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Artes Medical (ARTE) of San Diego is in the line-up to make its IPO this week. The company is in an interesting position: the FDA recently approved ArteFill, its injectable aesthetic inplant product that “corrects” those nasty smile-lines, which used to be accepted as a normal part of aging. But the company will not begin marketing the product until early next year. In fact, much of the proceeds of the IPO are earmarked to building a marketing effort.

Although the company originally filed for its IPO in May, the underwriters have held off on advancing Artes until the approval was in hand. With that element of risk now off the table, the other - will the market accept the new product? - is the question investors must face.

The newly approved product for Artes, ArteFill, fits right into the continuum of products offered that treat the dermatological effects of aging in the face, as we pointed out in our recent overview of the field (see The Quest to Look Younger Fuels an Injectable Boom).

It differs from its competitors in that Artes takes the commonly used ingredient of bovine-derived collagen and adds microspheres of polymethylmethacrylate [PMMA]. PMMA is the most commonly used artificial implant material used in the body. In ArteFill, it has the effect of making the injection non-resorbable, thereby lengthening the effect. The FDA allows Artes to claim that ArteFill lasts for a year, though Artes is about to examine how much of the original effect remains after five years. The company broadly hints that the beneficial effects of ArteFill are permanent.

There are some problems, however. Some reports of granuloma have surfaced, a frightening notion in a treatment that is supposed to be near-permanent. Artes counters by saying that the incidence of the problem is no higher than it is with normal collagen, and that it is treatable with steroids.

The use of a bovine-derived collagen means that patients must first undergo a test to prove that they are not allergic. Thus, patients must make an initial office visit and then wait while the test is being evaluated before making a second visit to the doctor’s office. Some of the competition has moved on to human-derived collagen that does not have the allergy problem.

And, finally, the company itself got in hot water when one of its co-founders, Dr. Gottfried Lemperle, injected ArteFill into the face of his son, another co-founder, Dr. Stefan Lemperle, before the product was approved. The FDA was investigating the company because of reports it was urging people to try ArteFill, pre-approval. The FDA invited Artes to come clean. But ArteFill did not disclose the incident. As a result, Dr. Stefan Lemperle left his CEO role in the company, though he remains on the board. His father, Dr. Gottfried Lamperle, stepped down from the board and from his position as Chief Scientific Officer.

An interesting point is that ArteFill will put the aesthetic dermatology industry into a dilemma. Will the industry be pleased to offer a product to customers that means patients will return to the office less frequently? Probably they will have to, if their competition is offering the product. They can, however, emphasize its drawbacks while presenting ArteFill as an option.

In the future, Isolagen (ILE) may offer a competing product that uses a person’s own skin cells. A sample is taken and then cells are grown in a lab, which are injected as a filler. That product has the prospect of having an infinite life, plus it could be easier to work with than ArteFill. But Isolagen’s dermal filler is probably at least three years away from the market, giving time for ArteFill to establish its presence.

Analysts expect Artes to charge about 50% more for ArteFill than the shorter-lived Restylene, which costs between $500 and $600 per syringe.

Artes Medical is offering 4.6 million shares in its IPO in a range of $12 to $14. After the IPO, the company will have 15.9 million shares outstanding. At the midpoint, the IPO will give Artes a market capitalization of $206.7 million. So far, investors have made $77 million in equity investments into Artes, and the company had cash on hand of $12.8 million on September 30, 2006. Artes would take in $51.8 million in the IPO after expenses, should the IPO take place at $13, the midpoint of the range. That does not include the overallotment, which is 690,000 shares.

The company says it will use $12 million of the proceeds for its sales and marketing effort, $5 million for a 1,000 patient post-approval safety study, $2.5 million to expand manufacturing capacity; and $2 million to seek additional uses for ArteFill. All of that adds up to $21.5 million, or less than half the amount the company seeks.

In 2005, Artes had a net loss of $20.3 million. The run rate increased in 2006 as the 9-month figure for the year is $17.2 million. The only promise the company has made for the future is that their costs will continue to rise as they beef up the sales and marketing effort. They expect to market their product directly to dermatologists and plastic surgeons.

More than the usual number of options are also overhanging the offering. There are 1.9 million options at $5.85 per share; 335,246 options at $10.63 each; 3.6 million reserved for future options grants; and 2.5 million from preferred and common stock warrants at $6.98 per share.

Despite the problems with the product, and despite the fact that the active ingredient for ArteFill may not be the most advanced on the market, the product does offer a significantly longer duration of effect. At one year, ArteFill is effective for approximately twice as long as any of the competition, and it seems to last more than a year. As such, ArteFill will probably find a niche, which may be a significant niche, in the aesthetic market. Plus, let’s face it, the market for these products is hot.

Disclosure: Author has no position in stocks mentioned.

Source: IPO Analysis: Artes Medical