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OTC Journal Members:
Over the last 20 years the use of
lasers as medical devices has grown dramatically. Lasers are now used to
correct vision, treat skin conditions, for dentistry, and in micro surgery.
The use of lasers has exploded in the vision correction market.
At the forefront of the laser revolution
in corrective eye surgery was Visx Inc (NYSE: EYE). This was the
first company to obtain an FDA approval in 1996, and enjoyed a virtual
monopoly for several years. The business model was highly profitable. Eye
surgeons were able to purchase the lasers at a reasonable price, but licensing
fees for every procedure generated most of the revenues and profits.
As you can see from the chart, the
company's high growth phase was exciting for shareholders. Adjusted for
splits, the stock was trading in the $7 range in early 1998. A mere 15
months later the stock would find its way to $104 for an enviable
return. The stock lost a great deal of its luster when the company
was defeated in a patent infringement suit with a Japanese company. In
late 1999 their monopoly ended, but shareholders had a great ride during
the company's high growth phase.
Today's profile features a company
that is breaking new ground in laser based medical technology. Their business
model lends itself to high profit margins. Their drug company partners
absorb the huge up front costs associated with the FDA Approval process,
and they partner in the benefits. They now have two FDA Approvals, one
having come within the last three weeks. They generated significant sales
in 2001, and expect to turn cash flow positive in 2002. Their core shareholder
base reads like a Who's Who of international financiers and Wall Street
legends. The company is on the verge of a major fundamental breakout, and
shareholders have the potential to enjoy extraordinary gains.
The stock began trading today on
the American Stock Exchange. The company went public through the RTO process
described in our January
16th edition. The company completed a reverse merger into a fully reporting
"Shell" company on February 19th, and traded for three days on the OTC
Bulletin Board prior to making the jump to the American Stock Exchange
in record time. The stock traded as high as $9 on nearly a million shares
of volume the first day it opened. We intended to release our profile earlier
in the week, but we chose to wait for the stock to pull back to a more
favorable entry point.
There was no traditional IPO where
preferred customers of the underwriters received the "cheap" stock. Every
open market investor has the same opportunity to make a profit. For your
Profile: Diomed Corporation (AMEX: DIO)
Massachusetts based Diomed Corp
opened for trading today on the American Stock Exchange at $7.03
per share, and we believe the stock should be accumulated up to $8.50
in the short term. $10 is a reasonable price target for
the stock over the next several months, but longer term investors with
a 12 month time frame could see appreciation into the $15 to $20
Stock Listing: AMEX: DIO
Estimated Shares Issued and Outstanding:
Estimated Public Float: 9.2 Million
AMEX Opening Price: $6.95
Market Capitalization: $200 Million
High and Low Since Merger: $9/$5.45
Corporate Web Site: http://www.diomedinc.com
The company manufactures and markets
lasers and fiber optics which are used in unique treatment protocols for
many types of cancer and varicose vein removal.
Their first FDA Approval for use of their lasers and fibers with the photo
sensitive drug "Photofrin" came in August of 2000, and the company
is expected to report about $8 million in revenues in 2001. Here is a review
of their products and how they work:
Laser Treatment (EVLT™) - Their New, High Profile Product
On January 24, 2002, just three short
weeks ago, Diomed announced it had been granted the long awaited
FDA Approval for EVLT™, a new and revolutionary treatment for varicose
veins which has been the subject of a feature on Good Morning America.
Diomed believes demand will
immediately surface for this newly approved procedure, and as much as 68%
of its 2002 revenues could be derived from EVLT™.
EndoVenous Laser Treatment
is the most painless and effective way to remove varicose veins, an affliction
which plagues nearly half the population over 50 years of age. EVLT™
is a quick, minimally invasive laser procedure that leaves no scar, has
a short and relatively pain free post-operative recovery period and is
performed under local anesthesia in the doctor's treatment room.
Varicose veins are caused by inefficient
valves which allow blood to pool. Laser light is inserted in the vein through
a strand of fiber. The walls of the vein shrink, eventually closing it
so blood can no longer flow through. The vein disappears over a short period
of time, eliminating the unsightly varicose vein.
There is so much interest and demand
for this new treatment, Diomed has set up a web site which explains
the entire treatment process. You can even locate a treatment facility
through this site. Check out www.summerlegs.com
for complete information.
