Card Guard AG - equitystory.com Guard Research Report.pdf · April 27, 2009 Card Guard AG Key HigHligHts early mover advantage in a niche and under-penetrated market of wireless telemetry

April 27, 2009

Card Guard AG

Key HigHligHts early mover advantage in a niche and under-penetrated market of wireless telemetry ■

Unlike the fragmented and competitive market of traditional cardiac monitoring services, the wireless telemetry market is still very young and small with mainly Card Guard and CardioNet operating in this field. Although it currently accounts for only 6.5% of the overall cardiac monitoring services market, this share is expected to increase to 50% in mid-term future.

Card Guard has a significant early mover advantage which can be capitalized upon. The Company does not only provide state-of-the-art devices and services but also a strong sales force to reach a large number of physicians and hospitals. This enhances the conversion to the new technology LifeStar ACT and supports Card Guard’s strategy in becoming the leader in cardiac telemetry devices and services.

Change in strategy to focus on lifestar ACt has paid off well in Fy 2008 ■

Since the introduction of the LifeStar ACT services in 2007, Card Guard has revised its strategy to focus predominantly on market development of the wireless telemetry market rather than providing a wide range of products and services for multiple diseases. This change in strategy has paid off well in FY 2008 with a tenfold increase in LifeStar ACT services revenue over FY 2007. Already in Q4 2008, LifeStar ACT contributed to more than 50% of the total revenue indicating a strong potential for these services. LifeStar ACT services are also more profitable and helped the Company post a net profit of 4.7 mUSD in FY 2008 as compared to a loss of 10.8 mUSD in FY 2007. To further communicate the strategic focus of the Company, it has announced its plans to change its name to “LifeWatch AG” in the AGM scheduled for May 26, 2009.

services only model for lifestar ACt ensures recurring revenue and scalability ■

Unlike traditional monitoring services, LifeStar ACT services are provided through an Independent Diagnostic Testing Facility (IDTF) where the Company provides services exclusively through its monitoring facility and not through sales of devices. This business model ensures recurring revenues over a long period of time and helps develop a strong relationship with physicians and hospitals thus ensuring easier scalability.

Company Research

i n t e l l i g e n c e d y n a m i c sresearch & analys is

2CardGuard AG Investment Research


strong growth in lifestar ACt services revenue expected in the next couple of years ■

Card Guard expects revenue from LifeStar ACT services to increase rapidly in the next couple of years. This will help the total revenue to grow by more than 50% per annum for at least the next two years from its current base. This is a major turnaround given the fact that revenue had stagnated over the last few years.

Since January 2009 a national Medicare coverage is effective which will enhance the conversion rate from older technologies to the new ACT and increase Card Guard’s profi tability for its provided services.

Revenue composition according to the business segments

3.6

35.840.5 36.0 37.7 38.0 38.343.6

43.2

40.7

52.8

23.010.3 9.3 9.8

11.0 8.1

7.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

In m

USD

Revenue from LifeStar ACT servicesRevenue from traditional monitoring servicesRevenue from sale of systems

good growth prospects, technological advantage and current low valuation makes Card guard an ideal acquisition target ■

Card Guard, in our opinion could be an ideal acquisition target for a large med-tech company which is eyeing to enter the wireless telemetry market. Card Guard has a substantial customer base and is one of the only two companies in the wireless telemetry services market. The Company has already acquired 26% of the wireless telemetry market within two years and is well placed to exploit the growing market with a strong IP protection (has as many as 41 patents mostly related to wireless cardiac technology). The valuation of Card Guard is also attractive as compared to its closest competitor, CardioNet, as evident from the P/E and P/S multiples.

Comparison point Card guard CardioNetRevenue in 2008 (mUSD) 84.3 120.5

EBIT margin in 2008 13.0% 8.0%

Market cap (mUSD)* 176.8 473.0

P/E* 36.8 74.7

P/S* 2.08 3.95 *as of April 27, 2009

Excellent growth opportunity in

LifeStar ACT services in a wireless

telemetry market of 2 bUSD

Strong IP protectionwith 41 patents and

50 registeredtrademarks

More than 50%cheaper valuation

than its closestcompetitor CardioNet

Strong financialperformance in FY2008 in more than

50% revenue growthwith increase in

marginsAn ideal

acquisitiontarget



Card Guard AGISIN : CH0012815459

tABle OF CONteNts

1 Company Profile 4

2 Outlook and Projections 4

3 History 5

4 Product Portfolio 5

5 Business Model and Strategy 7

6 Business Model of the LifeStar ACT 8

7 Strategy 8

8 Financial performance 11

9 Shareholding Structure 12

10 Management Profiles 12

11 Market Environment 14

12 Market Sizing 18

13 Wireless Telemetry Services – Growth Engine for a Slow-Growth Market 19

14 Market Forecast 19

15 Competitive Landscape 20

16 Financial Statements 22



Date of report: April 27, 2009

Core business:Telemedicine services

Exchange: SIX

Stock price as on April 27, 2009: CHF 15.5

52 week high and low: CHF 16.2 – CHF 6.0

Fiscal Year End: Dec 31

Ticker-symbol: CARDG

Shares Outstanding: 12,81 million

Market Cap as at April 27, 2009: 198.5 MCHF

stock performance over 1 year

0

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4

6

8

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12

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18

Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-08 Mar-09

In C

HF

COmpANy prOFileCard Guard (hereafter referred to as “Card Guard” or “the Company”) is a telemedicine solution provider, specializing in advanced monitoring services for high risk and chronically ill patients especially with heart diseases such as arrhythmia. Card Guard is headquartered in Switzerland and derives more than 90% of its revenue from its wholly owned US subsidiary LifeWatch Corp.

