Monday, 19 September 2016

8 Reasons To Buy LPTN Right Now

Lpath, Inc. (LPTN) continues to perform well since our recommendation on September 10th. It has moved up 34% from $2.68 to $3.60 during that time, including a 15% move on Monday after we stated that this stock could double at any given moment. We stand by this recommendation and here is a list of eight reasons why readers should continue to hold onto LPTN while new investors should consider it a buy even at this higher price. If you want to get in picks like this early, make sure to click the follow button on the left hand panel so you get immediate access to our reports once we release them.

1. The chart looks solid:

LPTN has been subject to several spikes and dips over the course of the past year as would any speculative, small cap, low-float stock. But looking at the chart, the stock has been in an uptrend for a month. This is the longest sustained run-up it has had all year, breaking the downtrend with the most recent move up. The long black bar on September 9th and subsequent white bars to reach new highs is particularly significant. Look at the daily spikes and black bars on June 20th and to a lesser extent on April 25th. They were indicative of a top with weeks of ugly red candles and dropping stock prices to follow. The trading over the past week has changed the trend. It looks like a breakout and is indicative of the positive news that is driving money into the stock.

2. The extremely small float of just over 2 million shares:

The merger with Apollo Endosurgery will see the share float grow to around 56 million, but until the deal is complete the float is a mere 2.37 million shares. Traders know that small float stocks have the potential to rip out a double or higher in a day. LPTN's 15% move today was on only 322,900 shares. Imagine what would happen if the stock has a one million or five million volume day, like it has had in the past.

3. The potential for a short squeeze:

Short interest as of 8/31 was 213,817. This is not a lot, but it's the highest it's been all year and is nearly 10% of the float and about one day's worth of volume. Once 9/15 data is out we can see if the spike and fade on September 9th on 825,100 volume trapped any more shorts for an even bigger squeeze potential.

4. LPTN is half the price of STEM:

As brought up in previous reports, LPTN's deal with Apollo Endosurgery appears to be better than the StemCells Inc. (STEM) deal with Microbot Medical. LPTN has a market cap of $8.6 million while current shareholders will be getting 4.2% of Apollo upon approval of the merger, which reported $68 million in revenue in 2015. STEM trades at a $16.8 million market cap while current shareholders will be getting 5% of Microbot, which is a pre-revenue company. STEM is the far more liquid of the two stocks so when the market starts to appreciate that LPTN's deal is one that gets shareholders revenue right away, it should catch up to STEM. Or the other scenario is that STEM collapses.

With or without STEM as a comparable, there is a strong argument that LPTN is undervalued. If Apollo is valued at 5.0x of revenue, it will achieve a market cap of $340 million. LPTN holders will be entitled to 4.2% of that or $14.28 million, a 66% premium to today's closing price.

5. Apollo's investors have committed to put $29 million into the company upon merger:

We have quoted this before but it is worth quoting again:

"Apollo's major investors have committed to invest approximately $29 million of new equity in the combined company, which will form part of the Apollo 95.8 percent ownership. The major investors include affiliates of PTV Healthcare Capital, H.I.G. BioHealth Partners, Remeditex Ventures, Novo A/S, and CPMG Inc."

If Apollo has five venture capital health care funds willing to put $29 million into the company once it achieves a public listing with LPTN, wouldn't it be reasonable to think that these companies would be interested in buying up LPTN in the open market to ensure that their investment remains strong? An extra $2 or $3 million of open market orders could shoot LPTN to $10 and the value of the $29 million investment could be substantially higher. Now whether these funds would take profits and put downward pressure on the stock once it reaches $10 is another story, but being in September right now, that worry is weeks or months away until the merger is complete.

6. Todd Newton, Apollo's current CEO and incoming CEO for LPTN, has had a history of success with a $1.7 billion exit:

Todd Newton's CV from Apollo's website:

Todd Newton joined Apollo Endosurgery as Chief Executive Officer and as a member of the board of directors on July 1, 2014.

Mr. Newton is a seasoned executive and comes to Apollo after five years at ArthroCare Corporation, where he served as Executive Vice President, Chief Financial Officer and Chief Operating Officer. During his tenure, Mr. Newton helped to stabilize operations, which lead to the Company’s achievement of its highest ever levels of profitability and cash flow and its recent sale to Smith & Nephew for $1.7 billion.

Can Todd Newton repeat his success at ArthroCare and lead Apollo to record levels of profitability once it is public through LPTN? Several VC funds have just bet a combined total of $29 million that he will. The next reason shows that he is a well-spoken and intelligent individual who appears apt to take Apollo to the next level in attempting to treat obesity.

7. Apollo's obesity solution could succeed where others have failed:

Arena Pharmaceuticals, Inc. (ARNA), VIVUS Inc. (VVUS), Orexigen Therapeutics, Inc. (OREX) and EnteroMedics Inc. (ETRM) have all been miserable failures for investors over the years as their drugs or medical devices to treat obesity have not taken the industry by storm as people had first hoped. But at one time some of these companies were valued over a billion dollars.

