Irish medical device maker ClearStream Technologies finished last year with a flourish and is finally on course to make meaningful profits for its shareholders, says James Crux

Asmall venture with a track record of losses since floating on AIM at 79p in 2004, Irish medical device maker ClearStream Technologies has had to fight tooth and nail to command investors’ attention. Yet its story is well worth hearing, as alongside salvaging limbs and saving lives, the company is moving towards meaningful profitability and offers the prospect of healthy returns.

County Wexford-based ClearStream develops and makes ‘minimally invasive’ devices such as catheters and stents that are used by interventional cardiologists, radiologists and vascular surgeons in angioplasty procedures.

Put simply, its products clear blockages within coronary arteries and peripheral arteries. Its angioplasty catheters clear blocked arteries, while stents are permanently implanted devices used to prevent prolapse of the artery following the angioplasty procedure.

Significantly, by unblocking arteries, these products can avoid the need for risky open-heart surgery, or prevent the amputation of the legs and feet of the elderly or infirm.The company is swiftly gaining a reputation as a leading developer of products for the new and growing market for the treatment of critical limb ischemia (CLI) – severe obstruction of the arteries which seriously decreases blood flow to the hands, feet and legs – which results from diabetes.

Products are sold under its own brand as well as supplied to original equipment manufacturers (OEMs) including the US’s Cordis, part of Johnson & Johnson, while an international distributor network is being built across Europe, Asia and the US.

Furthermore, in developments boosting growth prospects considerably, a number of ClearStream products have received approval from the US Food and Drug Administration. Restructured and seeing growing demand for products (both existing and new), analysts forecast profitability in the current year. And despite being a relatively recession-resistant investment, shares in the business are trading on very modest prospective multiples.

Strategy
Chief executive Andy Jones’s lofty strategic ambition is to transform the company into
the leading European manufacturer of interventional medical devices in a growing angioplasty products market. Core strategic tenets include the building of a business with a strong brand and a ‘multichannel’strategy – own-brand devices are sold through distributors (including OEM Cordis) as well as on a co-labelling basis, while unbranded
devices are sold on a business-to-business basis to other medical device companies.

Jones has implemented a targeted, costeffective R&D process, the aim of which is to extend the portfolio of higher-margin own-brand products, while looking to drive manufacturing costs down and margins up.

The success of this strategic emphasis was amply demonstrated last year, when 11 distinct ‘CE-marked’ products were released, with an average time to market of just four months.

Market share gains are a further strategic focus for 2009, with Jones focusing on fostering the distribution network for ClearStream’s products.At the last count, 33 distributors were sellers of ClearStream-branded devices, although there is considerably more scope to access further geographical markets for the full range of coronary and peripheral products.

Many of these existing distributors have hitherto focused only on the cardiology market
– in fact less than 30 per cent actively sell peripheral devices. A key push for ClearStream is therefore to add more distributors for peripheral products in the months ahead.

While continuing to invest in its brand, the company is now being run as a far tighter ship, having taken out €750,000 (£671,000) of cost in the second half of its last financial year.

Ongoing operational improvements to drive efficiencies, lower manufacturing costs and
increased margins are high on the priority list. Meanwhile, the company will continue to
introduce new products. ClearStream recently announced a development project for a unique peripheral catheter with Terumo, the Japanese medical devices giant, who will market and distribute the product. ClearStream has also signed a two-year extension to its distribution deal for catheter products with Cordis, boosting prospects in the important US market.

Management
Occupying the CEO hot seat is Irishman Andy Jones, a medical devices and equipment expert who has previously plied his trade with Bayer Diagnostics and Summit Technology. He joined a venture known as AngioDynamics in 1996, then went on to lead an MBO in 2000, which led to the formation of ClearStream, which he brought to AIM in 2004.

Mike Love, an AIM mover and shaker who chairs technology group Scisys and acts as a
non-executive director of Surface Technology Systems, is non-executive chairman. A member of the London Stock Exchange’s AIM Advisory Group, he is a seasoned entrepreneur who entered the software industry back in 1976.

The director of operations is economics and computers graduate Pauline Oakes, who,
significantly, is a member of the Irish Medical Devices Association supply chain committee.

Prospects
Results for the year to July illustrated the healthy nature of the group’s recent strides, with losses pared back from €2.68 million to €1.2 million, on improved sales of €9.21 million (2007: €9.18 million).Driving the improved performance were strong own-brand sales, rapid growth in higher-margin peripheral sales and cost-cutting, combined with actions to streamline manufacturing. As a result, a pre-tax profit was established in the second half-year.

Exciting developments that underpin growth prospects include the introduction of new products, opening up new clinical applications and markets, as well as FDA and other registrations and approvals paving the way for growth in the huge US market.

During the first quarter, the group’s unique long balloons (catheters) were added to a range of catheters already co-labelled with Cordis – the ‘Sleek’and the ‘Savvy Long’were then approved for sale in the USA by the FDA.

Meanwhile, the year’s most important European branded product launches were for Intrepide, a ‘drug-eluting’stent on which much hope hinges, which received CE approval in April, and that of SatinFlex, a cobalt chromium stent.

Jones sees these two devices as likely to have the most significant impact on prospects in the short term and, together, says they have the potential to form more than 90 per cent of the stent market. Prior to their launch, ClearStream could only compete with a possible eight per cent share of this market.

Trends within the sales mix add further excitement, with branded revenues now running
substantially ahead of OEM and co-labelling sales – own-brand product sales grew strongly last year, from €4.15 million to almost €6 million. Moreover, within those branded sales, the proportion of higher-margin peripheral (as opposed to coronary) sales burgeoned from nine per cent to over 20 per cent.

Increased penetration of European markets has brought a further benefit, by making the
business less exposed to currency fluctuations.

‘Three years ago, most of our sales were to the Far East and Middle East,’ recalls Jones,
pointing out that more than 47 per cent of turnover now emanates from the EU. No longer burning cash, the balance sheet was strengthened through a €600,000 postyear-
end placing backed by directors. A move into profit is predicted for the current financial
year, based on contracts in place and further deals to come, new products and sales
contributions from additional distributors.

Valuation
City analysts are now looking for some heady growth rates for ClearStream going forwards. For 2009, sales are expected to push north to almost €13 million, producing a swing into pretax profits of just over €1 million and positive earnings per share of 3.5 cents (2.5p). By 2010, sales are likely to surpass €18 million, from which profits could hit €3 million and earnings 10.4 cents a share, or 9.3p.

On those numbers, the shares are trading on a prospective multiple of just 7.8 for this year, falling to a budget multiple of 2.6 next.That lowly rating likely reflects the size of the
business – small-caps remain out of favour – as well as its loss-making past.

Sources close to the company are also keen to point out that, in the wake of recent cost
cutting and good growth, margins should expand to 34 per cent this year. As those
margins continue to build, there is a strong likelihood that the ‘valuation differential’ between ClearStream and its quoted peers should narrow. Investors that buy in now will reap the benefits of that price appreciation.