ELX 1.96% 75.0¢ ellex medical lasers limited

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  1. 4,086 Posts.
    This is from November last year but nonetheless is a very good summary.



    ELLEX: PROFITABLE MAJOR IN OPHTHALMIC LASERS IN AN EXPANDING MARKET

    By Jenny Prabhu and Gerald Stanley

    Ellex Medical Lasers Ltd is currently trading at $1.05 at 24.4x forecast 2002 earnings. Given its track record and expanding markets, the current share price could represent less than 10x earnings on a 2/3-year outlook.

    Foster Stock broking analyst Alison Coutts and Wilson HTM analyst Paul McCarthy both have "buy" recommendations on the stock.

    Although Ellex is trading above Wilson HTM's 95c valuation on a DCF basis, the analyst sees capacity for a significant upward re-rating of the stock.

    Ellex, headed by founder Victor Previn and with an excellent R&D team and corporate culture, also has great hidden value which appears nowhere on the balance sheet - but which would cost any company trying to replicate its know-how many tens of millions of dollars.

    * * *

    Ellex is one of the significant commercial ventures that grew out of the huge spend in the 1950's and 60's by US, UK and Australian governments in a partnership that focused on developing Adelaide into a centre for defense technologies and electro-optics research.

    In those decades Adelaide was the largest employer of engineers and scientists in Australia, with more than 5,000 working on advanced projects at the Defense Science and Technology Organization headquartered in Salisbury, Adelaide. This defense activity spawned a number of commercial electro optic ventures including: AWA Defense Industries, now known as BAE Systems, The Australian Submarine Corporation, Vision Systems and the LADS Project, Tenix Defense Systems and Sola Optical (which is one of the largest manufacturers of cast polymer ophthalmic lenses, is New York listed, with a market cap of $1bn).

    Victor Previn, an electrical engineer by profession, has built Ellex into a medical device business based on a solid-state laser technology platform that grew out of the Adelaide Defense environment, working in conjunction with a multidisciplinary team inclusive of local ophthalmic clinicians including Professor Doug Coster from Flinders University. Ellex engineered a laser Photodisruptor with unique features that has proven to be an international success.

    ELLEX MEDICAL LASERS LTD - A SNAPSHOT

    Ellex, well known in the international ophthalmic surgical market, has manufactured and internationally marketed ophthalmic solid-state lasers for over 12 years.

    Ellex's Laser Photodisruptor product range, primarily used for post cataract operation treatment has achieved over 50% of the global market share.

    Ellex is now moving into the Photo-coagulator market for retinal surgery, which is five times as large, with its newest product, the Integre ™ Laser Photocoagulator.

    Ellex has approval for its entire suite of products from Japan, Europe (CE Marked), Australia (TGA approved) and the US (FDA approved), and 95% of Ellex's annual sales of more than $20m are generated from exports.

    It has 60 distributors in over 80 countries. It has a 60% stake in Laserex Systems Inc, incorporated in the US that is licensed to market and distribute Ellex's own brand products throughout North America.

    The company's entry into the Glaucoma market is at a fairly early stage, but offers further blue-sky research. Ellex will soon be moving into new premises in Adelaide, and analysts see sales steadily increasing as a result.

    All products are designed and manufactured under a Quality Management System that is certified to ISO9001/EN46001 Standard and meets the requirements of the US FDA Good Manufacturing Practices and with the requirements of the FDA 21CFR and where necessary, are CE marked for sale into the European community.

    The cataract surgery market

    The market in the developed world for Ellex YAG lasers, used for the surgical treatment of Cataracts, is thought to be approximately US$30 million. However, cataracts are far more prevalent in countries such as India, China, Egypt and the third world, which are as yet untapped markets by Ellex. The number of sufferers of cataracts in this market is thought to be up to100 million people.

    What is a cataract?

    A cataract is a clouding of part of the eye known as the lens, which helps to focus light onto the retina at the back of the eye. Normally, the lens is clear and is located just behind the iris (or coloured part of the eye). When a cataract begins to form in the lens cloudiness appears and light is no longer transmitted evenly through the lens and the vision becomes blurred, and without treatment blindness results.

    The common symptoms of a cataract include blurred or hazy vision, and cataract sufferers find their vision is affected as if they are looking through a cloudy piece of yellowish glass. Developing a cataract is a normal part of ageing where about 50% of people between 60 and 75 have some cataract formation, which rises to about 75% of people over this age. Research suggests that there are many causes for cataracts, including age, diabetes, ultraviolet exposure and cigarette smoking and at the moment nothing is available to prevent cataracts.

    Surgery is the only form of treatment currently available to remove cataracts. This surgery is painless and takes less than 30 minutes, using a modern technique called phacoemulsification, and it only needs around 2 1/2 hours at a day surgery before the patient is ready to return home. During surgery the cataract is removed from it’s thin protective covering, called the capsular bag, and a new, synthetic implant is placed inside the empty capsular bag at the end of the operation. The back of the bag is clear at this time, and is called the posterior capsule.

    The role of the Ellex products.

    The surgery is very successful and cataracts cannot regrow. However, in about 30% to 50% of eyes the posterior capsule becomes milky and opaque several months to a year or two after the surgery and needs to be opened up. This opaque membrane is cut using a laser Photodisruptor, and the procedure is very simple and completely painless. The Ellex Photodisruptor is used to fire about 20 laser shots at the posterior capsule, to cut the posterior capsule and restore vision. Being a laser there is no infection and no anesthetic is required.

