US medical device company Avinger Inc (NASDAQ:AVGR) just served up a revision to its second quarter earnings guidance, noting a couple of shortages on both its own and consensus estimates. On the revision, markets sold off on Avinger to the tune of 40%. This author believes this sell off is far in excess of a reasonable response, and that as a result, Avinger makes an attractive value proposition at its current price.
First, let’s look at the revision. The company announced second quarter revenues of circa $4.7 million (these are preliminary; the confirmed numbers have not yet been filed), which represents a $1 million shortfall on expectations of $5.7 million for the period. Full year 2016 guidance also picked up a revision. Avinger had expected to generate between $25 million and $30 million revenues for the year. With the alteration, new guidance puts these figures at $19 million and $23 million respectively.
So, a $1 million quarterly shortfall, and what looks like a between $3-5 million shortfall (perhaps a little more) for the full year. It’s a bit disappointing, sure, but when we zoom in and see what’s driving the miss, things seem a little rosier.
The company designs, develops and sells medical imaging tools. Specifically, it’s got what it calls the Lightbox, which is a reusable imaging unit, and complimenting this unit, a suite of therapeutic devices that are designed to work in tandem with the Lightbox. Of these devices, an atherectomy device called Pantheris is the latest to pick up approval from the FDA (the agency green lighted the company’s 510(k) at the beginning of March, 2016). It’s essentially an engineered catheter with a camera in the middle, and a cutter to remove plaque from the blood vessel into which it has been inserted.
These two products, the Lightbox and the Pantheris system (as well as a few of the company’s other disposable devices) are probably what’s going to drive value for the foreseeable future (say, the next 24 months).
Now, alongside the revisions, Avinger stated that Lightbox revenues should come in at around $1 million. This is a close to 30% decline year over year and a just shy of a 20% shortfall on the first quarter number. Not great. However, the disposable device number should come in at $3.7 million, accounting for nearly 80% of the company’s revenues. This is a near 120% increase on the same period in 2015, and a 12% increase on the comparable first quarter figure.
In other words, the area of the company’s operations that generates the greatest portion of its sales (as mentioned, nearly 80% based on the latest figures) is growing triple digit year over year.
There’s an argument against this – specifically, that physicians need the Lightbox if they are going to use some of the company’s other disposable devices. It’s a sort of anchor product. That’s correct, and a valid argument, but the rapid increase in disposable product use by physicians, and the quick uptake of the company’s newly approved Pantheris product, demonstrates the utility of the Lightbox as a product. If it wasn’t useful, physicians wouldn’t keep buying the disposable satellite products. Thus, this author believes the long term potential of both the Lightbox and the disposable complementary products is vindicated by the increase in the latter’s uptake, rather than negated by the slightly lower than expected increase in the former’s.
The medical device industry is a highly competitive space. The success of a product depends on a combination of both its utility, and the strength of the sales team behind it. The former is a constant, the latter a variable. The dip in expectations is disappointing, sure, but it’s far from justified in wiping 40% off a circa $145 million market capitalization overnight.
This, therefore, is where the opportunity lies.
Avinger may only bring in $20 million revenues this year, but its got more than that cash on hand (as of March 31) and just picked up approval for a product that promises to bring in sales for years to come.
There may not be a full recovery near term – a downside revision is a downside revision, after all – but an expectation of at least two thirds of the recent decline correcting to the upside across the coming quarters is far from unreasonable.