Small Caps | Oct 19 2011
– GI Dynamics offers alternative treatment for diabetes and obesity
– Clinical trial results of EndoBarrier product positive to date
– Potential market opportunity considered significant
– Bell Potter rates GI Dynamics a Spec Buy
By Chris Shaw
GI Dynamics ((GID)) is a US based medical device company, its leading product being the EndoBarrier implant for treating Type II diabetes and obesity. The EndoBarrier product gained a CE Mark in July of last year for a 12-month implantation indication and GI Dynamics subsequently listed on the ASX last month to raise money to fund clinical trials for the product.
Bell Potter has picked up coverage on GI Dynamics, rating the stock a Spec Buy with a price target of $2.00. The target reflects the huge market opportunity the EndoBarrier product represents, as in the US alone an estimated 8% of the population are diabetic and 34% are regarded as obese.
The EndoBarrier product offers an alternative treatment for these health issues, as Bell Potter notes to date take-up of bariatric surgery is very small at present with a penetration rate of less than 1%. Bariatric surgery is surgery to reduce the size of the stomach to help morbidly obese people lose weight.
This small take up of the bariatric surgery option suggests the primary competitors to GI Dynamics will be the diabetes drugs of Januvia and Actos, which are in a market estimated to be worth at least US$9 billion and growing strongly. A further positive is the FDA in the US continues to reject most new obesity drug candidates given possible adverse side effects.
Significant market potential stems from the serious and costly long-run health consequences from both obesity and Type II diabetes. Obesity raises the risk of coronary heart disease, type II diabetes, hypertension and colorectal cancer among other problems.
The EndoBarrier product being developed by GI Dynamics is a thin, impermeable plastic sleeve that lines the first 60cm of the small intestine. This causes food to be digested further down the intestine, which has the effect of changing hormonal signalling pathways in the body.
As Bell Potter notes, these changes include causing the patient to eat less, which helps in weight loss. Clinical data indicates morbidly obese patients achieve around 20% overall weight loss with EndoBarrier, while improvements in terms of blood pressure and cholesterol are also achieved.
Where EndoBarrier has an edge, in the view of Bell Potter it represents a minimally invasive alternative to gastric bypass surgery, while being a reversible procedure it is also not the permanent measure that is gastric bypass surgery.
The product and procedure are also cheaper, Bell Potter estimating the EndoBarrier will cost around US$4,000 and the operation to implant around US$8,000. This compares to costs for gastric bypass surgery of around US$25,000 and gastric banding of around US$15,000. The product also stacks up well when compared to the treatment costs of diabetes.
With the EndoBarrier being CE Marked in Europe commercial development has begun in that market. The product has been launched in both the EU and in Chile, Bell Potter expecting GI Dynamics can be profitable on an EBITDA (earnings before interest, tax, depreciation and amortisation) basis by 2014.
GI Dynamics should deliver solid positive news flow over the next 12 months or so, Bell Potter noting announcements relating to new markets, new reimbursement coverage and the completion of various clinical studies should all be made.
News flow to date has been good, as Bell Potter points out the EndoBarrier has performed well in 13 separate clinical trials to date, both in terms of results with respect to weight loss and reduced side effects. Further trials will be needed before the EndoBarrier is launched in the US, which Bell Potter suggests may not happen until 2017.
As device availability and reimbursement rolls out in Europe and other markets, Bell Potter expects GI Dynamics will be re-rated. The magnitude of any re-rating is potentially significant, as on a base case scenario the stockbroker values GI Dynamics at $1.90 per share, rising to $3.10 per share using more optimistic assumptions.
The assumptions factor in an expansion of gross margins as EndoBarrier volumes grow, while economies of scale should also see the cost of goods sold fall as a proportion of revenues in coming years.
At a current share price of around 9c, GI Dynamics has a market capitalisation of about $250 million. This means little coverage in the broader market, as none of the eight brokers in the FNArena database research the company.
Shares in GI Dynamics today are slightly higher, trading up 1c at $0.92 as at 1.20pm. This compares to a range over the past year of $0.75 to $1.07.
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