Description

NMT Medical (NMTI, $2.60)

NMT Medical ("NMTI") is an advanced medical technology company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional cardiologists to treat structural heart disease through minimally invasive, catheter-based procedures. NMT is currently investigating the potential connection between a common heart defect (patent foramen ovale, or "PFO") and brain attacks such as embolic stroke and transient ischemic attacks (TIAs). Data from this nearly seven year trial will be unblinded in mid April. Backed by insider purchases, implicit positive feedback from the FDA, and meta-analysis showing a link between PFO and stroke, we believe there is an asymmetric payoff to an investment in NMTI as a successful trial result will likely make the company an attractive acquisition target for any number of larger medical device companies with well established sales forces (BSX, MDT, STJ, JNJ,etc.). Given the immense market opportunity (world-wide sales could easily reach hundreds of millions of dollars as there are over 750,000 strokes per year and PFOs exist in 27% of the general population) NMTI would likely be valued between $300 to 500 million ($15-25/share) or 7-10x current market prices.

Investment Positives:

1) Positive implied feedback from the FDA. NMTI's Closure I trial began almost 8 years ago. At the time there was very little data on what the recurrent event data was for stroke. Because there was so little data and also because it was likely that it would take a long time to enroll the large number of patients needed it was agreed that there would be interim analysis performed on the data. After 4 years into the trial the Device Safety Monitoring Board unblinded the data and had to decide whether it was worth having the trial go forward. They were required to stop the trial not only if there was a safety issue, but also if the study or the outcome was thought to be futile or if the trial could not be powered properly based on the current enrollment. The FDA's response was that not only should the trial go forward, but they also lowered the amount of patients needed to complete the trial. Furthermore, the FDA stopped allowing the device to be used under a Humane Device Exemption; they believed the trial was so important to be finished that they did not want doctors implanting the device on their own as they were anxious to complete the trial. While it is impossible to predict the outcome of a clinical trial with precision it is obvious that the data was at a minimum trending the right way or the trial would have been stopped.

2) Immense market opportunity. According to the American Heart Association (AHA), 6.5 million people in the United States suffer from stroke. Every year, 610,000 people experience a first-time stroke, while 185,000 recurrent strokes are recorded annually. We view the potential market for PFO closure to include all stroke patients who have had at least one ischemic stroke (i.e., a stroke caused by restricted blood flow to the brain), of undetermined source (cryptogenic), and who also have a PFO. We estimate there are over 200,000 such patients annually worldwide. At $5,000 ASP this equates to a potential billion dollar addressable market.

3) NMTI is totally under the radar screen. There is no street coverage; the last sell-side report was on 4/8/09 when the stock was downgraded by an analyst because he thought the company's ability to complete Closure I was at risk. This is no longer a concern as the recent capital raise and the FDA stating the data is now statistically significant has taken this risk off the table. Still, no one is paying attention despite the trial results being only a month away.
4) Its closest competitor, AGA Medical, is valued at $700m and is covered by 6 analysts - yet the largest part of that value ($500m), according to analysts, is the opportunity in the trial that NMTI has already finished. Independent checks have shown that AGA is having problems getting patients to enroll in their trial and with NMTI reporting their results it is unlikely another patient will ever enroll. Thus, NMTI actually has a chance to have the only FDA approved trial for stroke. This is important because NMTI would have a minimum of a couple of years head start into the market.

5) NMTI's trial design is more favorable in producing a positive outcome than AGAM's. NMTI's trial has a better chance of success than AGAM because of the presence of TIA's in their trial design since TIA's are not ischemic events so there is less lasting damages. The AGAM trial does not include TIA's, and independent checks have confirmed that AGAM has tried to change their trial design to use TIA's, but the FDA has refused. This is a significant structural positive for NMTI's chances of achieving a statistically significant outcome between PFO closure using their devices and stroke reduction. Wall Street is under the impression that AGA's trial could be completed any day now. We would argue that the trial will never be completed because it will be impossible to reach the proper powering without including TIA's.

6) NMTI has tipped their hand about their intentions in a recent 8K that they filed. In it they announced the return to the Board of their former CEO, John Ahern. Ahern had been involved in selling several businesses when he first joined the company. The 8k specifically states, "In conjunction with recent discussions with certain of the Company's significant stockholders, including some of the investors in the Company's recent private placement, the Board determined that, in the event a committee of the Board is formed to explore strategic transactions, Mr Ahern will be appointed to such committee.....". A positive trial will almost certainly result in several bidders for a couple of reasons. The large cardiology companies are cash rich and growth challenged and this would give them the opportunity to have a head start in a new market. Furthermore, there is already a CPT code and reimbursement available from when the device was sold under the Humane Device Exemption Code. Thus, this product already has an installed base so to speak of surgeons who are familiar with it and have performed it in the past. While the FDA stopped allowing the procedure to be performed as they wanted to have the trial completed the CPT code is still available. An acquirer will be able to hit the ground running fair quicker than a typical technology acquisition.

