Orthocell regenerates

Paul Anderson is the CEO of Orthocell. Now, Orthocell was brought to our attention, or at least blazed into my attention on the 8th of May, by going up 356 per cent that day, from 11.5c to 52.5c and since then it went back a bit the following day. On Monday this week, it went up another 45 per cent to 61c and now it's back to the mid-50s. 

But the company is now capitalised at $53 million and is looking in better shape than it was before. 

What it's got is its technology which it calls a scaffold, which is a collagen substance, I guess a gel, that surgeons use to assist in the operations to join damaged nerves, and tendons and bone. It's a regeneration product, that assists in the regeneration of tissues, sold to hospitals to help in operations.

The announcement that came out on the 8^th of May, which caused the share price to go up so much that day, was basically some results from clinical tests. They don't have to do trials in the sense of drugs do trials, but they do have to do some tests, and the four tests that were done came in positive, and basically the stuff works, that's the conclusion. 

They are already selling it for the regeneration of bone, and now this one on the Wednesday showed that it works on nerves. Paul Anderson is talking the thing up hugely of course, and reckons that there are billions of dollars in the market available for this substance. He reckons it will become the standard scaffold for use in operations. He's got a whole lot of global patents to protect them. Paul Anderson and the rest of them are off and running. 

Here's Paul Anderson, the CEO of Orthocell. 

Obviously, the shares have done a big run in the last little while after you announced some nerve repair results.  But before we get onto that, tell us a bit about the background of the business, because it was founded in 2006.  Where exactly did the technology come from that it's founded on? 

Yeah, so we work specifically within the regenerative medicine space, and our target to choose within the regenerative medicine space is, what's called the musculoskeletal system.  The musculoskeletal system is effectively the framework that supports the body, the bone, the tendon, the nerve tissue and muscle, of course.  We're focused on developing collagen-based, or a biological medical device and the intellectual property for that came from the University of Western Australia, which has a really, really strong track record in this MSK, as it's called, regenerative medicine space.  We were able to licence some technology out of that university.  We then set about raising some capital, some venture capital, and we’ve really now gone through a development phase in the company, and now transitioning through into a really strong execution phase, with our products reaching market, and also, as in the nerve announcement, making some very amazing clinical impacts.

How much money did you raise, and where did it come from? 

We existed as a private company, and we went and did an IPO about four years ago.  Over the life of the company we’ve spent about $30 million, of which has really driven not just a single product to market, but an actual platform of opportunities around this collagen-based medical device. 

It's interesting you called it a device, and collagen-based, but it's a substance, right?  It's not an actual physical piece of machinery, it's a substance, right? 

Yeah, correct.  So, what we do is...  I guess the best way to describe it this way, it's often described as a scaffold, and I think if you think about human tissue as when it's tired or degenerated, or injured as a tired old building, and that scaffold is applied to the outside of the building.  In this case it's a scaffold applied to tissue that's repairing.  And you see workman run around and fix the building, and those workmen are cells effectively.  It's the body healing itself.  Sometimes tissue requires help to heal itself, and in particular, bone, tendon and nerve tissue all suffer from these degenerative pieces. 

What we've developed is a scaffold that's used in conjunction with surgical repair tissue, that enhances that tissue repair, provides a better quality and generally faster outcomes than what is currently experienced. 

Okay, so the question is, firstly, what exactly did the University of WA discover and what's the royalty deal, or the licensing deal?  Do they get ongoing royalty, or what? 

Yeah, we've completed what was a licence and acquisition agreement with the university, we originally licensed the technology and then as we proved the technology and showed that it was effective, we then acquired that.  We acquired the intellectual property from the university, and the university benefited from a...and also an ongoing royalty around our products as well.

Right, so they do get a royalty ongoing, do they?  Can you tell me what it is? 

They do indeed, I'm not sure that's been made public as yet, but it's 3.3 per cent royalty that we pay back through to the university. 

Right, okay.  I'm just wondering what the regulatory process is for something like this, because I take it, it's not a drug, so therefore you don't have to go through phase one, two and three trials and so on, but you do have to go through some trials don't you? 

Yeah, correct.  It is a very different pathway to a drug, or a stem cell approach.  It provides very, very well-defined pathways to market.  It's rated as a medical device, it's a biological medical device class three, which does require some further diligence, over say, a metal device.  But we have recently had our first product approved in market in Europe, so cell growth or dental bone repair has been approved and received the CE Mark within the European market, which enables us to commence a marketing authorisation there.  These technologies have clear, defined pathways to market both in Europe, Australia, and the US, which is our major target regions.

I think, on the 8th of May, which caused the share price to almost quadruple I think?

