The telltale heart
This US$4.27 technology stock is about to enter the Red Zone of Profits—buy now for 300% gains!

When I first came across this company, I was told that someday it would provide the catalyst for an easy fortune. The math is deceptively simple. Heart disease causes 100,000 deaths a year in the U.S. But there are only 2,000 heart transplants a year.

That leaves 98,000 people a year who die because their hearts give out. And yet, we live in a world where a workable, battery-operated, fully insertable mechanical heart exists. There is one public company that has the clear lead in this field. You may have heard of them. They go by the name of Abiomed (ABMD:NASDAQ).

Smooth operator

Two years ago, in the summer of 2001, Abiomed became the darling of Wall Street after inserting the first AbioCor hearts into critically ill patients. At one point the stock was trading at US$28. (And I recall readers of the Taipan Group’s daily e-letter, the 247profits e-Dispatch, had the opportunity to hitch a ride or two on ABMD’s stellar rise, netting profits of 18% to 46% between various entry opportunities in 2001–gains that disappeared as the stock hit one stop loss after the other in 2002.)

Abiomed garnered the attention of every newspaper, magazine, and broadcast television show in the United States. After all, it had a great story. Its technology cheated death. It turned invalids knocking loudly at death’s door into rosy-cheeked convalescents who for the first time in years were able to leave their beds and roam the neighborhood.

There’s just one problem with cheating death: death always wins out. Even a life extension of several months beyond the wildest expectations of the doctors comes to an end. Thus far, eight artificial hearts have been inserted over the past two years. Six people died. Two are still alive, one of them a spectacular eighteen months after surgery.

But if cheating death sells stock, death winning out sends prices plunging. Until last week, no implants had been performed for eight months. A moratorium was called while the company worked out some bugs. It seems the valves caused blood clots, which led to strokes. The stock hit a low of US$2.35. But the most recent insertion suggests that these problems have been solved.

High number of deaths

The seemingly high failure rate has to do with the tough criteria required for recipients. A patient must have less than 30 days to live to qualify for the trial. This means that Abiomed must find people who are going to die, but who are strong enough to live if they get the heart.

Abiomed received permission to perform 15 heart implants in the first trial. There are seven left, and they are not about to squander their remaining chances. It is an absurd set of circumstances that leads to hyper-caution and a lack of testing.

Abiomed has simple goals: if the patient lives more than 60 days, the heart has extended life and the product works in terms of this trial. All patients have met this limited criterion. The investment community didn’t sell the deaths so much as they sold the moratorium.

As I’ve said, the eighth operation happened in mid January. The result: so far, so good. The stock price jumped to US$5.03 and is starting to settle back.

How the thing works

The AbioCor Implanatable Replacement Heart is a fully self-contained system for patients suffering from end-stage coronary heart disease. There are no wires running outside your body. It is recharged through the skin.

The AbioCor has two blood pumping chambers, each capable of delivering two gallons of blood a minute. The right pump goes to the lungs. The left pump sends blood to the rest of the body. The amount of blood pumped is scaled to the body’s needs. The heart is about the size of a softball and is constructed from a special material called Angioflex created by Abiomed.

How they make money

AbioCor is in the early development phase. Abiomed makes money from the BVS 5000–the most widely used biventricular assist device in the world. Last year, this product made up most of the company’s US$20 million in revenues.

Other companies such as Thoratec (THOR:NASDAQ) and World Heart (WHT:Toronto) also make biventricular assist devices. THOR has US$98 million in sales and a US$502 million market cap. That puts them at roughly 4.10 times sales.

World Heart has about US$9 million in revenues and trades at about 3.57 times sales. But it trades on the bulletin boards and is still fishing for private placements in order to continue as a going concern. They have US$1.5 million in cash and a US$27 million market cap. I expect you will see a great deal of dilution of shares before you see any real return from this company.

Cost cutting

Abiomed is on track to lose US$1.02 a share (US$21.42m) this year with revenues of US$20 million. They have 21 million shares out with a small float of 13.6 million, which puts their market capitalization at US$88 million. That means they trade at 3.38 times sales–less than the two biggest competitors, even though they don’t have the advanced technology of a fully insertable heart. Absurd!

Furthermore, Abiomed has US$60 million in cash and short-term investments. That means they can last another three quarters without further dilution.

The company maintains that it will be a going concern at the end of its current trial, i.e. halfway through 2004. To do this, Abiomed is cutting costs to slow down the burn rate. So far restructuring has included axing 21 of 290 employees and outsourcing most manufacturing of electronic components.

Catalyst for share price appreciation

By the time you read this, the latest implant will be almost a month along. I expect some remarks about the patient at the conference call in late January. (Check the Taipan website for updates.) Also, the long-term survivor will be approaching 17 months with great quality of life.

As you can tell by this chart, Abiomed is "long gone and forgotten". By the way, this is my favorite chart pattern. All of the weak hands are out. The volume has dried up, and there is no one left to sell. The upside is vastly greater than the downside. Any positive information, such as a string of successful implants, would propel this stock into the US$8 to US$12 range for a possible 300% return. Interest is coming back. Things are starting to percolate.

Buy Abiomed, (ABMD:NASDAQ) under US$4.50 today. Investor Contact: Abiomed, Inc., tel. 978-777-5410.