Initiation Report For Theralase Technologies

May. 9.14 | About: Theralase Technologies (TLTFF)

Summary

Theralase Technologies is an emerging player in developing therapeutic laser systems for non-invasive pain management.

Their patented light-activated molecules along with the laser systems that activate them have shown high anticancer effectiveness, microbial sterilization potency and bacterial infection control in preclinical trials.

We are attracted by Theralase’s strong management and scientific advisory board and view the company as a good investment opportunity.

We feel that the stock is undervalued; we have initiated coverage with an Outperform rating and $1.00/share price target.

Theralase Technologies, Inc. (OTCPK:TLTFF), headquartered in Ontario, Canada, operates under two divisions; the Therapeutic Laser Technology (TLT) division, which is focused on the development and commercialization of laser-based non-invasive pain management devices and the Photo Dynamic Therapy (PDT) division, which is focused on discovery of small, light-activated molecules and laser systems that activate them with high anti-cancer effectiveness, microbial sterilization potency and bacterial infection control.

Theralase's current product line from the TLT division is the TLC-1000, and expected to launch in Q4 2014, the more advanced TLC-2000. The TLC-1000 device has been endorsed by Dr. James Andrews, who is a member of the American Sports Medicine Institute as well as Chair of Theralase's Medical and Scientific Advisory Board.

The TLC-2000 has been designed to measure a patient's specific optical tissue characteristics based on the skin color and the thicknesses of various subcutaneous tissues. The device possesses the ability to precisely target injured tissue with clinically optimal doses of energy that is particular to the patient's condition. The dosages specific to optical tissue profiles will be stored in a HIPAA compliant central databank and be accessible to all practitioners utilizing the TLC-2000, in a real time format. This central databank will contain the clinical protocols derived from the clinical trials using laser therapy and will be updated continuously with real time feedback of the systems that are in use by practitioners.

The company markets its products directly through its in-house sales and marketing force as well as through a network of distributors in the Middle East, South America and China. Theralase plans to phase-out the TLC-1000 system and incentivize its customers to upgrade to the latest technology, the TLC-2000, the commercial launch of which is expected to occur in the fourth quarter of this year. The company is now actively working towards securing a new Current Procedural Terminology (CPT) code for reimbursement of TLC-2000 laser treatments in the U.S.

Theralase's Photo Dynamic Therapy division focuses on discovery of small, light-activated molecules and laser systems that activate them with high anticancer effectiveness, microbial sterilization potency and bacterial infection control. Photo Dynamic Compounds (PDCs) are drugs that are activated when exposed to visible light and become cytotoxic in oxygenated environments. The Theralase PDCs have the added capability to be activated by a wide range of laser wavelengths and also function effectively regardless of the oxygenation level present in the tissue under treatment, a major plus when dealing with cancerous tissue and certain bacteria, which tend to thrive in low oxygenated tissues.

The PDT technology involves the research and development of PDCs activated by patented and patent pending biomedical lasers for the selective destruction of cancers, bacteria and viruses. Theralase has successfully completed in‐vitro analysis demonstrating destruction of brain, breast and colon cancer cell lines in 2010. In 2012, Theralase successfully completed small animal in‐vivo preclinical analysis of the PDC technology with the complete destruction of colon cancer in an orthotopic mouse model. Since the treatment, the mice have been living cancer free for over 20 months, which is encouraging considering that a mouse's typical life span is only 18 to 20 months.

Bladder cancer has been chosen as Theralase's principal cancer target for its lead PDC compound. Theralase PDCs have proven to be toxic to bladder cancer cells when activated by light (100% kill rate) at very low effective concentrations (micrograms). Theralase is currently pursuing destruction of bladder cancer in an orthotopic animal model. Preclinical trials using different PDCs are currently underway and expected to be completed in late 2014. Theralase plans to commence a Phase 1/2a clinical trial in bladder cancer in first quarter 2015. Based on the clinical data from this study of the PDC technology, Theralase expects to qualify for the U.S. Food and Drug Administration (FDA) "Fast Track" designation, a process designed to facilitate the development, expedite the priority review and accelerate the approval process. Theralase believes that their PDC technology to treat cancer may potentially address an unmet medical need; hence, Theralase believes that they might have a reasonable chance of achieving Breakthrough Status.

