Nephros Awaits Two Pending FDA Marketing Clearances

Jul.29.09 | About: Nephros, Inc. (NEPH)

Nephros (OTCQB:NEPH) is a medical device company which originally developed HDF products for ESRD patients and has since expanded its core business to include water filtration, including FDA marketing clearance for the company's DSU filters in early July. A summary of the company's products includes the following:

  1. The OLpur MDHDF filter series is already sold in Europe and currently consists of the company's MD190 and MD220 diafilters, which represents the only filter designed expressly for HDF therapy and includes proprietary Mid-Dilution Diafiltration technology;
  2. The OLpur H2H is an add-on module designed to allow the most common types of HD machines to be used for HDF therapy;
  3. The OLpur NS2000 system is a stand-alone HDF machine with associated filter technology.

On 11/14/08, Nephros submitted a 510(k) application to the FDA for approval of its Hemodiafiltration (HDF) products for End Stage Renal Disease (ESRD) in the U.S. market. Following its review of the application, the FDA requested additional information, and Nephros replied to the Agency on 3/13/09.

Per FDA guidelines, the FDA has 90 days to review the additional information provided by the company, but a response from the Agency is still pending for the OLpur H2H HDF Module and OLpur MD 220 Hemodiafilter.

On 10/7/08, Nephros filed a 510(k) application for approval to market its Dual Stage Ultra-filter (DSU filters) to dialysis clinics for in-line purification of dialysate water. On 7/1/09, Nephros received approval of the DSU to be used to filter biological contaminants from water and bicarbonate concentrate used in hemodialysis (HD) procedures.

Nephros also plans to market the DSU filters to the over 5,000 hospitals in the U.S. for their showers and faucets to remove a broad range of microbes and other toxic substances which pose a threat to patients with compromised immune systems.

In addition, the 2006 U.S. Defense Department budget included an appropriation for the U.S. Marine Corps for the development of a dual stage water ultra filter. In connection with this Federal appropriation of about $1 million, Nephros is developing a personal potable water purification system for use by soldiers at war. Nephros commenced work on this project in January 2008 and has billed approximately $530,000 through the 15 months ended 1Q09.

In December 2007, the U.S. Department of Defense Appropriations Act appropriated an additional $2 million to continue the development of a dual stage ultra reliable personal water filtration system. This additional appropriation expires in September 2009, and Nephros submitted a proposal to the Office of Naval Research in February 2009 without a final agreement reached to date. The company has also proposed the DSU to a variety of government agencies as a solution to provide potable water in emergency situations, in addition to investigating other commercial, industrial, and retail marketing opportunities for the DSU technology.

As of the company's most recent SEC 10Q filing, the company stated that its products included in the OLpur MDHDF filter series are more effective than any currently marketed products for ESRD therapy because of their ability to better remove larger, heavier toxins which are known in the industry as middle molecules from the blood. The accumulation of middle molecules in the blood has been related to such conditions as malnutrition, impaired cardiac function, carpal tunnel syndrome, and degenerative bone disease in ESRD patients.

Upon FDA marketing clearance, Nephros believes that the OLpur H2H will expand the use of HDF as a cost-effective and attractive alternative for ESRD therapy with the OLpur H2H and MDHDF filters representing the first and only FDA-cleared HDF therapy available in the U.S. Relevant to the current healthcare reform debate, the company's products which are pending FDA marketing clearance will provide a cost-effective solution that can reduce overall healthcare costs while improving patient outcomes. This combination of effects is possible because the OLpur MDHDF filter series and the OLpur H2H will provide these benefits to ESRD patients at competitive costs and without the need for ESRD treatment providers to make significant capital expenditures.

By removing a broad range of toxins from the blood in a well-tolerated, patient-friendly process, the need for hospitalization, medications, and supportive care for ESRD patients is expected to decline. A published study which analyzed over 2,500 ESRD patients demonstrated that HDF reduced mortality risk by about 35% when compared with standard HD. Nephros is also developing the OLpur NS2000 system to become the most cost-effective stand-alone HDF system available on the market.

Nephros posted 1Q09 revenue of $631,000, representing a gain of about 63% from the year-ago period thanks to the contract with the Office of U.S. Naval Research and $24,000 in sales of the company's DSU in the U.S. this year which did not occur in 1Q08. Sales of MD filters in Europe declined by $91,000 during 1Q09 compared to the year-ago period, which consisted of unfavorable foreign exchange rates and a 13% unit sales volume decline.

The company stated that the decrease in unit sales was attributable to production delays that resulted in deferred shipments rather than a decline in the number of customer orders. Net cash used to fund operating activities for 1Q09 was about $660,000 versus $1.2 million in the year-ago period. Nephros ended 1Q09 with cash and equivalents of $1.65M, zero debt, and about 38.2M shares outstanding for a market cap of about $47 million based on a closing price of $1.23/share on 7/28/09.

With two pending medical device 510(k) submissions pending FDA marketing clearance, a low cash burn rate, and the prospect for continued sales growth based on new approvals and new market opportunities; Nephros is a buy for aggressive investors in the bio-medical space with a high risk tolerance (as the beta for the stock is 4.67 according to Yahoo Finance).

Additionally, the deferred European sales during 1Q09 should improve results in subsequent quarters and the possibility exists for additional appropriations for the company's DSU technology (up to $2 million) from the Department of Defense before the September 2009 expiration.

Disclosure: Long NEPH.OB