On Mar 24, 2016, we issued an updated research report on Cardiovascular Systems Inc. CSII. The Minnesota-based medical device manufacturer develops and commercializes innovative solutions to treat patients suffering from peripheral and coronary arterial diseases, including those with arterial calcium.
Cardiovascular Systems ended its second-quarter fiscal 2016 on a mixed note. While loss incurred was narrower than expected, the top line failed to meet the mark.
Moreover, loss widened year over year due to rising operating expenses owing to an increasing sales force. However, the loss was lower than expected, thanks to successful execution of the company’s cost reduction initiatives.
Currently, Cardiovascular Systems stands to gain from several favorable trends existing in the PAD as well CAD market spaces. At present, an aging population, coupled with increasing incidence of diabetes and obesity, is likely to propel the prevalence of PAD further. This offers huge scope for the unique PAD OAS system of Cardiovascular Systems.
Moreover, according to management, another major concern is underdiagnosis, with patients failing to display symptoms and/or physicians misinterpreting them. So we believe the PAD market space is still underpenetrated at large, which provides Cardiovascular Systems significant opportunities to expand in the market place.
During the second quarter of fiscal 2016, Cardiovascular Systems’ gross margin increased to 80.5% up 139 basis points (bps) year over year, driven by a significant reduction in the company’s unit costs. Going forward, management expects engineering enhancements and higher production volumes to continue to reduce unit cost. This will facilitate a higher gross margin in the coming quarters. In addition, increased sales of the coronary device which has a higher average selling price should help keep gross margins close to the range of 80%. This positive outlook makes investors optimistic.
On the flip side, Cardiovascular Systems bears a long history of net losses incurred since its inception in 1989. There is no respite, at least in the near term, which makes it worse. In recent times, the company incurred net losses of $35.3 million and $32.8 million in fiscal 2014 and 2015, respectively. Moreover, as of Jun 30, 2015, Cardiovascular Systems had an accumulated deficit of $271.4 million. Management expects these losses to continue, going ahead.
Although the company plans to take its products to the international markets in the future, uncertainty remains therein with regard to regulatory approvals and sales potential. Moreover, the company expects to incur substantial expenses in connection with its international expansion, which will put pressure on its operations. Further, Cardiovascular Systems faces tough competitive headwinds across the medical device industry.
The stock currently carries a Zacks Rank #2 (Buy).
Key Picks in the Sector
Some other well-ranked stocks in the medical sector are Hill-Rom Holdings, Inc. HRC, OraSure Technologies, Inc. OSUR and Orthofix International N.V. OFIX. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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