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EVAR: $15M Investment, Additional Positive Outcomes Data

By Brian Marckx, CFA

NASDAQ:EVAR

Lombard (EVAR) announced that they entered into an agreement with MicroPort Scientific Corporation, a Shanghai, China-based medical device company, whereby MicroPort invested a total of $15M in EVAR through a combination of common equity and convertible debt.  Two MicroPort representatives will join EVAR’s board of directors.  The deal brings EVAR not only financing on what we think are very reasonable terms, but also what could be relatively seamless commercial entry of Aorfix and Altura into the large Chinese and Brazilian markets.

The financing includes $5M in equity, consisting of 8.06M common shares @ $0.62/share (no warrants), and $10M of unsecured notes which are convertible at any time at $0.90/share with initial maturity 12/18/2021 (i.e. 5 years but which can be extended).  Interest on the notes is payment-in-kind (PIK) and calculated as six-month LIBOR (currently 1.30%) plus 4%.  The PIK interest, which is capitalized and added to the principal, reduces cash outflows.

Following the financing, MicroPort owns approximately 29% of EVAR’s outstanding shares.  The agreement stipulates that MicroPort cannot own more than 49% of the voting power of EVAR.  As such, in the event a conversion would result in MicroPort owning more than 49%, EVAR will pay in cash an amount equal to the number of shares that MicroPort is entitled to above a 49% interest.

Pro forma for the financing, EVAR had approximately $24M of cash as of the end of Q3 (9/30/16).  Cash used in operating activities was $4.9M ($6.0M ex-changes in working capital) and $22.4M ($18.7M ex-changes in working capital) in the three and nine months ending September 30
th.  As such, at the current burn rate, the pro forma Q3 cash balance represents approximately 12 months of operating funds.

We note that the increase in share count resulting from this transaction has no effect on our valuation of EVAR as our model had assumed a near-term capital raise in the form of either straight equity or convertible debt.

Offers Seamless Entry Into China, Brazil and Manufacturing Efficiencies...

Other potential benefits that this agreement brings is the potential for relatively seamless entry of Aorfix and Altura into the large medical device territories of China and Brazil.  MicroPort has substantial presence throughout much of the world, employs 3k people and has a portfolio consisting of more than 2k products which they note have been used in over 5k hospitals across the globe.  Their products cover ten major medical disciplines which includes a rapidly growing endovascular business, which currently generates an annual run-rate of approximately $20M in revenue.

Microport’s website notes that they currently sell a handful of AAA and thoracic stent grafts.  While Microport’s Minos (14f – 16f) AAA stent graft is currently undergoing clinical trials, noteworthy is that their endovascular portfolio currently does not include an ultra-low profile AAA stent graft (such as Altura) or a AAA stent graft approved for high neck angles (such as Aorfix).  This agreement comes on the heels of additional positive outcomes data related to both Aorfix and Altura which were presented at VEITH in November (see below).

The duo are also expected to enter into a component supply manufacturing agreement, whereby MicroPort will manufacture certain components of Aorfix and Altura in their (relatively low-cost) manufacturing facility in Shanghai, which could benefit gross margins.

And while details of the China/Brazil distribution agreement, including responsibility for regulatory approval activities in each country, as well as the component manufacturing agreement are still being worked out, we view the transaction as a significantly positive event for Lombard.  At the very least, the company secured financing at what we think are very reasonable terms (i.e. equity at a slight discount to current market, no warrants, PIK interest on the notes and conversion price well out-of-the-money).  And the distribution and manufacturing agreement offers a potential low-risk upside-kicker in the form of additional revenue contribution as well as lower-cost manufacturing.

We expect to hear additional updates on the progress of discussions regarding the distribution and manufacturing agreement in the future.

Data Continues To Show Positive Outcomes of Patients Treated With Both Aorfix and Altura

Lombard presented additional data related to both Aorfix and Altura at the 43
rd annual VEITHsymposium in NYC in mid-November.

- Aorfix Long-term PYTHAGORAS data:  as a reminder, PYTHAGORAS was a controlled, prospective, non-randomized clinical study conducted at 41 sites in the U.S., three in Canada and one in Poland.  Results of the study were the main support for Lombard’s U.S. premarket approval (PMA) filing and what FDA based their approval decision upon.  218 patients were enrolled in the investigational arm and 210 ultimately treated. Of the 210 treated with Aorfix, 67 had neck angles less than 60 degrees, 109 with 60 degrees to 90 degrees, and 42 greater than 90 degrees.  The Aorfix-treated group was compared to an open surgical group which consisted of 76 patients.  The high neck-angle cohort also had other risk factors that have been associated with poor outcomes.

The data presented at VEITH in November relates to five-year follow-up which continues to demonstrate  Aorfix’s high performance in both normal and tortuous anatomies.  Five-year data showed no type I or III endoleaks and migration in just 3.3% of cases.  In addition, 95% of patients with neck angles greater than 60 degrees and 99% of patients with neck angles less than 60 degrees were free from aneurysm-related mortality.  The data has been accepted for publication by the Journal of Vascular Surgery.

- Altura was featured in a presentation titled “Advantages and Limitations of Lombard’s Altura Endograft Device to Simplify EVAR Procedures: A Multicenter Study”.  Data relates to 24 patients with average of 75 which were treated with Altura over a six month period.  Results highlighted the advertised benefits of Altura – specifically the relative ease of placing the device, short procedure times, ultra low profile and high performance.  Specific highlights were a short deployment time, which ranged from just 19 – 45 minutes, low contrast dose, and very high success rate with 100% of patients free from type I and III endoleaks and no sign of migration.  In addition, it was noted that 18 of the 24 patients were discharged within 24 hours and no deaths had occurred at 90-day follow-up.

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