IPO Report: EndoChoice Holdings (ECPM Holdings) (GI)

Francis Gaskins |

IPO_Chart.jpg

EndoChoice Holdings (ECPM Holdings) (GI) is a medical device company focused exclusively on designing and commercializing a platform of innovative products and services for gastrointestinal, or GI, caregivers. GI currently serves over 2,500 GI departments that perform endoscopic procedures, which represent approximately one-third of the U.S. market. It is based in Alpharetta, GA.

Three other companies are scheduled for the week of June 1. The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: J.P. Morgan, BofA Merrill Lynch, William Blair, Stifel
Co-managers: None

End of lockup (180 days): Wednesday, December 2, 2015
End of 25-day quiet period: Tuesday, June 30, 2015

GI scheduled a $100 million IPO with a market capitalization of $394 million at a price range midpoint of $16 for Friday, June 5, 2015 on NYSE.

Summary

GI is a medical device company focused exclusively on designing and commercializing a platform of innovative products and services for gastrointestinal, or GI, caregivers. GI currently serves over 2,500 GI departments that perform endoscopic procedures, which represent approximately one-third of the U.S. market.

Valuation

Glossary
Pre-IPO grade-score summary
http://gaskinsco.com/scr-rate.htm

Many IPOs in today’s environment are graded C+ and scored 7.

If the pre-IPO grade is below C+ or the score is below 7, then our analysts may have some concerns about the company’s outlook and/or its market segment.

If the pre-ipo grade is above C+ or the score is above 7, then our analysts believe the company’s overall business outlook is very favorable.
C = unprofitable, C+ = profitable

Accumulated deficit ($mm)

.

.

-$116

     

Per share dilution

.

.

-$12.06

     

-----------------------------

         

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

EndoChoice Holdings (ECPM Holdings) (GI)

$390

5.8

-6.4

3.0

4.1

26%

             

Conclusion

Neutral

Serves 1/3 of the US market

P/E -6.4 indicating fairly heavy negative cash flow relative to market cap

Rev growth rate 21% to $17 for Q1, same as '14 vs '13

Loss rate on rev was 91% for Q1

Gross profit rate of change -13% for Q1

Gross profit 33% of rev for Q1

Per share dilution is 75% of the IPO price

Price-to-tangible book of 4.1

Price-to-sales of 5.8

Business

GI is a medical device company focused exclusively on designing and commercializing a platform of innovative products and services for gastrointestinal, or GI, caregivers. GI currently serves over 2,500 GI departments that perform endoscopic procedures, which represent approximately one-third of the U.S. market.

GI offers a comprehensive range of products and services that span single-use devices and infection control products, pathology and imaging systems.

In December 2013, GI began limited commercialization of its Fuse® full spectrum endoscopy system, or Fuse®. GI’s Fuse® system enables GI specialists to see more than twice the anatomy at any one time compared to standard, forward-viewing colonoscopes and has been clinically demonstrated to detect 69% more pre-cancerous polyps than standard colonoscopes.

GI believes its commitment to continuing innovation and focus on GI specialists provides GI with the unique capability to meet their evolving needs.

GI intends to leverage its broad product platform, established customer relationships, commercial infrastructure and Fuse® technology to set a new standard of care for the global GI market.

Market

GI estimates that the addressable worldwide market for its GI endoscopy products and services is over $6 billion, with more than 70 million GI endoscopies performed each year in the United States, Japan and Europe combined.

GI estimates that the addressable market for its GI endoscopy products and services is growing at 7% annually driven by increased governmental and payer focus on screening, prevention and treatment of colorectal cancer and other GI conditions, an aging global population and changing dietary habits.

GI endoscopies involve inserting a thin tube containing a camera or cameras into a natural orifice of the patient to examine the upper or lower GI tract in order to screen for, diagnose and treat various GI conditions, including colorectal cancer.

GI endoscopies require a large number of steps, including setup, imaging, therapy, specimen retrieval, pathology and endoscope disinfection and repair, which GI refers to collectively as the GI procedure cycle.

The GI endoscopy market is highly fragmented and served by numerous companies, many of which focus on only one or two areas of the GI procedure cycle. GI believes the needs of GI specialists are currently underserved due to the lack of a comprehensive provider solely focused on innovation in the GI endoscopy market.

Intellectual Property

As of May 26, 2015, GI owned approximately 30 issued patents, 9 of which are U.S. patents. GI owns approximately 133 pending patent applications, including 75 pending U.S. patent applications and 25 International Patent Cooperation Treaty applications. All of its issued U.S. patents expire between 2021 and 2032.

As of March 31, 2015, GI owned approximately 63 trademark registrations, of which 33 are U.S. trademark registrations. GI also owns 3 pending U.S. trademark applications and 34 pending foreign trademark applications.

Competition

GI believes the market for endoscopy products and services is fragmented and underserved by its competitors.

