The medical device field is all about breakthrough technologies... and I just found two companies that have them.
Medical Device Stock #1
LED Medical Diagnostics (TSX-V: LMD)(OTC: LEDIF)
LED is a small Canadian outfit that's on the verge of becoming a household name.
The company is a global leader in tissue fluorescence visualization. It has patented and proprietary devices (already commercialized) based on its own imaging technology that allow for the easy detection and treatment of disease in human tissue.
More simply, this company has a device that allows doctors to see and remove pre-cancerous spots in human tissue that are not visible to the naked eye.
The goal is for it to become the standard technology in pre-cancerous detection.
LED Medical was a private company for nine years, during which it secured $50 million from the National Institutes of Health and the BC Cancer Agency. It also raised $20 million in private equity, a large portion of which was raised at $1.80 per share.
You see, LED knows its investors didn't put up gobs of money to see it grow from a $23 million start-up to a $50 million nano-cap stock. They invested in a company that has the potential to be a multi-billion-dollar heavyweight in the medical arena.
And LED isn't going to let them down... On the contrary, the company is going to exceed its investors' expectations.
Within 10 years, LED Medical Diagnostics has become a verifiable cash cow capable of generating hundreds of millions of dollars in annual revenues and a worldwide leader in the fight against cancer.
A Visionary Invention
It all starts with the company's trademark invention, the VELscope — a device that's rapidly evolved into the world's preeminent weapon in the fight against cancer.
You might not realize this, but oral cancer is one of the most lethal forms of cancer on the planet.
Some 640,000 new cases will be discovered this year, and only half of those victims will live past the year 2019.
That gives oral cancer a 37.8% mortality rate. That's higher than rectal-colon cancer (35%), bone cancer (33.6%), breast cancer (10.8%), skin cancer (8.7%), prostate cancer (0.8%), and more.
What makes oral cancer so dangerous is that it's difficult to detect.
Dentists are legally obligated to screen for oral cancer, but most still do it manually with the naked eye.
The problem with that is over 65% of oral cancer screened manually is found in stage three or four. That leads to nearly half those patients having less than five years to live.
In its early stages, the only indication of oral cancer's presence is a slight discoloration of the gums or inner cheek.
So in most cases, the disease is only discovered when the cancer has metastasized to another location — usually the lymph nodes in the neck. Prognosis at this stage of discovery is worse than when it's caught in the mouth.
Hence the high mortality rate.
But that's where the VELscope comes in...
If you detect the cancer early (with the VELscope), the survival rate jumps to 95%. That's why the VELscope has sold over 15,000 units since 2006 and has been used to conduct over 25 million oral exams.
The VELscope is a wireless, handheld scope that helps doctors and dentists quickly and easily identify oral cancer while it's still in its early stages.
The cutting-edge technology detects tissue fluorescence, a near infrared light...
You see, when natural tissue is excited by light of an appropriate wavelength (blue), it will emit its own light at a longer wavelength (green). The resulting fluorescence can reveal a great deal about cellular, structural, and metabolic activity... or the lack thereof.
To put it simply, the VELscope is able to detect cancer that is impossible to catch with the naked eye.
Better still, it's not invasive. No dye needs to be used. There's no scraping or swabbing. It's a simple wand that takes two minutes to hold in front of a patient's mouth.
And the payoff: It could save millions of lives.
As I mentioned, oral cancer is especially deadly because it's hard to detect in its early stages. In fact, two-thirds of detection occurs in stage three or four, when it's already too late.
But with early detection by the VELscope, survival rates jump from 55% to 95%.
Not only that, it's good business.
The device is relatively cheap. It pays dentists back in just 11 weeks and adds $22,000 in profits annually.
The device has already been sold to over 15,000 dentists and is in its third generation. Nearly half the dentists that bought one... have bought a second.
Make no mistake: This is a serious medical breakthrough, and we're still just in the early stages. It's already saving lives and making a mint for its manufacturer...
The goal is to be the standard technology in pre-cancerous detection. It's certainly well on its way.
You see several videos featuring LED's products and potential applications on news shows and Dr. Oz here: http://www.ledmd.com/news-events/media-clippings/
Open Up and Say Cha-Ching
LED estimates the total North American dental market for VELscope is $730 million, with the potential to provide over 182,000 VELscope devices. The company believes it already has 8% of the North American market, and 13% is the industry tipping point that leads to mainstream acceptance and commoditization.
LED is targeting 15% market share in the United States in just two years and 40% of the global market in 2017.