Yeah, it was certainly a fantastic reaction from the market on what was a really exciting announcement, both for us and the surgeon involved, and in particular the patients who benefited.  One of our core focuses of use of this collagen scaffold, or Cell Grow as we call it, was for the regeneration of peripheral nerves.  These are catastrophic injuries that effect people’s ability to have motor and sensory function in their legs and their arms.  Effectively what happens is that you get a crush injury, which affects your ability to lift your arms.  Some cases it's completely paralysed, as was some of our patients.

The surgeons have to try and re-join these nerves and repair these nerves, and our collagen medical device is used in that surgery now to improve the operative technique, but most importantly, to improve the patient outcome.  And it was those results that we announced of the first four patients, who had completed the study, that we announced to the market last week. 

So was it a study?  Or was it actual operations and people were in fact helped by it?

Yeah, absolutely.  This was a clinical study, so this was a study that was involving human patients, patients that had received these injuries that resulted in lack of use of their limbs.  These are actual patients that showed more rapid improvement and a higher quality improvement after the use of Cell Grow for the indication of joining these two nerves back together.

And so it's the bottom line for the announcement, that really for the first time, you're sure that Cell Grow works on nerves. 

Yeah.

Is that right? 

No, absolutely that it works on nerves.  This is certainly the first clinical outcome data that we've released to the market around this nerve indication.  This is a massive global market with, you know, over $150 billion market size in the US alone.  To give you an indication that the current approaches generally result in, you know, in about 70 per cent of the patients receiving some kind of benefit in a moderate way, and in this study what we were able to demonstrate, was up to 90 per cent of the patients that we’ve treated so far, have received a near normal response, and those patients who received that near normal response in an earlier time frame than is generally expected.  There was the quality of the repair and there was the timing of the repair that was very impactful.  I think in essence, you know this is a very exciting opportunity for our company, and really what it does, I think, Alan, and what it has done is validated the hard work we've been doing over the last two years in setting this platform in place and really taking it from a product that's in development to now products that are being registered in global markets, and that have huge potential moving forward. 

Did those results the other day, result in lots of orders coming in?  Can you sell it now?  Are you on the market, are you selling the stuff? 

We selling our first product in market in Europe, currently not available in Australia.  That's for bone regeneration.  And we'll be following up those regulatory applications with nerve and an application for tendon as well.  We have three tissue types that we're focused on.  The largest of those markets, and the most exciting, is the nerve opportunity.  But, certainly the tendon market and the bone market are equal, are very exciting opportunities for us as well. 

The interesting thing here, Alan, is that the same principles that apply for the regeneration of the nerve tissue, also work within the bone and the tendon.  We’re talking about regenerative medicine themes here, that we've been able to capture and turn into a medical device that's advantage is in repair of soft tissue. 

What do you charge for it? 

Yeah, good question.  We haven't yet priced the nerve product because the clinical results are still growing, and the evidence that this has the potential to be a blockbuster continues.  But in essence to your question, these are affordable medical devices within the current medical system.  They attract pricing from anywhere between $500 and $2500 for instance.  Although those things are still yet to be ultimately defined. 

Do you mean per application? 

Per application, that's right.  What we've done here is we've produced a very high-end collagen-based biological medical device, a scaffold that helps to improve patient outcome and of course benefit the society from a broader cost economic impact perspective. 

And is it always to be used in operations?  Or do you expect that in some of the applications, perhaps with bone, and other ones, that you would just apply the stuff and let the thing heal itself?

Yeah, that's an excellent question.  I think that what Orthocell has been very strong at is being very focused on producing its very exciting spearhead products.  But we also have an exciting pipeline of products that are in our portfolio, and certainly the concept of an injectable collagen substrate to assist in regeneration of medicine is a highly desired potential development and we strongly believe that having the best in class collagen medical device, sets us up beautifully for transition into that style of intervention also. 

Yeah, I mean it leads to, and I'm just wondering who the customers are; is it the hospitals with surgeons asking for it to assist their operations, or is it doctors on prescription through pharmacies? 

Yeah, no, so this is a surgical approach, so this is a product that is demonstrated to orthopaedic surgeons, the clinical data is amassed to provide the evidence-based approach to demonstrate the quality and the improvement in patient outcome.  And from that time point, you then go through an introduction into the clinical sphere, treating patients and using the product on patients in the general community.  This is a surgeon led, hospital driven intervention. 

Tell us about the patent protection that you've got.

We've been extremely pleased with our patent developments, we have over 82 patents now.  We have a strong patenting position with Cell Grow, with patents approved in the US, in Europe, Australia and other major jurisdictions.  We have been very happy with the position, that we've been able to give ourselves within this market, that gives us good patent protection over a good number of years. 

Do you think it's an achievable ambition for you to be a standard scaffold in all nerve, tendon, and bone regeneration operations? 

