Neutral on American Medical

We maintain our Neutral recommendation on leading pelvic-health devices maker American Medical Systems (AMMD). Its first-quarter fiscal 2011 earnings of 33 cents per share beat the Zacks Consensus Estimate of 30 cents.

Both revenues and profit rose roughly 4% year over year on the back of higher sales from the Minnesota-based company’s men’s health and women’s health businesses, assisted by a healthy contribution from its international operation. Sales (of $140.8 million) for the quarter also beat the Zacks Consensus Estimate.

American Medical’s men’s health division remained on the growth track supported by the strength at its male continence business. Its benign prostatic hyperplasia (“BPH”) therapy business posted healthy growth in the quarter, led by the GreenLight XPS laser therapy and the next-generation BPH therapy system MoXy Liquid Cooled Fiber.

The pelvic floor repair products (such as Elevate anterior and Elevate posterior) remain the key growth engine for the company’s women’s health division.

American Medical is a world leader in manufacturing medical devices and procedures for treating health problems of both men and women. The company competes with larger players like Boston Scientific (BSX), Johnson & Johnson (JNJ) and C.R. Bard (BCR).

American Medical has a strong pipeline and remains focused on rolling out new products to drive growth. The company expanded its BPH therapy range with the launch of GreenLight XPS in May 2010 and MoXy Liquid Cooled Fiber, in September 2010. American Medical’s GreenLight HPS laser system was recently cleared in Japan, representing another important milestone.

American Medical has a dominant position in both male and female incontinence markets. However, the company is exposed to a significant reimbursement risk and its European markets are yet to fully recover from the macroeconomic softness.

American Medical is slated to be acquired by specialty healthcare solutions company Endo Pharmaceuticals (ENDP) in the third quarter of 2011. Under the deal, announced in April 2011, Endo Pharmaceuticals will buy the company for $2.9 billion or $30.00 per share in cash. The consideration includes the assumption of $312 million of debt.

The transaction has been approved by the Boards of both companies and is subject to the approval of American Medical’s shareholders, antitrust clearance and attainment of other closing conditions. The company will announce a special shareholder meeting in due course to secure stockholder clearance of the proposed deal.

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