The flagship product of the Company is LifeStar ACT that is used for wireless cardiac telemetry which automatically identifies arrhythmia events and transmits real time data to a monitoring centre. The Company also provides devices and services for the monitoring of indications such as diabetes and pulmonary diseases.

Card Guard has close to 450 managed care contracts covering approximately 280 million lives in the US through relationships with hospitals and physicians. The Company has a monitoring facility headquartered in Rosemont, Illinois which is accredited by various commissions and authorities. The Company employs over 500 people with about 75 in R&D in Israel.

OutlOOK AND prOjeCtiONsCard Guard is well positioned to exploit the 2 bUSD market for cardiac event monitoring services with the new telemetry devices based on its technological advantage, current market presence and limited competition.

The Company aims to double its revenue in the next two years as well as increase its operating margins from 13% in 2008 to as high as 18% by 2010 aided by increased penetration of more profitable LifeStar ACT services. The Company expects to enroll more than 75,000 patients for LifeStar ACT services in FY 2009 which is more than double of that done in FY 2008.

Financial Performance of Card Guard

54.8

84.3

126.6

185.4

11.020.9

33.4

-50

0

50

100

150

200

FY 2007 FY 2008 FY 2009E FY 2010E

In m

USD

Revenue Operating profit

Following our assumptions we expect a high revenue growth of about 50% p.a. in the next two years with a subsequent major impact on the operating profit which we expect to triple from 2008 to 2010. This is based on the one side on the positive market and reimbursement environment and on the other side on the lower operating expenses and higher gross and net margins.

Overall Card Guard presents an attractive opportunity for investors given its strong position in a growing market with a non-cyclical character. The current subdued valuations could also be an additional incentive.



HistOry1986: Card Guard Scientific Survival Ltd. was incorporated in Israel.

1990: Card Guard started operations with its founding members Yacov Geva, Dan Giora and Leonid Trachtenberg.

1997: Card Guard expanded its sales network in the US and Japan.

1999: The Company went public on the SIX (Swiss Stock Exchange)

2000: Card Guard completed a secondary offering on the SWX. The Company made two acquisitions in the US namely Instromedix, a provider of telemedicine systems and cardiac telemedicine monitoring services and LifeWatch Inc., a provider of cardiac event monitoring, pacemaker and Holter services.

2001: Card Guard moved to new headquarters to Schaffhausen, Switzerland as part of a re-organization. The Company’s listing was moved to the Main Board of SIX. The Company acquired Quality Diagnostic Services (QDS), a US cardiac event monitoring company.

2004: Card Guard signed a long-term agreement with Samsung Electronics to develop, manufacture and sell various medical software applications and devices which will be used in Samsung mobile handsets.

2005: LifeWatch signed an exclusive agreement with Guidant Corporation to provide long-term monitoring services to cardiac patients implanted with a Guidant Implantable Cardiac Defibrillator (ICD).

2007: Card Guard launches a new breed of continuous cardiac monitoring systems, LifeStar ACT.

prODuCt pOrtFOliOCard Guard’s product portfolio encompasses several monitoring devices and services for the diagnosis of various diseases such as hypertension, diabetes and pulmonary diseases. However the Company’s focus is on Cardiology with monitoring devices and services for the diagnosis of arrhythmia. As per the revised strategy, the most important products in the Company’s portfolio are LifeStar ACT and its newest version LifeStar ACT III Platinum.

LifeStar ACT III Platinum is an advanced version of LifeStar ACT which is a remotely programmable auto detect auto send event monitor. The important enhancements in LifeStar ACT III Platinum compared to LifeStar ACT include its proprietary QRS detection methodology in which an advanced algorithm computes the heart rate and detects atrial fibrillation, tachycardia, bradycardia and pause events. Whenever the set parameters are breached, the cellular phone within the system automatically sends the data to the monitoring facility for preliminary analysis and to physician if required.

Card Guard is focusing on the different cardiac monitoring services for arrhythmia especially the wireless telemetry services.



The other advantages of LifeStar ACT III Platinum are

3 channel ECG for better event monitoring ■

ST deviation analysis for detection of various types of arrhythmias ■

Six hours of memory which prevents data loss in case of unavailability of cellular ■network

Up to 30 days of retrievable ECG memory for minimum data loss ■

A LifeStar ACT III Platinum kit

LifeStar ACT III Platinum was launched in the last quarter of 2008 and it has received a good response in its first three months of launch. Total LifeStar ACT and LifeStar ACT III Platinum enrollments increased by more than five times from 6,132 in 2007 to 31,931 in 2008.

LifeStar ACT Growth in Enrollments

6631,252 1,495

2,722

5,126

7,106

8,545

11,154

0

2000

4000

6000

8000

10000

12000

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

Enro

llmen

ts

LifeStar ACT I LifeStar ACT III

LifeStar ACT III Platinum is the most advanced wireless telemetry services.



BusiNess mODel AND strAtegyChange in business model from technology and devices developer/provider to a monitoring services provider

Card Guard’s business activities were mainly focused on the development, manufacture and sale of cardiac monitoring devices until 2001. After the advent of the internet, mobile telephony services and increase in regulatory requirements with a jointly improved reimbursement environment made the Company change its strategy from a cardiac monitoring device manufacturer to a patient monitoring service provider.

Revenue Mix

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

Products and technology Monitoring services

%

The revenue composition of products and technology has consistently decreased since 2001, as can be seen in the chart above. In 2008, monitoring services composed 91% of the total revenue and the share of services in the revenue mix is expected to grow even further in the future. With the introduction of LifeStar ACT (Ambulatory Cardiac Telemetry) in January of 2007, the Company underscored its strategy to only focus on high end and highly profi table cardiac monitoring services and to become the leading company in this fi eld.

