market, which is a $2 billion market worldwide.

Adding a bow to the revenue story is the fact that Impella is one-time use only. Each procedure requires a new device from Abiomed, setting up a compelling recurring revenue model. Given that these devices are used in life-and-death procedures, sales are unlikely to be economically sensitive, either. Both of these factors make the company's revenue (and, importantly, free cash flows) reliable and predictable.

All of these factors paint an attractive revenue growth picture for Abiomed, both in the short and long-term. The company should continue to grow, and rapidly, with stable and recurring revenue.

The Moat Story

Here's another interesting factor concerning the competitive picture for Abiomed... there really isn't much of one!

That's right, in assistive heart pumps, Abiomed runs a virtual monopoly. Impella is one-of-a-kind for its targeted purpose at this point in time.

That's not to say competition is of no concern at all - just that it isn't much of a concern at present. The closest to direct competition that Abiomed has faced came from Thoratec, a division of diversified healthcare giant Abbott Labs (ABT), which offered a similar catheter-based pump solution called the HeartMate. However, last February the company halted sales after numerous safety incidents. The product is currently in limbo and faces the very real possibility of discontinuation.

Abiomed will face more competition as it moves into adjacent markets. The LVAD market, in particular, has established players in Thoratec and HeartWare (part of Medtronic (MDT )). Also, I expect more device makers to take a closer look at the PCI market in the future, given Abiomed's success and estimation of market size.

As for long-term competitive advantages, Abiomed does not really hold any that are extremely durable. Sure, the company owns a phalanx of patents, but these can be challenged or worked around. Probably the strongest competitive advantages are the high barriers to entry, given FDA approval requirements and securing Medicare and private insurance coverage. Abiomed's first-mover status and virtual monopoly position also gives it "pole position" in the market, as cardiologists become familiar with the product and less likely to accept a competitor.

Risks

There are two major immediate term risks that could hit Abiomed.

The first is theoretical and par for the course in medical devices - safety. Should Impella fail, or be shown to be ineffective or dangerous, Abiomed would be hit very, very hard, as this is its only product. Given the device's years-long efficacy profile, this seems like a low likelihood event, but still one worth mentioning.

Secondly, and more likely, are reimbursement challenges. The nature of Impella's patient demographics means that Abiomed earns a substantial amount of its revenue from Medicare. Last year, the stock was hit on news that Medicare was cutting Impella reimbursement rates by 35%. This ultimately turned out to be lower (19%). However, it is still a good example of the power of the government over the earnings potential for medical device firms, not to mention the movement of their stock prices.

Conclusion and Business Model Rating

Abiomed is an intriguing, upcoming medical device company dominating a large and growing need. We see a robust growth runway for the firm, along with a big lead and no current direct competition. While prospective competition, reimbursement concerns, and a very aggressive valuation are concerns, the business is an attractive one.

Quick Summary

Abiomed is a medical device company focused on the heart. Virtually all of the company's revenue is from sales of the Impella percutaneous heart pump, a device which relieves the burden on the heart during surgery. Currently the device is approved for high-risk percutaneous coronary intervention (angioplasty) surgery, cardiogenic shock, and right-side heart failure procedures.

Does The Company Have Recurring And/Or Rising Revenues?

YES. Abiomed has a 5-year revenue growth rate near 30%, a rate which has been accelerating in the past few years as Impella has garnered approvals for more indications and secured reimbursements from Medicare. The market remains substantial. The company estimates it services only about 9% of the U.S. addressable market, 12% in Germany, and it just started selling in Japan last year. This implies an addressable market of about $7 billion - and that's just in currently approved indications. Over the longer term, Abiomed is targeting devices to address ST-elevation myocardial infarction (STEMI), which could nearly double its market opportunity. Impella catheters and pumps are one-time use, necessitating ongoing repeat purchases and providing Abiomed with a true recurring revenue model.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. Abiomed owns over 300 patents, with nearly that many more pending, forming the basis of a REGULATORY BARRIERS INTANGIBLE ASSET on its devices. However, the company's real advantage at present is its virtual monopoly position in heart-assist pumps, creating trust, mind-share, and expertise with cardiologists that use them. We don't feel Abiomed's moat is impenetrable. Several large medical device companies, including Abbott Labs and Medtronic, have dabbled in the area, so far with little success. But the risk always exists of one of them entering the market to compete head-on with Abiomed (or, less adversely, buying it up instead).

Business Model Rating: 

We give Abiomed a YELLOW (somewhat attractive) business model rating. It is addressing a serious (and large market) medical need from a near-monopoly position, and has many avenues to continue rapid revenue growth for years. However, we are wary of the risk that new competition, insurance reimbursement cuts (Medicare has proposed reducing reimbursement for Impella by over 30% in some cases), and safety issues can have on the firm's business. Abiomed has an attractive profile, but one that faces numerous risks from many sides.