Market Overview

Investments in "Medical Science Fiction"

 


Medical technology is advancing at mind-boggling pace. There is increasing hope for the treatment of previously hopeless diseases with much success to our credit. Our first antibiotic, penicillin, was discovered by Sir Alexander Fleming in 1928 and has since been responsible for saving at least 200 million lives while improving the quality of life for countless others. Two decades later, Jonas Salk, after 5 years of research, developed and helped launch the first polio vaccine manufactured from a weakened strain of the virus with 60-70 percent prevention in those receiving the vaccine. Nationwide, results were seen quickly with a rapid decline: in 1955 there were 28,985 cases of polio; in 1956, 14,647; and in 1957, 5,894 cases. The disease has now been all but eradicated in the U.S.. with about 250,000 cases still occurring worldwide, mostly in developing countries where the vaccine's availability is still not as widespread. As a society, we continue to make huge strides with HIV, measles, malaria and other diseases on the decline as we advance our treatment regimen and educate the public, but there is much work left to be done.


The USA Today recently published a story about various versions of Star Trek's tricorder in development. While there is potential in each noted device, each pales in comparison to the famed television series' version which could perform full-body scans and provide detailed results of virtually any ailment present in just seconds. For investors, there are multiple companies developing impressive therapeutic and diagnostic medical devices as well as drugs for the prevention, treatment and maintenance of a host of diseases that are still very prevalent. Medical science is rapidly evolving with a few of the more novel concepts being developed in publicly traded small pharmaceuticals and medical device companies. Following I wish to provide brief summaries of what I believe to be three of the most innovative options among these companies. I consider each to be so novel and fantastic that it could even be considered "science fiction" until more fully proven in clinicals and accepted by regulatory agencies as viable, efficous, safe and marketable.


A Possible Answer to a Major Stem Cell Therapy Issue


Athersys (NASDAQ: ATHX) is a small pharmaceutical company that has been garnering investor interest in 2013 due to its novel stem cell pipeline. Stem cells are the precursor cells to every cell in the body, but in their earliest stages are not differentiated and can be coaxed into developing into any tissue type. Stem cell therapies are being developed to help treat injuries, grow new organs, repair brain tissue ravaged by Alzheimer's, treat diabetes and a host of other indications in which tissue regeneration can prove to be therapeutic. The cells may be obtained through various sources including the highly controversial embryonic stem cells, umbilical cord blood, adult bone marrow, amniotic fluid and adipose tissue (fat cells). While stem cell research is progressing a bit more slowly than anticipated, it is beginning to provide signs of hope with the first regulatory approval of a stem cell therapy via Canada for Osiris Therapeutics' (NASDAQ: OSIR) Prochymal for the treatment of graft-versus host disease GvHD in May of 2012.


With multiple efficacy and safety concerns associated with stem cell implantation, one of the biggest issues remains tissue rejection by the patient's own immune system of cells and tissue from other donor sources. It appears that the best means by which to counteract the problem is by utilizing stem cells obtained from the patient's own body, termed autologous stem cells. However, such treatments require laborious, and time-consuming procedures involving retrieving the cells from the patient's body, isolating the cells from the other cells and tissue, and then culturing the stem cells in order to greatly increase to the number to an efficous level --- typically in the millions. The careful culturing of stem cells is not only an issue due to the slow process which is a drawback if treatment is needed quickly in the event of an emergency, but it is also expensive as the cells are extracted, cleaned and cultured on demand. Athersys is attempting to address this problem and bring us a step closer to widespread acceptance of the stem cell concept via its MultiStem® technology. MultiStem®'s therapeutics cells are obtained from bone marrow tissue and other non-embryonic sources. Comparable to type O negative blood (considered as the universal blood donor type), stem cells produced via this technology are not patient specific and are not prone to inducing an immune response against the cells or their produced tissues. As such, there is no tissue matching required. Just as significant is the fact that the produced cells may be produced on a large scale and can be stored until needed via an "as-needed" or "off the shelf" basis, a much more cost effective and quickly administered therapy than the autologous counterpart therapies.


Athersys released its Q1 2013 financials and company update on May 14th. In the release, two substantial updates on its clinical pipeline with regard to MultiStem® were noted. First, Athersys noted that it had received permission from the U.K. Medicines and Healthcare products Regulatory Agency ("MHRA") which authorized the addition of U.K. stroke centers in the ongoing Phase II clinical study of MultiStem® cell therapy to treat ischemic stroke. Announced on April 17th, this will greatly expedite enrollment of the trial which is expected to treat approximately 136 patients who have suffered moderate to moderately severe strokes. More importantly was an update on the company's Phase II clinical study with partner,Pfizer Inc. (NYSE: PFE), involving administration of MultiStem® cells to patients suffering from ulcerative colitis. Athersys noted that initial results from the double blind, placebo-controlled trial are expected in Q4 of 2013, a significant event that could help to validate the company's MultiStem® platform. Athersys announced the collaborative effort in December of 2009 noting "Athersys is also eligible to receive milestone payments of up to $105 million upon the successful achievement of certain development, regulatory and commercial milestones." With much at stake for this trial data, I anticipate growing investor interest in the coming months as this significant data release approaches.


