Throughout what has proven to be a difficult time for small-cap medical device company AngioDynamics (Nasdaq:ANGO), I've been optimistic about the company's long-term potential. While businesses in vascular access, dialysis, and fluid management are not high-growth areas of medical technology, I thought the company's focus on product development would lead to better revenue and margin leverage than the Street seemed to be expecting.
So far that has been a bad call. While products like NanoKnife, BioFlo, and AngioVac do still hold the potential to drive long-term growth rates in excess of the industry norms, sales execution and market shares need to improve. Likewise, investors should not underestimate the potential risk of rejuvenated large competitors like Covidien (NYSE:COV) and CR Bard (NYSE:BCR).
A Tough Fiscal Third Quarter
Although the med-tech industry seems to be emerging from a period of serious doldrums, that recovery hasn't extended to AngioDynamics yet.
While revenue did grow 58% as reported, that number was massively inflated by M&A activity. On a pro-forma basis, revenue actually declined 2%, with a 4% decline in the large vascular business weighing on double-digit growth (10%) in the oncology/surgery business. As an aside, AngioDynamics is to be applauded for offering an exceptional amount of specificity in terms of segment/product revenue performance.
On the margin side there was good news and bad news. It's hard to be happy about a greater than six point decline in gross margin, but the more-than-doubling of adjusted EBITDA certainly eases the sting of that performance.
Share Loss Is Becoming A Concern
While I do believe AngioDynamics has some very interesting technology (NanoKnife in cancer, BioFLo and AngioVac in the vascular business) and good market share, it would seem that the company's position in the market has continued to erode.
AngioDynamics' NAMIC brand still appears to enjoy very good market share in fluid management (north of 60%), but it would seem that smaller rivals like Merit Medical (Nasdaq:MMSI) have closed some of the gap. Likewise, other small companies like Vascular Solutions (Nasdaq:VASC) seem to be enjoying considerably better growth in their respective (but not always directly overlapping) vascular businesses.
In businesses like PICC (percutaneously inserted central cathetor), the weak revenue performance is worse than the underlying medical procedure volume trends. Given that the company has already released some BioFlo-enhanced PICC products, this has me concerned that the company is struggling to gain on leaders like Bard. Last and by no means least, Covidien seems to be doing quite well in the varicose vein market, at perhaps at AngioDynamics' expense.
To their credit, management does not seem to be in denial about the unsatisfactory performance of the company. Still, their mention of problems like high sales force turnover concerns me – are they showing reps the door due to underperformance, or are reps moving on to greener pastures because they no longer believe that AngioDynamics has the right assortment of products to allow them to earn strong commissions?
SEE: 4 Ways Managers Spin Poor Performance
The Bottom Line
There's too much solid technology, IP, and market share within AngioDynamics for me to abandon the story outright. What's more, management is still new enough that issues tied to the new operating philosophy could be a relevant factor, and so too disruptions from the company's large Navalyst acquisition.
I believe that AngioDynamics could still reward long-term investors, but it's going to take better results in the near term to make me willing to give the company the benefit of the doubt for the long term. For now, I've revised down my long-term revenue growth forecast to about 8%, though my long-term free cash flow growth estimate of 23% is still quite robust. Unfortunately, net of debt, that works out to a fair value of about $11 today – not really a compelling return on the risk when AngioDynamics is currently losing market share.
At the time of writing, Stephen Simpson did not own any shares in any of the companies mentioned.