Description

Executive Summary

How would you like to invest in a company that has done four secondaries over the past 5 months and whose share price increased 140% during this time period? If that doesn’t scare you off, you’re in for an interesting read.

Pavmed (PAVM) is launching a revolutionary product suite to detect and combat esophageal cancer, which is one of the deadliest cancers out there. The market is huge, and competition is nonexistent. 13M people in the US should get tested according to current guidelines but only less than 10% are actually being screened using an upper endoscopy. PAVM’s solution is non-invasive, takes 5 minutes can be performed in an office, and is free for the patient. The opportunity to scale is massive. I conservatively estimate the share price to increase 4x over the next 2-3 years.

With the founder and former CEO of EXAS onboard the playbook is clear. The company plans to spinoff some shares of its subsidiary into a SPAC within the next few months which should provide a catalyst.

The products have already been approved and launched. There is almost no science risk here. Only execution risk.

Company

Pavmed (PAVM) is a medical device company with an impressive portfolio of devices and technologies. The company owns 74% of Lucid diagnostics who in turn owns the right to the an esophageal cancer portfolio (EsoGuard / EsoCheck / EsoCure). PAVM also owns 100% of rights to Carpx, a device to treat carpal tunnel syndrome. The company also owns other technologies. This thesis will concentrate around the esophageal cancer portfolio.

Esophageal Cancer (EAC)

The prevelace of EAC has increased significantly over the past few decades. A diagnosis is a death sentence with more than 80% mortality 5 years post diagnosis.

The progression of EAC is fairly straightforward and perdictable. It starts with GERD (Reflux) where stomach fluid gets into the lower esophagus, which is slowly transformed into its precancer state, and if no intervention is performed the area then becomes cancerous.

Today’s guidelines suggest that high-risk population should undergo screening every 3-5 years. This population is vast and includes every man 50 years old with chronic heartburn and one additional risk factor (being white is one of these risk factors). Total high-risk population is 13M men in the US alone.

The way to get screened today is with an upper endoscopy. The process is similar to a colonoscopy in which you need to come with an additional person and both of you would need to take the day off. Currently less than 10% of this high-risk population undergo screening. This compares to over 60% of high-risk colon cancer screening using colonoscopy.

The Solution: EsoCheck / EsoGuard

EsoCheck is a cool device the size of a pill which the patient swallows. Then as the capsule reaches the stomach the practitioner inflates the capsule which then collects cells from the area in question. Then the practitioner deflates the capsule and retrieves the cells (there is a very narrow tube connected to the capsule which is kept outside of the patient’s mouth). This entire procedure takes less than 5 minutes and can be performed by a nurse in an office setting. After watching this 6 minute video you can probably perform the test yourselves:

https://www.youtube.com/watch?v=PKwLwiZfln0

Once the cells are retrieved, they are sent to a lab authorized to do the EsoGuard lab test which identifies pre-cancerous or cancerous cells. The test is very accurate.

If the test returns positive, the patient will need to undergo an upper endoscopy to check how far along the disease progressed and to perform ablation to treat the area.

The company is also working on an additional device (EsoCure) which will perform ablation. They are also working on improving EsoGuard to differentiate between cancer and pre-cancer. I’ll ignore both of these advances for now as the story works without them.

The EsoGuard / EsoCheck combination is available and reimbursed by CMS at $1,938 per test.

Key Persons

Dr. Aklog is the founder and CEO and owns 7% of the shares. He sure has skin in the game.

The person who is even more interesting is Stanley Lapidus who recently joined as a strategic advisor to the subsidiary (Lucid diagnostics). Mr. Lapidus is the founder and former CEO of Exact Sciences (EXAS) which is responsible for ColoGuard and boasts a $21B market cap.

In a recent business update that took place Feb 22nd (and which I recommend everyone with interest to listen to), Mr. Lapidus made it clear that PAVM reminds him of EXAS in 2012 before the value inflection.   

Go-to-market Strategy

The company is targeting several approaches, but I think the most promising is the direct-to-consumer approach that will soon be launched. The idea is to select a metro area and release tv and radio ads. People understand heartburn and they understand cancer, so the message should resonate. Together with the test being free this is a compelling value proposition. 

The company plans to establish a few company-owned locations where the tests will be administered by nurses and a physician supervisor.

In theory, a single nurse could perform 50+ tests per day, generating $100,000+ in revenues for the company every day. Even if the nurse does 10 tests a day, she/he will still generate $2.5M+ in revenues per year. The model makes sense.

Catalyst

Sales is the ultimate catalyst. The company will begin generating revenues in the first quarter as it starts to receive CMS reimbursement. Obviously as revenue scale this becomes established and much more valuable.

That said, the company recently announced it is spinning off Lucid while still keeping control over it. I assume they will sell enough shares to inject the company with capital sufficient for the go-to-market, while keeping 50% of the shares (currently they hold 74%). I believe this spinoff will provide another catalyst.

Valuation 

Assuming 13M high-risk patients that would need screening once every 5 years, you reach a $5B annual revenue TAM. Assuming a 20% penetration, a 3x peak revenue multiple you reach a $3B market cap potential. I further assume only 50% of the shares will remain with PAVM so the value here is $1.5B. This is compared to current market cap of $340M. This provides much room to grow into a proper valuation.

Importantly, the above valuation only takes EsoGuard / EsoCheck into account and ignores the rest of the portfolio. Another device worth highlighting that can create significant upside is Carpx which will be launched later this year. This device is used to treat Carpal Tunnel Syndrome, which affects around 2M people annually. 600K people undergo traditional surgery every year while the others suffer in silence. Traditional surgery requires months of rehabilitation before returning to work, whereas treatment with Carpx does the same trick but allows a patient to return to work within a single week. A successful launch here can easily add another $1B of value to the shares.

Catalyst

Mentioned in thesis