This is a first look note on Biostage, Inc. (Nasdaq: BSTG) which was spun out of Harvard Bioscience (HBIO) Nov. 2013. We started taking a closer look at BSTG last week and what we saw seemed very intriguing indeed. Impressive, life saving organ growing technology that has been successfully transplanted into several patients yet their stock is currently getting crushed based on negative investor sentiment, largely retail it seems, following the sudden departure of the CEO a few months ago and persisting negative commentaries regarding a surgeon who had been closely associated with the company and completed the initial transplant surgeries. The stock closed at $1.67 yesterday for a $17M market cap, despite a $12M cash position, which even burning $1.7M in Q1’15 places a very low valuation on technology with such substantial potential.
Our non technical explanation of what they do is that BSTG has developed systems and technology that allows them to grow organs/tissue from your own cells which are from your bone marrow. Like in vitro fertilization but different, instead of an embryo, they are able to provide you with a new trachea or other wind passage (under development).
So far trachea have been grown & transplanted successfully on a compassionate use basis. The BSTG method addresses the problem of replacing critical breathing organs that have been damaged by injury or disease, and it addresses the rejection issues of transplants. The procedure/organs are not yet approved but they have put forth a clear plan to seek such approvals in the US and Europe and they are publicly affiliated with the Mayo Clinic on their Hart Trachea product. Hart plans to file an Investigational New Drug (IND) application with the FDA & similar European body by June 2016 and the Company recently confirmed they are on track with this goal for the BSTG Trachea product which has been granted orphan status by the FDA (Sept 2014). This status provides market protection for 7 years. [Note focus is now Esophagus – with FDA IND filing targeted for end of 2016.
So what’s the business we asked, as the Company was spun out by a medical equipment company. While BSTG has developed an array of products to enable the growth of these organs, the business is to grow and sell organs at prices roughly in the $100-200k range depending complexity, etc. The gross margin should be easily in the 90% range at normal production levels as the actual Costs of good sold are modest, it’s just the know how, personnel & equipment that’s required to make the magic happen.
And what’s wrong with the picture / driving the stock downward:
1) The pioneering MD closely associated with BSTG and who performed the initial transplants has some credibility issues in the medical world. For this reason he was removed from the company year and a half ago and the BSTG program was moved from Russia to US & Europe (sounds like a good idea for market credibility), however the perception and stigma remain – probably because the vacuum left by this physician has not yet been visibly replaced. As a result the physician remains a perception issue for the company as he’s really an industry renegade; the sort of personality that brashly pioneers new things while breaking some of the known conventions. Said another way, not a physician who’s strong on following protocols, adherence to data collection guidelines and postop care, etc. It is in these areas where he is facing challenges and those perceptions seem to have cast a cloud on BSTG’s technology and future, despite all the other corroborating evidence of efficacy, credibility and potential.
2) Also, founding CEO David Green “resigned” a few months back but what seems clear is he wasn’t getting the job done with the company and so it would appear that corporate governance has responded appropriately. Making the departure more impactful is that Mr. Green left his post as CEO of the parent company to lead BSTG following its spinoff. A big selling point of the spinoff was that the CEO and CFO of HBIO were moving to lead BSTG and now the CEO is gone – and the CFO remains now with the added title of acting CEO as well. Tom McNaughton seems very bright and capable from our conversation with him.
3) Absence of major news flow + overhang from offering done in February at $1.75
Yet we like the story because:
1) The technology is real, has worked on several patients, is moving into regulatory approval processes next year and provides a solution where there really is none. [Since this post, the new Cellframe Platform has been launched and achieved ground breaking results in large animals, focused on the esophagus. The prior trachea work is no longer commercially relevant given the new Cellframe approach [different material, different stem cells and far stronger response.]
2) The approach is supported by institutions such as the Mayo Clinic and others that should come to light later this year.
3) The BSTG team seems strong: The medical director is very impressive – comes from the DeBakey Heart and Vascular Center in Houston; the CFO & acting CEO seems very solid and the VP R&D comes from Organogenesis where he developed tissue engineered products. Added great CEO from Genzyme in Jim McGorry.
4) The valuation seems cheap given $12M in cash at 3/31/15 and a market cap of $17M based on yesterday’s close of $1.67. The Q1 cash burn was $1.7M. Not sure where the stock goes near term – but it does seem an enterprise value of $5M is probably not appropriate for a company of this genesis and market potential. This is where Mr. Buffets “voting machine” aspect of the market can make you a lot of money… when the “weighing” aspect of valuation catches up with a business of such potential opportunity.
Like all situations, we are of course interested in the IR opportunity should one present itself, but in the interim we thought we should profile another idea on CG Focus List as we’ve been very remiss in posting our ideas on this forum. [We have since been hired as IR counsel – our firm Catalyst Global – and are working through October 2016 when the biotech-focused IR firm Jenene Thomas Communications takes over.
Please let us know what you think about BSTG.
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