Athersys common shares closed on Friday, May 24th at $1.74 giving the company a current market capitalization of about $98 million. The company's stock chart has been bullish since November 15th, 2012's low of $0.951, with a recent 52-week high of $2.42 on April 16th. A good reflection of the company's quarterly cash burn rate for the remainder of 2013 can be ascertained by its Q1 expenses of $7.1 million, with an additional $2.6 million in expenses on top of that value for Q1 due to warrant liabilities. As of March 31st, Athersys had cash and equivalents of $21.3 million - enough to last through Q4 2013, the time of the expected Phase II ulcerative colitis data release. While the company could likely raise funds through an offering before then, I do not believe such financing is imminent as a milestone payment from Pfizer could be forthcoming as a result of the Q4 data release.


A Smart Phone Device to Enter the Worldwide $10 Billion Market of Diabetes Treatment


LabStyle Innovations Corp. (DRIO.OB) is attempting to enter the multi-billion dollar market of diabetes patients with its Dario™ glucose monitoring device used to monitor glucose levels in patients with type 1 and type 2 diabetes. The device is actually much more innovative than the small, near chewing gum package size indicates. It is comprised of a cartridge containing up to 25 strips used to monitor glucose levels, a lancet to prick the patient's finger, and a small meter designed to be removed and plugged directly into the audio port of a smart phone that has the associated Dario™ app loaded onto it. The actual procedure is quite simple and replaces the more cumbersome personal glucometers and data collection devices, both of which can be inconvenient for active individuals trying to live an active and normal lifestyle. The diabetic first plugs the small meter into the smart phone and places one disposable strip into the meter where it is held into place. He then pricks a finger using the device's small lancet and then places the finger with a small drop of blood on it onto the strip where it is analyzed for glucose levels through the phone's Dario™ app. Just as with the older technology glucometers, data obtained may be used to monitor sugar intake and adjust insulin administration "on the go" but serves to be quicker, less cumbersome and more compact, even stylish as the company s website attempts to convey. As an additional perk and likely cost-cutting design for its users, Dario™ has no battery to contend with as all electronic analyses and displays take place on the user's mobile device.


 


LabStyle's Dario™ smart phone app displays the patient's results which are stored in a personal record which can be shared with a physician via Microsoft Exel spreadsheet or an Adobe Acrobat PDF file. Protecting the integrity of the data, they are stored on the internet-based "Cloud." To aid in the diabetic disease maintenance, the app includes a nutrition guide, logbook of data, an insulin calculator and monitoring system. With over 88% of Americans owning mobile phones as reported in June of 2012, the number is now closer to 90% which means a majority of Americans already own a key part of the Dario™ device which is accessible via the app installed on Apple's (NASDAQ: AAPL) iPhone and Google's (NASDAQ: GOOG)Droid platforms. Such concept is providing indication of further growth and additional dependence on these two giants in the smart phone world as similar technologies evolve for the healthcare sector (perhaps the focus of a future article).


In its April 9th shareholder update, LabStyle updated investors on its plans for Dario™ in 2013. Most notably, the company announced that it had submitted an application for CE marking of the device in Europe late in 2012 and expects to obtain clearance sometime in 2013; a significant and imminent catalyst. Upon receipt of marketing clearance via CE marking, LabStyle will first target the 4 million patient market of the UK and 6 million patient market in Germany and notes that it is ready to launch the device and its app immediately upon receipt of regulatory approval. Readiness to launch was additionally validated after a subsequent April 25th press release in which LabStyle announced a three year distribution agreement with Farla Medical, Inc., a leading medical supplies distributor based in the UK. While waiting for marketing clearance of Dario™ in the European markets via CE marking is a significant catalyst for the company's common shares, investors should also be watching for a marketing application for Dario™ in the 25.8 million diabetes patient market of the U.S. in 2013 as well.


LabStyle released it Q1 financials on May 14, 2013. As of March 31st, the company had cash and equivalents of just over $330,000. However, a 4 million share stock offering that closed on May 10th garnered the company an additional $10 million. In Q1 LabStyle used $675,414 for research and development in Q1, $497,028 for pre-production and marketing expenses and $1,903,725 for general and administrative expenses for a total $3.08 million quarterly cash burn rate. While the total quarterly loss was $5.21 million, there was a $2,135,997 non-cash charge related to the revaluation of warrants during the quarter. Depending on regulatory filing fees associated with the upcoming regulatory filing in the U.S., LabStyle should have cash sufficient to fund the company into Q4 of this year. LabStyle's common shares closed Friday's trading at $3.00. On its April 9th IPO, the company's stock debuted at $2.60 per share where it briefly dipped to $2.00 that day, but its shares have traded in a tighter range of $2.50-3.06 since then. As the company's promising Dario™ product is presented to the healthcare sector, regulatory agencies and investors, I believe interest in the company should increase dramatically as awareness increases and regulatory decisions approach.


