Oxygen Bio: Initiating Coverage at Outperform

| About: Tenax Therapeutics, (TENX)

We are initiating coverage of Oxygen Biotherapeutics, Inc. (OXBO) with an ‘Outperform’ rating. Despite what has been a tumultuous past for the company and a abysmal fate for competitors attempting to develop similar products, the potential upside that Oxycyte offers is too significant to ignore.

Does Oxycyte do what management says it does? (Key Efficacy Question)

In theory, Oxycyte has the potential to be a wonder drug -- a sort of WD-40 of medicine. Preclinical data suggests that Oxycyte has astounding potential for the treatment of traumatic brain injury (TBI), decompression sickness, carbon monoxide poisoning, sickle cell crisis, organ preservation and as a neuroprotectant in patients with myocardial infarction or stroke.

The effects in TBI were clearly evident in the phase I program conducted by Oxygen Bio in 2006. Initial phase II data from STOP-TBI will become available in 2010. However, data from small animal studies show that intravenous injection of Oxycyte following lateral fluid percussion injury acts as a neuroprotectant in preserving neuronal cell counts and improving brain tissue oxygen consumption. Other small animal studies suggest that Oxycyte can improve circulating oxygen levels and cerebral blood flow following an induced ischemic stroke.

These results suggest that Oxycyte treatment can greatly improved the cognitive recovery and prevent cell damage in patients with brain injury, spinal cord injury or ischemia due to MI or stroke. The high gas solubility characteristics of Oxycyte suggest significant potential in treating decompression sickness, carbon monoxide poisoning and surgical iatrogenic air embolism.

For the topical Oxycyte applications, Dermacyte should begin recording sales later this year. The product will be marketed over-the-counter (OTC) as an oxygen-rich cosmetic gel that promotes healthy looking skin.

Is it safe? (Key Safety Question)

Oxycyte is biochemically and metabolically inert. It is thermal stable, and produces no immune response or antibody formation. There were no signs of thrombocytopenia in the preclinical or phase I program. Plus, perfluorocarbons are clearly safer than hemoglobin-based oxygen carriers when it comes to risk of vasoconstriction.

For the phase II STOP-TBI program, management has established a "platelet and thrombocytopenia" task force to assess the coming data along with an independent data safety monitoring board (DSMB). If management can alleviate the FDA’s concerns on thrombocytopenia, U.S. registration trials shouldn’t be too far off after STOP-TBI from Switzerland and Israel.

Does Oxygen Bio have the cash to see this through? (Key Financial Question)

Oxygen Bio exited the fiscal first quarter 2010 (July 31, 2009) with $2.5 million in cash and investments. Burn for the first quarter was $1.5 million. In June 2009, management entered into a securities purchase transaction with Vatea Fund for a potential total of $20 million. The first tranche was purchased in July 2009 at $5 million. Management used $2.8 million to re-purchase existing warrants outstanding.

The first milestone under the Vatea Fund transaction was achieved in September 2009 with the initiation of the phase IIb STOP-TBI program. This is worth $6 million, and is exercisable in early December 2009.

Cash balance at the end of the fiscal Q2 2010 (October 31, 2009) will be less than $1 million. However, the accounts receivable will be roughly $6 million. Therefore, we estimate that Oxygen Bio will exit the calendar year 2009 with north of $5 million cash on hand. This should be enough to fund operations into the fall of 2010.

Assuming management meets the milestones agreed upon with Vatea, the company has access to an additional $9 million in cash.


Risks are still high and the company is still a few years away from sustained profitability. Normally we would not recommend investors acquire shares in a company based on preclinical data alone, but Oxycyte (and perfluorocarbons in general) is a molecule well-studied over the past decade. Our answers to the above three questions give us enough confidence that we can recommend investors take a look at the stock.

Does it work and is it safe? So far, the data looks very intriguing. Is the company financially sound? We outlined above the current financial situation -- cash enough to make it into the calendar third quarter 2010. This is enough cash to fund STOP-TBI to interim data. Plus, Vatea can still contribute an additional $9 million in milestones, and sales of Dermacyte will help reduce cash burn in calendar 2010 and 2011.

With positive interim efficacy data from STOP-TBI in 2010, we have no doubt that the Army (for TBI) and the Navy (for DCS) will begin purchase of Oxycyte for deployment in the field. With positive safety data, we have no doubt that management will be able to secure additional developmental partnerships for the next wave of indications including carbon monoxide poisoning, sickle cell crisis, organ preservation and even cardiovascular indications. The financial position improves as the clinical data on Oxycyte begins to roll in.

The stock sitting at only 46 cents per share creates a very intriguing risk/reward profile. The planned 1-for-15 reverse stock split and move to a major stock exchange in the next two months creates an opportunity.

Oxygen Bio is making an impressive move from OTC back to a major exchange. We have preformed a detailed NPV analysis for each potential indication for both injectable and topical Oxycyte using an aggressive 30% discount rate in our calculations, and arrived at a fair market value of $301 million. Based on the current weighted-average shares outstanding, we arrive at a price target of $1.02 per share.

Additional information can be found in our full initiation report on our website.