Forty percent of the dentists who've bought one have bought a second. Over half the dental colleges in the U.S. already own one. The patents are valid until 2017. It's currently only in North America, but the company plans to have it in more than 23 countries by September of this year. A sales force is being put together for that right now.
Indeed, the global market is extremely promising. It could be worth as much as $2.2 billion, with the potential to provide 546,000 VELscope devices.
It's not just the VELscopes themselves, either. Each VELscope screen has disposable sheath and cap accessories. Caps cost $1.80 on average, good for a margin of 80%.
The global consumable sales market has the potential for 710 million annual screens. At $1.80 per screen, that comes out to about $1.3 billion in total revenue and $1 billion in net sales.
Furthermore, in 2012, LED partnered with PMI to launch Second Step Labs, a cytology and biopsy lab service. That means when dentists and doctors find abnormalities using the VELscope, they can collect a tissue sample and send it to Second Step rather than a third-party.
LED estimates gross revenue from each biopsy at $175-$350, with margins over 60%. The company estimates the average dentist performs more than 20 biopsies a year, creating a $750 million market in the U.S. alone. And that's recurring annual revenue.
This provides a third revenue stream for LED.
Indeed, consumables like screens and biopsies will ultimately have a much greater impact on LED's revenue and profit margins than the VELscope itself.
Better still, the VELscope itself is just the beginning.
LED's technology has the potential to develop devices that address other diseases affecting other parts of the body. The company is looking to expand into such markets as E.N.T. (Ears, Nose, and Throat), Proctology, Prostate Surgery, Gynecology, and Family Care.
In fact, privately, LED believes it could have a commercial dermatological device on the market in 18 months or less. According to the Skin Cancer Foundation, over two million Americans are diagnosed with 2.8 million cases of basal cell carcinoma and 700,000 cases of squamous cell carcinoma annually. To put the numbers in perspective, that's 85 times the number of oral cancer discoveries in the U.S. each year.
The bottom line: LED has the potential to go from single-digit millions in revenue to hundreds of millions annually in just a few years.
I'd expect the stock to double this year as a result.
Stock Information and Recommendation
LED currently has just under 75 million shares outstanding. It has just about $5 million in cash.
The company has a 52-week high of $0.63 and currently trades at $0.50, giving LED a market cap of approximately $36.5 million.
There are 37 million warrants outstanding, with the majority of those in the money, that should provide LED additional working capital when exercised and should give the stock needed liquidity to allow investors the opportunity to accumulate a position without the price getting too far ahead of itself.
Over $70 million in research grants and private equity investment, as well as FDA and Health Canada approval and WHO recognition, have given LED and its technology an important first-mover advantage in scaling out this potentially very lucrative technology.
Although there are 400,000 cases of oral cancer identified annually worldwide, there are over 85 million high-risk, North American dental hygiene patients (over 40 yrs. old, drinks and/or smokes), and there is a growing demographic of young people contracting oral cancer via HPV.
LED currently generates all of its revenues from the North American markets, but there is a focused effort by LED to not only capture a larger segment of the North American market but to make significant inroads and have a presence in dozens of countries.
The goal of capturing 15% of the $730 million North American dental market by 2016 indicates $109,000,000 in revenue. Achieving its goal of 40% of the $2.2 billion global market points to $880,000,000 in revenue.
The biopsy application is a $750 million market.
And none of this counts potential revenues from other fields of medicine or the recurring revenues from high-margin attachment items.
Just that $109 million spread over 74 million shares comes to a $1.50 share price. Getting 20% of the global market (it's shooting for 40%) would come to $440 million, or $6.11 per share.
Medical Device Stock #2
Second Sight (NASDAQ: EYES)
“The blind shall see, the deaf shall hear…” No longer is this merely hyperbole or prophecy in biblical texts of old.
And the man behind these miracles isn’t the Son of God, it’s Alfred Mann. Mann first founded Advanced Bionics in 1993, which became a leading maker of cochlear implants that restore hearing to the deaf.
In 2004, Boston Scientific acquired the company for $740 million.
He's also credited with the insulin pump, which he sold to Medtronic. And with the pacemaker, which is now owned by St. Jude Medical.
Now, Mann is backing another company that’s doing the “impossible” — restoring vision for the blind.
Second Sight Medical Products, Inc.’s mission is to develop, manufacture, and market implantable visual prosthetics to enable blind individuals to live more independent lives.
The company is directly involved in all aspects of that goal of helping the blind see; from extensive research, careful development, and precise manufacturing, to aggressively marketing finished products.
