Gamble of the Week: detecting a bargain stock

Just about anyone who has ever travelled through airport security barriers is familiar with the standard procedure of emptying their pockets and putting all objects through the metal detector. Pretty straightforward although it does pose obvious difficulties for those individuals with metal implants.

Gamble of the week: Inion Oy (Aim IIN: 53p)

Since its inception in 1999, Inion Oy, a Finnish healthcare business, has developed a range of biodegradable medical implants for the global orthopaedics market.Its patented technology covers the design and manufacture of biologically safe devices, such as plates, pins and membranes, that are used to enhance the healing of broken bones. The implants are made of natural polymers and degrade over time. Typically, the biodegradable material retains its strength for about 12 weeks and then weakens over the next three months. This allows the fracture gradually to become accustomed to weight bearing, which stimulates healing, rather than having to adjust immediately, as when a metal plate is removed.The material then safely dissolves into carbon dioxide and water over two years.

These products have considerable advantages over metal ones. For instance, they eliminate the need for a second operation in order to remove a metal plate and the material is safer and can be moulded perfectly to fit most fractures. The market for pinning the human skeleton with metal plates and screws is worth some $1.4bn a year. However, this is only the tip of the iceberg. Biogradable material can be used in dentistry and sports medicine. Furthermore, Inion has recently concluded a deal with CR Bard to develop a new range of biogradable stents that will be used to unblock human arteries.

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Inion is also developing the next generation in biodegradable devices, which combine naturally dissolving materials with bioactive molecules. Inion has committed e15m-e20m over the next four years on these bioactive products, which should greatly enhance bone healing.

Why is the stock so cheap? Unfortunately, Inion fell into the trap last year of over-promising and under-delivering. The shares were listed at 130p in December 2004 on the expectation of doubling sales. However, due partly to problems with Stryker, its US distribution partner, turnover rose by only 11% to e7.5m, while losses hit e9.9m. But more encouragingly, after stripping out the impact of Stryker, Inion's other sales grew by 77%.

While Inion's undoubted strengths lie in research and development, the board has recognised that it needs to beef up its sales expertise. This process is presently under way. And this year, there has been shareholder unrest with the board, which has led to short-term weakness in the price.

In summary, the company has first-rate technology and net funds of some e38m. Sales are forecast to be e8.7m this year and e12.7m in 2007, with break-even targeted for the end of 2008, once revenues hit e20m-e22m. At this week's trading update, the CEO announced that the firm was roughly on track, with first half turnover of e3.7m, representing 23% growth on 2005. Additionally, management believes that the company has enough money to achieve profitability without the need to raise new equity capital.

Finally, over the past two years, directors have been purchasing shares at prices between 87p and 50p. The stock is not for the faint-hearted, but I believe it is cheap. As with most small-cap healthcare businesses, if you do decide to buy shares, then I make sure they are just part of a well-diversified portfolio.

Recommendation: SPECULATIVE BUY at 53p (market cap £38m)

Paul Hill's personal portfolio has gone up by 483% over the last five years. To find out more about his specialist share-tipping service, 'Precision Guided Investments', click on the link below: