There was a contrarian article by Biotech Sage on Seeking Alpha early last Friday afternoon, jarring the InVivo (OTCQB:NVIV) investor community. At first glance, I deemed it a convincing case even though the words are poignant and emotional. Later on, after poring over the evidence listed by the author and doing my own due diligence work, I do not concur with Biotech Sage on most of the fronts. I would like to state my findings and analysis as in the following.
He organizes his points in two parts, in the first part of this article, he reviews: (I) the nature of spinal cord injury, (II) the current management of SCI, and (III) emerging therapeutic approaches to SCI.
This first part is of no question. The author took much effort elaborating the deficiencies of existing treatment to spinal cord injury (SCI), which supports the tremendous market potential of Invivo's products. He literally took the contra side of his point V, second part:
V. HDE approval unlikely to generate meaningful revenue. FDA approval of NVIV's scaffold product through the HDE regulatory path is unlikely to allow for any meaningful product sales. Management's assertion of per unit pricing of $60K or more is inconsistent with current HDE guidelines.
It is indisputable that currently there is no effective approach to treat SCI patients at all. The FDA approved Invivo's Humanitarian Devices Exemptions (HDE) request in April for this consideration too. But I am dubious about his assertive statement on "$60K unit pricing inconsistent with current HDE guidelines" . There is no citation of the corresponding "HDE guideline" in his article. The FDA website states:
An Humanitarian Use Device (HUD) is a device that is intended to benefit patients by treating or diagnosing a disease or condition that affects or is manifested in fewer than 4,000 individuals in the United States per year. A device manufacturer`s research and development costs could exceed its market returns for diseases or conditions affecting small patient populations. The HUD provision of the regulation provides an incentive for the development of devices for use in the treatment or diagnosis of diseases affecting these populations.
Apparently, the FDA is concerned that companies are not willing to spend money on rare but severe disease research; hence attempts to incentivize medical device manufactures to develop new products for small-sized patients by this HDE path. The FDA cares only about the efficacy and safety profiles of applying devices while a company's pricing strategy is not something the FDA regulates or dictates.
The second part states:
IV. Existing data do not demonstrate any clinical utility. Contrary to the company's assertions, detailed non-human primate data, presented to date, fails to demonstrate clinical utility for the biomaterial scaffold developed by NVIV. Strikingly, management consistently excludes such data from its investor presentations.
The management would have nothing to tout if it's not about the clinical utility of the bio-scaffold product. And if clinical utility is not compelling, the stock price of this company won't be soaring.
Given the same existing pre-clinical data, my interpretation disagrees with that of Biotech Sage as detailed below:
First, let's look at the rodent's data in 2002. The chart cited by Biotech Sage is originated from the scientific journal: Proc Natl Acad Sci U S A. 2002 March 5; 99(5): 3024-3029, where rigorous statistical analysis is conducted and a conclusion is made that "Implantation of the scaffold-neural stem cells unit into an adult rat hemisection model of SCI promoted long-term improvement in function (persistent for 1 year in some animals) relative to a lesion-control group. At 70 days postinjury, animals implanted with scaffold-plus-cells exhibited coordinated, weight-bearing hindlimb stepping."
Based on the exciting observation of the rodent study, the researchers documented a possible mechanism for preventing secondary injury process and suggested this new approach to SCI may serve as a prototype for multidisciplinary strategies against complex neurological problems.
To date, Invivo has conducted three primate studies in 2008, 2010 and 2011, respectively.
The experiment in 2008 is a pilot study with 4 primates. Given the extreme high cost of experimenting on non-human primates and animal care concerns, the result of this pilot test was compelling enough to move into the expansion stage, which was conducted in 2010.
Biotech Sage made several observations upon the 2010 16-primate study. I cite the exact same chart below and would like to go through the points one by one:
The author: By day 44 (the day to which data is presented in the 2008 study - see dashed line in figure 3) the scaffold seeded with human neural stem cells group exhibited a mean neuromotor score of around 6. This contrasts with a score as high as 15 in the prior study by day 44 in the same treatment monkeys (see figure 2). A full 9 point difference (out of a total score of 20).
Comparing the 44-day neuromotor score between the 2008 pilot study and the 2010 large-scale study is of no significant scientific meaning. The experiment design is not supposed to be identical in order to generate same benchmark scores. The score system itself allows for variations. Only the comparison among groups within the same experiment provides meaningful metrics. What's more, the author uses the average number of 2 objects to conclude it should be scored 15 in the pilot study, which per himself, is not mathematically reasonable.
The author: "In contrast to the prior study, the scaffold alone group seemed to perform better than the group implanted with the scaffold seeded with human neural stem cells."
Again, these two experiments are not comparable on groups. The pilot study used 1 primate without any treatment as control, 1 primate treated with scaffold only, and 2 primates treated with scaffold + neural stem cells. However, in the large-scale and more rigorous 2010 study, there are two control groups, one without any treatment, the other with standard/existing treatment - hydrogel and methylprednisolone; two experimental groups, one with scaffold alone, the other with scaffold and growth factors. The scaffold with neural stem cells was not in the 2010 result. The chart clearly shows treated groups improved better than the no-treatment group. Given the size of n=4, there shall be statistical analysis done and marking out those significant different points. Biotech Sage is quite right to question why the management excluded some information. However, it's not the bar or standard deviation missing in the chart. I suggest statistical analysis should be included in their notes.
With regard to the last point by the author:
VI. Full approval would be complex and costly. Demonstration of the scaffold's clinical utility to a level that would enable significant reimbursement and sales would require lengthy, complex and costly registrational studies. Those would require a significant commitment that is well beyond the company's current financial resources.
I never see any biotech company end up being able to take an easy way to get full FDA approval and subsequent marketing success. But as we all know, when there is a great new biotech product that proves to be safe and effective, financial resources always find their way to contribute to its success.
Investors shall always take a cautionary perspective. But based on the above analysis, I think the upside potential of NVIV is still tremendous. Why? Because the worst situation is that the scaffold is no better than the existing treatment. Even under this scenario, the FDA still is very likely to approve its HDE application for verifying it's an safe alternative.
As Invivo is continuing developing conjunction approaches such as neural stem cells and expanding applications to new disease areas, the upside is unlimited. In the SEC filing, they briefly mentioned the 2011 experiment has finished up with consistent positive results.
Lest we forget, Frank Reynold's resignation as CEO last week is actually a positive event for investors. The company will most assuredly find a replacement of higher pedigree and significantly better qualified to steer them through the rigorous FDA clinical trial and approval process. They can also breathe a sigh of relief knowing their new Chairman and CEO will not be unloading thousands of shares of founders stock as Reynolds has done almost every day since his shares became eligible for sale post the company's publicly offering in October 2010.