Uroplasty: Positioned as a Possible New Market Leader

| About: Uroplasty, Inc (UPI)

As you know, I prefer high growth, small cap companies that sell at a discount to their rate of growth ... which, I admit, are not especially easy to find these days. News about companies disseminates more quickly to more people at mostly the same time than ever before.

My investment recommendation of Uroplasty (NASDAQ:UPI) violates one part of my investing methodology, share price; I prefer a minimum threshold of $15-20. (How odd that my first two recommendations on Seeking Alpha fall under that minimum.) One reason for the low share price is that many investors do not know about the company … although that status likely will not continue.

Uroplasty provides essential solutions for incontinence. The company's focus is on clinically effective, minimally-invasive therapies that may be performed in an office-based or outpatient setting. These therapies deliver significant improvement in quality of life for patients and provide physicians unique products to broaden the treatment options for patients within their incontinence practices.

  • Urgent PC Neuromodulation System is a simple, office-based product for treatment for urinary urgency, urinary frequency, and urge incontinence. In the U.S. alone, more than 35 million individuals have one or more of these symptoms. Outside the United States Urgent PC is also indicated for the treatment of faecal incontinence.
  • Macroplastique Implants are now globally available to treat adult female stress urinary incontinence (SUI). Macroplastique is also CE marked for vesicoureteral reflux & male SUI. Used internationally since 1991 and on more than 70,000 patients, it is the predictable, permanent, and proven urethral bulking solution.

I understood immediately that Uroplasty benefits from demographics – the graying of the U.S. and elsewhere, but I wanted to understand better the absolute opportunity Uroplasty, and its products, represent. Why, for example, are its solutions better than those from its competitors? To gain better insight, I spoke with Dr. John Wrenn, a highly-regarded urologist (Alliance Urology Associates in North Carolina) who agreed to share his knowledge via the interview below.

Full Disclosure: John (and his colleagues at Alliance Urology) has been intimately involved with Uroplasty for the past 2-3 years. John also owns shares of Uroplasty/UPI.

What follows below is my (dmg) Q&A with John (JW), in media res ...

dmg: More important to a stock’s success is whether its widget(s), the company’s product or service, offer some opportunity for increasing sales, revenues, and earnings.

JW: Uroplasty’s treatment is for a group of patients who have relatively few options other than diapers. They have two urology products, the Urgent PC and Macroplastique, which is a urethral bulking agent for stress incontinence that rapidly gains market share. A competing product, Contigen, from CR Bard (NYSE:BCR), is being discontinued and Macroplastique will probably become the strongest player in that market.

dmg: Ironic. Your description reminds me of a long-ago investment for me, Sci-Med Life Systems, which arguably offered the best product and most elegant solution in its field at the time, and involved doctors with their solutions on a trial basis... but was an also-ran; a distant third behind the marketing muscle of Bard and Boston Scientific (NYSE:BSX). And then the FDA commanded Bard to take their product off the market … and Sci-Med never looked back, quickly becoming #1.

JW: I understand the comparison. My colleagues and I have participated in clinical trials for Uroplasty’s Urgent PC system for management of overactive bladder and urge incontinence for patients who fail to respond to or are intolerant of standard medical therapy. The procedure involves neuro-modulation of the posterior tibial nerve at the level of the ankle using a fine needle electrode. It is sort of like a TENS unit. The initial course of therapy is weekly for 12 weeks with responses generally expected by 6-8 weeks. After the initial course of therapy, if there has been an adequate response, treatment will continue at gradually increasing intervals until the treatment is given on an every 4-6 weeks basis.

The alternatives are more extreme, including injection of botox in the bladder, which is very effective but carries the risk of prolonged urinary retention, and surgical implantation of a spinal neuro-stimulator, the Interstim device from Medtronic, which is a much more invasive and costly procedure that many physicians would never consider in this older population of patients.

We have been very impressed with the patient responses, with 70-80% of this difficult-to-treat population deriving a benefit from the treatments.

dmg: Do you consider Uroplasty‘s executive and management teams to be up to the task of seizing the opportunity? Do they have a vision (for success), a strategy to make real that vision? Can (do) they execute? And, does the executive team have integrity?

JW: I think they are a (more than) competent bunch, and the company executives have the highest integrity. I have spent some time with the CEO and with the VP of Marketing both of whom are wonderful people.

I think the company has a lot of promise. They have weathered some troublesome times. This product got initial FDA approval a couple of years ago and the company was all set to rock… and then Medicare said, "Hold on” and made them do additional clinical trials against a sham/placebo procedure. The trial we helped with. Still, they have managed to keep their powder dry and received additional equity financing earlier this year, which they feel is sufficient to support the company until sales pick up.

