Here's a summary of my DD on ORTC. I've been accumulating the stock, which remains largely undiscovered despite the recent biotech craze. The company has a few potential near-term catalysts, noted below, that may move the stock.
Business Overview
Ortec International (Nasdaq: ORTC) is a development-stage company that operates in the biotech tissue-engineering field. It has one product, Composite Cultured Skin (CCS), which "acts as a biologically active dressing that stimulates the repair, replacement, and regeneration of human skin. When our Composite Cultured Skin is applied to the wound site, it produces a mix of growth factors that stimulate wound closure" (S-3/A, 14 Oct 1999). CCS is under FDA consideration for seven medical indications with a cumulative market of $3 billion per year (ORTC PR, 27 Oct 1999). The seven medical indications are Epidermolysis Bullosa, Erythema Multiforme, Stevens-Johnson Syndrome, Toxic Epidermal Necrolysis, venous stasis ulcers, autograft donor sites, and diabetic ulcers. ORTC has also developed a "cryopreserved" form of its product that recently received FDA approval for testing on donor site wounds. Cryopreservation is a freezing technology that allows CCS to be preserved and used for up to six months.
There are a number of other potential applications for CCS as a skin replacement, including the treatment of partial thickness burns and in vitro testing of the effects of various substances on skin.
ORTC is also taking steps to leverage its CCS technology platform beyond the skin replacement market. "Our immediate focus is to use our Composite Cultured Skin to treat acute and chronic skin wounds and associated diseases. However, we believe that there is an opportunity to apply our core technologies to repair selected structural tissues such as tendon, ligament, cartilage, bone and blood vessels" (S-3/A, 14 Oct 1999). In March 1999, ORTC announced that its U.S. patent for CCS will be widened to cover soft, connective tissue, muscle, and neural tissues (ORTC PR, 10 Mar 1999). In December 1999, ORTC established a research collaboration with M.I.T. and Tufts University "that will focus on the use of Ortec's proprietary CCS collagen sponge as a scaffold for the growth of various types of cells in the development of animal and human tissues such as smooth and striated muscle, nerve, ligament, blood vessels, bone, cartilage, and tendon. Of particular interest will be the use of Ortec's scaffold in the development of tissue-engineered heart muscle. Under terms of the agreement, Ortec will receive worldwide rights to license any technology resulting from this collaboration" (ORTC PR, 16 Dec 1999). Among those heading up the M.I.T.-Tufts research team are Dr. Lisa Freed and Dr. Gordana Vunjak-Novakovic, who also led a NASA-funded research team that conducted pathbreaking tissue-engineering work on Mir in 1996 and 1997.
Here are some items that include information on the efficacy of CCS, based on early clinical trials:
cpmcnet.cpmc.columbia.edu
pslgroup.com
buyside.com
biz.yahoo.com
Near-Term Catalysts
ORTC has a number of potential near-term catalysts that could move the stock price:
(1) ORTC has a FDA decision coming on its Composite Cultured Skin product for four medical indications: Epidermolysis Bullosa, Erythema Multiforme, Stevens-Johnson Syndrome, Toxic Epidermal Necrolysis. Approval will mean that CCS can be marketed commercially in the U.S. A 22 Nov 1999 PR announced that ORTC could expect to learn the result as early as mid-February, under a Humanitarian Device Exemption that the FDA granted ORTC in order to accelerate the review process.
biz.yahoo.com
(2) ORTC will appear at the Cruttenden Roth Growth Stock Conference next week, 21-23 Feb 2000, at the Ritz-Carlton Hotel, Laguna Niguel, California.
newsalert.com
(3) ORTC recently extended the expiration date of its Class B Warrants, which carry a strike price of $15, to 31 March 2000.
biz.yahoo.com
Financial Considerations
As a development-stage company, ORTC generates trivial revenues through short-term investments (U.S. Treasury Bonds, CDs) and significant losses due to its investment in research and development. ORTC lost $7.5 million during the first three quarters of 1999, $2.8 million during the third quarter alone. Costs are expected to increase as the company undertakes FDA testing for new indications and begins to market and sell its product for approved indications.
