In conversation with Ben Haynor
As a senior research analyst with Feltl & Co. for the past six years, Ben Haynor ranked second in the May 2013 Wall Street Journal Best on the Street publication in the Medical Equipment and Supplies category and was named the top stock picker in U.S. Health Care Equipment and Supplies in StarMine’s 2013 analyst awards. Prior to joining Feltl, he founded two technology startups – Taggart Communications and Spigot Games – and spent five years in equity trading at RBC Capital Markets, including several years as a NASDAQ market maker. In this interview with BioTuesdays.com, Mr. Haynor discusses industry trends in medical devices and a couple of his favorite investment ideas.
How does Feltl differ from other banks?
We are family owned and operated, with our headquarters in Minneapolis. As a boutique investment bank, our market niche is small- to mid-cap companies that are not widely covered by other research firms. In equity capital markets, research drives everything and if you don’t have good research, you don’t get the banking deals. We have about 150 retail brokers in the upper Midwest, five institutional sales people, with plans to expand, and six research analysts, covering restaurants and retail; healthcare, including diagnostics, medical devices, specialty pharma and services; agriculture; and financial technology. We hold our research department to very high standards, and strive to provide value-added investment ideas through sound fundamental analysis.
What’s the key to success for a medtech company?
Overall, I’d say it’s pretty similar to any other business – have a superior offering and make people aware of it. In the medtech space, that typically entails having strong outcomes data and perhaps health economic data to secure favorable reimbursement.
How did the medtech sector perform last year and so far in 2016?
If your 2015 strategy was to short everything below a $250-million market cap and buy everything $500-million-plus, congratulations on your performance. An analysis I did last December found returns in the medtech universe among companies with market caps lower than $250-million market cap over the prior 12 months had a median decline of 29% and below $100-million, the median decline was 38%. The best performers were companies with market caps from $1-billion to $5-billion and $5-billion to $10-billion, where average returns were 54% and 51%, respectively. However, in the past couple of months, small cap returns seem to be getting better, at least anecdotally.
How would you describe medtech’s relationship with the FDA?
It varies from firm to firm, so there’s no easy way to paint this with a broad brush. That said, the FDA seems more willing to listen to what industry is saying when a reasonable point is being made and more accepting of that, particularly with regard chronic conditions that are widespread, such as diabetes.
What’s the state of consolidation in medtech?
Surprising, it’s been largely absent in the small cap arena as large-cap firms have focused on bigger acquisitions over the past few years. I think this will change in the next couple years based on relative valuations and as smaller firms grow to the size they might be interesting to acquirers.
Feltl’s recent Best Ideas list for the second half had two of the companies you follow: Dipexium and Tandem Diabetes. What do you like about Dipexium?
Dipexium’s Phase 3 top-line data for Locilex, a topical antibiotic for use in mild diabetic foot infections (DFI), should be released in September. We believe the data will be positive based on trials conducted by Magainin Pharmaceuticals, the previous sponsor of the product, in the late 1990s and the design of Dipexium’s studies, which compared Locilex to placebo cream.
Systemic oral and IV antibiotics suffer from a number of drawbacks, including antibiotic resistance, narrow spectrums, poor safety profiles, and drug-drug interactions. Locilex does not suffer from these drawbacks and has not been shown to generate antibiotic resistance. In addition, it has shown the ability to treat drug-resistant bacteria, such as MRSA, or methicillin-resistant staphylococcus aureus infection, which is caused by a type of staph bacteria that’s become resistant to many of the antibiotics used to treat ordinary staph infections.
Currently, there are no pharmaceuticals approved for a mild DFI indication, despite over a half million cases occurring in the U.S. annually. Approximately two-thirds of mild DFI patients leave a doctor’s office with an antibiotic prescription, with an additional 30% to 38% told to use a topical, despite the fact that none of the topicals typically given are supported in clinical guidelines. As such, we believe Locilex will be able to capture about 45% of the mild DFI market and about 18% of the moderate DFI market in its peak sales year of 2022 in the U.S., which would result in U.S. revenue of $323-million. Moreover, Dipexium’s Phase 3 trial design has been deemed acceptable to European regulators without requiring European trials, which expands the potential U.S. market by about 50%-plus. When we factor in the potential EU revenue, our worldwide peak sales estimate increases to about $450-million in both 2022 and 2023.
The combination of a low-risk approval profile and the company’s present valuation help form our view of Dipexium’s shares as being a prudent investment risk. We have a “strong buy” on the stock, with a price target of $32.50. The stock closed at $12.20 on Friday.
What do you like about Tandem Diabetes?
In independent surveys, their t:slim Pump always comes out on top with the best features. Now, the company is preparing to launch the t:slim X2 Pump, which features new hardware advancements, including a new two-way Bluetooth wireless technology radio for communicating with more than one external device at a time. It gives Tandem the ability to roll out remote software updates and provide its customers upgrade-ability to new continuous glucose monitor devices as well as the ability to do so once the company’s artificial pancreas pump algorithms are approved by the FDA.
Tandem shares have been punished by a recent decision by UnitedHealthcare to designate Medtronic as its preferred provider of insulin pumps. About 8% of the pumps Tandem shipped in 2015 were to UNH plan members affected by the decision. Nevertheless, the company moved its 2016 sales guidance only marginally lower to a range of $105-million to $110-million, which suggests Tandem is comfortable with other aspects of its business and believes any UNH impact will be offset by stronger performance elsewhere. Additionally, the company has been remarkably consistent in hitting revenue numbers in the past couple of years. We have a “strong buy” on the stock with a price target of $14.75. The stock closed at $6.42 on Friday.
Any other medtech companies you’d like to mention?
I really like Heska (NASDAQ:HSKA), which markets diagnostic instruments and consumables to the veterinary market using a recurring rental model. Heska has the newest line of instruments on the market and for a good portion of their offering, I think their equipment is the best on the market.
[Editor’s note: Earlier this month, Heska posted record results for the second quarter, with revenue up 25% to $30-million and operating income up 94% to $3.6-million. The news sent Heska’s shares above Mr. Haynor’s target price of $48, which he raised to $60. The stock closed at $50.72 on Friday.]