VNUS Medical Technologies Inc. (VNUS) is a leading provider of medical devices for the minimally invasive treatment of Saphenous Vein Reflux Disease. The company possesses a technological advantage over competitors (laser), which has led to significant market share gains in recent quarters. We expect this trend to continue with the release of new products in 2009 and beyond.

However, we are changing our recommendation to Sell on valuation. At the current price, VNUS trades at 3.4x 2009 revenues, considerably higher than the industry mean of 2.5x 2009 revenue. While VNUS is the leader in the niche market it operates, the valuation appears too rich for the current economic environment.

The stock is trading at the same level it was before we entered the financial crisis. We recommend investors begin taking profits at these levels and purchase on future sell-offs. We apply a 10% premium to the industry mean P/S, yielding a P/S of 2.75x 2009 sales. This brings our target price approximately to $17.50.

Rajarshi Maulik contributed to the report.

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