Looks like we’ve got another small cap company being touted by Nick Hodge for his Early Advantage service — but now, instead of the “blue blood” company that he’s been touting for a year or so as the potential enabler of a cancer cure, he’s pitching this “blue light” company as the one that will save millions of lives and make millions of bucks by helping people discover cancer sooner.
Certainly an admirable goal, the earlier you detect cancer the better your chances of defeating it… but will it make you any money? Well, for that we first have to figure out which company he’s teasing us about.
And no, we don’t want to shell out $499 just to get the top secret name. We’ll check out the clues instead — and yes, this ad was chock-full of clues and I’m sure you could figure out the stock on your own…. no need, we’re here to help and we’ve already got some answers for you.
Of course, you have to sit through a bit of blather first. Let’s sample a wee bit of Hodge’s pitch to give you a taste of the promise:
“Thanks to this future billion-dollar technology…
“Cancer is Now Visible To the Naked Eye
“This simple ‘blue light’ may not only save your life… But also turn a small investment of $5,000 into… More than $1 MILLION.
“… despite the massive technological advances over the past half-century, Western medicine still hasn’t found a cure for cancer.“So the best way to fight the disease is to detect cancerous cells before they spread.
“That’s where the ‘blue light’ comes in….
“With the ‘blue light’ device, your doctor now can see cancerous cells during a regular check-up… without using any invasive, painful, or expensive procedures.
“It helps your doctor identify cancers at their earliest stages, when they’re still easily treatable and before they spread to other parts of the body.
“That’s why this device is revolutionizing the cancer diagnostics industry.
“Surprisingly, the company behind this breakthrough isn’t a large, global medical company.
“It has a market cap below $50 million. Last year, it only made $3.7 million in sales.
“But, as you’ll see in this presentation, sales are about to jump to $788 million… thanks to this ‘blue light’ technology.
“What does this kind of growth mean for investors like you?
“Well, that’s a jump of 21,200%… enough to turn each $5,000 invested into $1,065,000….
“For just five grand today, you could be a certified millionaire — with change to spare — in a matter of months… not decades.”
OK, so that’s obviously baloney. They’re not going to go from $3.7 million to $788 million in sales in a matter of months, and you’re not going to get a 20X return on this stock this year. That just doesn’t happen.
But that doesn’t mean it’s a worthless company, or that it might not be worth some speculation — we’ll keep an open mind. Just get that “$5,000 into $1,000,000″ bit out of your head first, that’ll completely poison any rational thought.
So what’s Nick Hodge talking about?
He’s teasing a company that sells a scanning device that can help detect cancer — specifically oral cancer, like that which got actor Michael Douglas.
Here are a few more clues from Hodge, if you’re playing along at home:
“Even though this is a tiny company, it’s not the typical biotech stock gamble.
“I’m not talking about a risky drug company that depends on a FDA approval for survival.
“In fact, the FDA and Health Canada have already cleared the ‘blue light’ technology.
“And I’m not talking about a technology that’s built on run-of-the-mill hype either.
“The World Health Organization has already recognized the ‘blue light’ device. And the prestigious Pride Institute has named it ‘Best of Class’ twice.
“The National Institute of Health and the BC Cancer Agency have backed it with $50 million.
“Dozens of clinical studies have shown that the “blue light” device can help doctors detect cancerous cells before they spread to other parts of the body.
“The National Institute of Health, for example, said that this device ‘has proved valuable in the detection of high-risk lesions, in the delineation of surgical margins, and in follow-up after treatment.’”
And then we get to the intriguing part — Hodge says that not only is this a medical device, but that it uses the “razor and blade” model that we investors are so attuned to … that’s what made Gillette such a behemoth, though in modern parlance we might actually refer to it as the “printer and ink” model, with companies subsidizing and heavily promoting a device … and then profiting from the ongoing sale of disposable attachments, refills or accessories that must be used in order for the device to function. It’s a great business model, obviously.
So how does it apply here?
Well, first we have to tell you what the stock is — Hodge gave plenty more clues in his presentation (he always gives plenty of clues in his ads … methinks he likes it that stocks often get a bit of additional surge from the fact that other folks sniff out the answers and buy the stock even if they don’t buy his newsletter), so the Thinkolator had a nice, easy Monday morning in identifying this stock as … LED Medical Diagnostics (LMD.V in Canada, LEDIF on the OTCQX in the US).
LED Medical Diagnostics is, so they themselves say, a “global leader in the development of tissue fluorescence visualization technologies.” They’re trying to develop several different types of scanners and applications that can help to visualize cancers, including skin cancer, but so far they really have one product that they sell to dentists for use in oral cancer screenings.
