Thursday, October 30, 2014

Huge Growth Delivered in Very Small Packages

Source: George S. Mack of The Life Sciences Report (10/30/14)

http://www.thelifesciencesreport.com/pub/na/huge-growth-delivered-in-very-small-packages-seethruequitys-ajay-tandon-and-brandon-primack

Institutional investors are, by and large, unable to own shares in companies with market valuations of less than $100 million, which means most sellside analysts don't write research on very small companies. The paradox: The micro-cap space is where investors can find the tenbaggers. That disconnect and its attendant irony are not lost on SeeThruEquity's Ajay Tandon and Brandon Primack. In this interview with The Life Sciences Report, Tandon and Primack discuss four companies nurturing seeds of dramatic growth that could materialize in the wake of upcoming catalysts.

The Life Sciences Report: Ajay, could you tell me the three most important characteristics of a micro-cap growth company—a company with a market cap under $200 million ($200M)?

Ajay Tandon: If I were to single out three characteristics, the first would be that we are looking for undervalued situations where a company has a niche or a compelling technology. Second, we're looking for companies that have management with a proven track record. In micro-cap situations, you need quality management that can execute. A very small company's success depends on that. Finally, as we all know, micro-cap situations vary in terms of liquidity and exposure, so we're looking for companies that are very serious about being in the public markets and can deliver a consistent, solid message to the market, at least on a quarterly basis.

TLSR: You have some very small companies in your universe of coverage. I'm sure small hedge fund managers, or possibly small-cap mutual fund managers, sometimes tell you that a company looks interesting, but that they are unable to buy it because it's too small. Do you ever see these money managers buy very small equities for their own accounts?

AT: I can tell you anecdotally that when we initiate coverage on a company, we're always approached by small hedge fund managers who have personal accounts. Because of their funds' guidelines, they may not be able buy micro-caps, or their holdings have to have market caps closer to $1B. We can't say for sure that they buy, but it seems like they have the interest.

TLSR: Is SeeThruEquity an investment bank? Do you structure deals, join syndicates and find financing for companies?

AT: We are not a broker/dealer or investment bank—we're an independent research firm. There are two main aspects to our platform. The research we produce is not paid for by the companies, and therefore is unbiased. We currently have 105 companies under coverage across a variety of sectors. We cover companies on the New York Stock Exchange and the NASDAQ, as well as companies on the over-the-counter markets. We are an approved contributor on the three major research aggregators: Thomson ONE, FactSet and S&P Capital IQ. Our research is completely open source.

We also do investor conferences, one each quarter here in New York City, showcasing micro-cap and small-cap companies. Our next conference is on Nov. 12, and will offer a good mix of companies from a variety of sectors. That begs the question: What is our revenue model? It's quite simple: We charge companies to present at our conferences. We write on companies in the micro-cap and small-cap space, and offer exposure and visibility at the conferences and via other service offerings.

TLSR: Brandon, you and Ajay like to think in terms of personalized medicine. For more than seven decades, clinicians have been trying to blast tumors away using shotgun-chemotherapy approaches. Surgery will remain an indispensible modality in dealing with many solid tumors, but do you believe that we will ultimately see the end of these broad-spectrum lines of attack? Will we see personalized or targeted approaches become the overwhelming primary method of treating genetically identified cancers?

Brandon Primack: We will certainly continue to see expanded use of targeted therapeutics, but it's very difficult to say that they will become the primary oncology therapies. We can say that targeted therapies have significant utility, and the research community clearly believes that precision medicine is the future. This is demonstrated by the number of targeted therapies that are available now, and the fact that many more are being developed.

It's difficult to say targeted therapies will become the overwhelming primary treatment option for a couple of reasons. One is that cancer cells have shown resistance to targeted therapies when the target itself changes through mutation, which reduces the effectiveness of these therapies. Tumor cells find new pathways to achieve growth, and they may no longer depend on the initial pathway that was being targeted. In addition, the use of many targeted therapies will be restricted to patients whose tumors have a specific gene mutation. Patients without that mutation would not be candidates for that particular therapy. That's why targeted therapies are often used in combination with chemotherapy drugs.

TLSR: There's one market in the world where biologic and drug makers definitely want to sell their products—here in the U.S., where the margins are wide. It seems that 60 Minutesdoes one show each year on how expensive medications are in the U.S., versus in Canada or Europe. People are angry because the same medications are much cheaper elsewhere. Will our system buckle under the pressure of personalized therapies?

