Establishment Labs (NASDAQ:ESTA) and Cutera (NASDAQ:CUTR) are two of the top picks for 2021 and 2022 from Chris Cooley of Stephens Inc.
Chris Cooley, CFA, is a managing director leading the medical devices and hospital supply sector. Mr. Cooley joined Stephens Inc. in July 2010 and has over 20 years of equity research experience.
Prior to joining Stephens, Mr. Cooley began his professional career with Dean Witter and also worked for Cargill, Inc., Morgan Keegan, SunTrust Equitable Securities and FTN Equity Capital Markets.
Mr. Cooley received a master’s in business administration, with concentrations in finance and operations management from the University of Tennessee and a bachelor of science degree in economics from the University of Arkansas.
In this 2,172 word interview, exclusively in the Wall Street Transcript, Mr. Cooley picks several small cap and medium cap healthcare winners including Establishment Labs (NASDAQ:ESTA).
“At the outset of the pandemic, last year, we saw a moratorium on all elective procedures and also a material decline in surgical volumes in general. The hospitals were full, people didn’t want to, or couldn’t get into the hospital, and physicians were limited in terms of their patient access as well.
What we’ve really seen since that time is a more efficient process evolve. We’ve also seen vaccination rates increase.
And so now, pretty much across the board, we’re seeing surgical volumes approach pre-COVID-19 norms. In regard to procedure volume trends, I’d also say that we’ve definitely seen the pandemic usher in heightened focus on practice efficiency, as clearly, you can see fewer patients, and there’s a greater burden there to get those patients in and treated.
We’ve seen uptake in terms of the use of PPE and other sterilization technologies. And also, lastly, just a greater acceptance on the part of both patients and physicians alike to use telemedicine when appropriate.”
The Establishment Labs (NASDAQ:ESTA) pick is based on a COVID 19 recovery thesis from Mr. Cooley:
“Coming out of the post-pandemic era, we definitely like the aesthetics space.
If we use the last three financial crises as a predicate, in each of those events, we saw the consumer exhibit a willingness to invest in themselves or splurge, if you will, and do things for themselves.
We’re seeing a very similar phenomenon now coming out of this pandemic crisis. So we’re seeing very strong uptake in terms of aesthetic procedures broadly, both non-surgical — whether it’s a straightening of teeth, microdermabrasion for the face, fat reduction and body contouring — as well as actual implants and surgical, more aggressive surgical procedures.
Households have higher levels of disposable income due to the limitations on travel and activities during the pandemic, and it’s also pretty interesting to note that the sector has really pivoted and it’s now perceived as more mainstream than it has been maybe even three to five years ago with non-surgical procedures as preventative in nature, and really becoming the norm across all age groups and demographic segments.
So we’re definitely bullish on that.”
This leads into the specific investment thesis for Establishment Labs (NASDAQ:ESTA) from Mr. Cooley:
“…Within the aesthetic space, we’d highlight Establishment Labs (NASDAQ:ESTA).
The company’s Motiva family of silicone gel breast implants is pending FDA approval right now. And outside of the United States, their Flora Tissue Expander is the only tissue expander which does not have any metallic elements, so you can still do an MRI without having to remove the expanders.
Establishment Labs (NASDAQ:ESTA) also has a new offering, the Motiva Mia, a minimally invasive procedure, which basically has the potential to transform aesthetic breast augmentation surgery to essentially an outpatient kind of lunchtime type procedure under a local anesthetic. So very, very exciting portfolios there.”
The concerns from Mr. Cooley are mostly macro in general.
“Most of my concerns going into calendar 2022 are macro in nature. First, we’re going to be anniversarying the COVID rebound and we don’t yet know the impact of the variants of COVID-19 that we’re seeing right now, the Delta and Mu variants.
So this is going to be a challenge for investors when we look at the comps and what these companies are going to be able to do in the environment that’s presented.
From a market perspective, we’ve really seen a bifurcation of market performance based on sector and liquidity.
And if we continue to see rising rates of inflation and even greater talk of the potential for stagflation, we could see pressure assigned to elective and premium procedures from just a market perception standpoint.
And then lastly, I’d note that CMS has increasingly demonstrated a willingness to cap or limit reimbursement in the outpatient setting.
And we’re seeing private payers increasingly require pre-authorization, all of which may ultimately lead to pressure on innovation. That, too, may weigh on the sector going forward, so we’ll just have to continue to watch that closely.”
Despite Establishment Labs (NASDAQ:ESTA) being one of Mr. Cooley’s top picks for the rest of 2021 and 2022 he reserves his highest praise for Cutera (NASDAQ:CUTR):
“Within the aesthetic space, right now, we’re very bullish on the Cutera (NASDAQ:CUTR) story.
Cutera offers one of the most comprehensive product platforms in the industry. But the real excitement is the company is in the final stages of developing an energy-based system for use in the treatment of chronic systemic acne with clearance levels that are very similar to the pharmaceutical gold standard of Accutane, but without the risk profile.
That offering should get approval as we exit the calendar year and we estimate the associated domestic capital and consumable opportunity approaches $2 billion. This really isn’t reflected in the valuation right now…
Right now, I definitely think it’s still Cutera for us.
The company is executing well and is valued at a relative discount, not only to its aesthetic peers, but materially so, versus the broader med tech index.
There is a newer management team there that’s doing a great job in terms of execution, both in terms of driving sales growth, but also in terms of expanding both gross and operating margins. And with the potential blockbuster product entry into the acne marketplace, definitely could see a further step up in terms of the growth and as a result valuation.”
Get the complete details on Establishment Labs (NASDAQ:ESTA) and Cutera (NASDAQ:CUTR) and many other picks by reading the entire 2,172 word interview with Chris Cooley, exclusively in the Wall Street Transcript.
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