You'd think investors in
would take heart.
The small medical-devices company won a major victory Monday when a
Food and Drug Administration
advisory panel gave a thumbs up to its lead product, a device that uses radiation to treat surgically opened arteries that have reclogged. The FDA generally follows the lead of its advisory panels, though it isn't bound to do so.
But Tuesday the stock plunged 11% to $48.25. What gives? Observers say the stock's sharp run-up in the months ahead of Monday's announcement is sparking valuation worries, particularly in light of the fragmented market for such a device and the potential for deep-pocketed competition.
Buying and Selling
The device, known as the Beta-Cath System, would be among the first to use radiation to open blocked blood vessels. That could lend a significant hand to cardiologists fighting the deadly problem of "restenosis," in which patients' arteries reclog after a common surgical procedure called angioplasty.
To some extent, the selloff was a classic case of "buy on the expectation, sell on the news." Novoste shares have risen more than sixfold this year on the view that the Beta-Cath device would be approved (along with bid speculation that usually powers small medical-device stocks with promising products). Now that the preliminary approval is obtained, the "upside" for the stock is limited, so it's time to take profit, accounting for today's slump, the reasoning goes.
But others say the stock could fall still further, contending that sales forecasts for Beta-Cath don't justify the stock's $771-million market capitalization.
"We're excited about the approval, but the stock is a little overvalued," says Lynn Pieper, a medical-devices analyst with Boston investment bank
Adams Harkness & Hill
, which has an accumulate rating on the stock and hasn't done corporate finance work for Novoste.
Analysts say a number of questions hover over Beta-Cath, such as the size of the market, whether cardiologists will adopt the product and how much benefit it offers over existing therapies. Furthermore, health care giant
Johnson & Johnson
could soon gain approval for a similar device, posing a major challenge to Novoste with its limited sales force.
Current sales data may offer some indication of the sales potential. Beta-Cath has been sold for more than a year in Europe, but in the second quarter, Novoste generated only $1.2 million in sales outside the U.S. Based on that, it could be a major challenge for Novoste to meet what Pieper says are analyst forecasts of $45 million to $50 million in sales in 2001.
Sky's the Limit?
But the company says the market in Europe is fragmented and that the U.S. would be a much larger opportunity. It says it remains to be seen what kinds of approvals it will gain for Beta-Cath. The FDA advisory panel unanimously recommended approval for the device to abate restenosis, but the company is testing the product for use as a single agent to unblock arteries. If it proves effective in that, it could pose a challenge to widely used balloon angioplasty, a system in which a tiny tube called a stent is installed in a blocked artery.
"If the data is good in this indication, Beta-Cath could be in competition with coronary stents," says Cheryl Johnson, a Novoste spokeswoman.
But some cardiologists say radiation is still too challenging to justify its use, particularly when current techniques, such as additional angioplasty, is effective in many cases. Furthermore, new stents impregnated with drugs are close to market, offering what could be a safer alternative.
"All of the radiation therapies in testing are cumbersome and logistically a nightmare," says the director of one major Western U.S. cardiology center who asked to remain anonymous. Since the use of radioactive substances like strontium-90 increases risks to medical personnel, cardiologists are sometimes loath to test such techniques, even though this one shows promise in reducing restenosis.
"You are asking invasive cardiologists, who are already getting too much X-ray exposure on a daily basis, to have additional hazard duty to use a potentially dangerous therapy of less than perfect success," says this cardiologist, whose center performs thousands of balloon angioplasties each year.