BP: Let me point you to some research from the University of California San Francisco, led by Dr. Dhruv Kazi and reported in February 2014 in the Annals of Internal Medicine. Counter to common thinking, Kazi and colleagues demonstrated that genetically guided personalized medicine can lower costs and increase the quality of healthcare.

Now, this is not an apples-to-apples comparison to a targeted cancer therapy, but the Kazi group built a computer simulation that tested the cost effectiveness of anticoagulant therapies that would be administered after a patient receives a coronary artery stent. A large question facing interventional cardiologists is whether to give Plavix (clopidogrel), which is the current standard of care and is now sold as a generic drug, or much more expensive targeted therapies. Plavix is a prodrug and requires activation by a specific liver enzyme called CYP2C19, which 28% of the patient population has a genetic variation to. In this minority—but large—group of patients, Plavix will be less effective. The Kazi group ran the simulation for a variety of factors, including efficacy, side effects and the costs of genotyping, as well as the costs of the drugs and other factors. What they found was that by determining a patient's genotype for loss of CYP2C19 function before prescribing the anticoagulant, and using the more expensive drugs for the patients with the gene variant, costs would actually be reduced.

TLSR: Give me an example of a targeted therapy platform from your own coverage.

BP: TapImmune Inc. (TPIV:OTCBB) is developing gene-based immunotherapeutics and vaccines for the oncology and infectious diseases space. Its vaccines restore gene expression within cancerous cells, making them immunogenic and providing a signal to the immune system to attack the cancer.

One of the company's trials involves developing an immunotherapy for breast cancers that overexpress HER2/neu, which has been shown to play an important role in the development and progression of certain aggressive types of breast cancer. Herceptin (trastuzumab) from Genenetch/Roche Holding AG (RHHBY:OTCQX) is the current standard of care for tumors that overexpress HER2/neu. However, Herceptin only slows tumor growth, and is effective for only a year or so because patients develop resistance pretty rapidly. In fact, 70% of HER2/neu-positive breast cancer patients don't experience efficacy due to acquired resistance to Herceptin, according to a paper called "Herceptin Resistance Database for Understanding Mechanism of Resistance in Breast Cancer Patients," which was published earlier this year in Nature. Even with these limitations, Herceptin still brought in $6B in 2013.

TapImmune believes its therapy, TPIV100 (multi-epitope HER-2/neu peptide vaccine), is applicable in close to 50% of the population of HER2/neu-positive breast cancers. Its 24-patient Phase 1 trial (NCT01632332) is being conducted at the Mayo Clinic, which is the sponsor of the study. The patients in the trial have previously been treated for HER2/neu-positive disease. We expect TPIV100 to advance to Phase 2 over the next couple of quarters, but we have to wait for word from the company on that.

TLSR: Is TPIV100 intended to treat patients who have failed Herceptin, or is it intended to prevent recurrence in patients who have been treated for HER2/neu-positive breast cancer?

BP: TPIV100 is being tested in patients who have failed Herceptin. But in time, the company believes it could be used earlier in the treatment chain. It is intended to be a therapeutic, not a prophylactic agent. Patients receive the TPIV100 immunization every 28 days for up to six courses, as long as there is no recurrence or serious adverse event.

TLSR: Could we talk about other companies?

BP: Manhattan Scientifics Inc. (MHTX:OTCMKTS) is a good segue to your question about the costs of personalized therapies. One way to lower costs is with better detection methods. Manhattan Scientifics is developing magnetic relaxometry (MRX) technology, which uses iron oxide nanoparticles that can be programmed to bind to specific cancer cells. Low-strength magnetic sensors are used to detect these cancer cells at an incredibly sensitive level.

Manhattan Scientifics has placed one of its MRX machines at the University of Texas MD Anderson Cancer Center, which recently presented unpublished data at the World Molecular Imaging Conference in Seoul, South Korea, that showed the technology to be up to 200 times more sensitive than current imaging technologies. We believe the technology will prove far more sensitive than that. We believe the MRX technology will lead to earlier detection, fewer false positives, fewer PET and CT scans, fewer biopsies and fewer unnecessary surgeries. We believe something like this technology could be a huge cost-fighting mechanism in the battle against cancer. The collaboration with MD Anderson will generate a lot of data over the next 12–18 months, as the technology progresses through animal trials and, hopefully, moves into human clinical trials.

Additionally, the technology could be a wonderful low-cost tool to track the progression of cancer. For instance, if you're a prostate cancer patient, you would be able to go to your physician every three to six months and see how quickly your tumor is growing, just by taking the nanoparticles and using the sensor. This could be a tremendous cost-saver. We have a $0.25/share price target on Manhattan, and it's currently trading around $0.12/share.