In fact, Second Sight’s brilliant brain child — the Argus II Retinal Prosthesis System ("Argus II") — will, in some cases, let the blind see (depending on the specific cause of a patient’s blindness... at least, for now).
The company was founded back in 1998 in Sylmar, California. The company is privately held and most of the investors are individuals, including Mr. Alfred E. Mann (mentioned above), who has started many medical device companies such as Pacesetter, MiniMed, Advanced Bionics, and Mannkind. Versant Ventures is a venture capital firm that also holds a stake in Second Sight.
Second Sight just IPOed in November 2014. The IPO was priced around $9.00... but the stock opened that day above $22.00 before running above $24.00.
Forbes reported that the market, “reacted to Second Sight as if the company had developed a cure for blindness. That’s not true. Not yet, anyway.”
The device is already FDA-approved (as of late 2013). And it was approved by Health Canada earlier this year.
In fact, it’s the only retinal prosthesis system currently approved by the FDA. European competitors like Retina Implant AG and Pixium Vision seem to be years behind the current Argus II technology.
Right now, the device is primarily for sufferers of retinitis pigmentosa — a hereditary, degenerative eye disease that damages the retina over time. The disability affects approximately 375,000 — so this is still a small portion of the 8 million who suffer from other forms of hereditary or otherwise unpreventable causes.
The Argus II — a 20-year project — is a combination of a camera and a pair of glasses… a patient has an artificial retina planted inside his/her eye used in collaboration with the Argus II in order to help restore the user’s vision.
Here’s a closer look at how it works:
(Click to Enlarge)
To see more on how this “bionic eye” functions for an actual patient (pain-free, no less!) check out this CNN video.
And here's how the company says it works in its filings:
Our Argus II System employs electrical stimulation to bypass defunct photoreceptor cells and to stimulate remaining viable retinal cells, inducing light and visual perception in blind individuals. The Argus II System works by converting video images captured by a miniature camera housed in a patient's glasses into a series of small electrical pulses that are transmitted wirelessly to an array of electrodes that are implanted on the surface of the retina. These pulses are intended to stimulate the retina's remaining cells, resulting in a corresponding perception of patterns of light in the brain. Following the implant surgery patients learn to interpret these visual patterns thereby regaining some functional vision, allowing them to detect shapes of people and objects in their surroundings. (SOURCE: EYES S-1)
EYES has had great success with the Argus II — it has achieved 20/200 in its labs… again, this is hugely significant considering the patients under study began with no ability to see at all.
To date, ~100 patients have successfully undergone Argus II implants/treatment.
Again, 375,000 is a still a relatively small market, but Second Sight is optimistic that future related projects will help millions more…
Coming software updates this and next year will allow the process to work for age-related macular degeneration (AMD), for which the market is five times as big... about 2 million people.
By 2017, the company is planning feasibility studies for a new device called the Orion I that will stimulate the visual cortex. This will open up its market to anyone without a functioning optical nerve.
It raised about $40 million in the IPO to execute the plan.
Here's a rough time line:
- ~Q1/15: Initiation of AMD clinical trial
- ~Q2/15: Completion of enrollment in AMD clinical trial
- ~2H/15: Apply for approval to conduct larger AMD study in US and EU
- ~FY15: Develop pre-clinical Orion device
- ~1H/16: Initiation of larger AMD study
- ~2H/16: Software upgrade to Argus II
- ~Q1/17: Conduct feasibility clinical trial of Orion visual cortical prosthesis
- ~2H/16: Development completion of Orion I
Based on an average selling price of $110,000 and a cost of $30,000, Second Sight's gross margins would check in at about 72% for the Argus device. As volumes increase, margins could expand to as much as 85%. It only needs to sell 350 units annually to break even:
This is all patented, of course. And none of its competitors yet have FDA approval, let alone sell devices.
Right now, it's valued as a ~$500 million company with only ~100 units installed. That's $5 million each. It plans to grow to 350 units by 2017. The same math would make it an undiscounted $1.4 billion company. A 30% discount would still make it a $980 million company, some twice what it trades today.
And that's just on forecasted unit sales, without valuing the software updates or new products.
I think it’s a worthwhile buy below $15.
Bottom line: Second Sight proved to be a hot IPO, with less sexy results in the following weeks. Nonetheless, any humanitarian, tech-guru, or medical expert should be supremely excited about the possibilities this company possesses.
This company’s significance to humanity could be gargantuan.
There is a great deal of growth potential, assuming software expansion and new technologies broaden the market and FDA approval is granted.
Second Sight looks like a great buy.