IPO Report: EndoStim (STIM)

October 22, 2014

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7 min read

EndoStim ($STIM) is a medical device company focused on the development and commercialization of a novel neurostimulation system for the treatment of severe gastroesophageal reflux disease, or GERD. It is based in St. Louis, MO.

Four other companies are scheduled for the week of Oct. 20, 2014. The full IPO calendar is available at IPOpremium.

Manager, Co-Managers: Wedbush PacGrow.

Joint Managers: Craig-Hallum Capital Group and Roth Capital.

STIM scheduled a $35 million IPO with a market capitalization of $92 million at a price range midpoint of $11 for Thursday October 23, 2014 on the Nasdaq. SEC filings

EndoStim IPO Report

Overview

STIM is a medical device company focused on the development and commercialization of a novel neurostimulation system for the treatment of severe gastroesophageal reflux disease, or GERD.

Valuation

Glossary

Valuation Ratios	Mrkt Cap ($mm)	Price /Sls	Price /Erngs	Price /BkVlue	Price /TanBV	% offered in IPO
annualizing June 6 mos
EndoStim (STIM)	$92	153.1	-9.2	2.4	2.3	38%

Conclusion

Neutral

2.4 times book

Small rev, large losses

No stockholder interest in the IPO

Business

STIM is a medical device company focused on the development and commercialization of a novel neurostimulation system for the treatment of severe gastroesophageal reflux disease, or GERD.

Severe GERD is a debilitating condition that significantly disrupts patients’ quality of life, work productivity and sleep.

Regulatory approval

Europe

In 2012, STIM received CE Mark regulatory approval to commercialize its neurostimulation system in Europe and in other countries recognizing the CE Mark.

STIM launched the system commercially in 2013. More than 40 sites in Germany, Switzerland, Argentina and Colombia have obtained access to third-party reimbursement for the procedure.

STIM currently uses a direct sales force in key European countries and specialized distributors in other European countries, South America and Asia.

United States

In the United States, STIM's device has not been approved for sale by the FDA. However, STIM received approval from the FDA for an Investigational Device Exemption, or IDE, application, which allows STIM to conduct a pivotal clinical trial in the United States.

GERD, gastroesophageal reflux disease

Based on several international third party studies, STIM believes the impact of severe GERD on quality of life can be worse than that of chronic back pain or urinary incontinence, two other chronic conditions that are successfully treated with neurostimulation.

Moreover, the impact of severe GERD on work productivity has been shown to be significantly greater than that attributable to back pain.

STIM’s innovative approach targets the main cause of GERD — a dysfunctional lower esophageal sphincter, or LES, a muscle at the junction of the esophagus and stomach.

The EndoStim neurostimulation system, which has a form and function similar to a pacemaker, delivers low energy electrical stimulation to the LES.

In STIM’s clinical trials to date, this stimulation has been shown to improve the tone and function of the LES, thereby significantly reducing the pathological reflux symptoms of GERD.

STIM’s laparoscopically implantable neurostimulation system is minimally-invasive, reversible and preserves the anatomy of the esophagus and stomach.

In patients with GERD, a dysfunctional LES allows gastric contents, including stomach acid and bile, to pass inappropriately from the stomach into the esophagus.

As a result, patients often suffer from heartburn, regurgitation, chest pain, and difficulty swallowing, among other symptoms, which can severely impact their quality of life.

In more serious cases, GERD can result in a precancerous condition called “Barrett’s esophagus” that can lead to esophageal cancer.

Patients who suffer from daily GERD symptoms experience a sevenfold increase in the risk of esophageal cancer, for which the World Health Organization reported 456,000 new cases worldwide in 2012.

GERD is the most common upper gastro-intestinal, or GI, disorder seen in clinical practice.

It is estimated to affect 15-20% of the population in developed countries and 5% in developing nations.

Today, GERD is most often treated with chronic medication, specifically proton pump inhibitors, or PPIs, such as Nexium and Prilosec, which suppress the production of acid in the stomach.