The commercial launch of the TLC-3000 PDC/Laser Technology Platform is likely to be at least a couple of years away. Between now and then, the company hopes to raise $10 to $20 million of operating capital to complete Phase I/IIa clinical trials and then plans to pursue partnering arrangements in order to commercialize its anti-cancer PDC technology.

Technology

Therapeutic lasers belong to a specific class of lasers that do not cut or destroy tissue, but instead are used to heal and have a therapeutic curative effect on tissue. The cold laser produces an impulse of light at a specific wavelength (between 600 to 970nm) that minimizes reflection and scattering but maximizes absorption of the energy (in photons) at a desired depth. Cold laser therapy can be used for healing various tissue structures, such as muscles, tendons, ligaments, joints, connective tissues, bones and treating numerous conditions such as muscular‐skeletal conditions, nerve rehabilitation, wound healing, anti‐aging and addiction therapy.

Theralase's TLC-2000 is a non-invasive, patent-protected, laser-based, reparative, biomedical platform technology product. It is expected to be rolled-out commercially in the fourth quarter of 2014.

Biodestructive laser therapy uses proprietary laser technology to activate the photo dynamic key of a specifically designed PDC that has an affinity to certain tissue types. When activated by light, it has the ability to destroy the target cell. There are thousands of potential applications of this technology including the destruction of cancer, bacteria and viruses. In 2006, Virginia Polytechnic had developed three unique PDCs (mixed-metal supramolecular complexes) for exclusive worldwide license by Theralase. These PDCs are unique in that they are activated via a Type 1 reaction that is independent of oxygen, an important characteristic as solid core tumors (i.e., breast, bladder, lung, brain, prostate, etc.) are hypoxic (low oxygen) in nature. In 2012, Theralase in-licensed PDCs from Acadia University, which have similar characteristics to the Virginia Tech compounds, being effective in oxygenated and low-oxygenated tissue, while remaining virtually non-toxic.

Characteristics of Low Level Laser Therapy

Low Level Laser Therapy (LLLT) operates within a specific wavelength range (wavelength 600-970nm) that is non-thermal, eliminating the risk of tissue damage or other complications. Wavelength and peak power determine how deep the light will effectively penetrate into tissue. Pulsing at 50,000 milliWatts (MW) up to 10,000 times per second (Hertz), the super-pulsed laser technique is able to deliver an exact dose of light energy to superficial as well as deep layers of tissue.


Figure 1 Therapeutic window (Source: theralase.com.)

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Figure 2 Tissue penetration depth at different laser strengths (Source: www.theralase.com.)

Physiological Mechanism:

Photobiomodulation has been applied clinically to treat soft-tissue injuries, accelerate wound healing and increase tissue regeneration. LLLT increases cell proliferation and differentiation and amplifies cellular signaling in degenerative and inflammatory conditions. Laser light emits a coherent, narrow beam of light that can be directed at very specific "absorption" bands of the intended molecular absorbing centers, called chromophores. Mitochondria are thought to be a likely site for the initial effects of light, leading to increased Adenosine Triphosphate (ATP) production, modulation of reactive oxygen species (ROS) and induction of transcription factors. Cytochrome c oxidase, the terminal enzyme of the mitochondrial respiratory chain, mediates the transfer of electrons from cytochrome c to molecular oxygen. It is considered as the photo-acceptor molecule responsible for photobiomodulation effects. By employing short and ultrashort light radiation pulses, up to 4" depth of penetration can be achieved. The local transient rise in temperature of cytochrome c oxidase may cause structural changes and trigger biochemical reactions such as activation or inhibition of enzymes, increased cell proliferation and migration (particularly by fibroblasts), modulation in levels of cytokines, growth factors and inflammatory mediators and increased tissue oxygenation that results in increased healing in chronic wounds, improvements in injuries and pain reduction in arthritis.

Theralase's methodology uses a three-pronged approach by activating all three known cellular pathways simultaneously to stimulate rapid healing described as follows:

1. Nitric Oxide (NO) pathway: When Near Infra Red (NIR) light of wavelength 905nm is absorbed by a tissue chromophore, a dissociation of (NO) (a physiologic regulator of cytochrome c oxidase activity) occurs from the catalytic center (iron-containing and copper-containing redox centers) of cytochrome c oxidase. 905nm super-pulsed light increases nitric oxide levels by 700% compared to other wavelengths and technologies. As a result, it rearranges downstream signaling effects such as increasing Adenosine Triphosphate (ATP) production, oxygen consumption, raising mitochondrial membrane potential and modulating production of ROS. NO signals endothelial cells to relax, leading to vasodilation (increased dilation of blood vessels); thereby, increasing blood flow and stimulating lymphatic vessels to become more porous, increasing interstitial fluid drainage which in turn, decreases swelling.