Last week LPTN and Apollo held a conference call to explain some details of the transaction. The transcript is filed with the SEC:

On the call, Todd Newton spoke very intelligently about the obesity epidemic and how Apollo plans to attack this potentially lucrative industry with more than 80 million people clinically obese in the United States, and over 500 million people globally:

"Traditional bariatric surgery has been clinically shown to deliver weight loss and improve obesity-related diseases in patients. However, the majority of these surgeries are invasive, anatomically altering, and often temporary, with weight loss results sometimes only lasting for a period of 5 to 10 years.

As a result, traditional bariatric surgery has not appealed to patients despite measurable results and reimbursement across the United States. In 2015 less than 170,000 bariatric primary surgery procedures were performed in the United States, representing less than 1% of the surgically eligible population.

Apollo’s objective is to improve today’s obesity health problem with new, less invasive and reversible interventional procedures for obesity that can be delivered without surgery. We are at the forefront of what is known as endobariatrics, which treats obesity with products delivered with a flexible endoscope and without traditional surgery.

Our portfolio of endobariatric products includes the ORBERA intragastric balloon and the OverStitch Flexible Endoscopic Suturing System. Our belief at Apollo is that the invasiveness of the intervention should be matched with the stage of the patient’s obesity. We believe earlier, less invasive intervention ultimately benefits patients as well as saves healthcare system costs, and patients, physicians and regulators have shown an increased willingness to adopt less invasive therapies for obesity treatment.

In late 2014 Canaccord Genuity estimated that the market for obesity devices, driven in part by new, safer, less invasive options, could exceed $1.3 billion in the US alone in the next 10 years. Apollo expects most of our future growth to come from our endobariatric products, and let me delve into our endobariatric product portfolio further.

We believe that the ORBERA intragastric balloon is the world’s leading intragastric balloon. It is delivered with mild sedation through the mouth and into the patient’s stomach, where it is filled with saline to the approximate size of a grapefruit and where it remains for 6 months. The ORBERA therapy is a 12-month comprehensive support program that includes diet, exercise and counseling, 6 months with the balloon implant and then another 6 months after its removal.

ORBERA has been implanted in more than 230,000 patients around the world, with more than 230 peer-reviewed publications that testify to ORBERA’s safety and effectiveness. In these studies, patients have lost anywhere between 30% to 40% of their excess weight, which is significant enough to have a positive effect on the patient’s comorbid conditions like diabetes or cardiovascular health.

In August of 2015 the FDA approved ORBERA, and since that time Apollo has trained over 600 US physicians and their practices on the use of ORBERA."

He also went on to talk about Apollo's OverStitch Endoscopic Suturing System which readers can read by clicking on the SEC filing link above.

In addition to the $68 million in existing revenue (mostly Lap-Band sales from what we can tell), how much is ORBERA worth going forward? This novel, less invasive, FDA-approved device for weight loss sounds like it could finally be the solution the market has been waiting for. 230,000 patients have already been implanted with ORBERA with over 230 peer reviewed publications on its safety and effectiveness.

Here is an article on ORBERA from July on a bariatric industry website. Key findings of the ORBERA post-approval study included:

  • At month six, the Orbera group achieved a mean of 38.4 percent Excess Weight Loss (EWL).
  • Mean Total Body Weight Loss (TBWL) at six months was 10.2 percent for the treatment group compared to 3.3 percent TBWL for the control group.
  • The Orbera group lost 3.1 times as much weight as the control group at six months.
  • The Orbera group also lost significantly more weight than the control group over the course of the study, and was able to maintain significant weight loss through month 12, six months after removal of the device.

Given the source and that Apollo was a private company at this time, we can be assured that the article has been written with patient and obesity medical industry concerns at the forefront, not a press release to try to pump a stock price like we see so often with NASDAQ-listed biotech companies. Reading this article gives us great confidence in the product portfolio of weight loss devices that will come to be owned under the LPTN/Apollo umbrella once the deal is complete.

8. LPTN has $34.5 million in deferred tax assets:

This merger will result in a change in control which may make it difficult for Apollo to capitalize on LPTN's past losses. But according to LPTN's 2015 annual report, the company has $34.5 million in deferred tax assets currently offset by a valuation allowance stemming from federal and California net operating loss carryforwards of approximately $82 million and $74 million, respectively. If Apollo can find a way around the change of control issue, it can take advantage of these losses and not pay taxes on profitable operations for the first few years, assuming it attains consistent profitability.

For those who are reading about LPTN for the first time, we suggest that you read our previous two reports on this deal:

As well as the company press release:

To ensure that you have full understanding of this deal. The next step is for the company to release an S4. On the conference call Todd Newton stated it will be available in the next few days and that was a week ago, so we should be expecting it at any time now.

With these 8 reasons - strong chart, small float, short squeeze potential, undervalued relative to a peer, $29 million in venture capital fund commitments, strong leadership, a diverse and prospective weight loss device portfolio and possibility to capitalize on substantial deferred tax assets - LPTN is looking like a very strong play with huge upside potential.

We do not get paid for our recommendations and participate in all of them. 

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