Lombard Medical : Grafting For SuccessLombard Medical Home Page



Biotech and medical device stocks are way out of favour at the moment but must be due a bounce some time. Lombard Medical has been massacred by the market yet has had NO product failures to justify that. It is worth a look. To get the thread started, below is a cut and past from the Traders' Room.

Cheers
2Bob

Lombard Medical : I'm In 2 It

2Bob - 07 Jan'03 - 22:23 edit



With 2003 upon us it is worthwhile summarising where we are with this company. Selling can be done for no reason and many, but buying usually needs a reason and some impetus. Hopefully there are a few bits of info below that help to unlock the "hidden value" in this stock.

Technical Data

Shares in issue 54.4M
Current market cap 3.2M
At least 37% of the shares are held by directors or senior managers.


Lombard currently comprises of 5 divisions

Anson Medical which produces AAA grafts and staplers was purchased for 16.5M
PolyBioMed which produces drug eluting polymers was purchased for 6M
DMC Medical which distributes cardiovascular devices in US and Europe was purchased for 4M
AME Medical which distributes in the Middle East was purchased for 1.5M
Lion Medical is a medical device company incubator purchased for up to 6.3M

Lombard has purchased businesses valued in total at 34.3M and yet its own market cap is still only 3.2M.


Anson Medical

Stent grafts are the main product for Anson. The grafts are focused on fixing aneurysms in the aorta. Aneurysms occur when the aorta becomes diseased and thins and balloons out under pressure from the blood flow to form a sac which often ruptures. Up to 95% of uncontrolled ruptures are fatal. As an alternative to open surgery a graft can be inserted, via an artery in the leg, into the aorta which will bypass the aneurysm.

Grafts to treat abdominal aortic aneurysm or triple A (AAA) for short are becoming more mainstream. Initial devices from other companies were problematic due to breakages of the device or slippage down the aorta from the intended repair site. The Anson device is unique and is designed to deal with these major failures and provides a more robust product and a more flexible one that can reach tortuous anatomy that other devices can't reach.

Anson have three main variants of the AorFlex
- a single piece or uni-iliac device which can be used in 5-!0% of procedures. This device is CE marked and on sale
- a Y piece or bifurcated device which can be used in substantially the rest of the procedures allows the aorta to be connected to the iliac arteries leading to the legs.
- a thoracic device for use in the main artery to the neck

The bifurcated and thoracic devices are expected to be filed for CE mark approval very early in 2003 with approval a few months there after.

The excitement for the share focuses on the strategy for entry to the US market which accounts for more than 40% of worldwide sales of AAA stent grafts. A large marketing partner will be required to pay for the requisite trial to attain a PMA approval by the FDA in the US. The company has already said they are in active negotiations and I would expect these to come to a conclusion in the next few months. But who will the partner be?

Not only does Anson have a unique product it has a unique manufacturing process which allows the product to made to order using bespoke software. Current manufacturers assemble their products by hand in limited sizes - the wrong size may lead to slippage and leakage in the aorta. Automation offers huge productivity gains for Anson. Selling prices for devices in the US are around $15,000 and in Europe around $12,500. A 90% margin on these selling prices makes the mouth water. The company has stated that competitor companies are interested in the technology and may license it.

Stapling Devices

Anson/DMC have two staplers.
Stapler 1
The graft fixator has been licensed to Cook who wish to develop their own catheter delivery system before proceeding to FDA approval. No detail has been released on the terms but it is expected that a market will exist to fix 25,000 stent grafts belonging to other manufactures which require to be stapled to prevent them slipping or prevent those that have already slipped in the aorta slipping further.

But how to value the deal? Working on a razor/razor blade model a stab in the dark is as follows:-
- 250 staplers sold per annum in 2005 (1 for every 100 fixations) at $2500 each on a 20% royalty (with 100% markup for LOM) to give 16,500 profit discounted back at 25% for 3 years
- 10 staples at $25 each per procedure to give $250 or $6.25M for 25,000 procedures. On a 20% royalty (with 100% markup for LOM) to give 165,000 profit discounted back at 25% for 3 years.
Apply a P/E of 20 to the earnings of 181,500 and we can guesstimate the value of this deal alone to LOM was 6.7p a share. That is more than the current share price.

