Short seller Kerrisdale Capital attacked atrial fibrillation-focused medtech AtriCure in a report Wednesday, arguing the company's core cardiac ablation business is "structurally unprofitable" and its move into minimally invasive procedures will fail.
Kerrisdale said surgical ablation growth will soon plateau as the market is fully penetrated. AtriCure is closing in on approval of a minimally invasive device that could lessen its reliance on open surgery but the firm sees the product as "completely obsolete" given improvements in catheter ablation.
- Shares in AtriCure plunged 14% immediately after the grim assessment but rallied to close almost flat, with analysts at SVB Leerink rebutting Kerrisdale’s arguments.
Shares in AtriCure have increased by 60% over the past year despite the deferral of procedures due to COVID-19 causing its revenues to fall 31% in the second quarter. The gains reflect a growing belief that AtriCure's minimally invasive Convergent procedure can add to ongoing double-digit growth at its legacy businesses.
AtriCure makes most of its revenues from devices that are used during open-heart surgery to ablate structures linked to atrial fibrillation. Ablation is not the primary purpose of the surgeries but, as they have access to the heart, some surgeons choose to eliminate structures linked to atrial fibrillation at the same time as treating another condition.
Believing the market to be underpenetrated, AtriCure sees ways to maintain double-digit growth in its core business even as open-heart surgery is replaced by less-invasive procedures in some areas. Analysts at SVB Leerink calculate Convergent could bring growth up to 20% by enabling AtriCure to treat atrial fibrillation patients who do not need open surgery.
Kerrisdale has a different view. "As Convergent fails and surgical ablation gives way to less invasive treatment modalities, we expect that profits will continue to remain elusive and that AtriCure’s share price will suffer some ablation of its own," the short seller wrote.
Kerrisdale, which would profit from declines in AtriCure's stock, disputes the company's claim that the surgical ablation market is underpenetrated. While analysts at SVB Leerink estimate the open ablation market is 25% penetrated, at most, Kerrisdale said the proportion of open procedures that include concomitant ablation is now 80%.
Kerrisdale reached its figure after reviewing a study that suggests around 10% of patients treated in open-heart procedures are candidates for ablation. AtriCure sees the addressable market as being far larger. The difference matters as AtriCure has little opportunity to grow by winning market share and the number of open procedures performed annually is being pressured by less-invasive options.
AtriCure calculates the U.S. opportunity for standalone ablation procedures is as much as twice the size of the concomitant open surgery sector it already dominates. If AtriCure is right, the approval of the device used in its minimally invasive, standalone Convergent approach will unlock a big growth opportunity. Kerrisdale argues the opportunity is an illusion.
"Convergent will fail because it doesn’t consider the role of electrophysiologists at the center of AF treatment. For AtriCure's gambit to succeed, EPs would have to refer their patients for a Convergent procedure, but they already perform catheter ablations on an outpatient basis, and without the risks of surgery. Asking EPs to split an ablation with a surgeon is tantamount to telling them they're not skilled enough to do it on their own," Kerrisdale wrote.
AtriCure and its supporters argue Convergent is better at treating persistent atrial fibrillation than catheter ablation. Kerrisdale said electrophysiologists it consulted called that argument "laughable." Analysts at SVB Leerink accepted getting buy-in from surgeons and electrophysiologists will "likely take time" but see an unmet medical need for Convergent, arguing that catheter ablation has a poor track record in patients with persistent, long-standing atrial fibrillation.