No ImpediMed to Success

I’ll be the first to admit that is a terrible play on words, but it was the best I could come up with today.

ImpediMed (ASX : IPD) is an interesting little company and there is a lot to like about it. The company’s basic technology is called bioelectrical impedance analysis (or bioimpedance analysis) and basically involves passing a very small electrical current through your body (i.e. your limbs) in order to measure the fluid composition. Fat, water and connective tissue all have different electrical properties, particularly when that small electrical signal is transmitted at different frequencies. By generating a “spectra” of those different tissue/fluid components, and comparing them differentially between limbs (or over time) it is possible to detect the very subtle build-up of fluid that may be early warning signs of a lymphedema. Lymphedema is basically when your lymph nodes are traumatised somehow (i.e. from a surgical resection) and the lymphatic fluids accumulate and can cause massive swelling. If not managed, it can result in infections and loss of limbs. For may patients, particularly cancer patients that have their lymph nodes removed as part of extended resections (breast cancer patients, prostate cancer patients), it is a major post-treatment risk that needs to be managed.

Bioimpedance measurements are nothing new. I remember doing bioimpedance experiments in a biomedical instrumentation lab 20 years ago when I was an undergraduate student (about the same time that early spectral impedance measurement tools were being tested in breast cancer patients to detect lymphedema). The spectral analysis part is very crucial – you can either sweep the signal across different frequencies, or you can use a short, sharp “pulse” that intrinsically contains many frequencies, and see how that pulse is modified when it travels through your body (limb, or whatever). Either way, developing a system that works very reliably and reproducibly is a reasonably solid engineering accomplishment. ImpediMed has taken a fairly well established scientific concept and turned it into a portfolio of products, experience and clinical validation that looks pretty robust.

From a commercial vantage, ImpediMed’s business is sort of a dream medical device business. It’s non-invasive, has a fairly easy regulatory pathway with the FDA, is based on well-understood science, is inexpensive to clinically validate, fulfills an unmet clinical need, has a reimbursement (CPT) code, is cheap to make, cheap to service (i.e. replace) – really, it’s kind of a no-brainer. The only snag is that the company has to create a new market that doesn’t exist, for an entirely new product concept. That’s not an impossibility and the clinical need that it fulfills is very clear, but it still requires real work and is non-trivial to accomplish. Fortunately, the team behind the company looks sufficiently experienced and capable to make it work, and is doing a lot of the right things in terms of opinion-leader engagement, luminary site traction, etc.

The finances of the company are “so so” (balance sheet solid, revenues not so much). During this product ramp-up phase they are going to obviously have to burn through a bit of cash and this should be anticipated in near-term financial statements. Selling a single product into the oncology / surgical setting is tough – and choosing distribution partners is a major challenge. Despite some early international distribution partners, it’s not fully clear to me what the game plan is for the US, at least based on the latest investor updates that I have seen. But to be fair, the CPT code really only came into effect in January, the NCCN guidelines specifically mentioning lymphedema were just overhauled about a month ago. From a selling point, the company has everything it could wish for to build its revenue stream and has really no impediment to success (except a surprisingly clunky website that needs overhaul). That being said, the Australian financial Q4 disclosure wasn’t that amazing (a good quarter to evaluate where the company is going because it is not impacted by the US hospital sales cycle) and with just $0.6m of quarterly revenue from the lymphedema product this company looks massively overvalued to me.

Today, IPD’s market cap is about AUD $340m. Applying any sort of device comparable to this means that in this coming financial year, the company needs to accomplish at least $12-15m in sales with an order book trajectory between Q3 and Q4 that supports a 40+% growth rate. My personal opinion is that this company is too expensive, but of course that could rapidly change in just a few quarters of sales. Of course, we’d rather see the stock price a little high at the moment because it makes any acquisition dynamic a little bit interesting, depending on whether or not you feel that a “premium” is already baked into the share price. Certainly, it’s very unusual to see a “niche” product like this stay stand-alone for very long. Perhaps with the share price being a little on the high-side, it buys a bit of M&A immunity for a couple of quarters for sales to catch up and really create some real exit momentum for shareholders. Let’s hope so – it will be very interesting to see if Mr. Carreon and his team can make it happen.

On the topic of the CEO, Mr. Carreon is on a pretty impressive compensation package relative to revenues, but probably in line with market cap. I think the total compensation package is what you would expect for a small-cap US public company CEO (including exchange rate), and not excessive (despite some off-hand commentary I have heard). For the board, compensation is perhaps a little on the high side, though having a US-based CEO certainly does place a higher governance burden on the Chair. Besides, I reckon Dr. Hirst is a keeper.

Downside?

There isn’t too much, in my view. Could another company come along and compete? In my opinion – yes – but it is also such a niche play. That said, IPD may have hammered out some technology optimisation but the fundamental concept is fairly old and the instrumentation complexity is modest. If one of the big boys thought this was a good space to go after, they could. Establishing a predicate device makes it easier for someone else to follow if they choose (the original 510(k) is sort of cute – IPD predicating … er… itself, in a way).

In the case of breast cancer patients, many cancer patients that have had lymph node resection already wear compression garmets as a matter of course. I suppose one of the challenges of measuring an “outcome” before it clinically presents, is that almost all mastectomy patients have some degree of fluid accumulation, so what are you really predicting? 100% of patients? Is that useful? Then again, it’s encouraging to see a company take an evidence-based approach with proper clinical trials – and especially getting an early opinion leader like Kaiser Permanente, brilliant for pushing the clinical case and payor engagement. Smart stuff.

This company is better than a punt, and having seen plenty of post-op cancer patients (including breast cancer patients) balloon up uncomfortably, it is one more useful tool in the arsenal of optimal patient management. Sometimes people forget that a big part of successful cancer treatment is recovery … getting on with life again as quickly as possible, with the least amount of discomfort.

6 thoughts on “No ImpediMed to Success

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