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Advanced Tissue Sciences, Inc. (NASDAQ: ATIS)
Market Data:
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ATIS Corporate Information:
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Summary Investment Considerations
Advanced Tissue Sciences, Inc. ("ATIS") is a leading tissue engineering company developing living human tissue products for therapeutic applications such as tissue repair and transplants. ATIS has one FDA-approved product (TransCyte™), one product in Phase III clinical trials (Dermagraft®), and a product pipeline that includes tissue engineered cartilage for orthopedic applications, engineered cardiovascular tissues such as blood vessels and heart valves, and products with applications in cosmetic and reconstructive surgery. ATIS has teamed with Smith & Nephew plc, a world leader in wound care, for the commercialization of TransCyte, Dermagraft, and ATIS' cartilage products.
We believe ATIS is significantly undervalued given its product pipeline, its technology platform, and its relationship with Smith & Nephew. We are initiating coverage on ATIS with a BUY rating, and recommend purchase of ATIS for investors tolerant of the risks associated with micro-cap and small-cap equity investments.
I. Human-Based Technology -- Integrated Strategy Addressing Large Markets
- ATIS is using a fully human-based approach to growing human cells into functioning human tissues and organs for transplantation. Large target markets include burns, chronic wounds, orthopedic applications such as cartilage, ligaments and bone, and cardiovascular tissues such as heart valves and vascular grafts.
- ATIS has a strong intellectual property porfolio, with 49 issued patents worldwide and licenses to 18 MIT patents.
II. Products and Pipeline -- One FDA-Approved Product, Another in Phase III Clinical Trials
- TransCyte has been FDA-approved for the treatment of second and third-degree burns. TransCyte consists of a sheet of bioengineered dermal tissue with an ultra-thin synthetic covering.
- Dermagraft, a living, human dermal replacement product designed to treat chronic skin ulcers (eg. diabetic foot ulcers, venous ulcers, etc.), is currently on the market in Canada, the U.K. and several European countries, and is in pivotal Phase III trials in the US.
- Pipeline Products: Includes cartilage and ligaments for orthopedic applications, heart valves and vascular grafts for cardiovascular applications, and injectable collagen for cosmetic and scar revision, urinary incontinence, surgical applications, device coatings, and cosmeceuticals.
III. Strong Corporate Partner -- Smith & Nephew plc
- ATIS and Smith & Nephew plc entered into a joint venture to globally market Dermagraft, TransCyte, and the future cartilage products. Smith & Nephew is a global healthcare company with over $1.7 billion in annual sales and a strong record of developing, manufacturing and distributing a diverse array of tissue repair products focused primarily on bone, joints, skin and other soft tissue.
IV. Coming Milestones -- BUY Recommendation
- We foresee a meaningful flow of new events for ATIS based upon the generation of revenues internationally, the presentation of clinical data at leading scientific conferences, potential partnerships in its cardiovascular and other program areas, and the launching of TransCyte and Dermagraft in additional foreign markets.
- ATIS, currently near its 52-week low, is trading at an excessively large discount to its peer tissue-engineering group as well as other biotechnology companies with promising products in late Phase III clinical trials. We recommend purchase of ATIS common stock.
Company Overview & Report Summary
We are initiating coverage of ATIS with a BUY recommendation with this abbreviated research report. We plan to publish a full-length report, with a detailed analysis of ATIS, its products and the competitive environment (including a detailed financial model), in the near future.
ATIS is a leading tissue engineering company focused on the development of human-based tissue products for therapeutic applications. ATIS, whose strategy is differentiated from the competition by being wholly human-based, is currently focusing its efforts on skin, cartilage and cardiovascular products. The Company's first commercial product, TransCyte, a temporary covering for partial-thickness (or second-degree) burns and full-thickness (or third-degree) burns was approved by the US FDA in March and October 1997, for each respective indication. The Company's second commercially available product, Dermagraft, a living human dermal replacement, was approved for sale in Canada in August 1997 and was launched in the United Kingdom in late 1997. Dermagraft is not yet approved for commercial sale in the US, but is available under a Treatment IDE (Investigational Device Exemption) for the treatment of diabetic foot ulcers. The Treatment IDE allows ATIS to recover manufacturing and distribution costs, but does not allow for active promotion until final product approval. Both TransCyte and Dermagraft are being commercialized through a joint venture with Smith & Nephew plc, a leading global wound-healing company.
Dermagraft's Regulatory History -- Creating the BUYing Opportunity
In January 1998, the General and Plastic Surgery Devices Panel of the Medical Devices Advisory Committee to the FDA recommended the approval of Dermagraft for the treatment of diabetic foot ulcers, with the conditions that ATIS perform a post-marketing study to confirm efficacy and provide physician training. In June 1998, the FDA indicated that the Premarket Approval (PMA) application for Dermagraft was not approvable without the supporting data from the additional clinical trial. Dermagraft is currently in the second Phase III trial for diabetic foot ulcers, and the Company believes it will be in position to file another PMA with the new data by the end of 1999 or early 2000. This trial is to include up to 30 treatment centers and enroll a total of 330 patients. Unlike the initial Phase III trial, a 32-week follow-up evaluation will not be required.
We have interviewed clinicians that participated in the initial Dermagraft clinical trials, and/or analyzed the data from the initial trials including the Phase III trial. The clinical experience -- Dermagraft for diabetic foot ulcers -- was universally positive, with most clinicians expressing dismay at the FDA's decision to not approve the product given the statistical significance of the results.
Impact on ATIS Valuation: After having trading at a price as high as $11.38 in early May 1998, ATIS common shares lost approximately 50% of their value following the announcement of the non-approvable letter, and has traded downward since that time. Given the technology platform, the products being marketed both domestically and internationally, the value in the Smith & Nephew partnership and the longer-term pipeline potential, we believe the market has been excessively punitive by overselling ATIS shares to their current level.
We are recommending purchase of ATIS for investors tolerant of the risks associated with micro-cap and small-cap equity investments.
Risk Considerations
This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of ATIS Corporation. For a complete description of risks and uncertainties to ATIS's business, see the "Risk Factors" section in ATIS's SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:
- Market risk: Like many small-cap and micro-cap stocks, ATIS shares are trading near their 52-week low. Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
- Business risk: ATIS has limited experience in the manufacturing, marketing, and the distribution of engineered tissue. Many of its products are in the early stages of development. Additionally, ATIS intends to license rights to its products to other companies. There can be no assurance that these licensing agreements will be completed, or that the market will accept any products under development.
- Regulatory risk: There is no guarantee that ATIS's products will be approved by the US FDA or international regulatory bodies for marketing in the US or abroad.
- Competitive risk: The tissue engineering industry is extremely competitive, in particular because of its large market potential. Many companies are developing products for wound care and other therapeutic indications targeted by ATIS.
Sources for Additional Information
The following are website addresses offering related information, and links to other sources of information.
www.Advancedtissue.com ATIS's corporate website
www.SmithNephew.com Smith & Nephew's corporate website
www.SmallCapsOnline.com SmallCaps Online's site for company information and research
www.FDA.gov US Food and Drug Administration homepage
www.sec.gov US Securities and Exchange Commission, with links to EDGAR filings
The information in this report has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC may have performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC or persons associated with SmallCaps Online LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. This material or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document that is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1999 by SmallCaps Online LLC. All rights reserved.