TranS1 Trading at High Levels
TranS1, Inc. (TSON) reported Q4 results in-line with our estimates on better gross margin offset by higher operating expenses. Increasing support expenses and recent physician reimbursement issues dampens the growth outlook. We are decreasing the revenue outlook slightly reflecting the reimbursement headwind. Our loss estimates consequently increase.
The TranS1 procedure offers a minimally invasive approach to alleviate pain from degenerative disc disease in the lower lumbar region, avoiding or reducing typical problems with conventional fusion approaches. The company currently markets two single-level fusion products, AxiaLIF and AxiaLIF 360° in the U.S. and Europe, and a two-level fusion product, AxiaLIF 2L in Europe, with FDA approval expected in 2008.
The company is now in the midst of market development and is growing revenues -- off a small base -- at a very rapid rate. However, the company is exposed to significant financial, operating, execution and competitive risks at such an early stage.
At the current price, TSON trades at 11.5x 2008 revenues, a significant premium to the comparables 9.5X 2008 revenues average. We had previously valued the company at 7x forward revenues. Given the increased reimbursement and execution risk, we are discounting TSON to roughly 6x forward revenues, still a substantial premium over the comparables 3.4x 2009 average. The premium can be justified by the significantly higher revenue growth outlook for TSON. Our target moves to $16.
Inspire Pharma Still Inspiring
Inspire Pharmaceuticals, Inc. (ISPH) is a specialty pharmaceutical company engaged in the development and commercialization of treatments for respiratory and ophthalmologic disorders. Currently, the company has three products on the market and a robust pipeline. We see strong top line growth from 2008 and beyond.
The company has a strong collaborative alliance with Allergan Pharmaceuticals (AGN) for key products that treat dry eyes and allergic conjunctivitis. The current price is attractive. We maintain our Buy rating on shares of Inspire with a price target of $8.50.
We believe Inspire is heading in the right direction. Elestat and Restasis continue growth momentum. Although initial uptake of AzaSite has been slow, we believe sales may pick up momentum after a few quarters and that AzaSite sales will drive top line and bottom line growth going forward. We believe Denufosol could total $300 million alone given its potentially superior characteristics for cystic fibrosis [CF].