7) Insider buying/ownership. Since 2006 the company's two principal officers have been consistent buyers of the stock at prices ranging from $14.06 to $0.64 per share. Over this period of time Former CEO, and current board member, John Ahern has purchased 100,000 shares of stock in the open market for $450,000 and Current CFO/COO and board member Rick Davis has purchased 84,615 shares in the open market for $243,440. In addition, Davis and two other board members participated in the company's recent capital raise. This represents a substantial portion of their cash compensation over this period as Mr. Ahern received approximately $440,000 year over this period, and Mr. Davis $350,000.

8) Downside protection. Unlike other companies undergoing clinical trials, NMTI has a cash balance of $15 million ($1/share) and a product portfolio that currently produces $14 million in annual sales at high gross margins. The company's products have been in the market for multiple years and have been proven safe and effective at PFO closure. The trial offers the optionality of massively expanding the company's addressable market by making its products the standard of care for everyone who has a PFO.

 Discussion:

Stroke is the third leading cause of death in the United States, and for some young adults, a PFO may be the primary cause or risk factor of embolic stroke. When intracardiac pressures are increased (for example, by strenuous activities, lifting or straining), the PFO may open and allow blood flow to move, or shunt, from one atrial chamber (the right/venous) to the other (left/arterial). On occasion, emboli present in venous blood, which are normally filtered through the lungs, can now cross through the PFO into the arterial side, travel to the brain and block essential blood flow. The result may be a stroke, causing potential loss of speech, vision and movement, and even death. Each year, approximately 750,000 Americans suffer a new or recurrent stroke and 500,000 Americans experience a TIA. For these people, who risk embolic stroke because of their PFO, traditional therapeutic options have been lifetime medication or heart surgery. PFO closure using NMT's proprietary implant technologies is an alternative treatment for a certain subset of patients and is potentially a multi-hundred million dollar market.

It is estimated that the current worldwide market for PFO closure is about $60 million annually (including off-label closure in the United States). AGA Medical (AGAM) has approximately 65% market share in the PFO closure market, and NMTI the balance. If NMT's clinical trial (5 years worth of data on 900 patients to be released in April) proves that closing a PFO can reduce recurrent strokes, we believe the annual market opportunity for PFO closure devices would be around $800 million globally, with about half coming from the United States. Additionally, NMT will have the only FDA approved clinical trial making its devices the standard of care for treating PFO closures.

Currently NMTI does $14mm in revenue and has a market cap of $40mm (enterprise value of $25mm). We believe that a successful outcome on the company's Closure I trial could result in hundreds of millions of dollars in increased revenue and make the company a logical acquisition for any number of larger Medical Device companies, such as St. Jude, Boston Scientific, or Medtronic, to name a few. The company's patent protected, proprietary products would marry well with a larger, more established sales force.

Market Opportunity:

According to the American Heart Association (AHA), 6.5 million people in the United States suffer from stroke. Every year, 610,000 people experience a first-time stroke, while 185,000 recurrent strokes are recorded annually. According to the AHA, 87% of strokes are ischemic. In most studies, cryptogenic strokes make up approximately 40% of ischemic strokes. One can further segment the market based on age since younger stroke patients have a higher likelihood of having a PFO. PFO prevalence in the general population is approximately 27%. However, most studies have shown a much higher prevalence of PFO in cryptogenic stroke patients, particularly young patients, for whom the prevalence is approximately 44%. About 20% of PFO patients also have an ASA.

At an ASP of $5,000 per device, the potential size of the PFO closure device market in the United States is large. The market represented by first-time stroke patients alone (incidence) represents an annual opportunity of $196 million, assuming all PFOs in patients less than 65 years old are indicated. If the clinical trials are successful, the existing prevalence pool of stroke patients is also likely choose to have its PFOs closed if presented with the option. This could increase the annual opportunity to as high as $405 million in the early years post-approval. Outside the United States, the market opportunity is likely to be similar in size, if not greater, to that in the United States, though the current penetration is higher after almost a decade of steady growth.

Another analysis that is helpful is to look at the scenario where the PFO stroke trials failed yet showed a positive trend in the ASA subgroup. Sizing this market opportunity presents a way to put a floor on the size of the market opportunity, as we think this is a more likely subgroup to show a benefit. The ASA subgroup represents about 20% of the total PFO market opportunity for young cryptogenic stroke patients, or approximately $81 million annually in the United States and a similar size in Europe.

Catalyst

The FDA trial results are completed and FDA approval is granted.