TLSR: What is the regulatory pathway for this device? Will it be a 510(k) premarket notification, or will it be a premarket approval application, like a new drug application? Or do we know?

BP: We do not know at this point. But since these nanoparticles, which pass through patients like a multivitamin, are used in other medical devices, it's not a revolutionary technology. We do not anticipate a long, onerous process. I would anticipate the 510(k).

TLSR: Will data be emanating from the human trials when they begin at MD Anderson? Will these data act as catalysts for the stock?

BP: Manhattan is a dual thesis play. Its nanotechnology platform is also being applied to structured metals. The company has a deal with Carpenter Technology Corp. (CRS:NYSE) in nanostructured titanium. The near-term catalyst for the stock is the development of this project, which should generate sufficient revenue to carry the company to its longer-term thesis, which is the development of the MRX technology.

At this point, it's difficult to say what the timeline might be for hearing additional news. We would love to see some major guidance on when the human trials might begin next year, but again, we don't know at this point.

TLSR: I'm noting that Senior Scientific LLC is the MRX subsidiary of Manhattan Scientifics. Is Senior Scientific a candidate for spinout?

BP: I don't believe so. The company has not talked about that at all. Manhattan's two businesses have a lot of interrelated pieces within nanotechnology.

TLSR: Another name, please?

BP: Sticking with the oncology theme, DelMar Pharmaceuticals Inc. (DMPI:OTCQB) is another company in our coverage. It is developing a novel small molecule therapeutic agent, VAL-083 (dianhydrogalactitol) for glioblastoma multiforme (GBM), which is the most aggressive and common form of brain cancer.

Currently, the standard of care is Merck & Co. Inc.'s (MRK:NYSE) Temodar (temozolomide) and Roche's Avastin (bevacizumab), which are used in conjunction with radiation therapy. However, 60% of patients treated with Temodar experience tumor progression within a year. In studies where Avastin was used as a second-line therapeutic, those patients demonstrated a 20–26% response rate. These data imply that more than half of GBM patients will fail both front- and second-line therapy.

VAL-083 is DelMar's lead candidate, and it has a differentiated mechanism of action. In separate trials, the combination of VAL-083 and radiation therapy showed an immediate survival benefit, comparable to or superior to that of Temodar plus radiation. DelMar is currently conducting dose-escalation studies.

In August, DelMar reported from cohort 7, its most recent cohort of patients receiving 40 milligrams per meter squared (40 mg/m2). VAL-083 still has not had any drug-related side effects, and a maximum tolerated dose has not been reached. The company is now evaluating patients in cohort 8, who are receiving 50 mg/m2. The company has opened three clinical trial sites in the U.S., and has filed a protocol amendment to allow dosing beyond 50 mg/m2. DelMar feels that as long as it can keep increasing the dose, it has a much better chance of hitting the tumors harder and hitting them earlier, and it hopes that will be a significant advantage. The company will be presenting additional data at the Society for Neuro-Oncology meeting in November. DelMar is on track to progress to phase 2b clinical trials in GBM in 2015.

TLSR: VAL-083 is approved in China for chronic myelogenous leukemia and for lung cancer. Don't investigators know by now what the maximum tolerated dose is?

BP: Not only is it approved in China, but this drug was also tested by the National Cancer Institute back in the 1960s. Those old studies only got up to 25 mg/m2 over a 33-day cycle, but DelMar has doubled that.

I don't think there is an easy answer to the question of whether we should know the maximum dose by now. VAL-083 is a small molecule that has been tested and used but was left at the side of the road. It's taken a company like DelMar to put some investment behind it to see where we can take the drug. The company that markets the drug in China has never really prioritized it.

Speaking of China, DelMar presented at the American Association for Cancer Research's (AACR) New Horizons in Cancer Research meeting earlier this month in Shanghai. Using in vivo models, the company reported that a significant survival benefit was observed with VAL-083 in non-small cell lung cancer (NSCLC) patients, compared to platinum-based chemotherapy in both tyrosine kinase inhibitor (TKI)-susceptible and TKI-resistant models of NSCLC.

TLSR: Your price target is an interesting $4.53/share. The stock was recently trading $0.85/share, giving the company a market cap of about $25M. Your target represents an implied return of more than 500%. How do you get there from here?

BP: At the beginning of this conversation, Ajay discussed company visibility and exposure to investors. If you look at comparable companies on the NASDAQ that have more exposure, you'll see a tremendous valuation gap between them and DelMar. DelMar has been taking steps toward a NASDAQ listing. It changed its fiscal year-end to accelerate the filings required for that. We believe that an uplisting to NASDAQ over the next few quarters would be a significant boost in terms of investor awareness, and might help bridge some of that valuation gap.

