See short position on (ORG) and also their record sales results, expanded manufacturing plant, new CEO and this.
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Growing a product and perhaps a firm
Profit eludes Organogenesis but CEO has big plans
By Ronald Rosenberg, Globe Staff, 2/16/2000
ANTON - Philip Laughlin remembers the reaction when he told his 9-year-old son his new job is leading a company that makes human skin.
'He looked at me and said, `You mean like `The Blob' - it's alive!' recalled Laughlin.
But explaining to a child how laboratory-grown skin can help heal certain wounds is easy, compared to convincing Wall Street the product can be profitable.
Laughlin, 53, is the new president and chief executive of Organogenesis Inc., a 15-year-old company that in 1998 beat the naysayers and gained US Food and Drug Administration approval to market the first lab-grown human skin equivalent. The pieces of skin are cultivated from cells donated from infant males' circumcisions.
Three Bay State biotech companies are merging. D7.
Unlike its rivals, which are developing products with cells from pigs and cows, Organogenesis is the only company with FDA approval for a full-thickness human skin substitute. The ability to cultivate a skin replacement opens a new chapter in the emerging field of tissue engineering.
Organogenesis's product, called Apligraf, is used to treat venous ulcers, which are leg wounds caused by ruptured blood vessels. About 800,000 people in the United States, many of them elderly, suffer from the open wounds.
But nearly 22 months after FDA approval, Organogenesis has not met many of its own ambitious expectations. After years of ups and downs, the company has attracted a top-name pharmaceutical company, Novartis, to market its product and is starting to show signs of real growth. But Wall Street expects profits are still two years away.
'With a new pill, a drug maker gets into the marketplace quickly. But the learning curve to educate doctors about a new medical device, like skin [replacements] - something they have not seen before - takes time. And that took longer than Organogenesis expected,' said Michael D. Becker, an analyst at Wayne Hummer Investments in Chicago.
So far, there are no signs of profitability, and 1999 revenue was far below initial expectations.
Organogenesis stock, which once commanded $35 a share, has recovered somewhat from a low of 63/4 in October. It closed yesterday at 107/8, up 1/16.
That's where Laughlin comes in. In October, he became the company's third president in nine years. He added the chief executive's post in December. Since Laughlin has 23 years of marketing and sales experience in the medical devices industry - four years at Medtronic Inc., a developer of stents, and 19 years at Baxter International, a health care products giant - investors are looking to him to finally bring stability and leadership to a company with a turbulent history.
Until this year, Organogenesis was run by Herbert M. Stein, 72, the mercurial chairman who cofounded it in 1985 with Eugene Bell, a professor of biology at the Massachusetts Institute of Technology who several years earlier had grown a living skin equivalent in his laboratory.
The skin was originally called Graftskin but subsequently renamed Apligraf.
Starting with cells from a single foreskin, Organogenesis can grow more than 100,000 three-inch round pieces of skin in large petri-like dishes containing nutrients. Each stretchable piece of skin costs $975. (Foreskins are donated; the company never pays because federal law prohibits the sale of body parts.)
The production process requires separating different types of cells from the foreskin and growing them over 20 days to create a full-thickness skin. Since Apligraf is a living product, the company says, it can heal itself and over time its color adjusts to the patient's pigment.
Under Stein, Organogenesis scrambled for money, raising $7.2 million in its initial public offering in 1986, followed by a series of warrant exercises, private placements, and public secondary stock offerings that brought in over $103 million.
Stein shunned investment bankers, and few Wall Street analysts followed the company. He rarely talked to reporters and analysts, and his management style led to a revolving door in the executive suite, according to former executives.
'Stein kept Organogenesis going during the lean years, but he also was difficult to get along with and never felt comfortable speaking to groups of people,' said one former executive.
Late last year, with an eye toward retirement, Stein hired Laughlin as his successor.
Without Stein, Laughlin has more latitude to make changes, which he says boil down to solving four fundamental problems:
Convincing Medicare to reimburse patients for the $975 cost of Apligraf.
Expanding Apligraf's usage into new markets, such as for diabetic foot ulcers.
Creating a pipeline of skin and nonskin products.
Reducing manufacturing costs.
'I don't view Organogenesis as broken,' said Laughlin. 'It is just going through a maturation and transformation stage, from research and development to a multifunctional commercial company.'
The steps Laughlin takes may also boost the company's stock price and reduce its unusually high number of shares tied to short sellers - investors who borrow shares and sell them, hoping to replace the shares at a lower price. Heavy short selling can be an indication that investors think a stock is overvalued.
Organogenesis has in recent years been a heavily shorted stock. Even now, short sellers control 5.62 million shares - about 18 percent of 30.5 million outstanding shares.
Some early investors in Organogensis were burned when the company, under Stein, made provocative statements about how quickly it would get FDA approval and become a leader in the $10 billion-a year market for wound-healing devices. The overly optimistic predictions led to accusations in the mid-1990s that the company may have manipulated the stock.
Evan Sturza, who edits an influential medical investment newsletter and remains one of Organogenesis's most ardent critics, said this week that the company's clinical trial was flawed. He predicted in 1997 that the FDA would not approve Organogenesis's product. But 10 months later, the FDA approved Apligraf for venous ulcers.
And early last year, Business Week magazine cited Apligraf as one of the 10 best new products in 1998, proclaiming 'a new era in regenerative medicine has arrived.'
This week, Sturza warned that the company will have a tough time making a profit under its marketing agreement with Novartis. The pact, he said, favors the big drug maker.
'With Herb Stein gone, that is a real positive, and the new guy [Laughlin] is very credible,' Sturza said. 'But Organogenesis's sales, after all these years, are still laughable, and we don't see any profits anytime soon.'
Indeed, some Wall Street firms had expectations in 1997 that the company would report 1999 revenue of $10 million to $33.5 million. The reality is that Organogenesis lost $20 million, or 66 cents a share, on revenue of $2.6 million for the first nine months of last year. Of that, $1.8 million was from Apligraf.
Laughlin maintains there is an upside. He acknowledged that Novartis, after nearly a year, is just beginning to seriously market the product with a 50-person sales force. The huge pharmaceutical company is also is working on gaining Medicare coverage for Apligraf. Currently, some physicans simply won't use Apligraf, because some venous ulcer patients lack the insurance coverage.
Laughlin expects to gain a second FDA approval this year, for using Apligraf on diabetic foot ulcers - a potential market of 600,000 customers who could theoretically avoid foot amputations. Organogenesis is also developing a replacement vein for patients cardiac patients.
'The company has made the dream-to-reality transition,' noted Michael Ehrenreich, an analyst at Techvest LLC. 'It's time to take a second look at Organogenesis.'
This story ran on page D01 of the Boston Globe on 2/16/2000.
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