As such, GI believes that it is in a unique position as the only company exclusively focused on servicing the entire GI procedure cycle through its broad and innovative product platform. Many of GI’s competitors are either large, multinational companies for which GI represents only a portion of a larger business, or niche players focused on a small portion of the market.

Accordingly, GI’s competitors are generally varied as to product and service lines, as categorized below.

Imaging Systems

In the imaging market, GI’s significant competitors include flexible endoscope manufacturers, such as Olympus, Fujifilm and Pentax, which together represent a significant portion of the GI endoscopy market.

In particular, each of these significant competitors have products that directly compete with GI’s Fuse® system, including EVIS EXERA III from Olympus, EXPX-2500 from Fujifilm and Pentax’s RetroView Colonoscope.

There is also the potential for new entrants to the market, particularly those based in China, as manufacturing capabilities grow.

Therapeutic devices. In the device market, GI’s significant competitors include Boston Scientific, Cook Medical, Olympus, Medivators/Cantel, and Steris/US Endoscopy, all of which sell GI endoscopy devices.

At any time, these and other potential market entrants may develop new devices or treatment alternatives that may compete directly with GI products.

Infection control products.
In the infection control market, GI’s significant competitors include Medivators/Cantel, Ruhof, Medline, Cardinal Health and Steris/US Endoscopy, all of which sell infection control products that directly compete with GI’s product offerings, including procedure kits, personal protection products, enzymatics and high-level disinfectants.

Diagnostics

The diagnostics market, including pathology services, is highly fragmented. GI’s primary competitors include GI groups with in-office pathology labs, independent pathology labs, hospital-based pathology labs and large diagnostic companies, including LabCorp and Quest Diagnostics.

Even with GI’s broad platform of products and services, its ability to compete effectively will depend on the acceptance and use of its products by GI specialists.

In addition, in the future GI may compete with alternative GI disease screening methods, including the non-invasive testing methods described below.

Stool Tests

Some western European countries have introduced a preliminary step before colonoscopy into their prescribed screening programs.

In these countries the patient is first asked to perform an “at home” stool test referred to as either a fecal occult blood test, or FOBT, or fecal immunochemical test, or FIT.

A physician interprets the results and, if positive, the patient is instructed to proceed to a colonoscopy. In the United States, FOBT and FIT are sometimes used as adjuncts to colonoscopy, but insurance companies generally do not require their use prior to screening colonoscopy.

FDA recently approved a non-invasive, DNA-based stool test for use in the United States as an alternative option to screen for colorectal cancer.

The newly approved product detects hemoglobin, a protein molecule that is a component of blood as well as certain mutations associated with colorectal cancer, in the DNA of cells shed by advanced adenomas as stool moves through the large intestine and rectum. If a polyp or colon cancer is detected through a stool test, the patient is instructed to proceed to a colonoscopy procedure.

Pill Camera

Other competitors have introduced pill camera technologies as another alternative method of screening the GI tract for polyps.

In this screening method, the patient swallows a pill that houses a battery, light and lenses, which travels through the GI tract while wirelessly transmitting images to a specialist.

The patient must limit physical activity during the approximate 10 hours that it takes the pill to travel through the GI tract.

If any colon abnormalities are detected through pill camera screening, the patient is instructed to proceed to a colonoscopy procedure.

Radiology Scans

Another alternative procedure to screen for pre-cancerous polyps is use of scans, including computed tomography, or CT, or magnetic resonance imaging, or MRI, scans.

In both cases, a specialist takes a scan of the patient’s GI tract and analyzes the results for the presence of any colon abnormalities. If any colon abnormalities are detected, the patient is instructed to proceed to a colonoscopy procedure.

5% shareholders pre-IPO
Sequoia Funds 21.79%

River Cities Funds         14.54%

Council Capital II, L.P.   8.31%

Envest III, LLC   9.69%

ESOP Management and Trust Services Ltd. for the benefit of U.M. Accelmed L.P.           12.47%            

Evergreen Funds           5.56%

J. Scott Carter  21.79%

Dr. Uri Geiger    12.47%

David L. Kaufman         9.69%

Rurik G. Vandevenne    14.54%             

Dividends

No dividends are planned.

Use of Proceeds

GI expects to receive $90 million from its IPO and use it for the following:

$29 million for the expansion of its sales and marketing activities, including hiring new direct sales representatives;

$27 million for increases in working capital requirements related to accounts receivable and inventory;

$17 million for capital expenditures for new product demonstration equipment, including colon models and other simulation equipment, used by its sales representatives and other personnel for Fuse® product demonstrations to GI specialists;

$4 million for investments to expand its manufacturing capacity as sales of its Fuse® system and other products increase in the future, which will include the acquisition of equipment and other fixed assets related primarily to the manufacturing of its Fuse® system and its other products; and

the remainder for other general corporate purposes.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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