TLSR: Could you mention another name?

BP: Cynapsus Therapeutics Inc. (CTH:TSX.V; CYNAF:OTCQX) is developing APL-130277 (sublingual apomorphine strips) for under-the-tongue delivery of apomorphine, which is the only drug approved for the "off-episode" symptoms of Parkinson's disease. These episodes are motor-nerve disturbances, with muscle stiffness and sluggish movement, and they affect quality of life for 25–50% of Parkinson's patients.

Apomorphine has had its issues, because in its approved form its administration involves a multistep process, including an injection, for people who are physically impaired and suffering when they need the drug. It's difficult to give yourself a shot when you are in a state of stiffness and hypomobility. It's much easier to put a thin film strip under your tongue. APL-130277 is now in Phase 2 development.

TLSR: Cynapsus is a Canadian company with a market cap of about $54M. What is the value proposition for investors?

BP: We recently did a valuation note on Cynapsus because Acorda Therapeutics Inc. (ACOR:NASDAQ) has agreed to buy Civitas Therapeutics (private), which is developing a Phase 3 Parkinson's drug contained in a blister pack and an inhaler. Acorda purchased Civitas for $525M, which is almost 10 times Cynapsus' market cap in U.S. dollars. And here's Cynapsus, with a Phase 2 product using a formulation of an approved drug and putting it into an easy-to-administer film strip, trading at one-tenth the price just paid for a competitive product. We find that to be a very compelling story.

Furthermore, the Michael J. Fox Foundation for Parkinson's Research (MJFF) has a history of investing in winners. In the last six months, four companies that MJFF has invested in have either been sold or have conducted licensing agreements, including Civitas. The foundation has been funding Cynapsus along the way as well.

TLSR: What are the nearer-term milestones for Cynapsus?

BP: The company has three upcoming studies, which we expect to be completed over the next two quarters—a pilot study (study ID CTH-105), a bioavailability study (study ID CTH-200), as well as an efficacy study in patients who have never taken apomorphine (study ID CTH-300a). The studies are critical as they are going to be the first studies of the drug APL-130277 in actual Parkinson's patients. Prior to these studies, the drug has been tested only in healthy humans.

TLSR: The Phase 2 pilot study (NCT02228590; CTH-105), with actual Parkinson's patients, will enroll only 20 people. We should know pretty quickly if these patients are getting relief from their off episodes, shouldn't we?

BP: Based on everything Cynapsus has said, it is going to be reporting data very shortly. We expect numerous catalysts for Cynapsus in the upcoming quarters.

TLSR: The CTH-300a study is an efficacy study. When will we hear these data?

BP: We're thinking very late 2014, maybe Q1/15. This study is in the apomorphine-naïve patient group.

TLSR: It would be wonderful to see Parkinson's patients able to manage off episodes by themselves. The difficulty level with injections is daunting.

BP: Apomorphine sales have been disappointing. How is someone who's experiencing impaired motor function supposed to go through a multiprocess injection? It defies logic. Imagine, instead, keeping your sublingual film strips by your bed; you have an episode and can just pull a strip out and put it under your tongue. We're very excited about the upcoming trial data. We anticipate that the results of the CTH-105 study will be the next major catalyst moving these shares.

TLSR: Thank you both. It's been a pleasure.

Ajay Tandon, chief executive officer and director of research with SeeThruEquity, brings more than 12 years of experience in the financial service industry to his role. Previously, Tandon cofounded Emissary Capital LLC, a private investment firm focused on micro-cap investment banking. Tandon also served as vice president of equity capital markets at Maxim Group LLC, a New York City-based, full-service investment banking firm. Tandon also served as an executive for Dealogic plc, an analytics platform used by global and regional investment banks worldwide to help optimize performance and improve competitiveness. Tandon began his career in financial services as a management consultant with IBM Global Services and earned his bachelor's degree from Cornell University.

Brandon Primack, senior equity research analyst and associate director of research with SeeThruEquity, has more than 15 years of experience in the asset management business, with a focus on equity research and portfolio management. Prior to joining SeeThruEquity, he founded Primack Capital LLC, where he ran a structured derivative product and provided asset allocation consulting services to high net worth individuals. Prior to that, Primack spent seven years at Allianz Global Investors, where he served as senior equity research analyst covering healthcare and industrials for large- and mid-cap growth-oriented products. He also served as a quantitative analyst in Allianz's Structured Product Group, which focused on enhanced derivative products. Primack received his master's degree in business administration (finance) from New York University's Stern School of Business, and his bachelor's degree in economics from the University of Michigan. He has been a CFA charterholder since 2004.

