Saturday, November 1, 2014

Harvard Regenerative Technology (Nasdaq - HART) -- Bionic Men

Harvard Regenerative Technology (HART $6.25) is a leading developer of replacement organs that use a patient's own DNA make-up.  Transplants currently depend on donors.  Those organs create tissue rejection problems along with a variety of other complications.  Regenerative medicine promises to alleviate those issues with replacement parts that are completely natural to the patient.  The company currently is developing substitute tracheas that employ a plastic foundation and are infused with the patient's own cells  That allows the new airway to acclimate to the body and work naturally without side effects.  The product recently was granted orphan drug status and is expected to enter formal clinical trials in early 2015.  Nine humans already have received artifical tracheas under special exemptions dating back to 2008.  One died in an automobile accident.  Two others passed away from unrelated medical problems.  In all nine cases, though, the replacement tracheas performed well.  Orphan drug status precludes competition for seven years after F.D.A. approval is obtained.  Harvard's patent portfolio offers additional protection.  Insurance companies view the technology favorably because it eliminates the need for expensive long term care.  Surgeons and research hospitals are attracted because regenerative medicine is a leading edge concept and Harvard's version holds a high likelihood of success.

Harvard was spun off from its former parent, Harvard Bioscience, in November 2013.  Shareholders received one share of the regenerative medicine spin-off for every four shares of the parent.  Harvard received all the assets associated with the regenerative business, plus $15 million in cash.  The company's cash burn rate has been approximately $2 million per quarter since that time.  It recently announce plans to raise an additional $15 million in equity.  That transaction was delayed by the general market's sell-off in early October but is expected to be completed before long.

The potential market for replacement tracheas is estimated at $750 million per year.  That assumes an average price to Harvard of $100,000.  The company may assign a higher list price.  Research collaborations are underway in new areas including lung, esophagus, heart valves, and the heart itself.  Harvard also is considering work on the bronchus, the tubes that go into the lungs.  The trachea market is split 50%-50% between the United States and Europe.  Clinical trials are expected to start next year, at four hospitals in each region.  Harvard is budgeting an extra $5 million a year in expenses to support the trials, above its current burn rate.  The company has obtained grants in the past.  Participating hospitals might underwrite some of the trial cost, as a research expense.  But Harvard is planning to pay most of freight itself.

Each trial will include 15 patients, for 30 altogether.  Unlike most medical devices and drugs, replacement tracheas will have a simple end point -- lung function.  The follow-up review period is expected to be brief, just three months.  Approximately 10% of the patient population consists of cancer patients.  The rest suffer from trauma.  Cancer patients have a greater chance of side effects because cells can escape and metastasize elsewhere in the body.  The surgery itself is considered fairly straightforward.  It's a complicated operation that costs an average of $250,000 all-in, assuming $100,000 to Harvard.  But the methods are well understood.  A large number of surgeons have the necessary background.

The scaffolds will be manufactured in several standard sizes.  Harvard still is determining exactly how many and what shapes.  Custom designs were employed in several early cases.  That approach might prove superior in the long run.  For now, though, the F.D.A. requires standard repeatable products with statistically meaningful data.  The scaffolds will be made out of conventional Dacron, a plastic that's widely used in medical implants.  The tubes are specially treated to create openings and surfaces for new blood vessels to use.  Harvard has its own bioreactor system that multiplies the patients cells, which are extracted from bone marrow two days before the operation.  The plastic is coated with the cells.  The device is surgically inserted.  Then the cells mesh with the body, allowing a complete and natural integration.

The regenerative approach offers several advantages.  Nobody has to wait for a donor.  Tissue rejection is not a risk.  There's no need for ongoing anti-rejection drugs or chemotherapy.  Costs are lower.  Quality of life is better.  The people who have had the operation to date talk and breathe naturally.  They leave the hospital and don't return.  Our projections assume only a small percentage of the potential market will employ the technology in its early years.  F.D.A. approval is anticipated in 2017.  Full scale marketing is likely to begin in 2018, although things could move faster in Europe.

Our projections assume gross margins of 90%.  Overhead costs are certain to increase.  Still, only a modest penetration of the potential market could launch Harvard into the black.  Additional R&D projects are likely.  At this stage the company plans to bring in partners to finance most of the development.  That could include drug manufacturers that are threatened by regenerative advances.  Brand new entrants may find the industry attractive, as well.

Regenerative medicine is in an early stage of development.  Roadblocks could emerge that prevent the business from getting off the ground.  Stem cells sound great in theory but have proven to be exceptionally hard to apply in practice, so far.  The advantage Harvard offers is that its technology is 9-for-9 to date.  Those were performed mainly in Russian hospitals.  Problems could develop with those patients down the road.  The technology itself could experience problems as more patients are treated, moreover.  Still, the high success rate so far is unusual.  New medical devices typically take a long time to perfect.    So the outlook appears favorable.  Experience with tracheas also could facilitate development of other regenerative organs.  That would be great for business and the stock price.  It also could change the course of human history.


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