AspenBio: Bursting with Possibilities

Includes: BIOP, NVS
by: Dan Weiss

AspenBio (APPY) is a Colorado-based biopharmaceutical company focused on the development of a test for appendicitis and for improvements in the area of animal reproduction where the company has formed a partnership with Novartis (NYSE:NVS).

Appendicitis is swelling and inflammation of the appendix which typically results from a bacterial infection. If an appendix is inflamed, it will often result in a bursting if it is not removed. This bursting spreads an infection throughout the body which is potentially life-threatening.

The most common symptom of appendicitis is abdominal pain, which often occurs without notice. Other symptoms may include nausea, vomiting, loss of appetite, diarrhea and an inability to pass gas. It is estimated that approximately 7% of the U.S. population is affected by appendicitis at some point during their lifetime. Although anyone can have appendicitis at any age it is most common to those between 10-30 years of age.

Up until 1998, potential cases of appendicitis were diagnosed through a physical examination where if an individual were to experience classic symptoms of appendicitis the individual would have their appendix surgically removed.

According to a study by the American Journal of Emergency Medicine, approximately 16% of the individuals which had their appendix removed did not have appendicitis. In 1998, CT scans were incorporated into medical procedures to attempt to improve overall diagnosis and although they have lowered false positives, the rate of false positives has stabilized and is still at relatively high levels.

The average cost of a CT scan is about $700 in the U.S., has about 500 times the radiation of a chest x-ray and due to the time to have the procedure completed and then read by a physician can increase the risk to a patient of a burst appendix.

In an article posted by the New England Journal of Medicine, it was reported that up to 2% of all cancers in the U.S. will be caused by CT scans so although it does reduce the incidence of false positives it is with potential intermediate and long-term risks.

AspenBio has developed a blood based diagnostic test, known as AppyScore, that is a rapid assay system which the company hopes to have approved by the FDA for the detection of appendicitis. The company has had a series of successful clinical trials which utilize the MRP 8/14 biomarker which has shown high negative predictive values.

In AspenBio’s prior clinical study of AppyScore it was found that at a clinical threshold of 15 with a normal white blood count, the negative predictive value was 98%.

On June 30, 2009, the company announced that they had filed for a 510(k) with the FDA for its ELISA test as a predicate for the rapid assay device which will include the reader and cassette. It is anticipated that the FDA will make its decision on this initial ELISA in late 2009/early 2010. The company will then conduct one additional trial on the instrument and reader with the ELISA as a predicate with final FDA approval and product launch in the second half of 2010.

The potential market for AppyScore is tremendous as nearly 8 million emergency room visits each year in the United States are due to abdominal pain with approximately 250,000 people having their appendix removed every year.

AspenBio anticipates that its test will take about 15 minutes to administer, cost only a fraction of what a CT scan costs, not have any of the radiation issues of a CT scan and be easy to administer with other blood work which is completed.

Several independent sources have put the potential market size for AppyScore, if and when its FDA approved at $1 billion globally per year (all for a company with a current market cap of $66 million and an enterprise value of $54 million).

In my conversations with the company, they mentioned that they anticipate working on international approvals once the first ELISA finding is approved. In addition to the AppyScore device, AspenBio has a partnership with Novartis focused on bovine reproduction which has a potential market according to the company of approximately $230 million.

The management of the organization is also impressive for a company of its size. In January 2009, AspenBio added Daryl Faulkner as its interim CEO and Executive Chairman. Mr. Faulkner has a long history of success including 15 years at Abbott Labs and more recently as CEO of Diagen (who was acquired by Qiagen) and with Invitrogen (bought by Life Technologies Companies).

The rest of the management team is also impressive with significant background in developing products as well as in mergers and acquisitions.

At a share price of $2.10 per share, the stock looks very attractive at current levels. The company has at least two products with significant market potential, one of which, could be a multi-hundred million or even billion dollar per year device.

If the AppyScore product is approved by the FDA, I expect it to be quickly accepted by insurance companies (much lower cost than CT scans and with lower false positive readings) especially in the new era of controlling health care costs.

As of its latest quarterly report, the company has approximately $15 million in cash and a burn rate of about $2.5 million per quarter the company has sufficient capital to the launch, however, it would not surprise me to see one capital raise to have extra cushion into next year.

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