Stapler 2
The open surgery stapler is under development in-house. This can be used to repair aneurysms that have ruptured. The number of acute procedures is expected to grow to 42,500 in 2005. Because there are other staplers on the market it is expected the open stapler will get an expedited review through the FDA via the 510(K) route rather than a PMA which requires clinical trials. Filing for FDA and also CE mark approval is expected early in 2003 with approval and launch in Q1/Q2 2003. DMC have their own distribution channels in the US and Europe but I would expect them to bring in other distributors in territories that they are not strong in. Royalties are likely to be much higher, perhaps as high as 50%, since distributors will be supplied with a finished product whereas Cook will have to do development work and pay for clinical trials for the graft fixator. An NPV calculation can wait for another day. Suffice to say it is worth more than the current market capitalisation.

Anson also have in development a coronary artery graft jointer and a range of peripheral and carotid stents


PolyBioMed

Drug Attachment
Polybiomed had developed coatings which can be used on devices that allow drugs such as heparin to be permanently attached. The company has announced that they have been approached by a large as yet unnamed graft device company to work with them in this area. No doubt when the interested party has done all its tests then we can all be let into the secret of who the mystery big partner is.

A license agreement with CardioTech for a heparin bonded vascular graft has been previously announced

Drug Delivery
PolyBiomed have a range of agreements. The major one is with Jomed the European medical device manufacturer for a polymer coated drug eluting coronary stent. Anson's range of peripheral and carotid stents may be suitable carriers for a drug.

Surface Coatings
Polybiomed have a development contract with Polystan AS for a heparin coated cardiac bypass device.

Hydrogels
A CE marked wound dressing product is available for licensing via BTG plc

Advanced drug delivery systems
Polybiomed have microsphere technology already developed which is an area that Biocompatibles is moving into with limited success to date. It would have been cheaper to license the PolyBioMed microspheres that try and develop their own in-house.

DMC Medical
A small distribution company based in Shannon, Ireland and California USA. FDA approved products include a saphenous vein distention system, vein irrigation cannulae and cardiac insulation pads. The company is also involved in the open stapler - see Anson above.

AME Medical
A small distribution company operating in the Middle East which I would be surprised to see avoid the chop in the overdue strategic review which was promised by the CEO.

Lion Medical
Lombard through Lion Medical has stakes in a range of small device companies
- A 15.0% stake in Endoart who have a number of innovative devices under development see http://www.endoart.com/products/flowatch_1.htm

- A 11.8% stake in Vascular Concepts which operates in India, UK and USA. It has a ProLink coronary stent CE marked and an innovative rapid exchange like coronary stent delivery system. An effective non-patent infringing delivery device could have huge value as the technology swaps/deals between the stent majors has shown. Vascular made $0.5m profit on $3.6M turnover.

- A 5.8% stake in YaBa a diagnostic device company see http://www.yaba.co.uk/

That then is Lombard Medical. Valued at 3.2M by the market with more than 2M cash in the bank it is my contention that there is a huge mismatch between the trade value and the market value. At some stage that must close.

As if the above were not enough for a little added spice there is always the old chestnut of a reverse into Biocompatibles.......


Cheers
2Bob



karmicpete - 23 Jan'03 - 00:51 - 15 of 18


Hi 2Bob,

Sorry for delay in replying to your earlier question.

The skin stapler we currently use is made by Smith and Nephew, it costs:

Stapler (can be re-sterilised a few times) 19.95
10 staple cartridge 10.70
20 " 12.00
35 " 13.20

I liked the news today. :)


Cheers

Pete


Mr Ashley James - 23 Jan'03 - 02:49 - 16 of 18


2Bob,

Read the thread, excellent thread did not really understand it,not my field of expertise but will read again and try to post something sensible in the morning.

This however is the kind of thread that will make AM a success, well researched objective and interesting informative share analysis.

Thank you for spending so much time doing the research for the AM Community!

Great stuff

Cheers

Ash


sybase - 23 Jan'03 - 22:15 - 17 of 18


Ashley,

So.... are you going to fill your boots ?


2Bob - 24 Jan'03 - 00:37 - 18 of 18 edit



-->karmicpete
Many thanks for the info. Very interesting.

-->Mr AJ
You are too kind, sir.