Focus on IDTF market and beyond

• Since the launch of LifeStar ACT in 2007,

the Company is focusing on high end continuous cardiac event

monitoring services• The change in strategy

brought a new dimension of high growth and high

profitability to the Company

Services provider

• From 2002 onwards, the Company started

focusing on the cardiac monitoring

services due to advances in technology

and changes in regulatory environment

• With a state-of-the-art technology platform

the foundation for future growth was established

Device manufacturer

• Unil 2001, Card Guard was a leading manufacturer

of cardiac event monitoring devices

• Difficult market and trends: high sales force

power needed, high R&D expenses,

less recurring revenues

Several milestones in this industry were key in Card Guard’s development from devices manufacturer to service provider. The major step was Medicare’s decision in 2002 to increase the regulatory requirements for 24 hour supervision of patients. This enabled the Company to start providing the device as part of a patient monitoring service and build up a complete offering in the service franchise. Although there has already been a high payor acceptance for this service over the last years despite its premium pricing, the fact that a national Medicare coverage through a category 1 CPT code is effective since January 2009 will most probably result in a higher conversion

Change in business model to focus on cardiac monitoring services which is a recurring revenue business.



rate from older technologies to the new ACT. Finally, Card Guard’s leading role in products and technology innovations was key to becoming the largest, independent diagnostic testing facility (IDTF) provider in the U.S.

BusiNess mODel OF tHe lifestar ACtThe launch of LifeStar ACT in 2007 not only underlines Card Guard’s strategy of becoming the leading wireless ambulatory cardiac telemetry service provider, but also represents a further shift in its business model. The Company does not sell its high-end ACT devices to other monitoring providers. Rather it charges for the services it provides to physicians, hospitals and clinical laboratories. As an approved IDTF for Medicare, the services provided are reimbursed by Medicare at $1’123 per patient but can also qualify for up to $1’500 for commercial payors. This compares favorably to the reimbursement rates of $96 for Holter services and $250 for CEM (older generation technologies).

The higher reimbursed prices for telemedical applications are based on:

An increasing awareness of health insurers (payors) that preventive care is ■signifi cantly cheaper than intensive medical care both in clinic and hospital settings.

The mounting evidence that wireless ambulatory telemetry solutions (ACT) ■provide superior diagnostic outcomes compared to fi rst and second generation technologies like Holter and CEM (Cardiac Event Monitoring).

The wireless cardiac telemetry service model works as follows:

Step 5LifeWatch sends patients' ECG reports to physician

Step 4Patient is monitored on LifeWatch service for up

to 30 days

Step 3LifeWatch hooks up

patient for ACT service

Step 2LifeWatch validates

insurance for ACT coverage

Step 1Physician enrolls patients

on ACT services

Step 6 LifeWatch bills patients'

insurance company

Card Guard gets a technical fee reimbursed of (at least) $1’123 for the ambulatory cardiac event monitoring services it provides in Steps 2 to 6 through its accredited IDTF centers. The professional fee of about $80 is reimbursed to the physician who enrolls the patients in Step 1 and interprets the outcomes of the ECG reports after Step 5.

strAtegyAccording to the 2007 Frost & Sullivan report, Card Guard held already a leading market share position in the U.S. market in 2006. The Company had a 20% share for ambulatory cardiac event monitoring services and a 35% share of the cardiac event monitoring device sales.

The wireless telemetry services model takes care of the entire value chain from patient enrollments to generation of ECG reports.



Card Guard will capitalize on its solid fundamentals to expand its leading position. To achieve these goals, the Company is focused on:

1 Leverage and expand the strong momentum of LifeStar ACT

2 Increase sales force

3 Convert older technologies to ACT

4 Expand into new disease management services and geographic areas

5 Provide further state-of-the-art technology

1) lifestar ACt – the growth engine for the Company

Since launch in 2007, LifeStar ACT has been the growth engine for the Company with more than tenfold growth in revenue from 3.64 mUSD in 2007 to 35.81 mUSD in 2008. Although the Company generates substantial revenues through pacemaker monitoring, Holter and CEM services, the LifeStar ACT service contributed more than 50% of the Company’s total revenue with record revenue generation of 14 mUSD in Q4/09.

Increase in revenue from LifeStar ACT

11.14 11.71 11.1212.82

14.11

18.7820.37

23.24

24.0022.0020.0018.0016.0014.0012.0010.00

8.006.004.002.000.00

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08

LifeStar™ ACT Cardiac Event and other Holter Pacemaker

10.338.08

3.391.92

+81%

In m

USD

14.01

2) increase sales Force

Card Guard is increasing its sales force rapidly to extend the Company’s reach to a large number of physicians and hospitals and capitalize on the positive momentum of LifeStar ACT. The Company has increased its sales force by more than 70% from 42 in 2007 to 71 in 2008 and expects to increase it to 120 in 2009.

With the increased sales coverage, Card Guard will be able to target physicians and hospitals across the U.S by further extending it’s wide presence in metropolitan and urban centers. In addition, the Company will be able to capitalize on the outsourcing trend. Hospitals and physicians control about 50% of the ambulatory cardiac monitoring market but are outsourcing more and more the service to independent diagnostic testing facilities (IDTF) provider like Card Guard as the reimbursement pressure for older technologies like Holter and CEM persists.

The Company has about 7,000 customers which include 3,900 cardiologists and about 2,100 hospitals. Also the Company has premier US cardiac centers as its clients which include Cleveland Clinic, Johns Hopkins, Columbia University and many more.

LifeStar ACT revenue has grown tenfold from 3.64 mUSD in 2007 to 35.81 mUSD in 2008 and was the growth engine for the Company.