On a side note the CEO’s son, Gavin Kaysen, is the executive chef at Café Boulud in NYC, and was a victor in one of the Iron Chef competitions (2010). I have eaten at his restaurant a couple of times, and he really does know how to cook.

dmg: Please explain a little about the pricing and reimbursement schema for the company …

JW: The company recently received a unique CPT code from CMS that became payable on 1 January 2011; several state Medicare programs had already initiated coverage. The value placed on the code will result in a payment of ~$140, if the Medicare rates remain unchanged, and about $100 if the full 30% cut that is legislated by the current SGR formula takes place. Medicare has approved 15 treatments/year after the initial course of therapy.

The company feels that they will be able to become profitable even if cuts occur, although I think the market share will be much slower to increase in that situation because the profit margin will be low enough that many physicians will not find the profit left over for their portion to be worth the trouble of setting up a program. (At $140 the physician’s office will be left with about $80-90 to cover profit and overhead.) The disposable leads are about $50-60 so the company will generate $600-720 for each 12 week cycle. The nice thing about this for Uroplasty is that the treatments must be continued to be effective and the number of patients will gradually grow so that they will have ongoing revenue and not just a onetime payment.

We (my partners) alone have 50-60 patients on our waiting list today, wanting to begin therapy. This is a high number, and we are but one practice.

As re reimbursement -- well, Medicare is paying. The regional Medicare administrators received enough pressure that they even began to approve coverage in advance of the January 2011 timeline.

Palmetto GBA, a regional Medicare carrier for California, Nevada, and Hawaii, included coverage for posterior tibial nerve stimulation using the Urgent PC Neuro-modulation System for the treatment of the symptoms of overactive bladder as of November 2010. This means that, while nationwide coverage will be in place on 1 January, local carriers can make independent coverage decision themselves. Moreover, California is one of the larger, if not largest, markets, so this is fantastic news for Uroplasty.

And, more recently, two additional Medicare carriers, Cahaba Government Benefit Administrators and First Coast Service Options have begun coverage of PTNS treatments using Uroplasty’s Urgent PC product. With the addition of these carriers, there are now nine regional Medicare carriers providing coverage for PTNS, using Urgent PC, for the treatment of symptoms of overactive bladder syndrome in 29 states and two territories. Coverage of PTNS using the Urgent PC Neuro-modulation System currently extends to approximately 28 million lives of the 46 million total lives covered under Medicare.

The challenge for Uroplasty, as always, is to get the commercial carriers to come on board. The company is working hard toward establishing better 3rd party coverage.

End interview

Hmm, the omnipresent "challenges." It is not enough to design a better mousetrap; you also must convince:

  • The FDA (in the U.S.) to agree,
  • Medicare to reimburse,
  • Insurance companies (3rd party payers) to cover the product or solution (reimburse),
  • Doctors that the company's solution is the best option (and most profitable to their practice),
  • Patients that their solution is the most practical, (and, in this instance, least embarrassing),
  • Wall Street. In that attempt, Uroplasty presents this morning (Monday) at Roth Capital Partners OC Growth Stock Conference.

Which brings us to today. Uroplasty shares have enjoyed a massive rally the past 18 months, to $6.60 (now $5.20) from $.50. Such a price level would be tempting for early investors to sell rather than buy more shares, especially in that the high trade matches the all-time high from 2004 -- when Medicare requested the company to perform more clinical trials.

(Click to enlarge)

This all served to create a high level consolidation (HLC) of seven years, a period with Biblical significance (Genesis). I would not relish holding a stock that endures seven years of "famine," declines to $1 from $6, but I would be overjoyed to hold the same stock as it rose to $6 from $1. The possibility now for Uroplasty is that the shares will break above its long term resistance at ~$6-6.5, and rally enduringly (seven years of "feast”?) to a much higher share price. Because the shares continue to trade sideways in its HLC, a method to lessen the anguish of investing early (in its base, not the uptrend) is to purchase during price swings beneath $5, and especially beneath $4. Alternatively, you could purchase the high volume breakout above $6.50.

In essence, I perceive:

  1. A huge market exists for Uroplasty’s products and services, one that should only become larger with each new day.
  2. Uroplasty has no real competition from other companies that offer minimally invasive products.
  3. And no competitors even remotely close to receiving FDA approval. (Some are being evaluated but trials only now begin).

Combine the reality that Uroplasty has first mover advantage, with its best of breed products, quality management, and a growing opportunity (the products serve an increasing demographic: the aged and aging), and you have an investment opportunity with serious upside potential; in addition to the opportunity to become a market leader. Thus, I believe Uroplasty’s story to be nowhere near its end; in fact, it is very early. Uroplasty remains an unknown company, but one that offers excellent potential to be a successful, long term portfolio investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UPI over the next 72 hours.