World Heart plans to tap
huge market
Garry Marr
Financial Post
In the race to create the world's first permanent artificial
heart, investors have been betting on World Heart Corp. to
finish first.
The Nepean, Ont.-based company's plan to implant its
HeartSaver Ventricular Assist Device in a human this year
has some company watchers saying World Heart is in the
lead to capture what could be a multibillion-dollar
market.
It was that kind of optimism that created a buying frenzy
this week, driving up the stock to $26 on Monday when
World Heart released its yearend results. But by
Wednesday's close, the stock had fallen back 34.6%.
World Heart bounced back in Toronto yesterday but lost
more ground in New York trading.
The shares (WHT/TSE) jumped 50¢ to $17.50 in Toronto
but on the Nasdaq Stock Market they (WHRTF/NASDAQ)
lost 21/64 to close at $11 19Ú64 (US).
"There's nothing specific driving the price but growth
stocks with significant value potential ahead of them in
the next 12 to 24 months seem to be garnering a lot of
investor attention," says Michael Lorimer, an analyst with
Scotia Capital Markets.
World Heart on Monday said the initial phase of the final
pre-clinical tests of the artificial heart began this month
and, subject to Health Canada approval, it would conduct
its first human implant this year.
With no significant revenue, World Heart says it expects
to record a loss of $3.7-million (30¢ a share) in 1998,
down from a loss of $9.4-million (93¢) in 1997.
Its results will be released next month.
The company is not predicting any notable operating
revenue in 1999 either and it expects expenditures to rise
to $12-million ($1) for the year -- the cost of pre-clinical
trials and initial clinical use.
World Heart's history dates back to 1989 when the
Ottawa Heart Institute began working on a device under
the Canadian Artificial Heart Program. About seven years
later, the school had developed a working model of
HeartSaver. In 1996, Rod Bryden, majority owner of the
National Hockey League's Ottawa Senators, and Michael
Cowpland, chief executive of Corel Corp., bought the
rights to the artificial heart and formed World Heart.
Medical experts say HeartSaver's strength is its
energy-transfer system. It uses electromagnetism to allow
it to avoid the usual external wires that penetrate the skin
in traditional implants and can cause infection.
A small, battery-powered coil is taped to the chest, with
energy transmitted through the skin to an adjacent coil
implanted in the body that feeds power to HeartSaver.
"This is the first time their device will go into humans and
that's a very large event for a development stage
technology company," says Scotia Capital's Mr. Lorimer,
about the recent investor excitement. "The market now has
more visibility as to World Heart's timeline."
The company reported its first commercial revenue in the
period ended Sept. 30, 1998 -- a meagre $19,062 from the
sale of an energy transfer system to an international
medical devices company.
World Heart doesn't expect to record its first profit until
2001, the first full year of sales.
Mr. Lorimer believes at "these prices" investors have fixed
into their equation the device being hooked up to a human
in 1999. The guessing game is in determining today's stock
price on tomorrow's revenue.
"You do what you call a risk-adjusted discounting model,
which is a fancy way of forecasting how the whole thing is
going and discount it back to a present value," he says.
The risk adjustment is how much of a discount you use in
calculating those earnings.
"We use venture capital rates and that's about 40% to
50%," says Mr. Lorimer, adding he is forecasting
$87-million in gross sales in 2001 and $195-million in
2002.
Of course, World Heart is not the only game in town.
In the United States, Thoratec Labs Corp., Thermo
Cardiosystems Inc., and Abiomed Inc. have all developed
temporary or bridge-to-transplant heart devices.
Since World Heart has not developed such a device, Mr.
Lorimer says it is behind those companies in one sense but
is leading in the development of a permanent artificial
heart.
"World Heart is going after the significantly larger
alternative transplant device," says Mr. Lorimer.
At $50,000 (US) a HeartSaver and about 40,000 or 50,000
patients in the United States identified as needing a new
heart, the potential is huge. Only about 2,500 transplants
are performed each year in the United States.
The primary heart transplant market, which includes the
United States, Canada, and Europe, is estimated to be
worth $5-billion (US). That is 100,000 patients at
$50,000 each.
Still, Mr. Lorimer rates World Heart a venture stock with
all the risks that come with that term.
He has a $24 one-year target price on its stock and $50 for
two years, both of which were set last November.
Jean-Luc Berger, an analyst with Credifinance Securities
Ltd., shares the view of high risk and high reward with the
company. "Overall risk assessment is high but the
successful completion of the pre-clinical studies of the
HeartSaver will lower the risk," he writes in his latest
report on the company.
With only about 12.2 million shares outstanding, he notes
there is "limited share dilution", despite all the years of
research and development. "The company is at an
important and exciting stage of growth, targeting an
unmet medical need in an untapped market characterized
by superior growth," Mr. Berger says.
WORLD HEART CORP.
CEO: Roderick Bryden
Ticker: WHT
Listed: Toronto Stock Exchange
Head office: 1 Laser Street, Nepean, Ontario.
K2E 7V1
Telephone: (613) 226-4278 |
