Medical technology is intimately linked to regenerative medicine. You could say these industries have a thunder-and-lightning relationship--you can't have one without the other.
The Life Sciences Report: Mark, you published a Q2/14 industry earnings preview on
Historically, hospitals, medical device investors and management teams--everybody, in fact--have traditionally viewed seasonality as follows: Q4 is the strongest quarter of the year, followed in strength by Q2, then Q1. Q3 is the weakest, driven by the summer vacation period.
This is the seasonality we investors are used to, and that the industry is comfortable with. Hospitals prepare budgets and utilization forecasts on this cycle. Management teams base their forecasts and provide financial guidance on this cycle. Investors build their models and expectations on this cycle. This seasonality expectation is, simply put, the way it is.
This pattern of utilization is driven by hospital-buying patterns, hospital budgets and scheduling, versus patient affordability.
TLSR: What has changed?
ML: Coming out of the economic downturn that started in 2008, we've seen companies push more and more of their healthcare burdens onto employees through the implementation of high-deductible healthcare plans. This, combined with elements of the Patient Protection and Affordable Care Act (ACA), which kicked in this year, has made affordability a much larger part of the healthcare utilization decision, and the timing of utilization, in my view. We learned, during the economic downturn, that healthcare spending is no longer a household priority, but is budgeted for alongside other household needs.
My thesis entering 2014 was that a new pattern of healthcare utilization would be established, driven by affordability. I expect H1 results will be weaker than guided to and expected, and H2 results will be stronger than guided to and expected. This is because patients will use the first half of the year to save for, or lower, their one-time, out-of-pocket costs for hospital-based procedures by paying down deductibles through cheaper utilization, and then have those procedures done in the second half of the year, before their deductibles reset at the beginning of next year.
I hold this view for 2014, as 2014 is the first year of change, and will be a "learning year" for the industry. I feel that 2015 will hold less surprise, as the industry will have a better utilization dataset to work from.
Going forward, I think we need to think more about Q1 and Q2 being weaker than before, with Q1 in line with Q3, or possibly weaker, and Q3 and Q4 being much stronger than before--especially Q4.
TLSR: Do you see this as a sustained pattern going forward?
ML: Yes. As long as we have high-deductible health plans, and patients have large out-of-pocket deductibles, I think this is a new sustainable pattern. Seasonality is going to be based more on patient affordability and deductibles, versus schedules and vacations.
TLSR: Your universe of coverage includes medical technology and regenerative medicine. Would you talk about some names, please? Do you have a regenerative medicine story you can share?
ML: While I don't formally cover
TLSR: RepliCel has two proposed Phase 2 trials with its RCT-01 (non-bulbar dermal sheath fibroblasts) cells, which should be initiated before the end of this year. One trial will be for the Achilles tendinosis indication. I realize that as a Phase 2, this is not designed to be a pivotal trial. But will 82 patients, 41 of whom will receive RCT-01, be enough to get an indication of efficacy?
ML: To me, the real questions are: What could go wrong and is it safe? My hypothesis is: Not a whole lot can go wrong and the therapy will be safe, as the company is using autologous cells. Autologous cells are taken from an individual and returned to the body. They are a perfect immunological match, and if handled in a safe and appropriate manner, should not cause the patient any harm. At this stage, I think what we are all interested in is the safety of RepliCel's therapy, and I do not see a lot of risk.
With that said, you are right: The numbers in this study may be too small to determine scientific evidence of efficacy. However, companies like to get some understanding or signal indicating that there could be efficacy, and they like to learn how to power larger studies. Also, and more important, in some countries, the pathway to approval and commercialization for stem cell therapy is being altered so that companies only need to generate safety data in trials. Then, within a specified amount of time, they must provide data on efficacy to maintain the therapies on the market. This is an opportunity that RepliCel can take advantage of, shortening the cost and time to market in some countries.
TLSR: The other proposed Phase 2 study will be in androgenic alopecia (male pattern baldness). This study will be with a total of 160 male patients--two experimental arms, one with 66 single injections and one with 66 repeat injections, with a 28-patient control arm. What could this trial tell us?
ML: RepliCel could get an indication of efficacy, and could also use this study to solidify a commercial partner with the financial resources to take the product to market. This is RepliCel's strategy: to develop new products and therapies, and then license the commercial rights to companies with deep pockets and strong distribution networks.
TLSR: You mentioned
ML: Yes. HART is also on the stem cell/regenerative medicine track. We have a Buy rating on the stock. The company grows organs--this is amazing stuff. It is starting out with an artificial trachea called the InBreath Airway Transplant System, which includes the synthetic scaffold and adjunctive technologies, and devices required to prepare the artificial trachea for implant. We've all read about growing organs--scientific fantasy and the stuff of the future. But while some investigators have tried to grow organs such as bladders, ears and noses with varying degrees of success, HART has done it. The company has treated a number of patients who are doing very well with regenerated tracheas, and have done so for a good amount of time. This is well beyond proof of concept; it is reality.
TLSR: Briefly, how is this done?
ML: You start with a porous synthetic scaffold, which is individually made to match each patient's exact needs. Bone marrow cells are removed from the patient, prepared, and then rained down and seeded into the scaffold using the company's proprietary bioreactor. Once implanted, the seeded cells become trachea cells and function just as normal trachea cells do.
TLSR: Eleven successful surgeries have been completed in humans with all versions of the HART trachea. Even though we're talking very small numbers, this is a stunning development in science and medicine. It gives you hope that the trachea and other types of organs made with living cells could be routinely available for cancer patients and others within a few years.
ML: It's truly remarkable, and shows the variety of therapies and solutions that are possible, especially for unmet clinical needs where the alternative outcome is death.
TLSR: You obviously can't use a control arm in these studies. You can't make these studies double-blind. How is the HART trachea clinically evaluated?
ML: You look at how the implant functions against metrics of a normal trachea, such as lung volume, exercise tolerance and so on. In scientific terms you use surrogate endpoints to measure efficacy.
TLSR: Can you mention another company?
I picked up coverage of the company back in 2011, when the stock was trading at about
Over and above a number of interesting injectable products, the company also has regenerative medicine products in the pipeline. Starting with the basis that hyaluronic acid itself has nourishing and restorative properties and is capable of being a carrier for stem cells and other cell-based therapies,
TLSR: This company's market value is up almost 800% since you started following it three years ago. Not only that, but it's up about 145% over the past 12 months. Where does the company's support come from?
ML: This is one case where the retail investor beat the institutional investor to the punch. People invest in what they know, what they use and their associated experience. Many people in the 50+ demographic know
TLSR: Mark, thank you very much.
ML: Thanks so much.
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