The Company intends to increase its sale force by about 50 people in 2009.



3) Converting older monitoring technologies to lifestar ACt

The better diagnostic outcome generated with ACT, the favorable reimbursement environment and the well established customer base provide Card Guard with a most favorable precondition to convert older technologies like Holter and CEM to the new ACT. It also enables Card Guard to further accelerate the conversion of “self service” clients to the IDTF “outsourced” model.

Total Solution Platform for Multiple Tests

2008 Enrollments

• 70,359 enrollments• ASP $96



Holter

CEM

ACT

Platium

The wireless cardiac monitoring benefi ts all parties involved: the physician, the payor, the patient and the Company. The physician gets a better diagnostic yield with more clinical data; the payor avoids higher costs related to intensive medical care in hospitals through preventive care; the patient gets earlier and better treatment with a convenient solution and the Company gets a 4x higher reimbursement.

4) expand into new disease management services and geographic areas

Card Guard can leverage its comprehensive technology platform, the call center infrastructure and the relationship networks with physicians and insurers to expand on the one side into new chronic diseases areas like diabetes, asthma and obesity, and on the other hand into new markets such eHealth, home health, fi tness and wellness.

In addition Card Guard will increase its regional presence by entering into selected international markets such as European countries. This selective expansion will be based on the reimbursement environment of these countries.

5) provide further state-of-the-art technology

As a leading provider for cardiac event monitoring devices Card Guard will further develop its technology platform to continue delivering tools and applications for modern and cost effi cient health management.

Card Guard is accelerating the conversions of its existing customers of Holter and CEM services to ACT services.



FiNANCiAl perFOrmANCeCard Guard’s FY 2008 performance was robust in terms of revenue and net profits with revenues increasing by 53.7% from 54.8 mUSD in FY 2007 to 84.3 mUSD in FY 2008 while registering a net margin of 5.6% as compared to loss in FY 2007. The main reason for the sharp rise in revenues was the tenfold increase in revenues from LifeStar ACT monitoring services.

Financial performance of Card Guard

3.6

35.8

43.240.7

8.1 7.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY 2007 FY 2008

In m

USD

Revenue from LifeStar ACT services Revenue from traditional monitoring servicesRevenue from sale of systems

The gross margin of the Company was in the range of 45-55% in the last three years, but a clear trend reversal in the operating and net margin can be seen in FY 2008. The operating expenses increased only by about 19.7% as compared to FY 2007 while revenues increased by more than 50% in the same period.

margin analysis Fy 2006 Fy 2007 Fy 2008Gross margin 50.18% 45.40% 53.80%

Operating margin -8.74% -21.35% 13.00%

Net margin 3.38% -19.72% 5.60%

Operating expenses analysisRevenue (mUSD) 54.54 54.84 84.32

Operating expenses (mUSD) 27.85 29.53 35.36

Op expenses as % of revenue 51% 54% 42%

As the Company’s revenues from its highly profitable LifeStar ACT services increased tenfold in FY 2008 compared to FY 2007, the gross margin rose by more than 8 percentage points and also the operating expenses as compared to revenues decreased by about 8% in the same period which helped the Company to achieve a net margin of 5.6%.

The Company had strong cash balance of 22 mUSD as of FY 2008 as compared to 7. 9 mUSD as of FY 2007 due to strong financial performance coupled with sale of marketable securities of 5.6 mUSD and issuance of shares of 3.9 mUSD.

Exponential growth in revenue from highly profitable LifeStar ACT services in 2008.



sHAreHOlDiNg struCture As of Dec 31, 2008, Card Guard has 12.809 million shares outstanding with a par value of CHF 2.00. Yacov Geva, the Chairman and CEO and Urs Wettstein, Vice Chairman hold together 22.1% of the Company’s shares. The other major shareholders are Archon Capital (4.6%), Dimensional Fund Advisors (1.3%) and Swiss Tech Invest (1.2%). Smaller institutional investors and private investors hold 70.4%.

Shareholding structure as on Dec 31, 2008

Yacov Geva

Archon Capital

Urs Wettstein

Dimensional Fund Adv.

Swiss Tech Invest

Valartis

Others

70.4%

17.8%

4.6%

4.3%

1.3%1.2%

0.4%

In addition, SK Holding AG announced the purchase of 395,900 or 3.1% of Card Guard shares as of Jan 22, 2009.

mANAgemeNt prOFiles management team

yacov geva (Chairman and CeO)

Mr. Yacov Geva is the Chairman and CEO of Card Guard and was also the co-founder of the Company. Prior to Card Guard, Mr. Geva served as a Chief Mechanical Engineer with Vishay Israel, a subsidiary of Vishay Intertechnology, USA, from 1979-1989. From 1976-1979, he was associated with the Koor Industries Group as a special projects manager for electronic communication projects. Mr. Geva is a graduate of the Technion-Israeli Institute of Technology and holds a B.Sc. in Mechanical and Nuclear engineering.

Kobi Ben efraim (CFO)

Mr. Kobi Ben Efraim is the Chief Financial Officer of Card Guard who joined the Company as a Director of Finance & Accounting in Jan 2001. He has more than 20 years of experience in finance and accounting in the Israeli Hi-tech industry. Before joining Card Guard, he was with the DSPC Group for 5 years where he held various positions including Chief Accountant. Mr. Ben Efraim holds a degree in Economics and Accounting from the University of Tel Aviv and is a Certified Public Accountant.

reuven Freudinger (Vp Business Development and global marketing)

Mr. Reuven Freudinger joined Card Guard as Vice President of Business Development and Global Marketing in March 2004. He has extensive overseas marketing and business development experience in the US, Europe and the Far East. Prior to Card Guard, he has served as Executive Vice President for Corporate Strategy and Global Marketing at Hello-Tech Technologies, a company specializing in wireless commercial applications. From 1995 to 2000, Mr. Freudinger was the President and COO at GSIT in the US. He has a graduate degree in Executive Business and Management Program from the Tel Aviv University in Israel.