2. ATP pathway: ATP is the fuel inside living cells that drives all biologic reactions and has been found to be a signaling molecule. Small changes in the ATP levels, specifically increasing the amount of this energy, can significantly improve cellular metabolism, especially in cells that lack energy or are suppressed as in wounds. When tissues are exposed to light at 660 nm wavelength, oxidative phosphorylation is initiated. The receptors, for ATP as a signaling molecule, form a channel that allows sodium and calcium ions to enter the cells. Calcium ions are a positive effector of mitochondrial function.

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Figure 3 Hypothetical illustration of the initiation of nociception on primary afferent fibers in the periphery and purinergic relay pathways in the spinal cord (1)

3. Lipid absorption pathway: Since ATP regulates the cellular sodium-potassium pump; transmission of pain signals from the area can be altered by controlling ATP production. When light receptors in the bi-lipid membrane of nerve cells are activated by 905 nm laser light, the cell membrane permeability is altered that allows the reintegration of sodium back inside the nerve cell and creates a proton gradient. This in-turn decreases the C-fiber afferent nerves (unmyelinated) activity by blocking depolarization and mitigates bradykinine release as well as increase levels of endorphins to reduce nociception (pain).

Figure 4 The energy to drive the sodium-potassium pump is released by hydrolysis of ATP. In order to decrease pain, the sodium ions need to repatriate into the cell and the potassium ions need to be released outside the cell through the sodium potassium pump or through the permeability of the bilipid cellular membrane, both activated by 905 nm laser light. (Source: www.theralase.com.)

Products

TLC-1000: Therapeutic Laser Technology
The TLC-1000 Cold Laser System, a high-end, high power therapeutic laser system is in wide-spread use in Canada and has made a small entrance into the U.S. market. Theralase employs dual-pulsed (905 nanometer (NM) Near Infra Red (NIR) and 660 nm (visible red) laser technology to accelerate healing by eliminating pain, reducing inflammation and accelerating tissue healing, while staying below the Maximal Permissible Exposure (MPE) tolerance for tissue (< 500 mW). The TLC‐1000 is FDA, Health Canada and Conformité Européenne (CE) approved.

Theralase plans to phase-out the TLC-1000 by the end of 2014 and introduce their next generation laser system, the TLC-2000 with a biofeedback technology in fourth quarter 2014.

TLC-2000: Biofeedback Therapeutic Laser Technology
The TLC‐2000 laser system is the new next-generation patented technology that delivers an exact dose of energy to a targeted tissue location and structure, taking into account physical characteristics such as skin pigmentation, fat and muscle content. It is devised to "remember" the clinical protocols performed by practitioners based on a patient's physical and hence optical tissue characteristics. Theralase has outsourced clinical studies to the University of Buffalo to demonstrate efficacy of the new biofeedback technology. In July 2002, Theralase was granted U.S. Patent No. 6.413.267 covering the proprietary design of therapeutic laser devices, which monitor and control high-power, deeper penetration, clinical healthcare laser therapy. In November 2004, Theralase was granted the European patent No. 1075854, and Theralase validated the patent in a select list of major EU national economies: Germany, France, U.K., Italy, Spain and Belgium.

TLC-2000: Rollout
While a commercial roll out of the device is expected in Q4 2014, Theralase plans to place ten to fifteen TLC-2000 systems in the field with select healthcare practitioners, as Key Opinion Leaders (KOLs) for beta testing purposes in July 2014. Theralase's goal is to incentivize their existing customers by offering a trade-up credit (based on the date of manufacture of the TLC-1000 owned by the practitioner) to the 1200 existing customers in Canada and the US to upgrade to the new device as well as to increase the customer base globally.

Theralase plans to operate a direct sales force with Territory Sales Managers (TSMs) based in Calgary, Vancouver, Toronto, Montreal, New York, Los Angeles, Miami, Chicago and Houston in 2014 and 2015. The company expects to deploy an aggressive sales and marketing strategy through these additional TSMs that can help expansion into these markets. They also plan to offer their customers new ways of financing their products. The company has used third-party distributors to market its devices internationally including Europe, South America and Asia Pacific, which will continue to be the strategy for international sales of the TLC-2000. The strategy adopted by the sales force is to make a presence at major healthcare and industry conferences as well as focused seminar and webinar presentations to present the clinical, scientific and financial benefits of Theralase's technology to healthcare practitioners.