According to its most recent SEC financial filing, ORTC had $5.8 million in cash. On 29 Dec 1999, ORTC announced that it had raised $9 million through a private placement -- $7 million from Pequot Capital Management and $2 million from S Squared Technology Corp. The company sold 1,636,364 shares at an average price of $5.50 per share.
There are 1,188,600 Class B Warrants outstanding. They carry a strike price of $15 and expire 31 Mar 2000. If exercised, they would generate approximately $17.8 million for the company.
Overall, ORTC currently has about 8.2 million shares outstanding; the float is 1.7 million shares. At Friday's closing price of 10 13/16, the market cap is approximately $89 million.
Shareholder Information
Pequot Capital Management is ORTC's largest shareholder with about 2.1 million shares. Director Joseph Stechler owns about 750,000 shares, and his Joseph Stechler & Company holds approximately 1.3 million shares on behalf of its clients. George Soros owns about 1.2 million shares through his Soros Fund Management and Lupa Family Partners investment vehicles. Soros purchased the bulk of his shares on the open market in 1997 and 1998, at prices ranging from the teens up to the $22+ per share. S Squared Technoloogy Corp. owns 363,636 shares; Citigroup owns 311,412 shares.
Insider shareholders include Steven Katz, President, CEO, Chairman, 199,212 shares; Mark Eisenberg, Senior Vice President, Research and Development, 596,000; Ron Lipstein, Secretary, Treasurer, CFO, 247,771; Alain Klapholz, Vice President of Operations, 295,607.
Risk Factors
(1) CCS is the company's only developed product. Failure to gain FDA approval for its current medical indications would be a substantial setback. A flaw in ORTC's underlying technology platform would doubtless be fatal to the company.
(2) The company lacks a U.S. sales and distribution partner. The company can sell and distribute CCS on its own, but would benefit significantly from an established partner with broader channel resources. ORTC has had some success obtaining partners overseas: for example, it has signed an exclusive ten-year marketing alliance with Grupo Ferrer, one of the largest pharmaceutical companies based in Spain.
(3) The company will need to continue raising capital to support ongoing development and commercialization of its products. To date, the company has successfully met its capital requirements through a series of relatively small-scale private placements. Word has it that ORTC has retained DLJ to lead a more aggressive effort to raise funds, but there has been no official announcement about this.
(4) The healthcare industry is moving toward a managed-care/reimbursement payment structure, which raises questions about the pricing power ORTC will have in the skin replacement market.
(5) There are a number of competitors in the skin replacement field, including Johnson & Johnson, Organogenesis, Genzyme Tissue Repair, Advanced Tissue Sciences, Life Cell Corporation, and Integra Life Sciences.
Overall Investment Stance
This company has substantial risk, but in the midst of the current biotech craze looks ripe for a short- to intermediate-term trade. The stock had a nice run in December and has spent the past several weeks basing in the 10-11 range. Unlike so many other biotech stocks, it is not yet a moonshot; it has shown strength, but has not "gotten ahead of itself" during the past three months.
The company's patented technology platform isn't genomics, but it is innovative and holds considerable promise, beyond skin replacement, that is just now beginning to be pursued. The coming expansion of the company's patent and the research collaboration with M.I.T. and Tufts are signs that the company is serious about leveraging CCS for the treatment of heart muscle, blood vessels, tendons, ligaments, cartilage, and neural tissue. This is an exciting story that touches on a number of immense medical markets (cardiology and neurology). Moreover, this story has just begun to emerge and, to date, remains largely undiscovered.
The upcoming catalysts -- the company's presentation at the Cruttenden Roth conference and especially the expected FDA approvals that are expected to come soon -- add to the near-term potential of the stock. Factor in the extremely small float and large institutional and insider ownership, and it would appear that ORTC has the potential to make a large move. The problem is, that move could be up or down, depending especially on the FDA evaluation. |