SeeThruEquity's research is available on the company website.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Cynapsus Therapeutics Inc., DelMar Pharmaceuticals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Ajay Tandon: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Brandon Primack: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
Fax: (707) 981-8998
Email: jluther@streetwisereports.com

Wednesday, October 22, 2014

Japan Gives a Hug to the Cell Therapy Industry

Japan Gives a Hug to the Cell Therapy Industry: R. Lee Buckler

Source: George S. Mack of The Life Sciences Report (10/22/14)

http://www.thelifesciencesreport.com/pub/na/japan-gives-a-hug-to-the-cell-therapy-industry-r-lee-buckler

Last year, Japan rolled out the red carpet for cell therapy developers with new legislation designed to expedite development of regenerative medicine solutions for all manner of disease. In this interview with The Life Sciences Report, former regenerative medicine consultant R. Lee Buckler, now a vice president with RepliCel Life Sciences Inc., puts his consultant's hat back on to talk about Japan's hospitable stance on proposed cell therapies. He provides an update on the meaning of the new law and discusses a small cohort of companies poised to reap the advantages.

The Life Sciences Report: Lee, you've been around the stem cell and regenerative medicine industry for quite a long time, and you have a special interest in the new legislation enacted by the Japanese Diet (parliament) back in November 2013. The intention of the law is to hasten clinical development of cell therapies and regenerative medicine therapies. A new cell therapy can get conditional approval in Japan for a limited time with clinical (Phase 2) data showing safety in humans. This new law goes into effect in November. Tell me your thoughts.

R. Lee Buckler: The entire industry is watching Japan and this new regulatory model with an incredible amount of interest. We're on the brink of seeing more detail around the regulations.

This initiative sets up a paradigm of conditional approval, where a company can bring an application to the Japanese regulators, and if it shows sufficient safety evidence and some evidence of efficacy, the company could get conditional approval to sell its product in the Japanese marketplace. This conditional approval would be for a seven-year window, during which the sponsor or sponsors would have an obligation to continue to file clinical data toward an eventual final market approval—a biologics license application (BLA) or the Japanese equivalent thereof. There is also some suggestion that during the seven-year window, some reimbursement will be attached to the product being sold on the market.

TLSR: In mid-September, Pluristem Therapeutics Inc. (PSTI:NASDAQ), an Israeli company, said it was going to pursue a development strategy in Japan. It hired consultants to help the company get into that market. The company's lead indications are peripheral artery disease, intermittent claudication, critical limb ischemia and muscle injury. But otherwise, I don't see a lot of other companies initiating programs in Japan. Do you see companies from the U.S., Canada or Europe getting into that regulatory environment?

RLB: I think most companies in the regenerative medicine industry have a tremendous desire to have a Japanese strategy right now. The problem is that a lot of companies in this sector don't have enough bandwidth, or capital, to execute on that.

However, a few are making Japan a high priority. Currently, less than a handful of companies have a clearly articulated Japanese strategy, and only that many again have begun executing on the opportunity.

Pluristem has made the announcement about pursuing opportunities in Japan, and Chairman and CEO Zami Aberman has done an admirable job of executing deals. The company has the partnership with United Therapeutics Corp. (UTHR:NASDAQ), which is conducting a Phase 1 study of the company's PLX-PAD (full-term placenta-derived adherent stromal cells) product in pulmonary arterial hypertension, which is a fatal disease and happens to be a very large market. Pluristem also has a nice deal in place in Korea with CHA Biotech Co. Ltd. (CHA:KOSDAQ).

Going it alone all the way to market is not a good option for most cell therapy companies, and with the change in the Japanese regulation there is an appetite for regenerative medicine products in Japan that foreign companies in the sector need to capitalize on.

TLSR: You said there were a few others. Give me an overview, please.

RLB: Athersys Inc. (ATHX:NASDAQ) has announced a desire to move into Japan, and I know it is putting boots on the ground in the country to develop a strategy there. Back in January, the company announced some new Japanese patents in graft-versus-host disease (GvHD) and autoimmune diseases, such as inflammatory bowel diseases.

Cytori Therapeutics Inc. (CYTX:NASDAQ) has always had strong relationships in Japan, and has been there for a decade. It has a subsidiary in Tokyo called Cytori Therapeutics K.K.