"Manufacturing" Human Organs and Tissue Via a 3-dimensional Printer


Organovo Holdings (ONVO.PK) has been turning heads with its Organovo NovoGen Bioprinter. The device is much like the 3-D printer technology now giving 3D Systems Corporation (NASDAQ: DDD) its $4.5 billion market capitalization with a 52-week stock run from $17.04 to Monday's close at $48.50. While 3D Systems' printers manufacture parts comprised of polymers and metals, Organovo's device prints 3-D tissue and even organs, a concept that until now has only been in the wildest dreams of healthcare professionals and scientists. The material used as the "ink" in the printing process is composed of targeted tissue cells obtained from donor organs, biopsy waste, or surgical waste or are even lab-generated via stem cells. The cells are methodically "printed" onto a three-dimensional lattice that reproduces key elements of native tissue architecture without polymeric scaffolding or other artificial means of giving the tissue structure or support.


Organovo's April 22nd press release announcing the successful manufacturing of liver tissue is thus far the pinnacle of the company's technical accomplishments. The manufactured tissue is truly three dimensional with tissue thicknesses of about 500 microns. Differentiating the tissue from currently-utilized two dimensional tissue now utilized for grafts and research purposes, the three dimensional tissue is several layers thick, has multi-cellular tissues that closely reproduce the distinct cellular patterns found in natural tissue, and is comprised of cells and the proteins produced by those cells. All of this is accomplished without dependence on other materials or scaffolds for three-dimensional shape or structure.


The press release reported key findings as a result of the work Organovo has been putting into its novel device, specifically for the recently-produced liver tissue. These findings help to validate the company's technology for the manufacturing of viable and functional tissue and give the indication that this is a significant technology with quite a future ahead of it if events continue to unfold positively during its development. Organovo noted in the announcement that the produced tissue has several key characteristics. It is stable over time with "controlled spatial positioning of specific cell types in x, y, and z axes" and has multilayer composition of about 20 cells in thickness. While the structure, arrangement of different cell types and stability of the produced cells are significant, I believe investors should also focus on the most important aspect - functionality. Liver tissue produced by the NovoGen Bioprinter performed actual liver functions including albumin production, fibrinogen and transferrin production, inducible cytochrome P450 enzymatic activities and cholesterol biosynthesis. Already showing superiority in function versus its two dimensional counterparts, the NovoGene Bioprinter liver tissue produced albumin levels that the company noted were 5-9 times greater than the matched two dimensional controls.


While many investors may start having visions of large scale manufacturing of livers, hearts, kidneys and other organs, the technology still needs to mature a bit before it can attain such lofty goals. However, Organovo is already making plans to market the technology in the next year or so for another novel use - that of medical research. According to an April 22nd news release by San Diego radio station KPBS, Organovo plans on marketing the company's 3D liver tissue to researchers as early as next year. The tissue would be used for various purposes including testing safety and efficacy of preclinical drugs in vitro to ascertain which should progress to the more time consuming and expensive clinical stage trials and which should be scrapped or utilized for other organs or other indications. This marketing approach is the company's best chance of revenue for the short term while it continues to develop the technology to produce full-sized and fully functional organs or organ parts for transplants and grafting purposes. The marketing potential for therapeutic and research applications will likely help the company develop a solid investor following as should the allure of its novel and interesting medical device.


Organovo's shares closed Friday at $4.25, about midway of its 52-week range of $1.49-$10.90 with solid midterm support at the $4.00 region. With a market capitalization of $265 million, the company is priced a little high as a development stage entity with no current revenue. However, investors in these small pharmaceuticals understand that these companies are not valued based on revenue and sales but rather on a combination of the potential of the company to meet its development goals and the market size of the targeted products. Organovo reported its 2012 earnings and company update on March 18th. As of December 31st, it had cash and equivalents of approximately $14.8 million with $1.2 million in revenue for the year, mostly from grants and collaborative revenue. Largely due to non-cash transaction costs associated with the company's 2012 reverse merger and financing transactions, the company operated at a net loss for 2012 of $43.55 million. For determination of cash burn rate moving forward I believe investors should view a more applicable breakdown for such a determination. Organovo's 2012 operating expenses were $7.2 million, its research and development expenses were $3.4 million and its selling, general and administrative expenses were $7.1 million for a total of $17.7 million for 2012. Such a breakdown yields approximately a $4.43 million per quarter cash burn rate. Assuming the same expenses apply for 2013, the company has enough cash to fund it through Q3 of this year.


Each of the presented companies is in the developmental stages with regard to the promising technologies. While each company presented is progressing nicely and looks to have a promising future ahead, I advise investors perform additional research into each before opening any investment position. The year ahead looks to be catalyst-filled for each with any number of product development, licensing, partnership or financial update news possible to drive share price up or down. Remember, each of these companies will need funding at some point in the future as virtually all companies at this stage of development do. If data and marketing plans are impressive, I believe each has the potential to obtain favorable financing with minimal shareholder dilution required. I look forward to seeing how these "Medical Science Fiction" companies progress in the weeks, months and years ahead.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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