However, PPIs do not address the main cause of GERD, a dysfunctional LES.

Therefore, PPIs do not prevent the regurgitation of stomach contents into the esophagus.

As a result, 38% of patients taking PPIs to treat GERD reported continuing symptoms that were not resolved by their medication, according to a 2010 study of over 1,000 patients by the American Gastroenterological Association.

STIM expects to initially target a subset of these patients who experience severe symptoms while on medication, and whose GERD can be confirmed by an esophageal acid test. STIM estimates this subset to comprise approximately 4.6% of all GERD patients, or about 21 million patients worldwide.

Dividend Policy

No dividends are planned.

Intellectual Property

STIM owns intellectual property designed to protect its core technologies and STIM continues to strengthen its patent portfolio through new filings.

STIM initially acquired patents and other intellectual property from Dr. Virender K. Sharma through a Patent Assignment Agreement and an Assignment Agreement concurrently executed on September 2, 2009 and subsequently amended in January 2010. Pursuant to these agreements, Dr. Sharma transferred six categories of rights to STIM:

All right, title, and interest to the inventions disclosed or claimed in U.S. Patent Nos. 6,901,295 and 7,738,961 and any domestic or foreign patents related thereto.

All right, title, and interest to discoveries, intellectual property and know-how developed by Dr. Sharma, as of September 2, 2009, in the field of (i) the treatment or therapy of gastroesophageal reflux or gastroesophageal reflux diseases and all esophageal and extraesophageal conditions caused by gastroesophageal reflux or gastroesophageal reflux disease and/or obesity using electrostimulation in the stomach alone or in combination with the esophagus and (ii) the treatment or therapy of any condition or indication using electrostimulation in the esophagus, which STIM refers to as the “Field.”

All right, title, and interest to U.S. Patent No. 8,543,210 and all domestic and foreign patents related thereto, with STIM’s practice of the inventions embodied in the patent No. 8,543,210 being limited to the Field and being subject to a non-exclusive reservation of rights by the Mayo Clinic and Mayo Foundation for Medical Education and Research (“Mayo”).

Pursuant to an exclusive license agreement dated January 11, 2010, Dr. Sharma has the exclusive right to practice the inventions embodied in this patent outside the Field.

All right, title, and interest to discoveries, intellectual property and know-how developed by Dr. Sharma in the Field through to September 2, 2019 subject to any non-exclusive reservation of right to Mayo.

A first right of refusal to purchase rights to the inventions covered by U.S. Patent Application No. 12/030,222 and all patents related thereto.

A first right of refusal to purchase rights to all other discoveries, intellectual property and know-how developed by Dr. Sharma outside the Field but only with respect to electro-stimulation anywhere in the body other than the esophagus or stomach or the use of electro-stimulation in the stomach to treat conditions other than obesity, gastroesophageal reflux, gastroesophageal reflux diseases, or any esophageal or extraesophageal conditions caused by gastroesophageal reflux or gastroesophageal reflux disease.

Competition

STIM has numerous competitors and potential competitors in the medical device and pharmaceutical industries.

Patients and physicians may opt for more established existing therapies to treat GERD, including PPI treatment or fundoplication.

PPIs are currently being offered by several large pharmaceutical manufacturers, each of whom has significantly greater financial, clinical, manufacturing, marketing, distribution and technical resources and experience than STIM has.

Over the last decade a number of medical devices and treatments have been introduced to address the GERD “therapy gap” and treat GERD less invasively than fundoplication, including the following options that are currently commercialized:

LINX® Reflux Management System (Torax Medical) — an implantable magnetic mechanical collar around the LES.

Stretta (Mederi Therapeutics) — catheter to deliver radiofrequency energy to the LES to stimulate regeneration of smooth muscle tissue in the muscular layer of the LES and the gastroesophageal junction.

Medigus MUSETM — device to endoscopically replicate a partial fundoplication.

EsophyXTM Transoral Incisionless Fundoplication (EndoGastric Solutions) — device to endoscopically replicate a partial fundoplication (no longer commercialized outside the United States).