Bet on the Endobarrier and buy GI Dynamics

Chief Investment Officer and founder of Aitken Investment Management
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I recently sat down for dinner with an offshore colleague I have worked with for 20 years and I genuinely had trouble recognising him. The voice, stock ideas and the bad jokes were all the same, but the change in physical appearance was so dramatic I spent the first 30 minutes of dinner in pretty much a stake of shock.

Now the good news is my colleague hadn’t become sick, in fact quite the opposite, he had, more than likely, prolonged his life expectancy and was his healthiest ever due to large scale weight loss.

The money angle

All I could think sitting at dinner was how did this happen and how do we make money out of it?

I have written before about the global “diabesity” problem and its long-term impost on the hospital/medical system and, in turn, government budgets. Any measure that can reduce the “diabesity” problem is worth looking at, in my opinion, but particularly simple and highly effective measures that don’t require drastic lifestyle changes from the recipients of the treatment. Remember, most people didn’t get obese via being disciplined.

We could get into the debate about higher taxes on high sucrose, high carb, highly processed junk food, or tax deductions on exercise equipment and personal training/gym memberships, but I’ll leave that for another day. Today I want to focus on a cure rather than the cause, remembering 1:3 Australians are technically obese.

Let’s start by looking at a couple of before and after shots of my colleague. These are taken 12 months and 30kgs apart.

Before

 

After…

 

You can see why I was shocked, but if I’d never known him “before” I would have thought today he was an appropriate weight for his height. He looks fit and healthy.

The obvious question then becomes “how did he do it”?

Well, the answer is he had a GI Dynamics Inc. (GID) EndoBarrier installed, then removed 12 months later. The EndoBarrier may well look like a condom attached to some fishing hooks, but in reality, this is a high-tech medical device that is extremely effective.

The personal story

I thought the best way to describe this procedure and results was via advocacy from my patient colleague.

“At 105 kilos at 57 years of age, and endless failed attempts at diet and exercise, I was on blood pressure medication and concerning my GP. I was a candidate for any number of diseases not the least of which was Type 2 diabetes. The tipping point was when I couldn’t buy a size 19 collar shirt in my size in the USA (the land of lard).

Having seen the Endobarrier in operation in Holland during our diligence on GID, and knowing its rapid effect on reducing glucose and weight levels, I decided to have the procedure done in London in April last year at my own expense.

For me the process could not have been easier, a half hour procedure endoscopically inserted the tube just under my stomach under a light general anaesthetic. Three hours later I was on my way home.

For a week I was on liquids and for another fortnight on mashed foods to allow the anchor to settle.

Weight came off in bursts and by Christmas I was down to 88 kgs, which reduced to 83 kgs by mid-March. Then as the date of the extraction of the Endobarrier neared in early May, the weight began to fall off sharply to the stage I was at 77 kgs.

Extraction was as easy as insertion, involving an endoscopic removal of the tube and I was home two hours after the procedure.

The strangest thing is almost a month after extraction my weight levels have stabilised at the levels last seen in 1980 and I feel the same as when the Endobarrier was inserted. I am off all medications as my blood pressure and glucose levels have been markedly reduced.

For a type 2 diabetic the results are more dramatic, as in most cases those with Endobarrier come off their diabetic medication and stay off it.

The biggest change is my outlook. To lose nearly 30 kgs going into my sixties with minimal lifestyle changes, to reverse an almost inevitable meeting with heart disease or Type 2 diabetes, makes one want to tell people they do not have to risk surgery to get their life back.”

The GI Dynamics Inc. (GID) opportunity

If my colleague’s example is any guide, which it clearly is, then the Endobarrier device works. There seems to be no debate on that, but where the debate comes in, is what is the overall global market opportunity for the device, what can the company who manufactures and distribute it make, and what is that company worth?

Let’s consider a few variables.

Regulatory approvals for EndoBarrier: CE Mark in Europe, which allows it to be marketed in all countries within the European Economic Area. Approved by TGA in Australia. Approved in Chile and Colombia and also in some Middle Eastern countries such as Israel, Saudi Arabia and UAE.

Countries currently commercially available in: They are commercially available in Germany, UK, Netherlands, Austria, Switzerland, Australia, Chile and Israel. In total, they had 57 centres at the end of March quarter.

Rebates: The company is currently receiving partial reimbursements in Germany, Netherlands and Israel. Also, it is in the earlier stages of the reimbursement process in France, the UK and Australia.

FDA pivotal trial dates: We expect data from the trial by mid-2016 with potential approval from FDA by mid-2017 and launch by the end of 3Q17.

Cash position: After the recent equity placement, the company has US$80 million in cash and has burned US$3 million a month on average over the last 12 months.

At the current share price, GID has a market cap of $232 million. The current enterprise value is $152 million.

To me, the investment case is simple. FDA approval gets you access to the fattest nation on earth, the United States of America.

That is two to three years away but I would be banking on the EndoBarrier getting FDA approval because as you can see above, it works. I just can’t see how there will be any debate on that even with a larger subject group.

GID currently doesn’t have earnings or a dividend, but it is very well funded, has a product that works and potentially a global market place. Its production costs will come down with scale and its revenues will grow via a combination of geographic regulatory approvals, patient advocacy and more physicians being trained in the implementation/extraction of the device.

If everything goes right, device makers trade on anywhere from 20 times to 35 times earnings and most are acquired by the major medical brand distribution companies once they show true global potential. In the case of GID, Medtronic Inc. and Johnson & Johnson are already on the register with 8.3% and 6.3% of the company respectively. David Einhorn’s Greenlight Capital is also on the register with 6%, which interests me.

Medical device companies are truly premium companies due to ™ protection, barriers to entry, ROE, margins and the time, money and regulatory hurdles required to get to that point.

In the 50 to 55c range, I think GID shares should be accumulated and held for the next few years, as effectively a call option on all of the above happening.

Unlike most biotech/early stage medical device companies, GID has a product that clearly works. That in itself is a buy trigger.

Go Australia, Charlie

100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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