Additionally, they propose to personally contact and visit all existing customers as well as other practitioners that use competing technologies to demonstrate the TLC-2000. The marketing plan will include clinical, technical, scientific, financial, sales and marketing information about the new technology. The new corporate head office, in addition to housing executive management, finance, sales and marketing functions will also support an ISO-13485 certified, Health Canada, FDA and CE approved facility to manufacture the Theralase line of therapeutic lasers, as well as aftermarket sales and service support for all of Theralase's healthcare customers.

Theralase is migrating the business from a one-time capital equipment purchase model, where they sell the units for a one-time cost of approximately $16,000, to a recurring revenue model, where they will lease the units to healthcare clinics, hospitals and practitioners. Theralase expects this new model to provide more affordability for customers and facilitate more rapid penetration into currently untapped markets. With the recurring revenue model, Theralase expects to reach out to customers more frequently and build a more loyal customer base. From the recurring revenue system, Theralase has the ability to capture data sets that track consumer trends and preferences on a much more granular level compared to their traditional model. This, in turn, may lead to optimized pricing and packaging to meet customer needs. The ability to fine tune pricing and incentives based on this data will enable increases in consumerization as practitioners demand the flexibility and personalization these instruments provide.

Osteoarthritis Treatment
The disability and treatment costs associated with musculo-skeletal disorders in an aging population and in obese individuals is expected to increase in the future. Cold laser treatment offers an alternative to other treatments such as medication, joint surgery and electrotherapy. It is non-toxic and does not create dependency. Theralase's therapeutic laser system has now been proven clinically effective in the relief of chronic knee pain and for the treatment of osteoarthritis (NYSE:OA). An independent blinded, randomized, controlled clinical study was conducted to evaluate the Theralase laser system. Theralase's dual wavelength, multiple diode laser cluster probe with five super-pulsed 905 nm NIR laser diodes, each emitting 40 mW of average power and four continuous wave (CW) 660 nm visible red laser diodes, each emitting at 25 mW was evaluated in combination with standard chiropractic techniques on 126 patients presenting with osteoarthritis and knee pain. The efficacy of the study was evaluated by the assessment of subject pain levels via the Visual Analog Scale (VAS) measurement, a validated assessment tool widely accepted by the medical community, especially, neurology and orthopedic specialists. Improvement in VAS was significant for pain relief, with a statistical and clinical significance of p < 0.01 from baseline to the 30-day follow-up. The results of the clinical study were dramatic and have proven clearly that the Theralase therapeutic laser system is clinically and statistically effective in reducing pain in these debilitating conditions.

Addiction Rehabilitation and Weight Loss
Therapeutic lasers provide effective treatment for smoking, drug and alcohol addictions, as well as weight loss, by stimulating specific acupuncture points in the ear. This triggers the brain to release neurotransmitters (such as endorphins, serotonin and dopamine) that help to break the addiction cycle. Theralase combines this treatment with behavioral modification addiction counseling and nutritional guidance to create addiction rehabilitation and weight loss programs.

The nucleus accumbens mediates the release of the neurotransmitter dopamine, which plays a major role in reward-motivated behavior, but dopamine itself is released from the Ventral Tegmental Area (VTA). The VTA releases dopamine to the nucleus accumbens, the prefrontal cortex, amygdala and septum, all of which play an important role in the reward circuit. When an acupoint (an acupuncture nerve point) is stimulated, the brain releases neurotransmitters that eliminate cravings from addiction withdrawal. Theralase conducted an investigation to study the effectiveness of laser acupuncture on smoking cessation, in combination with counseling. The treatment was applied up to 5 laser acupuncture treatments over a 2-week period. The goal was to reduce the amount of tobacco products consumed by subjects by at least 25% as measured from baseline to 30-day follow up. The treatment group consisted of a relatively equal representation of male and female subjects with an average age in the mid to late forties. A Theralase therapeutic laser system was applied to specific ear and body acupuncture points. The results of the clinical study demonstrated that after 30 days, 74% of the subjects had reduced their consumption of tobacco products by 25% or more, of which, 92.0% of those completely eliminated the use of tobacco products and 8.0% of those showed a reduction of at least 25%. This therapeutic modality offers a non-pharmacologic and non-invasive option as compared to other therapeutic methods currently available for smoking cessation treatment, including the nicotine patch, nicotine gum and other pharmaceutical alternatives.

