LMA: IPO breathes life into Singapore's bioscience ambitions

An unusual healthcare IPO emerges out of Singapore.

Credit Suisse First Boston and DBS have begun pre-marketing a roughly $150 million IPO for medical devices company LMA (Laryngeal Mask Airways). The deal is unusual because it has all the hallmarks of a Nasdaq IPO, but its founders have chosen to list in Singapore instead.

The company currently derives just under 60% of its sales from the US. Were it to list on Nasdaq, there would be a host of other medical services companies against which to benchmark its products, which are used during surgical procedures for anesthesia and airways support in place of simple face masks and endotracheal tubes.

However it chose Singapore where there are no benchmarks and specialists say it did so for a number of reasons. Firstly, the local government has been trying to make Singapore a regional hub for life sciences and biotech through a raft of tax breaks and incentives. LMA is consequently making Singapore its global HQ and has established an R&D centre in the city.

Secondly, LMA is said to have been wary of listing in the US because of Sarbanes-Oxley. Thirdly, it sees Asia as a big growth market for its products and its major supplier is based in the region.

The IPO will not include the company's manufacturing facilities, but it will comprise the global distribution rights (ex UK) and IP (Intellectual Property) associated with its eight LMA products. The deal will predominantly comprise secondary shares and will result in its major financial investor completely selling out of the company and its original founder divesting about half of his stake.

Pre deal, the deal was roughly one third owned by: Dr Archie Brain, who invented the LMA concept in 1981; Moluccan Trust owned by Mike Panter and; its executive chairman, Robert Gaines-Cooper who will not sell any shares and is subject to a two-year lock-up.

Post deal, about 50% of the company will be in freefloat, with Gaines-Cooper owning a further 30% and the remaining 20% held by Brain and other directors.

Pre-marketing began last Monday and formal roadshows are scheduled to start this Thursday in Hong Kong. Pricing will take place on or around March 10 and listing on or around March 18. Nomura completes the syndicate as co-lead.

Given the company's rarity value there are no medical device companies that provide a true comparable in either Singapore or the rest of Asia ex Japan and Australia. As such the company is being pitched at a discount to globally listed comps, most of which are in the US and to a basket of mid-cap plays in Singapore.

Based on an IPO size of $150 million, the company is being pitched at 12 times 2005 forecast earnings. By contrast, Singaporean mid-caps are currently said to average 15 to 16 times 2005 earnings, while global comps tend to trade in the low twenties.

Analysts say the deal has a number of selling points, but also a number of challenges. In particular, investors are likely to query why two of its principals are cashing out rather than raising new funds for development. They are also likely to price in concerns that the company only has one major product line and is now subject to competition following the expiration of patents in 2002.

However, analysts also point out that the company is still the global leader and has not only been able to withstand competition over the past few years, but also grow market share. In the LMA sector it still has a 99% market share in the US and 85% in the rest of the world.

In the wider airways market (including face masks and endotracheal tubes) it has a 35% market share in the US and 17% globally. Its products received FDA approval in 1991, but as specialists point out, endotracheal tubes have been around for over 50 years so it has taken time to persuade surgeons to swap products.

LMA products are said to be less invasive than an endotracheal tube and form a low pressure seal around the laryngeal inlet, which allows gentle ventilation during surgery.

Specialists say growth is coming from three major areas. Firstly, the whole airways sector is growing in tandem with ageing populations in the West and a concurrent growth in surgical procedures. Secondly the company wants to expand into Asia.

Thirdly, surgeons are increasingly relying on disposable surgical equipment enabling hospitals to reduce sterilization costs. In turn this is boosting LMA's recurrent sales.

For example, LMA's sales of re-usable products over the past three years have only grown from 283,000 per annum to 300,000 per annum. But its single use products have grown from 177,000 to one million over the same time period.

In 2004 it sold a total of 2.2 million devices. The IPO prospectus contains financials for the first nine months of 2004.

Total net sales amounted to $56 million, gross profits to $43 million and net income to $16.5 million. This equates to a high gross margin of 76.8% and a net margin of 18%.

In the first nine months of 2003, net income grew 16.5% over 2002. In the first nine months of 2004, the comparable figure was 15%.

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