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Taking Stock of the New Normal: Mark Landy on New Growth Ideas for Biotech Investors

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chemicallight82 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. Mark Landy, director of research for medical technology and regenerative medicine at Summer Street Research Partners, has staked out the intertwined sectors as his universe of coverage. In this interview with The Life Sciences Report, Landy discusses three companies with very distinct capabilities that could bring extraordinary rewards to investors who understand the value propositions.

The Life Sciences Report: Mark, you published a Q2/14 industry earnings preview on June 26, writing that you do not expect Q2 results to be stellar, in part, because procedure volumes are being affected by high-deductible health plans. Is this about employers cutting expenses with lower-priced healthcare plans? Or is it about employees not wanting to tap into their medical savings accounts? Describe the situation, and the issues that have given rise to this headwind.

Mark Landy: We're entering what I call "a new normal of device utilization." I've obviously borrowed that phrase from the Internet bubble of the late 1990s and early 2000s, which forced us to dramatically change the way we did things.

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.

"RepliCel Life Sciences Inc. is at the forefront of the utilization of stem cells to treat disorders and defects."

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 RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB), I do find it an interesting and exciting story. I have been doing diligence on the company to learn more about its technology and opportunities. It falls into a new category of medicine that is very intriguing to me: regenerative medicine and gene therapy. RepliCel and another company I follow, Harvard Apparatus Regenerative Technology Inc. (HART:NASDAQ), are at the forefront of the utilization of stem cells to treat disorders and defects, which is definitely the future of medicine.

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.

"Seasonality is going to be based more on patient affordability and deductibles, versus schedules and vacations."

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 Harvard Apparatus Regenerative Technology, or HART. This is a regenerative medicine company that not a lot of people have heard about it. Would you discuss it?

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?

ML: Anika Therapeutics Inc. (ANIK:NASDAQ) manufactures the goop, for lack of a better term, that gets injected into your knee when osteoarthritis pain can no longer be treated using medicine, and you are either not yet a candidate for an implant or don't want to have an implant. I'm sure many of your readers have heard a friend talk about these knee injections, and how the injections have enabled them to delay knee replacement surgeries and return to normal function. The company has additional product lines outside of orthobiologics, but orthobiologics is, by far, the largest contributor to revenue—and what investors focus on.

Anika is one of the largest suppliers of hyaluronic acid injection products. The company's orthobiologics products are distributed in the U.S. by DePuy Mitek Inc., a Johnson & Johnson (JNJ:NYSE) company. DePuy is the world's largest orthopedic company, and the perfect partner for Anika.

"We learned, during the economic downturn, that healthcare spending is no longer a household priority."

I picked up coverage of the company back in 2011, when the stock was trading at about $5.60/share. My hypothesis was quite simple: If we are moving into an environment where people are going to delay knee surgeries because they've either lost their jobs, or they have high out-of-pocket deductibles, then Anika Therapeutics would work, as the demand for its products will grow. The stock price is currently about $40/share.

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, Anika has an approval in Europe for a product used to treat small defects in knee cartilage. The company plans to begin a clinical trial for this product in the United States in the near future. My guess is that, at some point, Anika will become a regenerative medicine company as well as a pain therapy company.

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 Anika Therapeutics through experience, and the relief and return to normal function they got following injections. This demographic is also actively investing in the stock market, and were quick to connect the dots. Thus, today the shareholder base of Anika Therapeutics is largely retail. Other large investor groups are quant funds and index funds. More recently, I have been taking more calls from institutional investors wanting to get a better understanding of the Anika story.

Anika is a great story. The company has $81 million in cash. It is very profitable and has a very deep product pipeline. It's one of the best-positioned stories I see, and is still an undiscovered gem from an institutional investor perspective.

TLSR: Mark, thank you very much.

ML: Thanks so much.

Dr. Mark Landy, director of research for medical technology and regenerative medicine at Summer Street Research Partners, has spent 17 years on Wall Street and in the medical device industry, and has significant transactional experience in both the developed and emerging markets. Dr. Landy has been recognized in numerous Institutional Investor magazine Top Analyst Polls, and was named to the "2008 PharmaVOICE 100" list of the top 100 inspirational people in the life science industry. Dr. Landy graduated from University of the Witwatersrand, Johannesburg, South Africa, and worked as a dental surgeon in South Africa and the United Kingdom before studying finance and management at the Wharton School of Business.

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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 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: RepliCel Life Sciences Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Mark Landy: 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: RepliCel Life Sciences Inc., Harvard Apparatus Regenerative Technology Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
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