Also, my own company, RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB), has an existing relationship with Shiseido Company Ltd. (4911:TSE), which will launch a clinical trial in Japan for pattern baldness in the next few months. This is one of the few cell therapy deals—perhaps the only one to date—that involves putting manufacturing capacity in Japan.

The company that is potentially in the pole position in Japan at the moment, however, may be Mesoblast Ltd. (MSB:ASE; MBLTY:OTCPK). The company inherited a relationship with Japan-based JCR Pharmaceuticals Co. Ltd. (4552:TKY) when, in 2013, it acquired the Prochymal (remestemcel-L or allogeneic, adult human mesenchymal stem cells) product portfolio from Osiris Therapeutics Inc. (OSIR:NASDAQ). The Osiris/JCR partnership, which was put into place a number of years ago, had been stagnant until the reemergence of the Japanese market as an important one for the regenerative medicine sector. Now Mesoblast has "regenerated" that relationship, and announced on Oct. 1 that JCR would be filing a market approval application for Prochymal in Japan for the treatment of pediatric GvHD, following similar approvals in Canada and New Zealand.

TLSR: Will a company be able to take Phase 2 data generated in the U.S. or Europe or Canada, including positive proof-of-concept and safety data, and submit that in Japan, potentially getting a seven-year conditional approval?

RLB: That's an important question. The best intelligence I have, based on interacting with people who have been working with the Japanese, including Professor Chris Mason from University College London, indicates the answer is "yes." The Japanese government is intentionally welcoming ex-Japan data for conditional market approval in Japan.

If a company gets conditional approval to market a product in Japan, it will also have to generate pivotal data outside of Japan, because no patients in Japan will want to risk being involved in a placebo trial when they have the option to buy the product in the marketplace. The end result of the paradigm is that there will continue to be data generated outside of Japan, which will be brought into Japan to support eventual final approval.

TLSR: Thank you for your time.

RLB: Many thanks to you.

[Editor's Note: Between the time this interview was scheduled and the time it was conducted, Buckler left his consultancy firm to become vice president of business and corporate development at Vancouver-based RepliCel Life Sciences Inc., a cell therapy company.]

R. Lee Buckler, vice president of business and corporate development at RepliCel Life Sciences Inc., has been an executive in the cell therapy sector since 2000, beginning with Malachite Management in the Stem Cell Technologies group of companies. Most recently he was the managing director of Cell Therapy Group, a firm he formed in 2008 to do business development consulting for companies and organizations working in or interested in the cell therapy sector. His work included deal-targeting, transactions, market intelligence, competitive analyses, strategic assessments and market profile planning for companies ranging from top-tier multinationals to start-ups. Buckler served six years as executive director of the International Society for Cellular Therapy and just over two years as director of business development for Progenitor Cell Therapy. Buckler has a bachelor's degree in education, and a law degree. He is on the editorial advisory boards of the journalRegenerative Medicine and the BioProcess International magazine. He is also co-chair of the Alliance for Regenerative Medicine's Communications and Education Committee. He is an active industry commentator in publications and in social media and serves on numerous industry advisory boards.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) R. Lee Buckler: I own, or my family owns, shares of the following companies mentioned in this interview: RepliCel Life Sciences Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: RepliCel Life Sciences Inc. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) The following companies mentioned in the interview are sponsors of Streetwise Reports: RepliCel Life Sciences Inc., Athersys Inc. Mesoblast Ltd. is not affiliated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
Fax: (707) 981-8998
Email: jluther@streetwisereports.com

Tuesday, October 21, 2014

Follow the Baby Boom to Profits

Follow the Baby Boom to Profits: Agility Health's Steven Davidson

http://www.thelifesciencesreport.com/pub/na/follow-the-baby-boom-to-profits-agility-healths-steven-davidson

In recent years, entrepreneurial therapists have comprised the fast-growing sector in outpatient physical therapy. But companies like Agility Health are beginning to seize acquisition opportunities and market share in this growing sector. Steven Davidson, CEO of Agility Health Inc., tells The Life Sciences Report how his company is innovating in the physical therapy space, improving patient care and clients' bottom lines through its management expertise and proprietary software, AgileRPM. With baby boomers aging and the Affordable Care Act increasing access to services, physical therapy just might be the safe haven sector to shield your portfolio from macroeconomic uncertainty.

The Life Sciences Report: What is the structure of the national physical therapy market?

