Small Caps | Mar 08 2013
-Large potential in diabetes treatment
-EndoBarrier 2013 sales to grow strongly
-Israel to now contribute to revenue
-US trial starts, key to big market
By Eva Brocklehurst
GI Dynamics ((GID)) is off to a firm start in 2013. The health services company has a device to almost guarantee success – EndoBarrier. The device treats diabetics, and diabetes is in plague proportions. Almost 8% of the world's adult population is diabetic. The device has been launched in Australia and will soon be on sale in Israel, where there is a high prevalence of diabetes. It is already available in parts of Europe and South America.
For CIMB, the spade work was well executed over 2012. EndoBarrier sales grew nearly 200%, underpinned by 28 therapy centres and sales in seven countries. The device gained Europe's CE Mark in 2010. Clinical work has demonstrated that EndoBarrier can return Type II diabetics to glucose control, as well as bring about a 40-50% reduction in excess body weight for obese patients. Given EndoBarrier is not a permanent fixture, this outcome is superior to bariatric surgery. The device's record on glucose control also exceeds that obtainable with diabetes drugs.
In 2013, 20 new centres will offer EndoBarrier therapy. GID plans to expand the number to 48 by year end. Australia and Germany will see a majority of the new centres, with the balance to be divided between new markets such as Israel and expansion in the rest of Europe and South America. Bell Potter notes management was very upbeat about the positive response EndoBarrier received in Australia and will aggressively focus on this self-pay market in 2013, with plans to open at least four new centres.
Revenue is expected to increase substantially as unit volumes grow. Bell Potter also expects Israel, a new self-pay market, to contribute to revenue in 2013. Additional local reimbursements are coming in and there is, potentially, the first of the national level reimbursements from Germany to consider. The broker will watch the company's quarterly sales trajectory for EndoBarrier closely. CIMB estimates sales of US$8 million in 2013, growing to US$142m over the next four years. The broker expects a net loss of around US$32m in FY13 and expects profitability by FY16. Bells expects break even in FY15.
What is also very positive is that a key trial has started in the US. Bell Potter believes that the trial can enrol fairly quickly, given the high prevalence of diabetes in the US. GI Dynamics can complete trial enrolment by mid 2014 and be in a position to release the results by the second half of 2015. So, given the usual timespan to product launch, EndoBarrier should be in the US at the beginning of 2017.
What pleases Bell Potter is that the company has collaboration agreements with GlaxoSmithKline (GSK) and Medtronic. These two represent the leaders in the drugs and devices industry respectively. The collaboration with Medtronic will focus on identifying the effects of the EndoBarrier device on continuous glucose levels. The arrangement with GSK will be in evaluating the hormonal changes in patients on EndoBarrier therapy.
Removing a potential negative, GID has also resolved its litigation with Gore3. This was without the need for a trial and without any financial obligations by either party. Bell Potter welcomes this resolution because the threat of a potential competitor for EndoBarrier has been dealt with. GID retained exclusive ownership of intellectual property, while granting a royalty-free, non-exclusive licence to Gore for using patents only for applications in blood vessels. Gore cannot use the patents for any applications in the gastrointestinal tract, the area of the body for which the EndoBarrier device is designed.
CIMB is the one broker covering the stock on the FNArena database and has a $1.90 price target and Outperform rating. Bell Potter's target is $1.70 and the broker expects GI Dynamics to be re-rated by the market as device availability increases and the money starts rolling in, as well as when further data emerges on the effectiveness of EndoBarrier.
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