Thursday, August 6, 2009

CardioNet Inc. (NASDAQ:BEAT) upgraded at Brean Murray

While there are plenty of firm out commenting Cardionet Inc. (NASDAQ:BEAT) after its 2Q09 results, I would like to highlight a call by Brean Murray, which should get plenty of attention today.

Results. Revenues for the second quarter were $38.3 million vs. our $40.2 million estimate. Gross and net margins (68.7% and 4%) were better than our estimates (67% and 3.2%). Hence, the company’s bottom line of $0.07 beat our $0.05 estimate.

Fundamentals of MCOT adoption defy recent bad news. In 2Q, new patient case starts grew 60% YoY and 15% sequentially to approximately 27,000 patients. The company negotiated 24 new contracts in the first half of 2009, bringing the total lives under coverage to 196.5 million.

We believe Highmark made an error. Highmark made the decision based on a hospital outpatient pricing scheme, not on provider-based data regarding the cost/benefits of the MCOT system. CardioNet is actively seeking to have Highmark reconsider its reimbursement level ahead of September 1, the date on which the new Medicare reimbursement of $754 would become effective. Moreover, the company is also pursuing discussions with CMS at a national level to establish a more robust, data-driven decision regarding a reimbursement level.

Two potential catalysts coming up this year. 1) Highmark may choose to reassign MCOT a higher reimbursement level ahead of September 1; our estimates conservatively assume that this does not happen. 2) CMS (with whom CardioNet is having separate discussions) may issue its own reimbursement level in November independent of Highmark. This reimbursement level may be the same or higher than that issued by Highmark – either way it should trump the Highmark decision.

Acquisition likely if reimbursement remains unchanged. Throughout this entire debate one thing has remained clear: MCOT is a valuable tool in the diagnosis and treatment of AF. It is at a nascent stage of growth, yet given the investments that STJ, MDT, and BSX are making in telemetry-based CRM devices, we are very confident that long-term telemetry systems have a place in the diagnostic arsenal. While the company is unlikely to reach profitability if the reimbursement rate is not raised to a more substantial level, we believe that the MCOT platform is a valuable addition to the framework of a more established company.

Valuation is compelling enough, given the risk/reward. Shares of BEAT are trading at 0.8x EV/S our FY10 sales estimate of $134 million. Our current model assumes that commercial and Medicare reimbursement levels stay static at $754. If the company is successful in arguing for a higher reimbursement level, the EV/S multiple would likely expand to a traditional medical technology multiple of 2x. An $850 (for the sake of argument) reimbursement level would lead us to raise our FY10 estimate to $148 million and an EV/S multiple of 2x gets us to our $14 price target. If reimbursement stays the same at $754, then we believe the company would be acquired for 2-3x sales, or $13-18 per share. The company ended the quarter with $44.5 million (or $1.83/share) in net cash.

Action: This call is giving me goosebumps! We have a beaten down stock with high short interest (standing at 15,8%) trading as if the story is broken. And then we have an analyst highlighting three major catalysts, each having the potential to send the the stock flying:
- higher reimbursement level from Highmark
- reimbursement deal with CMS
- outright acquisition of the company

This baby will fly today. I tend to be overoptimistic on such calls but 20% rally today would not surprise me. So I'm calling for a $9 stock today. Wonderful call by Jose Haresco of Brean Murray!


  1. Note that most of the firms are staying rather cautious and Merrill is taking down their rating to Neutral from Buy.