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Old 11-28-2008
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Default Volcano's IVUS Succeeds Despite Lack of Reimbursement

Doctors Take A Fancy To Ultrasound Device That Looks Inside Arteries
Wednesday November 26, 5:48 pm ET
Peter Benesh (Investors Business Daily)

For companies that have spent years developing medical products, the pot of gold at the end of a very long rainbow is Medicare reimbursement.
If the federal government, insurer of 43 million Medicare recipients, will pay for a drug, service or device, so will private insurers.

Investors in medical-sector stocks like reimbursement. That payment guarantee becomes, almost always, a ticket to profitability.

In some cases, a company gets a good return on a product that is not insured by Medicare or privately. That's happening to Volcano (NasdaqGM:VOLC - News), a maker of diagnostic devices for vascular and structural heart disease.

One device measures the pressure and flow characteristics in blood vessels. Volcano's main product is an intravascular ultrasound device, or IVUS.

Intravascular ultrasound combines a catheter with a tiny ultrasound widget on the end. Attached to a computer, an IVUS can show the inner lining of blood vessels.

It gives the physician a 360-degree fix on the plaque buildup inside the blood vessel. The technology can help determine if a stent is needed, and where exactly it should go.

But the technology has yet to get U.S. or European reimbursement. Insurers do pay for it in another big market -- Japan.

Despite the lack of reimbursement, Volcano has blasted past Wall Street expectations for 10 straight quarters. In its 2008 third quarter, revenue rose 40% from the year-ago period.

The firm reported nine-month revenue of $122 million, up 35%. Sales were propelled by a 78% year-over-year hike in IVUS system sales and a 29% boost in sales of related disposables.

By market region, revenue was up 40% in the U.S., 35% in Europe and 45% in Japan.

There's lots more opportunity, says Matt Dolan, an analyst at Roth Capital, which may seek Volcano's business.

Even without reimbursement, IVUS systems are used in just 15% of the 1 million annual U.S. cardiovascular procedures, says Jose Haresco, an analyst at Brean Murray.

"Volcano has been trying for several years to get reimbursement approval from the Centers for Medicare and Medicaid Services," he said.

Why no reimbursement? "Medicare says IVUS doesn't necessarily add immediate clinical value," Haresco said.

Volcano hopes to prove its case with data from real-life, marketplace cases. "More data is being generated daily," he said.

"IVUS' clinical value in complex cases makes a good argument that this should be the standard of care," Dolan said.

"The company argues IVUS can reduce the number of stents implanted," he said. "It can confirm the placement of stents, which means better outcomes, reduced lengths of hospital stay and resteonosis (re-clogging)."

It costs about $650 to use Volcano's IVUS system, Dolan says. That's not a lot compared with the $14,000 for an angiogram, which Medicare does reimburse.

Whether efficacy or reduced side effects are the criteria, the outcomes must outweigh the cost of the IVUS catheter, Dolan says.

While it tries to persuade CMS to reimburse, Volcano must also convince hospitals, physicians and patients that use of its IVUS is "clinically and financially valuable," Dolan said.

The company is on track for 20% to 25% growth, Haresco says.

Volcano faces competition from only one source worldwide, Boston Scientific (NYSE:BSX - News). The device giant had 58% of the world IVUS market in 2007, Dolan says.

With a wider range of IVUS products, Volcano has been eating into Boston Scientific's lead. In 2004, Boston Scientific had 70% of the global IVUS market.

Volcano also competes against Terumo Medical Corp. in Japan.

Dolan estimates that Volcano is winning seven out of 10 new IVUS installations in the U.S., and that Volcano's IVUS catheters are used in half of all U.S. procedures involving IVUS coronary catheters.

Volcano, which went public in 2006, acquired privately held CardioSpectra in December 2007 for $25 million in cash. It bought private Novelis in May 2008 for $12 million, with another $3 million possible if milestones are met.

Both companies brought technology that enhances what Volcano already has.

Volcano had $177 million in cash and equivalents at the end of its third quarter, with no debt.

That puts the company in good shape to market its products, develop new ones and make more acquisitions, Dolan says.

Management runs the company well, Haresco says: "They give as much forward-looking clarity as they can and tend to run conservative."

The company did not respond to IBD interview requests.

In Volcano's third-quarter conference call, Scott Huennekens, president and CEO, said the company has three growth strategies.

First is increasing its core IVUS and blood-flow measurement businesses by more than 20% a year. Second is to increase earnings by selling more disposable products, which are high-margin items.

Third, Volcano plans to add technology with more acquisitions and in-licensing.

A big piece of Volcano's business strategy is collaboration with big device makers. It has agreements to bundle its products with related gear from General Electric (NYSE:GE - News) and Philips (NYSE:PHG - News).

Such deals could lead to a takeover, Dolan says.
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