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A Biotech With Hidden Value?

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To invest in in a biotech company that manufactures one product, with a very niche market focus, and for which it is yet to receive FDA approval would normally be considered extremely risky. One company that fits this description however, yet might not be as much of a long shot in practice as it initially sounds is PLC Medical Systems (OTC: PLCSF).

PLC Medical Systems describe themselves as a medical device company focused on innovative technologies for the cardio and vascular markets. ‘Technologies’ in this instance should really be singular, due to the fact that as already mentioned they at present have one product on which they solely rely. This product, RenalGuard, is designed to reduce the toxic effects that contrast media (the ‘dye’ used in medical imaging) can have on the kidneys, which in turn (PLC believe) may help reduce the occurrence of Contrast-Induced Nephropathy (CIN). CIN is a frequently occurring complication of coronary diagnostic procedures and is associated with major cardiovascular events, prolonged hospitalization and early death. Approximately 7 million imaging procedures are performed worldwide each year, and about 15% of the patients involved are considered ‘at risk’ of CIN. At $500 per procedure this translates into a potential market of about $500 million

 

This potential being fully realized is reliant upon RenalGuard achieving FDA approval, but a look at PLC’s current operations reveals that a portion of this potential is already being taken advantage of, and to great effect.

At present PLC is has a market capitalization of a little over 6 million. In 2011 they reported revenues of approximately $600,000, which increased to just over $1 million in 2012 and is estimated to increase to around $3 million by the end of 2013. The vast majority of this revenue is derived from just two main markets, Europe (in which the majority of sales come from Italy) and Brazil. Equally impressive is PLC’s margin on these sales. During Q4 2012 gross profit on sales of $485,000 was reported as $252,000 or 52%. 

What are the chances of FDA approval?

To date there have been two main clinical trials, both based in Europe. The results of these trials are encouraging, showing RenalGuard to be both safer and more effective than any of the currently available alternatives to the treatment and prevention of CIN. Also completed (and passed) was an FDA approved pilot study designed to ascertain the safety of the system, which resulted in a close to 60% drop in the rate of CIN for RenalGuard users when compared to a control group. RenalGuard has also received a number of recommendations from key opinion leaders in the field of CIN treatment and prevention. 

The US pivotal trial on which RenalGuard’s FDA approval will hinge is underway, and is expected to be completed during 2014. Central to completion is PLC’s ability to raise more funds, but recent success in doing so suggest further success is more probable than possible. No doubt as a result of the impressive growth in revenue and the margins associated with this growth PLC has recently completed a round of financing during which it raised $4 million from a number of sizeable institutions including Brio Capital, GRQ Consultants and Genesis Capital Advisors. It is unlikely that these participants would take a sizeable position in a company they do not feel will be able to complete the necessary pre-approval trials. 

The management team tasked with guiding PLC through the approval process also seems to add to the strength of the company and in turn its chances of success. PLC is headed up by Mark Tauscher as president and CEO. Tauscher has over 20 years’ experience in the medical products field, holding posts that include exec VP of sales and marketing at Quinton (a company which develops and sells cardiology products) and division president for Marquette Medical Systems (now owned by GE Healthcare). PLC’s CFO is Gregory Mann. Mann, like Tauscher has exemplary previous posts, including Business Unit CFO at Virtusa, during which he was involved in its successful IPO and responsible for the company’s M&A activity. As of Jun 6th Mann was named to the Board of directors to replace Kevin Dunn, whose retirement was announced the same day. Finally the VP of clinical affairs is Susan Papalia. Papalia was the director of clinical affairs at Correx, Inc. and has over 25 years of clinical trial experience. 

What can be expected going forward?

As of this year PLC has a number of bright international growth prospects. Distributors have been appointed in France and Germany which will increase the company’s penetration of the European market, and the first step to approval in Japan has been completed. Patient enrollment in these trials is expected to commence over the next twelve months. Also, while RenalGuard is already tightly protected under a number of international patents that address the technology and delivery of the system there are a number of US patents that are expected to be granted this year concerning method and device. These patents (if granted) will set RenalGuard up as the only company in the US capable of treating CIN in such a manner.

So what are the risks?

The main risk, as with all biotech’s that are seeking product approval is failure. Trials in Europe have been successful, which gives reason for optimism when it comes to the US outcome, but each year only a tiny percentage of trialed products receive FDA approval and from a purely quantitative approach the chances of RenalGuard being amongst them are very slim. There is also the risk that the European trials will not be viewed as ‘clinically meaningful’ when viewed from within the US. 

On top of this is the funding requirement. Although recent events indicate potential success when the next round of funding is undertaken this is by no means a certainty and without a successful round before the end of the year PLC might be in trouble. Impressive revenue growth and high margins are reassuring but the European and Brazilian markets alone will not be enough to finance the trials through to completion.

All things considered PLC stock, whilst inherently risky due to its reliance on funding and approval, could represent good value. Large volume selling over the past few months have driven a recent decline, and currently at its lowest since Aug 2011 there is a chance that price could be bottoming out. If trials are successful (and FDA approval achieved) the growth potential of the stock could be huge, and the current price could be an opportunity to get in at the very bottom. Key to the survival of PLC is the management team’s ability to successfully raise additional finance, and soon, but with the experience and track record they have amongst them it could be achievable, and the current interest of institutional investors gives credence to this.

While PLC Systems is certainly in a precarious position financially it has a product that has stood up to testing and has a proven overseas market. If the European success can be replicated in the current US pivotal clinical trial and assuming additional finance can be raised to allay cash flow problems then there could be a vast market for their product RenalGuard, and in turn an opportunity for investors .

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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