Anti-Aging
Theralase's laser system combines both near infrared and visible red light, to treat various dermatological conditions to improve skin appearance through the production of collagen and elastin.

Post-Surgical Healing: Tummy Tuck, Breast Augmentation, C-Section
The formation of new capillaries speed up the healing process of injured tissue by supplying additional oxygen and nutrients, and stimulating the production of collagen. Collagen, along with elastin, forms a high degree of elasticity. Increasing both collagen synthesis and elastin production using Theralase's laser system, decreases the formation of scar tissue at the injured site.

The parameters of wavelength, effective dose, beam penetration, and pulses (peak power and repetition rates) dictate the effect LLLT will have and results are subjective to tissue damage, chronicity and health of the patient.

TLC3000: Cancer Therapy

Cancer Treatment
Destroying cancerous tumors and preventing cancer from recurring are important benchmarks in developing new cancer therapies. PDCs are drugs that get activated when exposed to light and become cytotoxic in oxygenated environments. Theralase PDCs are drugs that get activated when exposed to light in a wide range of wavelengths and become cytotoxic in both oxygenated and non-oxygenated environments. Photodynamic therapy is a treatment that uses a drug, called a photosensitizer or photosensitizing agent and a particular type of light. When photosensitizers are exposed to a specific wavelength of light, they produce a form of oxygen, known as Reactive Oxygen Species (ROS) that oxidizes and kills nearby cells. Each photosensitizer is activated by light of a specific wavelength. This wavelength determines how far the light can travel into the body. Thus, doctors use specific photosensitizers and wavelengths of light to treat different areas of the body with PDT.

The two drugs that are FDA approved for treating cancer are Aminolevulinic acid (ALA) and Photofrin®. ALA is a drug that is applied to the surface of the skin on the face or scalp to treat actinic keratosis (AK), a skin condition that can become cancerous. A special blue light, rather than laser light, is used to activate this drug. A methyl ester of ALA is one of several other forms of ALA that have been developed and penetrates cancer cells very easily. It was approved by the FDA in July 2004 for treatment of some types of actinic keratosis of the face and scalp. Methyl ester of ALA is activated with a red light. Porfimer sodium (Photofrin®) is the most widely used and studied photosensitizer. It's activated by red light from a laser. It is approved by the FDA to treat patients with pre-cancerous conditions that may lead to esophageal and endobronchial cancer.

The proprietary TLC-3000 medical laser system has been custom designed by Theralase for the activation of Theralase's patented PDCs, resulting in the successful destruction of cancer cell lines in-vitro and in-vivo. Theralase PDCs are small molecules that are able to localize to the nucleus of any cancer cell and are not as limited in scope as monoclonal antibodies, which require a specific marker or protein sequence on the outside of the cell to localize. In the treatment of bladder cancer, the Theralase PDCs only remain in the bladder for less than an hour and never enter the blood stream, thus providing a very high safety profile and ultra-low toxicity versus ALA and Photofrin®, which are injected into the blood stream. Theralase's PDCs have been scientifically demonstrated to be 668,000 times more effective than ALA and 198 times more effective than Photofrin® in an analysis done in-vitro. The Theralase PDCs have shown up to a 100% kill rate in cancer cells at very low concentrations (< 0.8µM) when light activated and virtually 0% when not light activated even at high concentrations (> 100µM) leading to a very high safety profile.

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Figure 5
Theralase's PDC efficacy as compared to 2 FDA approved drugs (ALA and Photofrin) (Source: www.theralase.com.)

In early 2010, the Ontario Cancer Institute at Princess Margaret Cancer Centre, part of the University Health Network (UHN) demonstrated complete destruction of breast cancer cells in vitro following administration of Theralase's patented PDCs and subsequent activation with the TLC-3000 light source. In Q2 2010, Theralase conducted a pre-clinical study where it evaluated a variety of cancer cell lines in an in-vivo small animal model. Theralase received the necessary approvals on its Animal Utilization Protocol by the UHN Ethics Review Committee in Q3 2010, allowing hands-on evaluation of the PDCs in a small animal model. Theralase's research team headed by Lothar Lilge, Ph.D., the principal scientific investigator of the PDCs and a senior researcher at the world renowned Ontario Cancer Institute, Princess Margaret Cancer Centre, evaluated the toxicity of the patented PDCs on small animals by choosing an escalating dose analysis whose result showed that the patented PDCs were as safe as any PDC presently approved on the market by a factor of 10.

