RAJ DENHOY
SENIOR ANALYST
PIPER JAFFRAY

COMPANY: Kyphon
TICKER: KYPH (Nasdaq)
PRICE: $38.70 (as of 4 p.m. yesterday)
52-WEEK RANGE: $24.85-$46.87
MARKET CAPITALIZATION: $1.71 billion

Raj Denhoy is a senior analyst at Piper jaffray in New York. Kyphon designs and manufactures medical devices to treat various spinal conditions.Mr.Denhoy spoke to David Dalley of The New York Sun about why he believes the stock could rise by more than 23% over the next 12 months.

What does Kyphon do?

They make a device for treating what are called vertebral compression fractures.The spine is made up of a bunch of bones called vertebrae. In some people, typically elderly women, those bones can become brittle and can collapse. Kyphon makes a device which is basically a very rugged balloon at the end of a catheter, which is inserted into the collapsed vertebrae and then inflated. It creates a pocket inside the bone, which is filled with a type of cement. In the process, the height and positioning of the vertebra is corrected. Some women have humps which are caused by a series of these fractures. If you can catch them early, you can correct them using this device.

Why do you like the company?

The way these fractures were treat ed previously, there was no balloon involved. Clinicians would often just fill the void with the cement, but the height and positioning weren’t restored.The bone was essentially locked into the collapsed position.

Kyphon came up with the idea of the balloon to restore the natural height and positioning of the spine as part of the process. It represents a fundamental advance in the way the condition is treated.

What’s driving growth?

The market is still very underpenetrated. There are 700,000 fractures per year in the U.S., that many again in Europe, and about 500,000 in Japan. In 2005,Kyphon treated only about 60,000 fractures, so there’s still a tremendous amount of the market left to penetrate. Their product is the best for treating this condition, and, importantly, they have very good intellectual property protections in place.

How does it look on fundamentals?

It’s a very fast growing company. Revenue in 2005 grew by 44%, and earnings grew by 88%.We’re expecting that to slow a bit in 2006 because the company is becoming quite large now. We’re predicting 27% growth in revenue and 29% earnings growth in 2006.

On a P/E basis,it’s trading at about 32-times 2006 earnings.For a stock growing as fast as it is, that’s not overly priced. They should be able to grow the top line very quickly in the current market.

Apart from that, Kyphon also represents a pretty attractive acquisition tar get for some of the larger medical device companies. It’s a novel business with very rapid growth. It would look attractive to, say, a large orthopedic company looking to expand.

What do you think the stock’s worth?

We have a $48 price target on this stock over the next 12 months. That’s basically that same multiple applied to our 2007 earnings estimate of $1.50.

What are the risks?

The primary risk is the emergence of competition. They won a very important patent lawsuit last year that reaffirmed their strong intellectual property position. There is still a risk that at some point a larger company could launch a similar product and fight the legal protections, and that creates some uncertainty. It’s something that we keep an eye out for, but we’re not overly concerned.