    The Integre™, Ellex’s latest Photocoagulator, is used to treat the retina,

    located inside and at the back of the eye. The retina is composed of light sensitive receptors that are supplied by a complex network of capillaries that supply it with blood. As a result of diseases of the retina, including diabetes and other age related conditions the capillaries require ongoing treatment that is similar to spot welding, or searing of the blood vessels, to prevent bleeding.

    Ellex is also researching products used for treatment of diseases of the back of the eye (the Retina), such as Macular Degeneration and Glaucoma, and recently released a new product called the Integre 532 for these applications. This device recently won the AusIndustry New Product Innovation Award.

    Competitors

    Competitors in the photodisruptor market include Nidek and Ziess.

    For the Photocoagulator market they include Iridex, Nidek and Ziess.

    Background

    Four partners, including Victor Previn, two colleagues and Singapore based Avimo Pte Ltd funded the start up company, then known as Taracan.

    When Thomson CSF of France, a focused defense stock, acquired 95% of Avimo Pte Ltd, it sought to divest all non-cores Avimo Pte ventures, including its 24% equity in Ellex.

    This triggered the appointment of KPMG to put the company on the market.

    Victor Previn retains some 10% fully diluted in the company and one of the original partners has about 4%, the others and Thomson CSF sold into the float.

    Ellex listed in the shell of Gemstone Corporation on July 16 after a $24m reverse takeover offer made by Gemstone to acquire Ellex, funded via a private placement of 48m new shares at 50c each and followed by a 1 for 5 consolidation of original Gemstone 20 shares, which in turn was followed by a 4 for 5 rights issue to raise $2.235m for working capital - so that a total of $26.235m was raised. Both the placement and the rights issue were underwritten by Taylor Collison.

    Ellex vs Q-Vis

    Briefly, the two companies service different ophthalmic market segments. While Ellex products are used to treat diseases of the eye, the Q-Vis product is used to treat cosmetic corneal procedures by reshaping the cornea (front of the eye) to correct vision (long and short sightedness).

    The Ellex products range in selling price between $40k and $60k each whereas the Q-Vis system is far more complex and will cost in excess of $500,000. However, the Q-Vis computer-assisted “surface machining” system that uses thousands of laser shots to re-shape the cornea, uses the same. base technology platform in that both are solid-state lasers.



    ELX Financials

    Last Traded price $1.02

    Shares Issued 58.3m

    Options 2.8m exercisable at $1 by 31/5/2002

    11.7m exercisable at 50 cents by 30/6/2004

    Market Cap $68.2m

    Year ended June 30, Values in Millions$

    INCOME 2001 2000 1999 1998

    Op Revenue 21.7 17.9 10.4 13.5

    Net profit 3.0 2.0 0.4 0.9

    EPS (Cents) 5.2 na na na

    PE Ratio (times) 19.6 na na na

    Average Revenue growth (year on year) 23.3%

    The Company forecasts net earnings of $3.5m before amortisation of goodwill for year 2002

    Year ended June 30, Values in Millions$

    BALANCE SHEET 2001

    Current Assets 8.2

    Non Current Assets. 21.8

    Current Liabilities 4.1

    Non Current Liabilities NIL

    Net Assets & Shareholders' Funds 25.9

    Gearing (Net of Cash) % NIL

    Net Asset per share (cents) 44

    Shares Issued (Millions) 58.3

    Estimates of future earnings as prepared by Fosters Stock broking and by Wilson HTM

    Year ended June 30, Values in Millions$

    INCOME Alison Coutts

    Fosters Paul McCarthy & Kirsty Bunn of

    Wilson HTM

    2002 2002 2003 2004

    Op Revenue 24.2 28.5 * 32.3 37.1

    Revenue Growth % 12 31 13 15

    EBITDA 4.9 6.6 8.0 9.7

    Net profit (reported) 3.2 3.4 4.0 5.3

    EPS (Cents) (Fully Diluted) 4.4 4.7 5.5 7.3

    PE Ratio (times) 23.2 21.7 18.5 14.0

    * Sales of new model Photocoagulators are estimated to kick in from year 2002 and onwards.

    OUR NOTE: Undoubtedly, the value of Goodwill should be written out and instead there should read "Intellectual property". The value may be greater than the Goodwill as shown in the following Balance Sheet.

    The impact on the Income Statement will be to cancel amortisation expense or $1.0m per year.

    2004 per calculation would improve to 12.3 on this adjustment.

    Directors:

    David Lindh, chairman

    Geoffrey Hill, non-exec

    Victor Previn, CEO. Mr. Previn is one of the original founders of Ellex. He initially worked for Quentron Electronics Pty Ltd, an Adelaide based contract research and supply house for laser and scientific equipment. He developed the technology platform that is the core of the company's product range and was involved in its commercialization. He returned to Ellex in 1996 to take charge of product development.

    Ellex is looking for a new CEO, which will free Victor Previn for business development, enabling him to focus on his core competence and his connections with the key option leaders and industry players.

    Major shareholders:

    NM Rothschild has 11.75% of Ellex Medical Lasers

    ends
    Disclaimer


    I DO NOT hold ELX

 
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