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A single "untitled" letter delivered by the FDA to OvaScience (OVAS) last week requesting more information regarding AUGMENT's (Autologous Germline Mitochondrial Energy Transfer) status as a human cellular and tissue-based product (HCT/P) has sent the company's shares tumbling more than 25% and given investors a case of the baby blues. Although, investors should be thoughtful as to what this new regulatory path, if needed, would mean for the timeline and cost to develop the product I believe the company has a sound strategy to mitigate any effects this delay may cause. The recent pullback in share price provides an excellent entry point for those wanting to invest in a novel scientific product that has the potential to revolutionize the expanding multi-billion dollar in vitro fertilization (IVF) market.

AUGMENT to the Rescue

For a couple struggling with infertility, there are few things in life more powerful than the desire to have children and be parents. As the age at which couples decide to have children continues to increase, it is no surprise that the number of women seeking infertility treatments has skyrocketed. Many women turn to the IVF approach ICSI (intracytoplasmic sperm injection) to increase their chances of conception. However, with a success rate of only 30% it typically takes several cycles for one to become pregnant. With an average cost of $16k per cycle for nondonor (from the mother) and $26k for donor eggs it is easy to understand why this is a billion dollar industry. In addition, current IVF treatments require grueling hormone injections and result in a high incidence of multiple births. OvaScience's AUGMENT is a groundbreaking product being developed to significantly increase a woman's chance of becoming pregnant with IVF and does not require hormonal stimulation or the additional risk of multiple births.

It is scientifically accepted that as a woman ages the quality of her eggs declines due to accumulating genomic mutations in the mitochondria, the eggs primary energy source, resulting in reduced fertility and increased birth defects. Therefore, by age 40 the chance of IVF success is less than 20%. Besides using a young donor egg with functioning mitochondria, there is nothing currently on the market that can increase egg quality and thus fertility. AUGMENT is that product.

There are few products in development that have as high a chance of success as AUGMENT due to the substantial amount of scientific proof of concept data available. Mitochondrial transfer has been shown to substantially increase egg quality and fertility in numerous animal studies and several human trials. In women who had previously failed 2 or more IVF cycles, the pregnancy success rate varied between 25% and 44% with close to 100% of those pregnancies resulting in live births.

Scientifically, it makes sense. Egg quality in older women is poor due to inefficient energy producing mitochondria, so the transfer of fresh mitochondria to the egg replenishes the energy needed to achieve fertilization and early embryo growth. However, since the majority of these studies used donor mitochondria from another individual, the FDA stepped in due to the concerns of mixing mitochondrial DNA from two different individuals.

To avoid this complication, OvaScience uses a unique source of mitochondria isolated from a woman's own germline egg stem cells (EggPC) discovered by their cofounder Dr. Jonathan Tilly while at Harvard Medical School. These mitochondria are then injected back into the woman's own egg along with the male sperm for fertilization. Importantly these EggPCs contain high levels of ATP, energy produced by the mitochondria, making them ideal to replenish the energy levels of the egg. Therefore, there is no reason why IVF success rates would not increase the same if not more than previous mitochondrial transfer studies using this novel technique and cell source.

The Future of AUGMENT

The stock tanked over 25% following OvaScience receiving the "untitled" letter from the FDA questioning the status of AUGMENT as a 361 HCT/P product, which does not require extensive clinical trials or pre-market approval. It must be kept in mind that although OvaScience has been in contact with the FDA regarding their study, apparently the FDA has not been supplied with all the study details. Therefore, the letter from the FDA requesting more information regarding AUGMENT should be seen as just that. OvaScience and all other analysts whose opinions I've read believe AUGMENT qualifies as a 361 HCT/P. After reviewing the requirements I also agree it should fit this status. Importantly, OvaScience's counsel Peter Hutt, who is the former Chief Counsel for the FDA also believes AUGMENT should be regulated under 361 HCT/P and will discuss this with the FDA along with OvaScience senior management. When one looks at the requirements for 361 HCT/P status AUGMENT fits them all.

• Cells or tissue need to have minimal manipulation: AUGMENT techniques do not change the biological characteristics of the mitochondria and no cell culture is required.

• Intended for homologous use: AUGMENT uses a woman's own mitochondria from EggPCs to supplement mitochondria in the woman's egg.

• Its manufacture does not involve combination with another article, except for water, crystalloids, or a sterilizing, preserving, or storage agent (not raising new clinical safety concerns for the HCT/P): AUGMENT mitochondria are isolated and placed in standard buffer for transport.

