Friday, April 18, 1997

Closure Medical Corp.
(Nasdaq: CLSR)
Phone: 919-876-7800
Price (4/18/97): $14 1/2

HOW DID IT DOUBLE?

Closure Medical Corp. has taken the main component of super glue and reworked it for use as a wound sealant. Investors now seem stuck on this stock.

After going public last September as Tri-Point Medical Corp. (the name change took effect in January), these shares dipped to $5 3/4 on anxiety about how the clinical trials for the company's TraumaSeal wound-sealing product would turn out.

But the multi-site trials showed TraumaSeal worked at least as well as the staples and sutures currently used. In December, the company applied to the Food and Drug Administration (FDA) for premarket approval (PMA), and the FDA has granted an expedited review. The shares rose steadily throughout this period, topping out at $21 1/2 in early February before a sell-off.

BUSINESS DESCRIPTION

Based in Raleigh, North Carolina, Closure Medical manufactures medical adhesive products based on its proprietary cyanoacrylate glue technology. The products seal wounds and incisions rapidly, thus stopping the leakage of blood and other body fluids from injured tissue. The nonabsorbable products can be used on topical wounds; they lead to less tissue trauma than sutures or staples since they simply slough off when the wound heals. The company's absorbable products can be used as sealants for internal wounds due to their novel capacity to degrade in the body into a harmless amount of formaldehyde. The TraumaSeal product will sell into a market estimated at $2.6 billion annually.

TraumaSeal will be marketed by Ethicon, a unit of JOHNSON & JOHNSON (NYSE: JNJ) and the world's top suture manufacturer. Closure is waiting to receive premarket approval from the FDA, but Ethicon will launch the product in Europe by mid-year. Though the company's future depends on the success of TraumaSeal, it also has marketing arrangements with PROCTER & GAMBLE (NYSE: PG) and CHIRON (Nasdaq: CHIR) for other products. The company has never turned a profit.

On March 27, Closure floated a secondary offering of 1.5 million shares (0.7 from selling shareholders) at the market price of $12.75. The company announced on April 4 that the underwriters (Lehman Brothers, Oppenheimer & Co., and Sands Brothers & Co.) exercised their option to purchase an additional 225,000 shares.

FINANCIAL FACTS

Income Statement

      12-month sales: $4.0 million
      12-month income: ($16.8 million)*
      12-month EPS: ($1.59)
      Profit Margin: N/A
      Market Cap: $187.8 million
      (*Includes a one-time, non-cash charge of $14.2 million)

      Balance Sheet
      Cash: $13 million*
      Current Assets: $18.2 million
      Current Liabilities: $3 million
      Long-term Debt: $0.01 million
      (*Does not include proceeds from the recent secondary offering)

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 47

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Investing in development stage biotechs and medical companies is a balancing act between opportunity and often substantial risk. But there are some predictable inflection points at which risk is reduced. In this case, the announcement of a successful randomized, multi-site clinical trial and the FDA's grant of an expedited review were both positive developments that meant TraumaSeal had a good chance of getting to market and that this would happen sooner rather than later. This is especially true given that Closure had already signed the deal with Ethicon. An adventurous investor might have taken the plunge late in 1996 as a result of these developments.

On the other hand, to spot this potential Double would have required determining the potential market acceptance for the product, and putting together such sales models remains a challenge.

WHERE TO FROM HERE?

We don't get a lot of help on this one. The only analyst covering the company estimates that Closure will lose $0.63 per share in FY97 and turn in a $0.03 per share profit in FY98. Since the industry is already dominated by products sold by major pharmaceutical companies and TraumaSeal has yet to be marketed in any locale, it's difficult to even hazard a guess about how well the product will be received by doctors. As a result, there's not much to go on in determining fair value.

That's especially true since Closure's future depends on its capacity to manufacture commercial quantities of TraumaSeal. If the company can't produce enough, Ethicon can produce its own and simply pay Closure a royalty. The company's 10-K report indicates that such a development would have a material adverse effect on the company's business. The filing also notes that Closure lacks such manufacturing experience.

However, the successful secondary offering (including the overallotment) plus the price rise afterwards are both positive signs for the stock. The investment community seems to believe in the company, and the cash infusion doubles the company's cash position, making it more likely that Closure will have the money to get its manufacturing capacity up to speed. Although the product sounds intriguing, this is one probably best left to the biotech mavens.

-Louis Corrigan (RgeSeymour)

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