The management owns 22.1% of the Company shares.



Brent Atwood (Chief Operations Officer of LifeWatch Services)

Mr. Brent Atwood joined LifeWatch, a US subsidiary of the Company in Dec 2006 and as an Executive Vice President of Sales, he oversees client sales, marketing and business development. Prior to joining LifeWatch, Mr. Atwood was associated with Cerner Corp. for five years. He held several positions in that company from sales and management roles with most senior been the senior executive over National Health Organizations. Mr. Atwood holds a Bachelor Degree in Business Administration.

yair tal (Vp r&D)

Mr. Yair Tal joined Card Guard as Vice President of Research and Development in July 2008. Mr. Tal has over 15 years of strong experience in the R&D projects specializing in hardware, software and very-large-scale systems integration. Prior to joining Card Guard, he held various senior positions at Resolute Networks, Gilat Satellite Networks and LSI. Mr. Tal has an MBA from the Technion, Haifa and a B.Sc.EE from Tel Aviv University.

Board of Directors

Name position BackgroundYacov Geva Chairman of the Board

and CEOBachelors Degree in Mechanical and Nuclear engineering

Urs Wettstein Vice-Chairman Certified Public Accountant and tax consultant

Gregory Henry Volkart Director Auditor with plenty of experience in strategic management consulting

Ruedi Stoeckly Director Expert in investment advisory for international holding companies and tax advice

Dr. Abraham Sartani Director Expert in business and commercial aspects of medicine and drug development



mArKet eNVirONmeNt Card Guard’s cardiac monitoring devices are used in the diagnosis of cardiac arrhythmia which is caused by abnormal heart beats.

What is cardiac arrhythmia?

A cardiac arrhythmia is an abnormal heart beat caused by changes within the heart which can result due to various reasons such as coronary artery disease, injury from a heart attack, or healing processes after heart surgery. According to the American Heart Association, 850,000 hospitalizations happen due to arrhythmia per year in the US.

Arrhythmias are classified by their rate i.e. speed of heart beat and the area of the heart from which they originate i.e. supraventricular or ventricular. Broadly, arrhythmia can be broken down into the following categories:

1. Atrial fibrillation: The most prevalent arrhythmia is atrial fibrillation which affects about 2.2 million Americans and is characterized by a rapid and irregular quivering of the upper chambers of the heart. According to the American Heart Association, approximately 15-20% of the estimated 850,000 strokes that occur per year in the US are attributable to atrial fibrillation.

2. Ventricular tachycardia: Ventricular tachycardia is a life-threatening arrhythmia which can interfere with the ability of the heart to pump blood and may degenerate into ventricular fibrillation requiring Cardiopulmonary resuscitation (CPR) and defibrillation. It can occur even without an apparent heart disease.

3. syncope: Syncope or fainting can result from an arrhythmia. It is the temporary loss of consciousness because of a sudden decline in blood flow to the brain.

Arrhythmia monitoring market

The arrhythmia monitoring market is divided into two types of treatments

1. Point of care treatment which includes ECG (electrocardiogram) and stress testing services

2. Ambulatory treatment which includes continuous or manual monitoring of cardiac events by Holter, Cardiac Event Monitor (CEM) or wireless telemetry services (remote monitoring).

The point of care treatment is cheaper and can be done quickly in the clinic or hospital. But as Arrhythmia often occurs intermittently or infrequently, the detection of these cardiac events (irregularities) are difficult to monitor because they are unlikely to happen during the clinic visit. Hence the patients are required to be monitored for a long duration of time. The physicians prefer ambulatory monitoring devices such as Holter, CEM or remotely programmable wireless telemetry devices to monitor the patient’s cardiac events.

Cardiac arrhythmia is one of the major cardiac diseases and causes 850,000 hospitalizations per year in the US.

Point of Care services are cheaper than the ambulatory treatments but are less efficient in detection of arrhythmia.



Cardiac monitoring and ambulatory services market

Point of care treatment

ECG services

Traditional monitoringservices

Srress testing Holter Services

Wirelesstelemetry services

Event monitoring services

Ambulatory treatment

Holter ServicesEvent monitoring

services

Cardiac monitoring landscape

There are three main categories of ambulatory monitoring devices: Holter monitors, event monitors, and wireless telemetry devices. The Holter and event monitors are the traditional devices while the wireless telemetry services are the latest generation and most advanced devices which have seen a robust growth in the recent past.

Holter services

Holter is the most basic ambulatory monitoring treatment which is often the fi rst step in determining an arrhythmia diagnosis and has already been available since the 60’s. The Holter is worn by the patient for 24-48 hours, during which it records the patient’s ECG continuously and storing it on a magnetic tape within the device but without real-time data transfer. The device is then returned to the physician for processing. As the Holter can be worn only for 24-48 hours, they are 90% ineffective in detecting arrhythmia.

event monitoring services

Event monitors are the advanced version of ambulatory monitoring treatment where the data recording can be done for few days but does not have a real time data transfer facility. Event monitor records several minutes of ECG activity at a time and then begins overwriting the memory which is referred as memory loop recording. The memory loop event monitor continuously records and stores the previous 60 seconds of ECG signal in internal loop memory. When a patient becomes symptomatic, he or she manually activates the monitor by pressing the record button which stores the 60 seconds of existing loop memory and an additional 30 seconds of ECG signal following patient activation. Event monitors have limited memory and can store data for less than 10 minutes. The patient has to transmit the event data to the monitoring center by phone.