The market for this treatment is
enormous. Varicose veins adversely affect the appearance of the legs of
25% of women worldwide. This simple, relative painless solution has a 98%
success rate and requires 45 minutes to complete the treatment. Women and
men worldwide who have been plagued by unsightly varicose veins now have
a reasonable solution to their problem. The potential market for this treatment
runs into the hundreds of millions of dollars.
The recent FDA Approval for this
new treatment has also sparked dramatic increased interest in the stock,
and there is so much interest in this treatment that Good Morning America
a special feature on Diomed's EVLT™ process.
Dynamic Therapy (PDT)
Diomed manufacturers and markets
the lasers used in a unique and revolutionary treatment known as Photo
Dynamic Therapy, or PDT for short. The FDA has approved the
use of Diomed's lasers and fiber in a "Modality", or three step
treatment. Currently, a modality is approved by the FDA for certain treatments
associated with throat and lung cancer.
The procedure is relatively non-invasive
and highly effective. The process is as follows: The patient goes into
the doctor's office or clinic and receives and injection of the completely
harmless and non toxic drug Photofrin. Two days later, after the
drug has had time to invade the patient's tissues, he (or she) returns
to the clinic. During this 48 hour waiting period Photofrin attaches
itself more aggressively to cancer and other abnormal cells.
The patient then returns to the clinic
for the actual procedure. A strand of fiber optic is inserted into the
targeted area through a tiny catheter. The laser then illuminates the treatment
area through the fiber using a specified band width of light, which activates
the Photofrin drug. An anti-oxidant type reaction occurs, which
inflicts great harm and in many cases kills the cancer cells.
After treatment the patient stays
out of the sun for a couple of days, awaiting the remainder of the drug
to be absorbed into the tissues. The procedure is far less harmful than
chemotherapy or radiation, and has virtually no negative side effects.
The laser costs upwards of $50,000
with a $9,000 installation fee, and the company enjoys about a 50% gross
profit on devices. The disposables carry a much higher margin. The company
stated goal is a 65% margin on the disposable fiber used in each procedure.
However, the company receives $500 to $550 for the fiber used in each procedure,
and their cost is approximately $150. The "razor/razor blade"
profit model has been replicated by many highly successful companies, and
can yield substantial profits as more clinics purchase laser equipment.
Barriers to entry for competitors
are stiff as the FDA Approval for this "Modality" requires Diomed's
laser and fiber to be used in every procedure. Diomed has
partnerships with four major pharmaceutical manufacturers, all of whom
have new drugs in the FDA Pipeline which could use Diomed's lasers
and fiber in the treatments modalities.
It is estimated the cost of completing
the FDA Approval process for a new drug is approximately $150 million.
Less than 40% of new drugs which begin the approval process ever receive
final FDA Approval. Diomed is in the enviable position of profiting
from the investments made by their four drug company partners once FDA
Approvals are achieved, but doesn't finance any of the costs associated
with the approval process. This minimizes the downside risk and maximizes
the upside potential for investors.
Uses of PDT- The "Off Branding Market"
As mentioned above, the FDA has approved
the three part "Modality" for treatment of specific types of throat and
lung cancer. However, this modality is proven to be effective in treating
nearly every type of cancer, and doctors are using it many ways in a practice
known as "Off Branding".
FDA regulations prohibit Diomed and
Axcam (manufacturer of Photofrin) from marketing the modality for any other
types of cancer aside from that which has been approved by the FDA.
Doctors are not restricted in the
same manner. Doctors are now routinely prescribing the use of this modality
for many types of cancer. In fact, Diomed estimates that as much
as 50% of its current revenues could be generated in "Off Branding" procedures.
Insurance companies and Medicare
are providing full coverage benefits for all treatments. Doctors, Hospitals,
and Insurance Companies are embracing this relatively new therapy as it
has proven to be a very effective treatment for cancer, but is far less
costly, has very few side effects, and requires far less follow-up treatment
than its counterparts, chemotherapy and radiation.
in the FDA Pipeline
As depicted in the table, there are
nearly 30 drugs in the FDA pipeline going through the approval process
which could potentially impact Diomed's sales. Approximately 40%
of these new drugs will eventually find their way to market. The table
represents hundreds of millions in potential revenue for Diomed,
with no associated up front costs.
The company has sold about 100 laser
systems to its four drug company partners, and the Diomed laser
and fiber is being used in clinical trials by these companies.