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Figure 6 in-vivo Tumors Treated with PDT in a mouse (Source: www.theralase.com.)

Having successfully completed the toxicity study in a small animal in-vivo model, Theralase's next strategic step forward in the company's cancer therapy research program was to demonstrate the efficacy of the PDCs in the destruction of tumors in a small animal in-vivo model. In the study, approximately 350,000 cells from a colon cancer line were injected subcutaneously into mice and the tumors were allowed to grow to five millimeters in size. Half the mice were used as a control group where no therapy was administered. The remaining animals were administered with Theralase's lead PDC by intra-tumor injection where they enter the cancer cell and lock onto the cell nucleus. The compound was allowed to distribute within the cancerous tumor for four hours and was then activated by Theralase's proprietary laser light source for 32 minutes. The light activated PDCs cleaved the DNA of the cancer cells and induced natural cell death known as apoptosis, destroying the tumor from the inside out. After a few weeks, the tumors were no longer visible on the treated mice and there was no development of scar tissue. All mice were monitored and examined daily. Complete destruction of colon cancer was achieved in the subcutaneous mouse model. The mice are living cancer free for over 20 months post treatment, which is remarkable considering that mice have a normal life span of 18 to 20 months; therefore, the mice lived their entire lives cancer free.

Click to enlargeFigure 7 Survival period of mouse post treatment with PDC anti-cancer technology (Source: www.theralase.com.)

In 2013, Theralase's proprietary PDC technology was approved for use in a live animal bladder cancer model by UHN Research Ethics Board. Theralase is currently pursuing the destruction of bladder cancer in an orthotopic animal model. Theralase hopes to complete the bladder cancer clinical protocol and commence a Phase I/IIa human clinical trial to prove the safety and efficacy of its PDC technology in the first quarter 2015. This development would accelerate the company's advancement towards commercializing its advanced bladder cancer therapy.

The lead PDCs have advanced towards international patent protection under a filed Patent Cooperation Treaty (PCT) application. Once approved at this phase, the Company expects to gain widespread patent coverage of the PDCs across numerous countries. The lead PDCs will be used by Theralase to commence toxicity analysis and manufacturing ramp up via Contract Manufacturing Organization (CMO); both mandatory prerequisites in the evolution towards an approved Investigational New Drug (IND) application from the FDA and Health Canada. With larger quantities of the PDCs in hand and an approved IND, Theralase would be in a position to commence a Phase I/IIa human clinical trial for the lead indication of bladder cancer, as early as Q1 2015.

Research to Combat Bacteria and Food Contamination
In the U.S. alone, more than 99,000 people die each year from bacterial infections. While this cost on human life is high, the financial toll is equally staggering. The World Health Organization has called healthcare associated infections one of the largest causes of avoidable harm and unnecessary deaths in the developed world. The Centers for Disease Control and Prevention estimate such infections add an additional $35 to $45 billion in costs to the U.S. healthcare system annually.

Bacterial infection, ranging from superficial skin infections to severe invasive diseases, is recognized as a very serious health threat, representing a major cause of mortality and adding financial burden to already-stretched healthcare systems. PDCs have been proven to target and destroy bacteria associated with the contamination of food. Photodynamic Inactivation (PDI) of pathogenic bacteria is a unique approach that combines a photosensitizing drug (PS) and light to generate cytotoxic singlet oxygen and other reactive oxygen species ROS. This oxidative burst leads to nonspecific damage with multi-faceted targets, including the cytoplasmic membrane, intracellular proteins and DNA.

In April 2012, Theralase presented new scientific data supporting the application of Theralase's advanced sterilization platform technology that kills 99.99% of life threatening infectious microorganisms, such as Staphylococcus aureus (S. aureus). This organism is responsible for both Hospital Acquired Infections (HAI) and Community Acquired Infections (CAI) that range from relatively minor skin and soft tissue infections to life‐threatening systemic infections.

Strategic Opportunity

Therapeutic Market

The World Health Organization estimates that 20% of individuals worldwide have some degree of chronic pain that has direct healthcare-associated costs. Treatment options include pharmacological approaches, interventional techniques including nerve blocks, surgery, implantable drug-delivery systems, spinal-cord stimulators, exercise, physical rehabilitation, psychological treatments, interdisciplinary treatment, complementary and alternative treatments.