Event monitors offer certain advantages over Holter as they can be worn up to 30 days, instead of the one to two day period. However, loop event monitors can not capture any of the asymptomatic cardiac events. As only 15% to 20% of clinically signifi cant cardiac events are symptomatic, event monitors can record only those events.

The newer versions of event monitoring devices are called the auto-detect loop event monitor. The auto-detect loop event monitor also records a short memory loop but incorporates basic algorithms that look at irregular heart rates and automatically detect certain asymptomatic arrhythmias. Auto-detect auto-send (ADAS) loop event monitors have the ability to send captured event data to a monitoring center via cell phone automatically.

Cardiac monitoring landscape is continuously evolving with technology advancements and better detection techniques.



shortcomings in the traditional monitoring services

The shortcomings of the traditional monitoring services are

1. Inability to detect asymptomatic events due to manual recording of the cardiac events except the auto-detect event monitors

2. Failure to provide real-time data due to lack of data transfer facility

3. Data storage constraints

4. Suboptimal diagnostic yields adversely impacting clinical outcomes

Due to the above mentioned shortcomings of the traditional monitoring systems, the new breed of monitoring services were developed which have the ability of real time data transfer and large storage capacity called wireless telemetry services.

Wireless telemetry services

Wireless telemetry services are the most advanced version of the cardiac monitoring services where the event monitor can auto detect and auto send the information through a cellular connection to the monitoring facility i.e. an independent diagnostic testing facility (IDTF). These devices are equipped with enough memory to record data for few hours or days. These devices can be remotely programmable and hence the patient can plug the device on his or her body and an IDTF takes care of the monitoring remotely.

The main advantage in these monitoring services is the fact that they don’t require physician’s attention in the monitoring period. The IDTF is responsible for the entire process of monitoring from patient enrollment and confirming his/her insurance schemes till the time it provides the detailed report to the physician after the monitoring period is over.

Currently Card Guard and CardioNet are by far the largest providers of wireless telemetry services in the US through their products LifeStar ACT and MCOT respectively.

The table below shows the evolution of the monitoring systems and their specifications.

Holter event monitoring

Wireless telemetry services

Timing of Market Introduction 1960 1999 2007*

24–48 Hour Monitoring Y Y Y

20–30 Day Continuous Y Y

Monitoring Y Y

Manual Trigger Y Y

Auto Detect Y Y

Auto Send Y

Remotely Re-programmable Y

Average Reimbursement USD 96 USD 250 USD 1,000 and more

Data Storage 24 hours Up to 180 seconds

Up to 30 days

Data transmission Manual transmission through returning device to physician

Telephonic transmission

Cellular transmission

Average Diagnostic Yield 6% 18% 80%

*LifeStar ACT was introduced by Card Guard in 2007

Wireless telemetry services are remotely monitored auto detect auto send event monitoring which addresses the shortcomings of the traditional monitoring services.

Average diagnostic yield of the wireless telemetry services is very high as compared to Holter and Event monitoring.



As can be seen in the table above, the average diagnostic yield of the wireless telemetry service is way higher than that of Holter and CEM which means that there is a significant superior diagnostic outcome with the new devices. This fact is also the reason why payors are willing to reimburse a 4 times higher price for these services provided.

revenue model of different cardiac monitoring services

The wireless telemetry services have a revenue model different to that of Holter and Event monitors. The revenue generated from the wireless telemetry services is exclusively based on services and developing relationship with the physicians and hospitals. As wireless telemetry services providers such as Card Guard take care of the entire value chain from enrolling the patient to continuous monitoring to claiming the medical reimbursement, the much higher prices for the services are justified. Although Card Guard does not sell the newest LifeStar ACT devices, the revenues it can generate through the complete monitoring services it provides are much more profitable. The ACT device has a life-span of 3-5 years and generates therefore recurring revenues to the company during this period.

Business model reimburse-ment per test

revenue model growth prospects

HolterProduct sales to the physicians and the services are provided on the revenue sharing basis

USD 96 The revenue is generated mostly through a product sale with small services revenue. Mostly the revenues are not recurring after the sale of a device

Stable or declining growth prospects as the reimbursements for older tests are declining. Still it is a very important segment as this is the predominantly used test for monitoring cardiac events

event monitorsProduct sales to the physicians and the services are provided on the revenue sharing basis

USD 250 The revenue is generated mostly through a product sale with small services revenue. Mostly the revenues are not recurring after the sale of a device

Limited growth prospects as the advanced versions of event monitoring devices are being developed. The segment is important as there can be significant conversions of these patients to remote event monitoring services

Wireless ambulatory telemetryOnly services are provided through an IDTF with no product sales

USD 1000 and above

The revenue is only generated from services provided. Revenue is mostly recurring once the relation with the physician or hospital is developed.

High growth prospects as this is the most advanced cardiac monitoring service. The IDTF gets about 80% or more of the total reimbursement. It generates far more revenues for the company per test as compared to Holter and Event monitors.

The revenue from wireless telemetry is only services based and hence mostly recurring once the relation with the physician is developed.



mArKet siziNg More than 4 million US citizens are affected by Arrhythmia and the total number of cardiac monitoring tests performed every year is approximately 60 million which accounted for a market size of 2 bUSD for the cardiac monitoring services. Around 80% of these tests are point of care tests while about 20% are ambulatory tests. But on a revenue basis, 65% revenue is generated from point of care treatments and about 35% from ambulatory as payments for ECG and stress tests are lower than ambulatory tests.

