Cashing in on Kidney Stones

05/09/2003 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

"Kidney stones strike about one million people in the US each year. In the case of tiny stones—which can be quite painful even if they're the size of a grain of sand—doctors often do what they have always done: wait for them to pass. For the one-third of kidney stone cases that require hospitalization, another course of action is required. Until 1984, the only option for larger stones was surgery. For about 20 years now, we've had a better answer. Here's Michael Murphy's review from Health Investing.

"HealthTronics (HTRN NASDAQ) is one of the leading providers of a treatment called extracorporeal shockwave therapy, or ESWT, which has been successfully used for years to break up calcium and other mineral deposits. ESWT works by sending powerful pulses of energy into the body through a rapid series of tiny explosions or acoustical pulses. What's makes HealthTronics so attractive right now is that researchers are realizing that ESWT is useful for more than just treating kidney stones. Heel spurs can be treated with it, providing relief to a painful condition that strikes an estimated 5% to 10% of serious runners (alone representing up to a million people in the US), as well as overweight individuals, and people who have to work on their feet all day. ESWT works on heel spurs because they are actually calcium deposits that form in muscle tissue. The same goes for tennis elbow, which affects 1% to 3% of the general population, or roughly six million patients.

"There is only one ESWT machine currently approved by the FDA to treat heel spurs and tennis elbow, and HealthTronics is the exclusive distributor of this machine in the US, Canada, and the Caribbean. The machine, is manufactured by a Swiss company, but HealthTronics is their agent in the US. HealthTronics conducted the clinical trials and submitted for FDA approval to use the device for these orthopedic indications. Final approval to treat tennis elbow just came on March 17. HealthTronics starts practice partnerships in various locations, gives a group of physicians a machine, and then retains a 30% to 40% stake in the shock-wave treatment practice. Thus, instead of just booking one-time sales of equipment, they get ongoing revenue from treatment of patients. Pretty clever.

"HTRN did about 5,000 orthopedic procedures in 2002 (vs. 34,000 kidney stone procedures), charging insurers about $4,500 for each. They expect that number to double this year as shock-wave treatment catches on in orthopedic circles, and they start to treat patients with tennis elbow. The potential goes beyond that. Other possible orthopedic uses for shock-wave therapy could include calcified shoulder tissue (a form of rotator cuff tendonitis), hip necrosis, tendonitis of the Achilles' tendon and patella (knee), even non-union bone fractures. In every instance, insurance companies love shock-wave therapy, because this quick, non-invasive treatment provides a cheap alternative to surgery. Treatment is done on an outpatient basis; there is no surgeon's bill; no hospital stay; and outcomes are better, cheaper and faster.

"In March, the company gave financial guidance for the year, expecting to bring in revenues of $100 million with earnings per share of 65 cents to 70 cents. That means the stock is trading at about 1X annual sales. Perhaps the biggest risk with HealthTronics is the stock's lack of liquidity, which makes for greater volatility. On average, just 50,000 shares trade hands a day, although that number has been much higher recently. An extraordinary percentage—almost 50%—of HealthTronics shares are owned by management and other insiders. Buy under $9.50. I look for HTRN to hit $15 by the end of 2003—which would be almost a 60% jump from our buy limit."

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