• It does not have a systemic effect and is not dependent upon the metabolic activity of living cells for its primary function or, if it has such an effect, it is intended for autologous use or allogeneic use in close relatives or for reproductive use: AUGMENT is autologous and is for reproductive use.

Due to AUGMENT meeting all the criteria to be regulated under 361 HCT/P I believe further detailed discussions between OvaScience and the FDA will clarify its regulatory status. If the FDA does not agree and still insists that AUGMENT needs to be regulated as a new investigational drug, then they should redefine the criteria for a HCT/P as AUGMENT clearly meets the current descriptions. Although, these trials would be costly and time consuming to conduct, there is no reason to believe OvaScience would not be successful in demonstrating efficacy and safety. From the recent conference call OvaScience held regarding AUGMENT updates, it was mentioned that some of the data they have already accumulated may be able to be used and other studies that the FDA may require regarding safety were already underway. Due to the stock dropping rapidly following the FDA letter, many law firms are trying to rally class action lawsuits against OvaScience. These are typical lawsuit trolls who are trying to recruit a lead plaintiff and bank some quick money. As most investors know, these lawyers pop up everywhere as soon as a stock's value declines rapidly and very rarely succeed. I think most smart investors in OvaScience realized not meeting HCT/P status was a possibility.

AUGMENT Launch Overseas in 2014

Regardless of the outcome of the US regulatory status of AUGMENT, OvaScience continues to push forward with its plans for 2014 overseas product enrollment and launch. In fact, the majority of global IVF treatment occurs outside the US, mainly in Japan and Europe, which combined, represents more than 4 times the number of IVF cycles in the US. It is important to note, that IVF is typically paid for by people in cash and not normally covered by insurance plans. Therefore, unlike many medical services that must wait 60-180 days for insurance reimbursement, OvaScience would recognize revenue upon completion of service. Moreover, the exorbitant cost of an IVF cycle typically restricts those who use it to the middle, upper class in the US. If AUGMENT can save a couple 1 or 2 cycles of IVF treatment or if standard IVF is simply not working, I would not be surprised to see a high number of couples take the flight overseas to be treated, especially since insurance coverage is not a factor. It is not uncommon to see US couples travel overseas to adopt children, perhaps they would do the same to conceive their own.

OvaTure Overlooked

Although Wall Street is currently focused on AUGMENT, OvaScience's other product in development OvaTure has the potential to change the way IVF is practiced. The OvaTure product takes a woman's own egg stem cells, EggPC, which are free from accumulated genomic mutations and cultures them to create new fresh mature eggs, which can then be fertilized. This product would greatly increase the age at which women could become pregnant. Proof of principle studies have been conducted in mouse models and human EggPCs have been shown to be capable of maturing into eggs. It is likely that the FDA will require regulatory approval for this product as there is cell differentiation and cell culture involved. However, if trials are successful, the product would be groundbreaking.

Potential Risks

As with all small biotech companies there are always risks that need to be taken into account. The main concern of investors has already been factored into the stock and that was the regulatory status of AUGMENT in the US. Although, I believe there is still a good possibility the FDA will agree that the product should be regulated as an HCT/P once provided more details, this is not a guarantee. If time consuming studies are needed to satisfy the FDA then OvaScience may need to raise additional funds. However, revenue from a successful overseas launch could help pay the bills.

Other Important Factors to Consider

In addition to their revolutionary products for the rapidly growing IVF market, there are several other factors that make OvaScience a very attractive investment. There is little to no competition in the space, which will allow OvaScience to capture the majority of the IVF business. Due to the lack of advancements in IVF, OvaScience's AUGMENT product has already gained strong traction in the US with enrollment filled for the AUGMENT study before suspension and numerous advocacy groups lobbying to bring the product to market. Likewise, OvaScience's approaches have been well accepted by the major fertility clinics with a lot of the thought leaders in the field on their Scientific and Product Advisory boards. Importantly, OvaScience also has an executive team, which is second to none. The CEO, Michelle Dipp, M.D., Ph.D has a track record of success, leading the acquisition of her last company Sirtris to GSK for over $700 million and is also the founder of a high profile healthcare investment fund. It is also important to note that many of the senior team members have been actively buying up the stock, including the Dr. Dipp who just entered into a 10b5-1 stock purchase plan.

Conclusion

I believe OvaScience's unique AUGMENT product has a very high chance of success and investors should not be deterred by the FDA asking for more information regarding how the product should be regulated. Worst case scenario, AUGMENT is launched first into the overseas market. This definitely does not warrant the over 30% drop in value the stock has relinquished since last week. OvaScience is a unique play in the rapidly growing IVF market and at these levels is a bargain for investors.

Source: Despite The Baby Blues, OvaScience Is A Strong Buy