Maket Composition of Cardiac Monitoring Services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20%

80% 65%

35%

Number of tests Revenue distribution

Point of care tests Ambulatory tests

In m

USD

Source: Frost and Sullivan

Card Guard is mainly operating in the market for wireless telemetry services (i.e. the services provided through LifeStar ACT) which has currently a market size of about 136 mUSD i.e. approximately 6.5% of the overall cardiac services market (source: Frost and Sullivan). This market space is dominated by only two companies – Card Guard and CardioNet with their products LifeStar ACT and MCOT respectively. CardioNet has 74% of the wireless telemetry market and Card Guard has the remaining 26%.

Market sizing for wireless telemetry services in 2008 in USD mn

All traditional services such as ECG, Holter and Event monitoring Card Guard’s

LifeStar ACT

Cardionet’sMCOT

Wirelesstelemetryservices

136

36

1001,870

Wireless telemetry services currently contribute only 6.5% to the overall monitoring market. Card Guard and CardioNet, only two major companies, operate in this market.



WireLeSS TeLemeTry ServiCeS – GrOWTh enGine fOr A SLOW-GrOWTh mArkeTIn the last several years, the cardiac monitoring services market has seen a slow growth rate of about 3% due to lack of new technology development, a highly fragmented market and reimbursement pressure from insurance companies. Despite of this slow growth, the market forces such as increasing demand due to demographic changes, attractive reimbursement rates for advanced technologies and need for an outsourcing facility to save physician’s time were always intact.

Since the wireless telemetry services have been introduced by Card Guard and CardioNet, they have got satisfactory acceptance from the physicians and good reimbursement rates from the insurance companies. Hence they have contributed a significant portion to the overall growth of these companies.

The chart below depicts the growth in revenue for wireless telemetry products for Card Guard and CardioNet in 2008. While the overall market was growing at a stable rate of about 3%, the growth rate for the wireless telemetry services was 176% in 2008 over 2007.

Growth in wireless telemetry revenue in 2008

45.6

100.23.64

35.81

0

20

40

60

80

100

120

140

160

2007 2008

In m

USD

Cardionet's MCOT Card Guard's LifeStar ACT

49.24

136.01

176%

growth

mArKet FOreCAstWireless telemetry services currently contribute only 6.5% to the overall cardiac monitoring services market and according to Card Guard, this ratio is expected to increase to 50% leading to a nine fold increase in the market for wireless telemetry services in the midterm future. Also we expect the overall market size of the monitoring services will increase by 5% on average p.a. for next few years based on the robust growth in the wireless telemetry services offset by the decline in the market for traditional services due to reimbursement pressure as well as conversion to the wireless telemetry services.

Wireless telemetry revenue grew by 176% in 2008 over 2007 as compared to only 3% growth in the overall monitoring market in the same period.

Contribution of wireless telemetry revenue is expected to increase from 6.5% in 2008 to 50% in mid-term future.



As currently there are only two companies in this market space, both Card Guard and CardioNet will have the first movers’ advantage and are expected to gain from the huge increase in the market size.

Future estimation of cardiac monitoring services

2008

In m

USD

Traditional cardiac monitoring services Wireless telemetry services

3000

1864

1250

1250

136

2500

2000

1500

1000

500

0

in mid -term future

COmpetitiVe lANDsCApe The overall cardiac monitoring services market is fragmented with many companies competing hard for market shares thus reducing the margins. But the wireless telemetry services market, a so far niche segment is a duopoly with Card Guard and CardioNet as the two companies operating in that space. Hence the most important competitor for Card Guard is CardioNet which is profiled below.

CardioNet

CardioNet is a US company which provides continuous, real-time wireless telemetry services for arrhythmia. The company provides diagnostic services for cardio vascular diseases through its flagship product- Mobile Cardiac Outpatient Telemetry™ (MCOT™) as well as through Event monitoring and Holter services. The Company got listed on NASDAQ with its IPO in March 2008.

MCOT, the wireless telemetry service received FDA 510(k) clearance for its first and second generations in 2002. CardioNet started a monitoring center in Pennsylvania in July 2002 and has released its third generation of MCOT (“C3”) in December 2007. The C3 generation MCOT device includes the following enhancements over previous generations.

Reduction in size so easy to use ■

Increased radio transmission strength which allows greater mobility ■

Enhanced graphical interface to be more patient friendly ■

As Card Guard’s LifeStar ACT III and CardioNet’s MCOT are the only two most advanced services competing in the wireless telemetry services market space. The table below depicts the main features and differences between the two devices.

CardioNet is the closest competitor of Card Guard with its flagship product MCOT.



product comparison table

Feature lifestar ACt iii mCOt CommentsType of ECG 3 Channel ECG 2 Channel

ECG3 Channel ECG is better in recording cardiac irregularities than the 2 Channel ECG

Sensor memory 6 hours No memory Sensor memory is important to store the event data in case of no cellular connection for small time duration

Battery life 10 days 24 hours More number of batteries are required for MCOT

Cellular transmission Through any STD cellular phone

Specific phone developed for this application

Low dependency on the cellular connection in case of LifeStar ACT. Also MCOT had a huge development and manufacturing cost for the phone

ST deviation Using NEB configuration

For arrhythmia only

Better technology used in LifeStar ACT

The following table compares the two companies in terms of financial multiples and valuations

Company comparison table

Comparison point Card guard CardioNetRevenue (in mUSD) 84.3 120.5

EBIT margin 13.0% 8.0%

Sales force 71 88

Managed care/ Billing 445 contracts – 278 million covered lives

199 contracts – 190 million covered lives

Market cap (mUSD)* 176.8 473.0

P/E* 36.8 74.7

P/S* 2.08 3.95*as of April 27, 2009

The other companies providing wireless telemetry services but not direct competitors to Card Guard are as follows:

