While having a look at the valuation of some big medtechs listed in the US : Given Imaging and its Pillcams (GIVN) almost $1billion, the diversified Boston Scientific (BSX) $17billion, and Intuitive surgical (ISRG) $16billion, I realized that could well be the future market cap (albeit in a few years...) of one of my recent investments in the Medtech sector. Then checking some comparable smaller players like Mazor Robotics, what came to my mind was how european early-stage biotech companies tend to be extremely poorly valued, and how my bet could soon benefit from a re-valuation phenomenon.
My bet of the day is the French medtech Mauna Kea Technologies, which is revolutionizing the field of Endoscopy with its Confocal Laser Endomicroscopy device (CellvizioTM) that received reimbursment codes in march 2012 (effective january 2013).
For the moment, the 160 Million euros ($220M) market cap company is cheap, and still navigating slightly below its IPO price of 2011. This is partly thanks to the lack of bio/medtech bubble in Europe, although it also can be explained by smaller sales growth than initially expected. That said, we're not talking about a pinksheet-like stock here : the MKEA benefits from institutional investors confidence, who own 44% of it. Medtechs often need time to get health institutions convinced to use their systems, and once that is done you need to train the doctors to use the new tech. However, once a few elite hospitals and clinics own them, the rest of the pack tends to adopt the tech if it shows real financial and qualitative value, which is the case now for MKEA.
What I like the most with Mauna Kea Tech is that it has no competitors in its field. It is the only patent-protected system of its kind, a flexible 0.8mm thick optic fibers microscope. It is adapted to common endoscopy devices to allow live biopsy during endoscopy, and its usefulness has been reviewed in many publications (search Confocal Laser Endomicroscopy or CLE). We're talking about real serious tech (actually derived from astronomy optics used at the Mauna Kea observatory) but how this is revolutionizing endoscopy ?
While gathering data to write a detailed article about this company, I came across the following concise and easy to read investors' presentation the company released recently. It's worth reading to gain a good overview of it (including the size of the market it's going after, without competition). We'll then be able to confront our views in the comments section.
So here we go :
Potential short term catlysts I see for the coming quarters:
1. The company has recently started to make communication efforts towards american investors. The entry of an american fund would dramatically increase exposure to US stock exchange markets and thus increase demand of its share. This really is a great catalyst: Innate went from 2.5 euros to almost 5 in two weeks after announcing it raised capital from US investors. Now, 3 months later, it's flirting with 11 euros and a market cap of 500 million euros.
2. Sales should start to grow faster now that deals have been signed with distributors in Asia last year (with already a few first sales in China and Japan), and the device is gaining attention from health institions in the US. (example of how it is displayed by hospitals now to patients: www.stanthonyhosp.org/cellvizio-faq)
3. French reimbursment codes are still pending but are expected this year by many observators. Once obtained, this easy market for the company will be unlocked. (French administration is known to be slower and more conservative than the US one, which explains the delay)
4. Its small cap, and float of over 52% (institutional holdings at around 44% and founders a little below 5%) make it an easy target for acquisition by a Medtech giant.
5. Unlike US bio/medtech stock markets, European medtechs have started to see significant price appreciation since a few months only, so market caps are remaining small in comparison.
Long term catalyst:
The device, already approved and routinely used in some elite hospitals for Barrett's Oesophagus and Colonoscopies, has shown to be useful in new applications (precision surgery when associated with robot da Vinci (demonstrated benefits in prostate removal where it allowed to keep tiny nerves intact avoiding the erection and incontinence problems), lung cancer, bladder cancer diagnosis etc... ). This is a growth catalyst for the coming years. Publications about that are mentionned in the presentation linked above.
Main risk :
If sales continue to grow modestly, the company might be forced to raise funds through dilution. However at current cash burning rate (10Meuros/year), with 28 Meuros in hand, it has almost 3 years to do so. ( this is conservative since, even with modest growth, sales growth would probably lower cash burning)
Conclusive remarks :
My general feeling with MKEA is that these are the last times we see it at such bargain prices. It has received approvals on huge markets (US included), doctors are talking about it, patients will start to ask for it both for cancer diagnostics and prostatectomies (who wants to loose his erections and become incontinent?) I expect big growth this year, profitability for 2015 and once this is attained, everything is possible, including an acquisition from a big Medtech.
Disclosure: I am long MKEAF.
Additional disclosure: I own MKEA shares purchased on the NYSE Euronext market, which are listed in the US on the OTC grey market under the symbol MKEAF. Shares haven't traded for a long time on the OTC due to lack of demand, i suspect you need to offer a little premium to the market maker so he buys shares in europe to sell them to you on the OTC market. However I would advise you to go directly buy MKEA in Europe if you are interested in the company.