IPO Preview: Capnia

Aug.13.14 | About: Capnia (CAPN)

Summary

Develops medical diagnostics and therapeutics based on its proprietary technology for precision metering of gas flow.

Intends to begin selling the first product, CoSense, in the second half of 2014.

Introducing a new medical diagnostics product can be a long and expensive process.

Based in Redwood City, CA, Capnia (NASDAQ:CAPN) scheduled a $20 million IPO on the Nasdaq with a market capitalization of $52 million at a price range midpoint of $7.50 for Wednesday August 13, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Co-Managers: Maxim Group LLC

Joint Managers: National Securities, Dawson James Securities

End of lockup (180 days): Monday, February 9, 2015

End of 25-day quiet period: Monday, Sept. 8, 2014

Summary

CAPNU develops medical diagnostics and therapeutics based on its proprietary technology for precision metering of gas flow.

CAPNU's first product, CoSense™, aids in the diagnosis of hemolysis, a condition in which red blood cells degrade rapidly. When present in neonates with jaundice, hemolysis is a dangerous condition which can lead to long-term developmental disability.

CAPNU intends to begin selling CoSense in the second half of 2014.

Introducing a new medical diagnostics product can be a long and expensive process.

Entities associated with existing stockholders Vivo Ventures and the Chairman, Ernest Mario, have indicated an interest in purchasing up to $5,000,000 on the IPO, or 25%.

Valuation

Glossary

Accumulated deficit ($mm)

-$58

Per share dilution

-$4.82

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Q1 '14

Capnia (CAPNU)

$53

n/a

-15.7

2.5

2.8

38%

Click to enlarge

Conclusion
The rating is neutral.

The price-to-book is 2.5.

Medical diagnostics IPOs often struggle.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

CAPNU develops medical diagnostics and therapeutics based on its proprietary technology for precision metering of gas flow.

CAPNU's first product, CoSense™, aids in the diagnosis of hemolysis, a condition in which red blood cells degrade rapidly. When present in neonates with jaundice, hemolysis is a dangerous condition which can lead to long-term developmental disability.

CoSense received initial 510(k) clearance for sale in the U.S. in the fourth quarter of 2012, with a more specific Indication for Use related to hemolysis issued in the first quarter of 2014, and received CE Mark approval for sale in the European Union, or E.U., in the third quarter of 2013.

CoSense is not yet commercially available and has thus not generated commercial sales to date; however, CAPNU is currently focused on launching CoSense commercially with the proceeds of this offering.

CAPNU intends to begin selling CoSense in the second half of 2014.

CoSense combines a portable detection device with a single-use disposable nasal cannula to measure carbon monoxide, or CO, in the portion of the exhaled breath that originates from the deepest portion of the lung, which is referred to as the "end-tidal" component of the breath.

With respect to therapeutics, CAPNU has previously obtained CE Mark approval in the E.U. for Serenz™, an as-needed treatment of symptoms related to allergic rhinitis, or AR.

Serenz has shown statistically significant improvements in AR symptoms in randomized, controlled Phase 2 clinical trials. In the U.S., where Serenz has not yet been approved, the FDA may require Phase 3 trials to be conducted prior to approval. Serenz is still in development and has not generated sales to date.

CoSense market

Approximately 143 million babies are born annually worldwide, with approximately 9.2 million of these born in the U.S. and E.U.

Over 60% of neonates present with jaundice at some point in the first five days of life.

CAPNU believes CoSense has the potential to become a part of routine pre-discharge screening for all newborns, by aiding in the differential diagnosis of hemolysis in infants that present with, or are at risk of developing, jaundice.

Red blood cell breakdown is a normal phenomenon, but in certain situations the breakdown is accelerated or is excessive and is referred to as hemolysis.

The most common cause of hospital readmission during the neonatal phase is jaundice, and CAPNU expects that CoSense will help reduce such readmissions.

Many causes of jaundice do not represent a significant health threat. However, when severe jaundice occurs in the presence of hemolysis, rapid diagnosis and treatment may be necessary for infants to avoid life-long neurological impairment or other disability.

Also, unnecessary treatment increases hospital expenses, is stressful for both infant and parents and may increase morbidity. There is an unmet need, therefore, for more accurate diagnostics for hemolysis, particularly if they are non-invasive, rapid, and easy to use.

Dividend Policy

No dividends are planned.

Intellectual Property

CAPNU's patent portfolio surrounding its Sensalyze Technology Platform, including CoSense, consists of one issued U.S. patent, four pending U.S. non-provisional patent applications, and four pending U.S. provisional patent applications.

Three of the non-provisional filings have corresponding Patent Cooperation Treaty, or PCT, filings and are still eligible for expansion into other geographies.

It is CAPNU's intent to file these, and future cases, in other major commercial geographies over time. CAPNU-issued U.S. patent (no. 8,021,308) expires in August 2027. The pending patent applications, if issued, would likely expire on dates ranging from 2023 through 2034.

Competition

Currently no device is commercially available with the sensitivity and accuracy necessary to detect ETCO levels that are meaningful for monitoring the rate of hemolysis in neonates, and CAPNU does not know of any such device that is under development by any party.

From 2001 to 2004, Natus Medical marketed the Co-Stat device for detection of ETCO in neonates.

The Natus product was withdrawn from the market due to poor sales.

CAPNU believes Natus' Co-Stat did not achieve commercial success due to several disadvantages that CAPNU has overcome with its product, including a lack of consistent accuracy, limited ability to compensate for environmental factors such as humidity and heat, high price, and poor ease of use, including a requirement for frequent calibration.

Use of proceeds

CAPNU intends to use the $17 million in proceeds from its IPO as follows:

$10.2 million of the net proceeds from this offering will fund its planned commercial launch of CoSense; and

$6.8 million to fund working capital, capital expenditures, research and development of additional future products, and other general corporate purposes, which may include the acquisition or licensing of other products, businesses or technologies, although CAPNU has no plans regarding any specific acquisition candidates at this time.

Disclaimer: This CAPNU IPO report is based on a reading and analysis of CAPNU's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.