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Medical device-maker AtriCure Inc. (ATRC) has received priority review status from the FDA for its AtriClip System, used for the treatment of atrial fibrillation (AF) or for stroke reduction. There are already surgeons using this System in the United States, and the feedback has been exceedingly positive in clinical trials. We believe this will become the standard of care for the less-invasive surgical management of persistent and permanent atrial fibrillation.  Astonishingly, the re-order rate for this system has touched 100% in the three quarters since its launch. To date, this is a unique statistic among medical devices, and testament to the ease of use and cardiovascular proficiency of the product. We look for at least 200 more hospitals to adopt the system before yearend 2011. We also believe it will become the standard of care for epicardial treatment. FDA approval is anticipated in the final quarter of this year, possibly the first quarter of 2012. 

The company has recently expanded its sales territories from 30, to 40, to support growth, and we look for a significant sales ramp-up from this move in the second half of this year. ATRC is also developing a hybrid ablation system that combines the company’s minimally invasive devices with endovascular tools (ablation and mapping catheters). AtriCure received conditional FDA approval for its Dual Epicardial Endocardial Persistent AF (DEEP AF) trial in May 2010. The company is moving from six to approximately 35 investigational trial sites this year. This less-invasive system is garnering a great deal of attention in the cardiac community because it enhances the survival /disability rate due to its less invasive nature.

Strong Operating Conditions
ATRC generated a per-share profit of a penny in the final quarter of 2010. This was the first time a profit had been made. The company rounded out the year with a bottom-line deficit of $0.19. This compared to a loss of $0.86 in 2009. Sales have risen from $19.2 million in 2004 (the year the company went public), to $59 million in 2010. Although we expect a combined loss of $0.10 in the first half of this year (the first-quarter deficit amounted to $0.08), we look for earnings to materialize in the second half. For the full year, AtriCure could possibly post share net of $0.10-$0.15, rising to $0.60 in 2012, on sales of $85 million.

In the first-quarter, ATRC had $15.7 million in cash on the balance sheet and a current ratio of 2.96. The long-term debt-to-total capital ratio stood at a very reasonable 27%, and we look for the company to be cash-flow positive in the final interim of 2011. Capital spending is likely to rise due to training costs associated with teaching physicians and surgeons how to use the new equipment.

Conclusion
With very solid financials, and significant earnings potential, we recommend most investors take a look at this diamond in the rough. The stock has risen threefold over the past 12 months and, should the company receive FDA approval for its AtriCLip System before yearend, the stock is liable to skyrocket based on the huge market potential of an aging population with increasing heart and circulatory problems. Meanwhile, we expect existing product revenues to continue growing at an 8%-10% average annual clip. With a Beta of only 0.75, the stock is not as volatile as one might expect for a minor player in the medical device space. We are valuing the equity on an EV/EBITDA basis (currently about 9.5x), since a profit hasn’t yet been posted.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.