LeMaitre Vascular (NASDAQ:LMAT) (6.05), a small medical device company specializing in peripheral vascular disease, began publicly trading this past fall. Unfortunately for shareholders, its trading debut has been more of a fizzle than a sizzle. This has been somewhat surprising considering Goldman Sachs was one of the underwriters involved in the IPO.
Some of the early underperformance can be credited to the overall mediocre performance of medical device companies in general last year, particularly those involving cardiovascular/vascular products such as St. Jude (NYSE:STJ), Boston Scientific (NYSE:BSX), and Medtronic (NYSE:MDT). However, there may be other telling reasons weighing on LMAT making it a risky investment over the next 12-18 months.
After reviewing the prospectus, the net sales growth of the company is clearly highlighted at an impressive 50% from 03 to 05. The company tallied $30 million in net sales in 05. Not bad for a company with a market cap of less than $100 million. So what’s the problem? Well, these sales came at a price. Overall, marketing expenses more than doubled in that time frame and SG&A expenses were up 50% as well. Thus, the company is still not in the black.
Another giant red flag concerns the company’s recent acquisitions. In particular, one new product purchase is the EndoFit Aortic Stent Graft from Endomed Inc. In its prospectus, the company pointed out that it is not certain it will be able to transition the manufacturing of the new product effectively and efficiently. LMAT also pointed out that it inherited a phase three clinical trial involving the EndoFit Aortic Stent Graft. This may pose a problem for the company because its experience in these particular trials is limited and it is not certain the end result of the study will meet the company’s business objectives.
This issue becomes more of a concern when reading further in the prospectus where the company lists an eerily similar situation in 2003 when it acquired Expedial Vascular Access Graft from a U.K. firm, Credent Limited. This product was involved in a phase three study in the U.S. and the FDA did not view the results favorably and the trials were ceased. The company finally sold off the product. How crazy is that?
Finally, the size of the company is also going to pose huge challenges, specifically in the U.S. where it looks to grow. The young sales force encompasses only 49 sales representatives in Japan, Europe and the U.S. Not a formidable presence considering the company is operating in a $3 billion marketplace and not possessing any long-term contracts with its clients. Add to this, the move toward industry consolidation which has forced smaller firms to produce or perish.
I researched LMAT because I have confidence in the medical devices market, particularly those dealing with the circulatory/cardiovascular system. In fact, I have Boston Scientific Inc. (BSX) 16.87 as one of my contrarian recommendations for the upcoming year. Usually, Goldman Sachs is a great source for IPOs and provides investors with solid companies possessing impressive growth opportunities. However in the case LMAT, I am not certain even Goldman can save this company or its investors. No matter how much I like the sector, I am staying away from LMAT until it maintains a path to profitability and its new product acquisitions appear to be more of a reward than a risk.