We are short shares of AtriCure, a $1.9bn medical device company that manufactures and sells ablation equipment used in the surgical treatment of atrial fibrillation (AF). At about 7x forward revenues, AtriCure’s valuation implies that the company’s outlook is brighter than at any point in the last decade. But with the company’s core surgical ablation market almost completely saturated, and the relentless improvements in catheter ablation technology accelerating, AtriCure is facing both rapidly decelerating revenue growth and the threat of technological obsolescence, simultaneously.

At the root of AtriCure’s impending difficulties is the company’s reliance on surgical cardiac ablation procedures, which underlie roughly 80% of the company’s revenue. The overwhelming majority (over 90%) of these procedures are performed concomitantly with open-heart surgery that patients undergo irrespective of their AF – the chest is already open, so the surgeon takes some extra time to ablate the cardiac structures from which the AF originates. The problem for AtriCure is that, despite demographic tailwinds, the absolute number of open-heart surgeries has stagnated over the past decade as less invasive procedures, and earlier medical intervention, have successfully reduced the need for risky surgery. In stark contrast to AtriCure’s claims, about a tenth of these procedures are performed on patients with preoperative AF, and the proportion of these procedures involving a concomitant ablation has steadily doubled to about 80% over the last decade, leaving little room for growth through further penetration. AtriCure’s inability to turn a profit, even as it dominates an almost fully penetrated market, suggests that its core business is simply structurally unprofitable.

With the plateauing of surgical ablation growth in clear sight, AtriCure has been making a strong push for its “minimally invasive” Convergent procedure. While surgical ablation is usually restricted to patients already undergoing open-heart surgery, Convergent’s minimally invasive nature aims to enable most of the benefits of surgical ablation on a stand-alone basis for all patients with persistent AF. Investor optimism about this market expansion has led to the explosion in AtriCure’s valuation.

But Convergent will fail because it doesn’t consider the role of electrophysiologists at the center of AF treatment. For AtriCure’s gambit to succeed, EPs would have to refer their patients for a Convergent procedure, but they already perform catheter ablations on an outpatient basis, and without the risks of surgery. AtriCure claims that Convergent is far more effective for treating persistent AF than catheter ablation, but the EPs with whom we spoke found that claim laughable. The accelerating improvements in catheter ablation technology over the past decade have made it much easier for EPs to non-invasively create all the same cardiac lesions as Convergent. Asking EPs to split an ablation with a surgeon is tantamount to telling them they’re not skilled enough to do it on their own. We expect that to work out very poorly for AtriCure.

Meanwhile, new technologies, particularly pulsed field ablation (PFA) and real-time electrical mapping, are set to dramatically advance catheter ablation. PFA creates lesions rapidly and precisely without any of the safety issues involved in thermal cardiac tissue ablation, while real-time cardiac mapping allows EPs to identify and eliminate sources of AF with much greater precision. The upshot is that catheter ablation is set to become safer, faster and more effective than ever, making any stand-alone surgical ablation – including Convergent – completely obsolete, while also encroaching on AtriCure’s core surgical business. As Convergent fails and surgical ablation gives way to less invasive treatment modalities, we expect that profits will continue to remain elusive and that AtriCure’s share price will suffer some ablation of its own.

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