-->All
Jomed filed for protection from its creditors today so I will write off any chance of a deal from that quarter for now. Amazing how a company can implode so quickly

Valuation summary based on 2005 revenue now reads

AAA graft = 476p
Stapler = 15p
Polymer Jomed = 0p
Polymer graft = 26p
--------------------
Total valuation = 517p per share

Cheers
2Bob

The "internals" on this stock actually improved today with Durlacher moving their offer from 6.75p to 7p leaving Peel Hunt alone on 6.75p. How long can they feed the market with some reasonable buying going on today?

Prof. Hopkinson who has implanted many of the LOM AAA grafts is back on the lecture circuit in a couple of weeks time. He has a couple of papers being presented and he is also co-hosting Session VII with Dr Veith of Veith Symposium fame.

https://www.endovascularcongress.org/new2002/program.asp

Cheers
2Bob

more buying this week, buy price moved up slightly

I note the volume has picked up in this stock lately.

For info
-->What is a AAA stent graft?

The aorta is one of the main arteries of the body. When it becomes diseased it thins. As it thins it starts to balloon out under pressure from the blood flow. This is called an aneurysm of the aorta. Most aneurysms occur in the abdominal cavity hence abdominal aortic aneurysm or AAA or triple A for short Many aneurysms eventually rupture leading to catastrophic blood loss and death in many cases.

If an aneurysm is detected it can be treated by open surgery repair, but this is an invasive and complicated procedure not without its dangers for the patient. An alternative is the use of what is called a stent graft. A stent graft is a metal device, which gives the piece its strength, and is coated with cloth, often polyester, which when in place stops the blood gaining access to the ballooned area of the aorta.

The stent in the Anson AAA stent graft is made from nitinol, a shape memory alloy. If you think of your bathroom sponge at home when squeezed into the tiniest ball possible reverts back to its original shape when the pressure is released. The Anson graft is the same. The graft is inserted into the groin using a catheter and maneuvered into position before the protective sheath is removed and the graft expanded into shape. This minimally invasive procedure causes less trauma for the patient and is becoming the de-facto standard.

What is special about the Anson graft?



- It is so flexible it can go around 90 degree corners that most if not all other grafts can't.
- It is a single piece device rather than a modular device which are assembled in the aorta, perhaps through two access holes. One hole is better than two. Some modular devices have suffered fractures due to the stresses placed on them in the aorta
- Some devices are so rigid that the rings that make up the stent have fractured which is bad news for the patient.

Cheers
2bob

Article today in Shares mag
Shares Mag link

-->All
There has been quite a deluge of information from the company via articles published in The Wall Street Transcript, Shares Magazine, Clinica and Medical Device Technology this past week.

I note that the Medical Device Technology article can now be accessed here:-
Medical Device Technology

and more importantly the Clinica article which is a good balanced view of pospects in my opinion can be accessed here. It may take a minute for the pdf to download:-
Clinica - World Medical Device & Diagnostic News

One can access the TWST transcript summary here:-
The Wall Street Transcript

and the Shares article is reproduced here summarised as may be worth a speculative punt:-
Shares Magazine

Cheers
2Bob

-->All
Investech see a postive share trend.
LOM Chart

-->All
Merrill Lynch have done a short review of AAA stent graft adverse events reported through the FDA in 2002.

ML report that the US market in 2002 was worth 216M with $153M or 71% going to Medtronic's AneuRx and $63M or 29% going to Guidant and their Ancure device. ML estimate that MDT implanted 12,750 devices with a selling price of $12,000 each and GDT implanted 6300 devices at $10,000 each.

Of the total estimated 19,050 devices implanted there were 480 adverse events reported to the FDA of which 58 were deaths. This gives an adverse event rate of 2.5% for all devices implanted and a death rate of 0.3%. The death rate compares favourably with a typical 4% level for surgical repair but that may include more difficult cases. The death rate for both devices is similar. But the GDT device has overall a higher adverse event rate of 3.6% compared to 2.0% for the MDT device.

Clearly there is room for a safer device in the US market.

Cheers
2Bob

There have been positive movements. If you are a Lombard Medical plc holder who did not convert to LMT shares then email me at 2Bob@iname.com and I can provide you with more detail of your holding and its worth.

LOM shareholders (not LMT) now have postal mail calling an EGM on 28th Feb. If your holding is in a nominee account check with your advisor.

Cheers
2Bob :-)