YES, NEVER ENOUGH TOILETS->Subj: Diomed- History's Lessons Could Mean Profits For You
Date: 5/1/2002 1:42:43 PM Pacific Standard Time
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May 1, 2002
Volume V, Issue 32
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To OTC Journal Members:
History never looks like history when you are living through it. It always looks confusing and messy, and it always feels uncomfortable.
John W. Gardner from No Easy Victories
Diomed (AMEX: DIO)- Now Is the Time To Be Aggressive
Those of you who believe history repeats itself should be enthusiastic about Diomed by the end of today's edition. The editors of the OTC Journal believe this there is strong evidence to suggest this company has a blockbuster clinical solution, and the stock is poised for a move to the upside. If you have any risk capital set aside for a special situation, you should own some of this stock at today's levels.
Different markets favor different trading styles. In the last bull market fortunes were made by momentum investors. Once a stock moved higher, it kept moving higher, and you could still make money chasing stocks up the charts.
Today's market favors a different style. The NASDAQ's large cap technology companies are making new lows everyday. Only a few select stocks make new highs and continue higher. Astute investors can identify low risk entry points, filter out the noise around them, and take positions with minimal exposure.
We demonstrated the power of this philosophy in our April 20th edition on XML Global. The stock has risen 42% over a mere eight trading days. It's still very speculative, but the market provided a very low risk entry point.
We believe those same conditions exist today with Diomed. Here's some evidence to consider:
Understanding EVLT (EndoVenous Laser Treatment)- What It Could Mean For the Company and Investors
Diomed's immediate future is tied to the roll out of EVLT, the revolutionary new clinical solution recently approved by the FDA for the treatment of Varicose Veins.
50% of women and 35% of men over the age of 50 are plagued by varicose veins in their legs. They are painful and ugly. Until EVLT's recent approval by the FDA, the alternatives for treating varicose veins were as follows:
Ligation and Stripping: A surgical procedure requiring general anesthesia where the vein is stripped out or tied off. This is the most widely used treatment. The leg is bandaged and bruised, and recovery times can be 4 to 8 weeks.
Sclerotherapy: A chemical is injected into the vein causing it to be inflamed and close up. Can be temporary and is ineffective about 40% of the time.
VNUS Closure®: Similar to EVLT as a probe is inserted in the vein. The probe is heated by a radio frequency generator. The heat is supposed to seal the vein. It takes twice as long and costs twice as much as EVLT with a much lower success rate. There is additional risk associated with the heat characteristic of the treatment.
The EVLT treatment is clearly superior to the alternatives listed above. In an outpatient procedure taking about 45 minutes, a strand of fiber optic is threaded into the vein. Laser light is pulsed in, and over 30 days the vein simply dies and is absorbed into the blood stream. A band aid is placed over the incision, and an elastic sock may be worn up to a week. The procedure is effective over 95% of the time.
EVLT received European Approval last Fall, and FDA Approval this past January. The company has embarked on a worldwide sales and education effort for physicians and treatment centers who treat varicose veins.
The company was able to achieve $7.7 million in revenues last year. The company has not publicly released any formal projections, but we believe they are on track to achieve $14 to $20 million this year.
According to the company's recent 10K filing, there are approximately 1 million stripping procedures performed annually on a world wide basis.
If their far superior, more effective, and less invasive EVLT procedure can attain 10% market share of stripping procedures, this would equate to about $50 million in annual sales between lasers and the disposable fiber. Gross margins on the sale of the laser runs about 50%, and the disposable fiber is about 65%. This would give the company nearly $30 million in gross profits.
We believe this would equate to a $10 to $15 stock (100% to 300% above today's levels.) We will be carefully monitoring any public disclosure concerning the EVLT roll out. As more evidence builds concerning their progress, the OTC Journal will bring it to you. Currently, no other company has filed for an FDA Approval for a similar process, giving Diomed a significant head start should any competition appear on the horizon.
Consider the Case of Merit Medical Systems (NASDAQ: MMSI)
If you think no one has made money in the market over the last year, take a look at the chart of Merit Medical Systems. One year ago this stock was trading in the $4.50 range, just as Diomed is today. Had you invested in Merit before they were profitable and no one knew about them, you would have made 300% to 400% on your money over the past year in a horrendous market.
The company manufactures disposable medical products used primarily in the treatment of heart disease. They focus their energies on the 510K FDA Approval process for their products. The application process does not require new clinical trials, as the products are generally approved already in other applications. This is similar to the way Diomed obtained its FDA Approval for EVLT.
We believe history could repeat itself using this example. Diomed's development over the coming year could easily mirror the progress of Merit Medical. Merit, after several years of 510K FDA Approvals and setting up a distribution network, turned profitable. Sales were only up 14% from 2000 to 2001, but net profits went from $828,000 to $6.7 million.
If Diomed can convert 10% of the annual stripping procedures to EVLT, $50 million in sales would easily equate to strong bottom line profits and a stock chart mirroring Merit Medical one to two years later.
The chart also tells us that once the stock of Merit Medical began to move, it was a smooth ride for investors who accumulated the stock in the $4 to $5 range. The stock ran from $6 to $16 in two months.
Diomed (AMEX: DIO)- The Stock Could Be Poised to Move Higher
The chart shows the high of $9 Diomed made on March 11th shortly after coming public through a reverse merger. There was unprecedented early interest in the stock, mostly focused on the potential for EVLT. Over $4 million worth of Diomed was changing hands daily.
The stock has now made a good double bottom at about $4, and rebounded to trade very quietly at about $4.50. The NASDAQ has been pounded down under 1700, and many biotechs have been clobbered in the last two weeks.
In the case of Diomed, the volume has completely dried up, suggesting that sellers are no where to be found. The yellow line indicates support level, suggesting today's level is a low risk entry point.
Short term upside brings us somewhere into the mid range of the blue lines, or about $6.50 per share. Simple common sense tells us that in this market, anybody who wanted to sell at these levels would have done so already. There may be sellers at higher levels, but today's entry level is low risk in the short term.
Investors are carefully watching the company, waiting for signs that EVLT is gaining market acceptance. As the company sells more laser systems to treatment facilities (they run about $30,000), sales of disposables will provide strong bottom line growth for years (a razor/razor blade business). The company is focusing its initial sales efforts of high volume facilities where as many as 6 or 7 doctors could be using the same laser. Recent announcements of laser sales to Massachusetts General and the Mayo Clinic in Florida represent facilities where the disposable sales could be more than the original laser sale over the first year.
Diomed should be accumulated between $4.50 and $5 right now with your risk capital. As with Merit Medical, when the rest of the market realizes the value, you could be computing your profits. Our price target for 2002 continues to be $10. We will bring you any breaking news.
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Charts Provided Courtesy Of TradePortal.com
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