BBLG: Bone Biologics Set up For Success

By Brad Sorensen, CFA

NASDAQ:BBLG

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Although the stock BBLG of Bone Biologics has suffered along with the rest of the biotech-related space, we remain confident in the company's technology to improve the bone regeneration process, potentially providing relief to millions of back pain sufferers in the US and around the world. The NELL-1 protein and the way the Bone is attempting to use it is described in detail below, and the initial results in animal testing have been quite encouraging and we are anxious to see the results of the upcoming first-in-human trials.

The combination product, NELL-1/DBM is expected to be purified NELL-1 mixed with 510(k) cleared Demineralized Bone Putty recommended for use in conjunction with the applicable hardware consistent with the indication. The NELL-1/DBM Device will be comprised of a single dose vial of NELL-1 recombinant protein mixed with DBM putty in the operating room. A vial of NELL-1 plus DBM will be sold in a convenience kit with a diluent and a syringe of 510(k) cleared demineralized bone (DBM putty) produced by MTF. A delivery device will allow the surgeon to mix the reconstituted NELL-1 with the appropriate quantity of DBM Putty just prior to implantation. Since committing to this process and bring in new leadership Bone Biologics has already surpassed four milestones:

• Demonstrating a successful small laboratory scale pilot run for the manufacturing of the recombinant NELL-1 protein in Chinese hamster ovary cells

• Validation of protein dosing and efficacy in established large animal sheep models pilot study

• Completed pivotal animal study

• Filed for a Pilot clinical trial outside the US

Additionally, Bone Biologics has received Human Research Ethics Committee (HREC) approval for a multicenter pilot clinical trial to evaluate NELL-1/DBM in 30 patients in Australia with degenerative disc disease. Additionally, UCLA TDG and Bone Biologics received guidance from the FDA that NELL-1/DBM will be classified as a combination product with a device lead—meaning the PMA approval process will likely be less onerous than if it was a pure drug or classified as a drug lead.

As mentioned above, the prevalence of back pain in the United States, and around the world, is tremendous—with over 65 million Americans reporting some sort of back pain. The market for Bone Biologics, however, is a narrow slice of that pie—although still representing what we believe is a great opportunity. Bone is focusing on the procedure known as spinal fusion—a surgery performed around 350,000 times in the US and many more when looking globally. Spinal fusion surgery is the process of grafting bone, or some synthetic form of bone, in between two vertebrae to stimulate the growth of bone between the vertebrae and link them together. Spinal fusion surgery involves an incision in the neck or back directly over the spine, or on either side of the spine, or in the abdomen or throat so the surgeon can access the spine from the front. The next step is where NELL-1/DBM comes in. This is point in the surgery where the surgeon uses either bone grafts from the patient or a donor's body or a synthetic substance meant to replicate bone in between the two vertebrae. The fused vertebrae may then be temporarily held together while the bone grows with metal plates, screws or rods. The patient can usually go home after a couple of days, but the recovery time can be multiple months with activity severely limited, allowing time for the bone to grow in between the two vertebrae. Indications from the completed trials of the NELL-1/DBM technology indicate that it could cut that recovery time by causing bone regeneration in a more rapid fashion, while reducing the chance for unwanted side effects associated with current synthetic substances. As mentioned, spinal fusion surgery is not meant for all kinds of back pain but some of the conditions that may be relieved by the procedure include:

• Degenerative disk disease

• Spondylolisthesis

• Spinal Stenosis

• Fractured vertebra

• Infection

• Herniated disk

• Tumor

The orthobiologics, which are biological substances naturally found in the body that are used to promote quicker healing of muscle, tendon and bone injuries, is a $3 billion market, but the spine is only a portion of that:

The spinal portion of the orthobiologic market is where Bone Biologics is focusing but there are other areas of that $3 billion pie that the company should be able to expand into with NELL-1/DBM. There are many cases that would benefit from quicker and more structurally sound bone regeneration including:

• Spine implant—this is the largest market for bone substitute product—representing more than 70% of the total US market according to Transparency Market Research.

• Non-Union Trauma Cases—while the majority of fractures heal without the need for osteosynthetic products, bone substitutes are used in complicated breaks where bone does not mend naturally. Bone Biologics' management believed that NELL-1 is expected to perform at least as well as high-priced growth factors in this market.

• Osteoporosis—The medical need to find a solution to counter a decrease in bone mass and density is a major medical challenge. The systemic use of NELL-1 to stimulate bone regeneration throughout the body, thereby increase bone density, could have a very significant impact on the treatment of osteoporosis.

Having promising technology is one thing but having the capital and ability to bring that technology through the onerous approval process is almost as important. We believe the leadership currently in place has positioned the company to be able to do just that. The company's 1Q earnings release showed us that expenses remain in check and the cash balance is a healthy $5.8 million, which helps alleviate concern that the company can continue to move the process forward. Once Bone gets into human trials, they will likely need periodic capital infusions, which we believe the current leadership has shown the ability to obtain at relatively favorable terms.

We believe the company is currently trading well below our current valuation of just under $8.00 per share. The stock has undoubtedly suffered from the overall market pullback and the apparent risk aversion among investors but we believe that this provides an opportunity for investors who are willing to take on some risk with the potential for a fairly good-sized upside.

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