FDA approvals are granted for the
three stage treatment or "Modality"- which is the combination of the drug,
specific laser, and fiber. FDA regulations prohibit the use of any substitute
lasers or fibers in the treatment, which creates a very formidable barrier
to entry for other laser and fiber manufacturers. Once approval is granted,
a competing company would have to replicate the clinical trials with their
own equipment to achieve an FDA approval, absorbing the cost out of their
own pocket. The drug manufacturers have no incentive to seek alternative
suppliers of lasers and fiber as their profits come from the sale of the
drug. As long as Diomed is a reliable supplier of equipment, their
drug company partners will be content with their profits.
The next anticipated pending FDA
Approval which represents a major commercial opportunity for the company
is expected to be granted in the fall of this year. Axcan is in clinical
trials for a modality to treat "Barrett's Esophagus", more commonly
known as Acid Reflex Syndrome. The market is estimated to be 10
times that of Photofrin, so Diomed's growth could be explosive after
this approval is granted.
Audited 2001 financial performance
will not be available for at least one month, and there are no formal published
projections by the company at this time.
However, based on revenues through
the end of September, it appears the company will achieve about $8 to $8.5
million in sales in 2001. We'll know for sure when the final results are
disclosed in the near future.
Looking forward, discussions with
management lead us to believe the company could achieve as much as $18
million in revenues in 2002, up 113% from 2001 estimates. Revenues
from the newly FDA Approved EVLT™ procedure are expected to represent
68% of sales in 2002, and the company expects to turn profitable this year.
As more clinics purchase lasers from
order to offer these procedures to patients, the demand for the disposables
should increase dramatically, and margins will improve.
While losses are anticipated in 2001
due to the high cost of R & D, the company expects to turn cash flow
positive in 2002, and could make as much as $6 million in 2003 off current
FDA approved products.
The company manufactures its own
lasers, but the fiber component is manufactured by a third party. Just
prior to going public, Diomed completed a $10 million private placement.
The company will use part of the proceeds to purchase the fiber manufacturer,
thereby increasing its profit margins on the disposable side of its business.
In short, sales should more than
double this year, and increase nearly 60% the following. That equates to
a 275% percent growth rate over the next two years with no additional FDA
Approvals. Growth rates of this type lend themselves to high performance
This Fall should bring another FDA
Approval- the PDT treatment for "Barrettes Esophagus" being developed
by Axcan Pharmaceuticals. The market for this product is estimated to be
10 times the market for current PDT applications. This provides shareholders
with a potential windfall event for the stock price.
Stage Investors- Several of Wall Streets Best Names
As mentioned in the introduction,
there are several high profile early stage investors in Diomed who
helped finance the company's growth as a private company. Many institutional
funds have participated, but here are four key individual names who have
invested personally through funds they control:
While these individuals names represent
some of the best in the investment world, this does not guarantee Diomed
will perform better than other companies we have covered, and you should
not view their investment as an endorsement. These investors probably put
capital in many development stage companies only to end up being disappointed.
Sir Richard Branson- High Profile
Founder of Virgin International (Virgin Airlines and Records)
Jack Rivkin- Former Executive
Vice President at CitiGroup Investments
Jonathan Cohen- JHC Capital Management
- Formerly at Merril Lynch and Smith Barney- See our January
Robert Lessin- Chairman of Wit
We view their involvement as another
compelling reason to believe this could end up becoming an exciting stock
to own. Clearly, if the company lives up to its potential, shareholders
stand to profit right along side these high profile Wall Street names.
The profile you are reading from
the OTC Journal is the very first coverage published on Diomed
any source. The power of this information allows you to make an informed
investment decision before the rest of the financial community knows much
about this company. The OTC Journal tries to uncover under followed situations
ahead of Main Stream Wall Street. This has risk, but also can have significant
rewards for investors with the courage to act in the early stages.
Today is the first day of trading
for Diomed, and because they went public through an RTO you are
on a level playing field with other open market investors.
We believe Diomed should be
accumulated up to $7.50 for a move to $10 during
2002. Much higher levels could be attained later in the year as corporate
developments unfold, and longer term investors could see doubles and triples.
Medical/Laser company investments
have paid off handsomely for investors in the past, and this company is
one of the few that will enjoy FDA approval profits without high upfront
costs. Their razor/razor blade business model positions them for long term
growth and accelerating profits as their market expands.
If you have any risk tolerance for
high reward situations, you need to own Diomed today.
For a free due diligence package
on Diomed Inc call Investor Relations toll free at 1-888-400-0643.
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