Steven Davidson: Physical therapy is a $31 billion ($31B) market. During the last 20 years, the sector has steadily experienced a 6% annual growth rate. One reason for the growth is that baby boomers are getting older. But in addition to that, there is a strong national trend toward evidence-based medicine. The market is sorting out what types of services provide the best value for the dollar. Studies report that rehab is a cost-saver, especially when compared to surgery and other procedures. For example, early therapeutic intervention for workers' compensation claims saves as much as 79% of the cost versus waiting before starting rehab. These quantifiable outcomes bode well for the financial health of the industry.

TLSR: What is the acquisition history of your company, Agility Health Inc. (AHI:TSX.V)?

SD: Physical therapy has long been a fragmented industry. Even today, the top four players represent only 9% of the overall market. Agility Health started in 1968. In 2003, my business partner and I engineered a management buyout. We self-funded acquisitions until 2010, then we took on some leverage to do eight buys. One of our two key growth strategies is to continue to acquire small- to medium-size outpatient clinic groups with two to four clinics. That is our sweet spot: It is big enough to be meaningful, but too small for the much larger players. We tell the clinic groups that we will buy a super majority of the business. "We want you to continue to manage it," we tell them. "And we will absorb human resources, revenue cycle management, IT services, practice management software and accounting functions."

TLSR: What is your other key growth strategy?

SD: Our other key strategy is to target organic growth in our hospital business line. Partnering with hospitals in joint ventures is a big part of our strategy. We are talking with three hospital systems right now about collaboratively managing their hospital services. We also have a proprietary software system designed to manage hospital-based rehab businesses. That software, combined with our management expertise, improves the quality of service and overall performance metrics for all our clients.

TLSR: What portion of the outpatient business is workers' compensation-related?

SD: Worker's comp is less than 10% of our business. Most of our accounts receivable are for traditional insurance product—health management organizations, preferred provider organizations. About 20% is Medicare.

TLSR: Has the Affordable Care Act impacted your sector?

SD: It has generally affected our space positively. The Affordable Care Act has quietly improved healthcare access for some folks who did not have such access in the past. It has also reinforced the evidence that rehab is a service that is required for all insurance plans.

TLSR: What makes Agility Health unique in your industry?

SD: Most of our competitors stick to providing just one or two service lines. For example, U.S. Physical Therapy Inc. (USPH:NYSE) sticks to outpatient clinics and industrial rehab. Kindred Healthcare Inc. (KND:NYSE) sticks to the nursing home business and outsourcing to hospital and nursing homes. Concentra Inc., which is a subsidiary of Humana Inc. (HUM:NYSE), focuses on occupational medicine and rehabilitation. Agility Health provides all these services and more. We are in the acute care hospital business, outpatient services, senior care, long-term care, orthotics and industrial rehab, not to mention the software business.

When we acquired the company in 2003, our goal was to diversify geographically. Originally, most of our business was in Michigan, and now less than half of it is in that state. Healthcare services in the U.S. are very decentralized and regional. For example, here in Michigan, the system in Grand Rapids is very different from the healthcare environment an hour away in Kalamazoo.

Geographical diversification is like creating a stock portfolio that spreads the risks and benefits over a large space. We provide all these services, and then we tie them together with software and management policies. We are the only rehab company that has developed its own propriety practice management software.

TLSR: Are you putting the proprietary software on the market?

SD: We have just announced that we will begin selling the AgileRPM software service early next year to hospitals and outpatient clinics.

TLSR: Who are your major clients?

SD: In the national hospital business, we work with large providers such as Trinity Health Corp (private). We service a lot of regional healthcare companies. On the industrial side, our long-term clients include Ford Motor Co. and Pratt & Whitney, which is a subsidiary of United Technologies Corp. (UTC:NYSE). We have American Airlines Group Inc. (AAL:NASDAQ) and Medtronic Inc. (MDT:NYSE). In the orthotics business, we are the exclusive provider for the Women's Tennis Association, for which we make handcrafted orthotics.

TLSR: Do you contract directly with Ford?

SD: Like many large corporations, Ford Motor is self-insured. We have physical therapists located inside Ford's plants who provide direct rehab services in their assembly facilities. We provide a broad range of preventative and rehabilitation services for our manufacturing clients. We provide ergonomic assessments, early intervention on injuries, and coaching on how to do the job properly without getting injured. Our goal is to reduce the number of workers' compensation claims and promote good health practices.

TLSR: Are you taking on debt to support your revenue growth curve?

SD: We have taken on debt to support acquisitions, as well as a bit of equity. Moving forward requires a combination of debt, equity and internal cash flows. We went public last October to accelerate growth. This created an opportunity for us to reward our 1,100 employees with a stock purchase plan and managers with stock options. Our clinicians are our key asset. It is smart to provide them with stock options and stock bonus incentives.

