ORG ready to possibly explode upward on new CEO changes and FDA approvals... media sees potential in "no-competition"
Bruce
SCG
geocities.com
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worldlyinvestor.com Sector of the Day
The Skinny on Organogenesis
By Robert Cyran, Correspondent
Sci-Fi skin maker Organogenesis helps heal ulcers, but Medicare can't make hide nor hair of the product.
Biotech is having a whiz-bang year so far. From the close on Dec. 31, 1999, the Nasdaq biotech index shot up by 81% to a high on March 6 as amazing technologies lured investors into the sector. But since then, the index plunged 31% as investors realized most companies had no approved products. The index is still up 36% for the year to date.
One of the whizziest is Organogenesis (AMEX:ORG - news), a company that designs and develops living tissue for humans. In a process seemingly straight out of Star Trek, it takes what would normally be thrown out -- believe it or not, the foreskin of circumcised baby boys.
The tissue cells replicate quickly and skin from one circumcision can yield skin covering the area of several football fields. The manufactured skin, called Apligraf, will naturally match the color of the recipients skin.
Fading Short Sellers
What's more interesting for investors is that Organogenesis is that rare biotech company which actually has an FDA-approved product. So far, the company uses Apligraf to help heal venous leg ulcers. These are leg wounds typically found on the legs of people over 50 with varicose veins. The target market for Organogenesis is the roughly 250,000 to 500,000 cases a year that don't respond to traditional treatment.
Organogenesis stock has risen 78% this year as investors gain hope that the company can actually take advantage of the billion-dollar market with its manufactured skin. The company has had a large contingent of doubters though, who point out that the company has had trouble selling Apligraf.
Short sellers continue to dog the company as well, with one in five shares held by the pessimists. But the shorts have diminished rapidly over the past month. One reason is new CEO Philip Laughlin, who has held executive positions in Baxter (NYSE:BAX - news) and Medtronic (NYSE:MDT - news).
In the past, investors regarded Organogenesis management as distant and mercurial. Laughlin is attempting to rebuild ties to the investment community.
``Their new CEO is huge positive for them and should lead to lots of progress. It seems like all the top biotech CEOs have come out of Baxter,' says Michael Becker, editor of the biotech newsletter Beck on Biotech.
One of the major problems smaller medical companies historically have is distribution. Given that Organogenesis is a small company, it negotiated a distribution deal with Swiss giant Novartis (OTC:NVTSY - news). Organogenesis received a large amount of cash in exchange for giving up a percentage of the profits on Apligraf.
Although the exact terms of the deal have not been disclosed, analysts estimate that Organogenesis probably needs to sell about 100,000 units a year to be profitable. In February, the company sold 810 units; at this rate, the company will be far below profitability in 2000.<P>Devil's in the Details
``What investors in small medical companies need to look for are large markets, rapid innovation and reimbursement, and I can't stress reimbursement enough,' says Sandra Hollenhorst, VP at Prudential Vector Healthcare Group.
Reimbursement, or payments to hospitals by Medicare and private insurers, is not a typical concern of biotech investors but it should be. If hospitals can't get paid, they won't use a product no matter of how sexy the technology is.
The problem with Apligraf is that the technology is too new. So new, in fact, that the people running Medicaid and Medicare haven't figured out whether to classify it as a drug, medical device or biological agent. As a result, neither program can reimburse patients who use Apligraf.
Furthermore, the bureaucratic problem in classifying Apligraf has created is even worse overseas, according to a company spokesman. Insurers relying on Medicare for payment guidelines compound the problem.
But given that the majority of potential patients are elderly, once regional Medicare officials OK the procedure and the government gets its act together, sales should rise rapidly. Luckily for Organogenesis, that could be as early as this year.
Stretching Applications
Besides reimbursement, the other driver of Apligraf growth is the expansion of its market into the multibillion-dollar diabetic foot ulcer and skin surgery markets. Organogenesis expects FDA approval for these uses by the end of the year.
Diabetic ulcers are much more serious than venous ulcers. Many diabetics have low sensitivity to pain and often don't notice an injury. Any injury to a diabetic's foot is dangerous because diabetics heal poorly due to poor blood circulation in the leg. One of the more tragic outcomes of a diabetic ulcer is amputation. According to reports, the are about a thousand diabetes-related amputations a week.
Apligraf should gain rapid acceptance as a treatment for diabetic ulcers, since ulcers covered with it heal faster and more often than those treated conventionally.
As for skin surgery, expect rapid acceptance, too. Apligraf causes remarkably less scarring than conventional skin grafts.
No Competition
``Competition is non-existent. The only company close to them, Advanced Tissue Sciences (Nasdaq:ATIS - news) has had its product fail miserably in clinical trials,' Michael Becker says.
Despite Advanced Tissue's problems with developing skin, the company is valued slightly higher than Organogenesis by the stock market. Given that the two companies are in the same market and Organogenesis has a product while Advanced Tissue does not, this clearly means Organogenesis should be worth more.<P>Organogenesis has several engineered tissues in development. The most promising is a more advanced skin product currently being tested that contains the deeper levels of tissue, which the body cannot regenerate. Other projects including a temporary liver and blood vessels for heart transplants.
Whether these projects ever make it past the FDA and are reimbursable is an open question. What's certain is this field is going to be one of the biggest in medicine. |
