Five Ways to Play Heart Health

Jason Mills has earned the respect of his colleagues and is known for having an outstanding knowledge base with "depth of insight," according to a former coworker from a previous investment bank. I was led to expect meticulous analysis and was therefore not surprised to hear that Mills had a specific prescription for picking winners.

At the top of his list of essentials is that a company must be able to expand its top and bottom lines. Indeed, he's very specific on this issue. "Continued growth must be based on a large, still-underpenetrated patient population where there are clinical data to suggest that the therapeutic modalities have improved patient care," he says. For Mills that translates to 15%/year revenue growth. "We use that as a screen in our coverage to try to separate the real strong growth companies from the ones that aren't." Second, he looks for companies that are positioned for leadership in their particular space. Third, he wants to see a development pipeline from which new technology will emanate. And last, he wants a company to be a legitimate acquisition candidate. With that background, I asked him to show me some companies.

His first pick is Edwards Lifesciences Corp. (EW:NYSE) (Mills: Buy; Target $86), which recently released some clinical trial data showing that even physicians new to the technology of implanting transcatheter heart valves (THV) could achieve results as good as the more experienced interventional cardiologists. The THV market space is estimated to be in the range of $1.5–$2 billion (B) per year, "with Edwards being a leader in the market over the next half-decade." Mills expects the company's THV business to grow 40–50% between now and 2014.

He is expecting growth in the mechanical circulatory support arena where very sick, end-stage heart-failure patients require left ventricular assist devices (LVAD). There aren't enough donor hearts available for these patients, and Mills points to HeartWare Int. (HTWR:NASDAQ) (Mills: Buy; Target $95), which is innovating through LVAD miniaturization, making a very difficult and highly invasive open-chest procedure easier with patients spending fewer days in the hospital and suffering lower rates of morbidity.

Another favorite is Spectranectics Corp. (SPNC:NASDAQ) (Mills: Buy; Target $14.50), an up-and-coming company innovating and providing excimer laser instruments to treat peripheral artery disease (PAD). The idea is to clean out arteries that are narrowing and getting clogged with atherosclerotic plaques that can cause a patient to lose a lower extremity. He says the PAD market is still underpenetrated, and he estimates it is growing at the rate of 10%/year. In addition, Spectranetics has what could be a "killer app" in treating peripheral in-stent restenosis, "which is the bane of interventional cardiology—you have plaque that proliferates into the stent, which then fails," he says.

Mills also follows Volcano Corp. (VOLC:NASDAQ) (Mills: Hold), on which he is rather neutral at the moment because of the "general sluggishness in the underlying growth of percutaneous coronary interventions (PCI)," he says. But he says "the company has done a phenomenal job of outgrowing the underlying growth in PCIs to where it's actually had negative growth on the back part of last year."

He goes out of his way to mention AtriCure Inc. (ATRC:NASDAQ) (Mills: Buy), which is in the major growth market of atrial ablation to treat atrial fibrillation. AtriCure's technology is designed for surgical use, meaning that when the cardiovascular surgeon is grafting new vessels to the wall of a heart, the short circuits in the myocardium can be zapped while the chest is open. It only adds about five minutes to the entire procedure, and studies show that results are outstanding with an overwhelming majority of patients getting a veritable cure for a problem that can be deadly.

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