TLSR: What was your operating revenue last year?

SD: Our revenue in 2013 was $63 million ($63M).

TLSR: Are you operating at a net profit?

SD: We are EBITDA (earnings before interest, taxes, depreciation and amortization) profitable, but not yet net income profitable, which is a near-term goal, of course. Our adjusted in 2013 EBITDA was roughly $3M.

TLSR: Are you going to continue to make acquisitions to grow revenue?

SD: Our target is to grow revenue by 25% per year, with roughly 20% of the 25% through acquisitions of small outpatient clinic groups. Each acquisition has its own twist, but we look to finance a buy with a combination of 50–60% cash and the balance in vendor take-backs or seller debt. We are looking to acquire clinic groups in the 4–5X range on a multiple of trailing 12 months EBITDA.

TLSR: Do you structure acquisitions as partnerships?

SD: Our goal is to partner with sellers. These entrepreneurs retain 20–30% as a synthetic or real equity for three to five years.

TLSR: Is there a limit to Agility's growth?

SD: Our goal is to become one of the largest physical therapy operators in North America.

TLSR: Who are your main competitors?

SD: U.S. Physical Therapy is New York Stock Exchange-listed. It is the best pure-play rehab comparable for a public company. Select Medical (SEM:NYSE ) is the largest provider of rehab in the country, with numerous hospital assets. Gentiva Health Services Inc. (GTIV:NASDAQ) provides predominantly post-acute healthcare. Kindred Healthcare is one of the more aggressive acquirers. It is in the long-term care and the post-acute care business. It also has substantial nursing home assets. On the whole, there is a very dynamic and competitive acquisition market. Unlike resource stocks, macroeconomic events do not generally affect our industry.

TLSR: Is the corporate future of physical rehab emerging from these acquisitions, or will there still be a majority of mom-and-pop operations?

SD: There is more consolidation now than there has been in the past. Running a rehab clinic is becoming more difficult. Fewer people are jumping into the industry. There is a lot of private equity money in the space. There is no single emerging leader; everybody wants to consolidate to grow.

TLSR: How has Agility Health's stock fared since your initial public offering?

SD: We came out at $0.20/share. We peaked at $1/share. We are at about $0.20/share today. Our business management team and our directors are very bullish. A number of us have been actively buying our own stock. It is at a good value, and we are all quite positive about the long-term prospects.

TLSR: As you continue to make acquisitions, will there be splits in the stock?

SD: Because we are a growth company, most of our energy is focused on creating shareholder value and reinvesting.

TLSR: What catalysts could put you into the net income profitability?

SD: We are aggressively shifting our energy toward our higher margin business lines. Our second quarter was 10% EBITDA over revenue, and our long-term vision is to be over 10%. We have been reengineering within the organization to improve our overall margins, by acquiring high-margin businesses and picking up high-margin contracts.

TLSR: Where would you like to be in five years?

SD: I see Agility Health with revenue of $100M within a year or two, and $300M within five years.

TLSR: What business weaknesses do you need to address to get to that goal?

SD: We need to make sure that we aren't capital-constrained. That is one reason why we went public. We aim to keep our executive talent, adding more of that talent as we grow by acquiring organizations that share our corporate culture.

TLSR: How do you describe your corporate culture?

SD: Our culture is a major asset. We started with one therapist in 1968. Our managers are clinically oriented, with strong healthcare backgrounds. Our clinical focus makes us unique in the rehab marketplace. People looking to sell their clinical businesses tend to migrate toward our strong, clinically based culture because they are comfortable with our priorities.

TLSR: Thank you, Steven.

SD: You are welcome.

Steven Davidson is CEO of Agility Health, where he directs the company's care delivery and quality initiatives, financial performance and strategic acquisitions. Davidson has served as CEO since 2003, when he and partner Ken Scholten led the management buyout of Agility Health's predecessor, GNA. Davidson's 14-year tenure at GNA included a series of leadership positions covering regional business development. Davidson has also served in leadership roles at Health East Corp. and PT Management Consultants, where he provided specialized rehabilitation consulting and contracting services to nursing homes and hospitals across a five-state region. Davidson is a licensed physical therapist and member of the American Physical Therapy Association. He earned a bachelor's degree in physical therapy from the College of St. Scholastica and a master's degree in business administration from the University of Chicago.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the company mentioned in this interview: None.
2) Agility Health Inc. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Steven Davidson had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Steven Davidson and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
Fax: (707) 981-8998
Email: jluther@streetwisereports.com