Spectranetics plans follow-on stock sale to raise up to $50 million; posts 1Q loss versus year-ago profit

By Ronda Fears

Memphis, April 19 - Spectranetics Corp. announced first-quarter results Wednesday and plans to raise up to $50 million in a follow-on stock offering, including the greenshoe. While the quarter's performance mildly pleased onlookers - with revenue up 50% year over year while profits reversed to a loss - the deal put extreme pressure on the stock as it caused some players to question the timing.

Guy Childs, chief financial officer of the medtech firm, said comments on the offering could not be in any detail as it is in a quiet period before the deal launches.

But on questions from some participants on the quarterly conference call related to possible acquisitions with the proceeds, he said, "I can't talk about that. It will be addressed probably in the offering."

Joint lead mangers of the deal are Jefferies & Co., Inc. as bookrunner and First Albany Capital Inc. Montgomery & Co., LLC and Rodman & Renshaw, LLC are co-managers. Timing and a launch, however, have not been established.

Colorado Springs, Colo.-based Spectranetics develops, manufactures and distributes single-use medical devices used in minimally invasive surgical procedures within the cardiovascular system for use with its proprietary excimer laser system.

Spectranetics says its excimer laser system, CVX-300, is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple, minimally invasive cardiovascular procedures, including atherectomy for the treatment of peripheral and coronary arterial disease and also for the removal of infected, defective or abandoned pacemaker and ICD leads.

"I wouldn't worry about the offering," said one trader in the stock. "Listen carefully to the [earnings] call, they're firing on all cylinders, exceeding all prior announcements and planning for the future robust demand for their products. All of the above will take additional capital and the offering provides that; they may have their eye on a company that fits in the long-term plan as well. I believe this will be a major league home-run for those who have the patience to hang in there."

Follow-on timing debated

Spectranetics' deal plans were not necessarily un-welcomed but some players complained that the timing was not the best.

"I think raising some capital for the next growth stage is a good thing, but the timing of the release, conference call, et cetera, just stinks," said one Spectranetics player in Chicago.

"Don't get me wrong. This company has a very bright future and I'm in for the long-haul. That said, there are ways to handle a secondary in order to maximize the pricing and the way they have gone about this one just goes against reason, what with 13% sequential growth in first quarter, plus note that the company already has exceeded the management guidance for 2006. The stock should have been up big time and look at where we are, all because of the secondary."

The stock opened modestly lower Wednesday - at $11.89 versus Tuesday's close of $11.97 - on the quarterly result but began to quickly sink into negative territory after the follow-on news hit the tape, declining by as much as 5% before the earnings conference call began at noon ET before bouncing back before the close.

Spectranetics shares (Nasdaq: SPNC) settled the day off by 14 cents, or 1.17%, at $11.83.

Another buyside market source, however, said the company might as well bring a deal now with pleasing earnings at the forefront of the market's recollection.

"Timing of the offering was OK. There is never a good time to have a secondary. It will always temporarily knock the share price down. They will probably address the secondary during the conference call," the latter buysider said.

"Besides, the dilution at this stage of their growth is only about 15%, so it's no big deal. I tried to buy some more in the $10.70 range this morning and it took off without me. This really is a long-term growth story, not a trading vehicle. The liquidity in Spectranetics makes if very difficult to trade much at one time."

Some see acquisition brewing

One more thing the source in Chicago said was a downer for the deal is that the plans for the proceeds are murky. Several onlookers, though, are anticipating the company will be on the hunt for an acquisition.

"Hopefully the company will explain what it intends to do with the cash from the stock offering - acquisition? They have already been spending the increasing revenues to grow the company at the expense of growing earnings and seem to be [in] good shape financially," the fund manager said.

"Will Spectranetics use the proceeds to fund internal growth to allow some of the revenues to drop to the bottom line and show some earnings? Or, are they contemplating an acquisition? MDRX recently did this... did an offering when they didn't appear to need the cash. I surmised they were going to do an acquisition since they didn't need the cash...they in fact did make [an] acquisition announcement shortly after the offering. If the company doesn't bring it up in the CC [conference call], hopefully someone will ask about it; I would be surprised if it doesn't come up."

A sellside trader said it was expected that Spectranetics would address the deal, including the use of proceeds on its earnings conference call.

"I, too, believe they are going to do an acquisition, because of the size of the offering, which I think will let them show earnings sooner," the trader said. "Anyway, they better have some good stuff to say on the conference call to justify the secondary. Lastly, I think that sometime soon, probably before next quarter [results] they will raise guidance. I estimate that they will bring in between $60 to $63 million in revenues this year."

First quarter reverses to loss

For first quarter, Spectranetics posted a net loss of $638,000, or 2 cents per diluted share, compared with net income of $75,000, or breakeven on a per diluted share basis, in first-quarter 2005, while revenue climbed 50% to $13.6 million from $9.1 million.

Revenue growth, the company said, was driven primarily by its atherectomy product sales, which increased 97% year over year.

"The acceleration of revenue growth in the first quarter reflects our continuing focus on penetrating and expanding the market for laser atherectomy to treat PAD [peripheral arterial disease]," said Spectranetics chief executive John Schulte in a prepared statement.

He said that during the quarter the company also increased the number of field sales employees to 67 from 55, putting it on target to build its sales organization to 75 to 80 employees by year-end.

Cash and equivalents plus investment securities at March 31 came to $11.2 million, compared with $16.9 million at Dec. 31.

2006 outlook maintained

The company confirmed its guidance for 2006 results, too, saying it still expects a net loss of $2.5 million to $5.5 million, assuming gross margins in the mid-70s. Stock-based compensation impacting the bottom line is estimated to be in the neighborhood of $2.5 million to $3.5 million during 2006, the company said.

Revenue is forecast at $55 million to $58 million, representing 27% to 34% growth over 2005. Factors in the revenue growth, the company said, are continued penetration of the peripheral atherectomy market and the ongoing expansion of its field sales organization, among other things.

"I was really hoping for some upside on the bottom line. The company is sticking to its projections of no earnings this year and now they are issuing more stock," said another buyside market source.

"As I said last quarter, I don't expect a meaningful move up until a growing top line falls to the bottom line - earnings. The company issuing up to $50 million in additional stock will further keep the stock under pressure. We've all seen it before. A company announces it's issuing more stock and the stock price stagnates or drops until the offering is completed. I like their product and market but will continue to stay on the sideline until the company can demonstrate meaningful earnings growth."

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