Biowatch medical: Biowatch Medical is a private company which offers Vital Signs Transmitter (VST). VST provides continuous, real time, wireless ambulatory patient monitoring of two ECG channels plus respiration and temperature. The VST monitor incorporates large-scale-integrated circuitry packaged in a belt-assembly worn around the patient’s chest without adhesive electrodes. VST requires manual data transmission on activation by the patient or by the monitor’s real-time analysis software.

sHl telemedicine ltd.: SHL Telemedicine is an Israeli company which is specialized in developing and marketing advanced personal telemedicine systems as well as providing end-users with telemedicine services including medical call center services with a focus on cardiovascular and related diseases. SHL is the market leader in Israel and also has a presence in Germany, through a wholly owned subsidiary and in the US through a distribution by Philips Healthcare. The CardioSen’C™, the company’s product is a personal cellular-digital 12 lead ECG transmitter which transmits to medical call centre for the remote diagnosis of arrhythmia and other heart diseases.

As SHL is mainly operating in Israel and some European countries, it will not be a direct competitor to Card Guard till it expands beyond US.

LifeStar ACT III Platinum is more advanced and efficient as compared to MCOT



FiNANCiAl stAtemeNts income statement

12 months ending Dec. 31, 3 months ending Dec. 31, USD in thousands (except per share data)

FY 2007 FY 2008 Q4 2007 Q4 2008

Sales of Systems 8,051 7,822 1,955 1,596

Services 46,793 76,507 12,823 23,239

total revenues 54,844 84,329 14,778 24,835Cost of revenues 29,952 38,945 7,560 11,303

Gross profit 24,892 45,384 7,218 13,532Research & development expenses, net *

4,369 4,878 1,051 1,008

Selling and Marketing expenses

12,380 16,123 3,040 4,959

General and administrative expenses

12,782 14,362 3,942 3,550

Costs associated with re-structuring and other

7,072 -950 - -

total operating expenses 36,603 34,413 8,033 9,517Profit (loss) from operation -11,711 10,971 -815 4,015Financial expenses, net -466 -1,034 -216 -416

Other income, net 349 619 - 614

Profit (loss) before taxes on income

-11,828 10,556 -1,031 4,213

Tax (expenses) benefit on income

895 -5,840 -307 -1,411

Equity income 117 1,038 -

Net income (loss) for the period

-10,816 4,716 -300 2,802



Balance sheet

usD in thousands Fy 2007 Fy 2008 Audited unaudited Assets Cash and cash equivalents 7,861 21,996

Marketable securities and structures 2,605 261

Accounts receivable (trade & other), net 9,073 14,690

Deferred income taxes 1,403 4,716

Inventories 4,926 4,981

total current assets 25,868 46,644Marketable securities and structures 5,175 1,780

Other investments & non-current receivables (trade & others) 9,620 1,382

Total investment and non-current receivables 14,795 3,162

Fixed assets, net 8,309 11,999

Goodwill, intangible and other assets, net 15,954 15,296

total assets 64,926 77,101

liabilities and shareholders’ equity Short-term credit from a bank and others 3,176 3,890

Current maturities of long-term loans and other liabilities 5,008 5,488

Accounts payable and accruals (trade and other) 12,858 16,890

total current liabilities 21,042 26,268Loans and other liabilities, net of current maturities 7,037 4,977

Liability for employee rights upon retirement, net 176 105

total long-term liabilities 7,213 5,082total liabilities 28,255 31,350

Share capital, warrants, treasury stock & capital surplus 151,186 155,550

Accumulated deficit -103,699 -114,515

Net income (loss) for current year -10,816 4,716total shareholders’ equity 36,671 45,751total liabilities & shareholders equity 64,926 77,101



Cash Flow statement

usD in thousands Fy 2007 Fy 2008CASh fLOWS frOm OPerATinG ACTiviTieS: Net income (loss) for the period -10,816 4,716

Adjustments required to reconcile net income (loss), for the

period to net cash provided by operating activities:

Income and expenses not involving cash flows:

Depreciation and amortization 7,457 4,324

Amount charged in respect of warrants granted 711 530

Capital gain from sale of associated company - -612

Change in deferred income tax, net -1,679 4,811

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable 2,475 -5,396

Share in losses of an associated company -116 -

Increase in inventories -119 -55

Increase (decrease) in marketable securities -65 272

Increase (decrease) in accounts payable, others -267 1,301

Net cash provided by (used in) operating activities -2,419 9,891CASh fLOWS frOm inveSTinG ACTiviTieS: Purchase of fixed assets -5,454 -4,335

Proceeds from sale of associated company - 712

Purchase of marketable securities and structures -5,575 -200

Proceeds from sale and maturity of marketable securities 9,387 5,577

Restricted bank deposit -195 -111

Investment in investee company -750 -

Purchase of other assets -30 -50

Net cash provided by (used in) investing activities -2,617 1,593CASh fLOWS frOm finAnCinG ACTiviTieS: Issuance of share capital, net 853 3,912

Release of treasury stock 4 8

Obligations under capital leases undertaken 3,328 3,751

Discharge of long term loan - received from a bank -2,084 -2,827

Discharge of obligations under capital leases -2,248 -2,715

Long-term loan received 1,666 211

Short term loans, net 750 714

net cash provided by (used in) financing activities 2,269 3,054translation differences on cash balances of subsidiaries 1 -403increase (decrease) in cash and cash equivalents -2,766 14,135Balance of cash and cash equivalents at beginning of period

10,627 7,861

Balance of cash and cash equivalents at end of period 7,861 21,996

Documents

Card Guard AG - equitystory.com Guard Research Report.pdf · April 27, 2009 Card Guard AG Key HigHligHts early mover advantage in a niche and under-penetrated market of wireless telemetry