Oral cancer screening is a real thing — your dentist probably does it at your annual checkup, poking around your mouth for odd lumps and looking to see if anything jumps out as irregular. There are also several technologies used by a few dentists to try to do more intensive detection, but from what I’ve seen in my ten minute survey of the industry the device offered by LED Medical’s subsidiary LED Dental does seem to be one of the least intensive ones.
Their device is called the VELscope VX, here’s how they describe it:
“…the company manufactures the award-winning VELscope® Vx Enhanced Oral Assessment System, the first system in the world to apply tissue fluorescence visualization technology to the oral cavity. The VELscope® Vx is now used to conduct more screenings for oral cancer and other oral diseases than any other adjunctive device.”
The VELscope VX is not new, it’s been around for a couple years and its predecessor, the VELscope, was around for a few years before that. It’s also not the only visual imaging device that’s used to screen for mouth cancer, though the only other ones I’ve seen, like the ViziLite are a bit more intensive or uncomfortable for the patient, requiring a mouth wash or dyes, and not necessarily more effective. Of course, there seems to also be some question as to whether the VELscope is substantially different from the traditional oral exam — not that the VELscope doesn’t work, but that it may not consistently find things that the doctor or dentist wouldn’t also find in mass screenings of low-risk patients (tobacco is an especially strong risk factor for oral cancer and smokers generally get a more intensive visual exam, one assumes, though HPV transmission through oral sex is thought to be a leading cause, particularly among younger people, now that tobacco use has fallen so much).
So that’s probably worth some more research if you’re thinking about investing in this company — it makes a product that has effectively been in use for more than five years, without a dramatic breakthrough in sales. There is a newer version of the product now, the VELscope VX, though I don’t know what the difference is and that product has been out for at least a year or two.
The product is relatively inexpensive, costing the dentist something in the neighborhood of $3,000 from what I can tell, and they’ve broken off their exclusive relationship with their North American distributor so it’s now available from a bunch of the big distribution companies (it is available from a couple of the major dental distributors who I just checked, including Patterson and Henry Schein, but pricing is not particularly public or transparent in this sector — Schein lists it at $3,300, most of the others didn’t give me a price).
The disposable covers, which I assume are a hygienic cap for the end that goes in your mouth, cost less than $2 and probably net the company close to a dollar, so the goal would obviously be to get really high volume usages — if they could get most dentists to offer this to most patients at a cost of $30 or so, they do have some potential to generate revenue growth.
But they haven’t been able to yet. Last year was, in CEO-speak, “challenging.” They saw declining revenue from the prior year, partly but not entirely because they changed their revenue recognition policy and also changed their relationship with their primary distributor, but they have also simply not had big surges of orders. So something is not working.
Is it the product? The marketing? The financial case for dentists, who may or may not be able to get insurance coverage for these tests (some insurers cover it, but it looks like less than half do so far)? Reluctance to change among dentists? Or is the company screwing something up with distribution or pricing? I have no idea. They’ve sold thousands of these devices over the years, but not enough to turn it into a profitable business.
You can see the CEO’s latest letter here, and the September quarterly report here — they have been forced to sell a lot of shares to raise cash to build up their distribution, marketing and R&D, so they sold 17 million shares last Spring and another 15 million after the close of the last quarter, so the share count is now around 73 million shares… and at 50 cents a share, that means the market cap is roughly C$35 million.
Yes, that’s absurdly tiny. There are some warrants, too, but the company is so small that they’re not hugely meaningful. The business is in transition to some degree, but they have apparently had a run rate of somewhere between a million and three million in actual cash burn over the last couple years — I suspect, given the transition to a new CEO and the hiring and the distribution changes that they’re going to run through more cash this year as they try to ramp up marketing and build onto this platform with R&D for more products, but I don’t really know.
The cost of goods in their income statement has run at around 40% for the past couple years, so they can theoretically turn this into a profitable product line… but they had a heavy marketing budget in 2012 and a much lower one in 2013 and it didn’t seem to make any real difference to their bottom line, so I don’t really know what it will take to get revenue growth and profitability.
They should be reporting the new CEO’s first quarter and the full year 2013 results sometime fairly soon, I find the product interesting and I like the business model but clearly something isn’t working — I’ll personally withhold judgement for a while, but I’ll be interested to see what they say in that next quarterly report.
And, as always, let me remind you that this company is teeny. So small that Nick Hodge shouldn’t be using it as a single-stock teaser and building up this level of excitement among his prospective customers… and so small that I shouldn’t even be writing about it to the great legion of Gumshoe readers — any attention at all can drive a nano-cap stock like this crazy, so while I do like to answer your questions about such tiny teased stocks … I feel a little guilty. Sorry. You’re adults, you can go forth, researchify, and share your opinion on LED Medical with a comment below.