Yeah, absolutely.  The advantage that we have is that the quality of the ultra-structure of this scaffold, the very unique characteristics of it, mean that it can stand head and shoulders above any other scaffold in the marketplace today.  And part of the reasoning for that, as a regenerative medicine company, we understand absolutely the interaction between the tissue, the cells and the scaffold and what that scaffold needs to look like.  Historically, the scaffold business has been about strength, what's the strongest piece of tissue we can use to help the repair.  Now it's about strength, it's about integration, degradation, and many other characteristics that we have been able to put into this product.  We see that this has had three initial indications in bone, tendon and nerve repair and that they can be a market leader in this space, so we're very excited about the future, very excited about the clinical data that we've generated and excited about the regulatory pathway that we are on. 

What are surgeons using for scaffolds at the moment? 

I'll give you an example, in the tendon space, the most favourable scaffold in the United States today is a product which is taken from human skin.  It's human cadaveric or humans who have died, who donate their tissue, and they take the skin.  You know, that's a very basic approach if I may say, and one that doesn't really have much of a regenerative medicine role to play.  And so, what we're seeing is that many of the other scaffolds in the market are really at the generation one phase, at the very early phase of development in relationship to what a scaffold should look like.  That puts us in an extremely strong position globally, to forge, not just regulatory approval processes, but importantly partnering into these large markets for these exciting products. 

And how big do you reckon the market is? 

Well, you know, the nerve market, the addressable market for us is greater than $1.1 billion US, Europe, Australia and some of those other major markets.  The tendon market is in excess of a billion dollar market surgically, for the surgical repair of tendons.  And the dental market for bone that we are currently in, is one of the fastest growing regenerative medicine market segments in the world.  Today, we are approaching $1 billion in size.  These are three products that are clearly differentiated from any competitors.  They're three products that have defined pathways to market, and they’re three products that surgeons are telling us are easy to use and give them an advantage.

Do you mean to say that those numbers you just quoted are potential sales for you?  Or that those are the total market of which the scaffold is a portion? 

Yeah, let's be clear, they're the addressable markets that we will be moving into.  We would obviously need to gain market share and forge our way through into those markets.  We, as a strategy aren't looking to employ a full-blown workforce within the US.  Really for us, we have developed these and de-risked these products, have clinical data, regulatory approvals in some markets.  If you look at what is attracting large acquirers in this space, there's a number of different pieces, and that is number one, having a product at least approved in a major regulatory market.  Secondary to that is attracting some of the very best key opinion leaders in the world to use your product, which we've been able to do.  And then the third piece of course is to introduce these products into market and to see what kind of reaction they gain.  We've been delighted that we've been able to make a real splash in the bone market where we have approval and making a real impact in Europe.  And of course, with this nerve result and announcement, has attracted even greater attention to this opportunity. 

What about beyond nerves, tendons, and bones, is there a wider application of the scaffold for other regeneration?

Yeah, there is indeed, and as I mentioned, these concepts are similar, and one of the biggest areas of current need is in women's health and herniation in women's health is a problem that is currently has a real void to fill because of some issues that it had on previous products.  The global hernia market is probably the most common operative procedure today, about 27 per cent of all men suffer from hernias.  We currently use synthetic scaffold, so we believe that this scaffold can be used for a broad range of soft tissue reconstruction applications, and be applicable in many areas around the body. 

What do you think the company could end up being worth, when you come to sell it to some other large company?  Are we talking $1 billion? 

Look, I mean, I think that we are only beginning to realise now, in a full sense, the true sense, the true value of some of these technologies, and we certainly believe that there's very strong comparables for us as a company to justify driving number one, our market cap, continue to drive that through $100 million and beyond.  We've also seen good comparables from licensing and acquisition that set us up, so I think that the sky's the limit for this company currently with multiple shots on goal, with a genuine platform, which is attracting a tremendous amount of interest because of the excellent clinical outcomes that we've been able to demonstrate. 

Do you think you'll need to raise more money before you get to some sort of breakeven?

Yeah, I think that’s always a consideration.  Obviously, increase in revenues, the potential for licensing deals, and the like, help to mitigate that need to a degree.  But, we're very concentrated on making sure that we have a secure pathway and runway to execute on these three really well-defined opportunities. 

Yeah, well according to your latest quarterly, you're down to three and a half million, and you're burning more than a million a quarter, so it's not too far off for another capital raising is it?

Yeah, look I mean, there is certainly the requirement for us to make sure that we, as I say, enable us to execute our pathway, that's certainly something that we'd be looking at.

But at least you're doing that above 50c this time. 

Absolutely, certainly, I think the market cap now is more reflective of the development phase and we certainly believe the market has understood that we were certainly undervalued, and we’ve seen that turnaround, it certainly makes the discussion a lot easier. 

Very good to talk to you Paul.  I appreciate it, thank you. 

Thanks, Alan. 

That was Paul Anderson, the CEO of Orthocell.