In 2014 and 2015, Theralase expects to continue expansion of its sales and marketing initiatives in the US market, while maintaining its dominant position in Canada. Theralase has established and is further evaluating augmenting its direct Canadian (2 largest provinces) and U.S. (5 largest states) sales force with additional direct representatives, manufacturing representatives and distributors, while growing its sales internationally through the strategic partnering with international medical product distributors. It is estimated that currently there are approximately 1,600 and 6,800 competitive therapeutic laser devices in use in Canada and the U.S., respectively. Propelled by increased usage of laser equipment for minimally invasive treatments and cosmetic therapies, market segments such as therapeutic lasers are witnessing increased demand. Asia-Pacific represents the fastest growing regional market with a CAGR of 11.7%.

Bladder Cancer Market

$3.98 Billion is spent annually for bladder cancer treatment in the U.S. There are 77,000 new cases in the US each year; 386,000 new bladder cancer cases annually worldwide. Bladder cancer is the most expensive cancer to treat, costing between $100,000 to $200,000 per patient, with a high recurrence rate of up to 80%. Standard treatment has remained relatively unchanged with no new drugs approved since 1998.

In the early stage of the disease (Ta, T1), the standard of care is a procedure known as Trans-Urethral Resection of the Bladder Tumor (TURBT), which involves a surgical excision (scraping) of the tumor from the bladder wall followed by treatment with bacillus Calmette-Guérin (BCG), a bacteria originally used for the vaccination of tuberculosis. The 5-year survival rate at this stage of the disease is 75%. In the mid-stage of the disease (T2, T3a/b), the entire bladder is removed along with nearby reproductive organs and lymph nodes in a procedure called a radical cystectomy, providing a 5-year survival rate of 31 to 63% depending on progression of disease. In the late stage of bladder cancer (T4), the disease has spread beyond the bladder to distant sites, such as the bones, liver and lungs and is generally regarded as incurable with a 5-year survival rate of 21%.

The standard of care for all types of cancer focuses around three main disciplines: surgery (to remove the cancerous tissue and any tissue surrounding it), radiation therapy (to destroy the cancerous tumor with ionizing radiation) and finally chemotherapy (to destroy the cancerous tumor with cytotoxic (cell killing) drugs). All of the aforementioned therapies have severe side effects, affect Quality of Life (QOL) and diminish the effectiveness of the immune system, the very system that helps the body combat disease. The Theralase PDC anti-cancer technology works by destroying only the cancerous tissue and leaving healthy tissue intact without causing any serious side effects or QOL concerns.

Medical Reimbursement

Cold laser therapy is usually paid for in cash at clinics, as it has limited CPT code coverage. Currently, other pre-existing codes are in use for reimbursement purposes depending upon the state legislation and insurance plans. The CPT code 4 (97026) (application of a modality; infrared), has been used in the past since the laser emits light in the infrared spectrum. In January 2004, a HCPCS level 2 code (S8948) was added that is specific to cold laser therapy.

Theralase expects to secure a new CPT code for reimbursement for laser treatments in the U.S. for its new patented TLC-2000 technology. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), CPT codes are updated annually and effective for use on January 1 of each year. The American Medical Association prepares an annual update so that the new CPT books are available in the fall of each year, preceding their effective date to allow for implementation. With the implementation of the Patient Protection and Affordable Care Act (PPACA), the device could make even more headway in the mainstream healthcare system with over 8 million Americans expected to be added to the medical insurance system.

Financial Condition

Theralase's TLC-1000 instrument has been the primary revenue-generating product for the company. The TLT division product revenue for 2013 dipped by 34% to $1,203,620 compared to $1,824,313, for the same period in 2012. The decrease in revenue is mainly attributable to decreased focus on sales as a result of the relocation of the company's new head office, setup of a multidisciplinary therapeutic laser center and increased focus on the PDT anti-cancer division.

Theralase has been successful in raising capital on a regular basis through non-brokered private placements in April 2012 and November 2013. The company will likely need to continue to raise money through 2016 for prototype development, licensing fees and later, pre-launch preparedness for the TLC-3000 anti-cancer technology. The U.S. clinical bladder cancer trials will commence in early 2015. We expect this to be largely financed through outside capital and potentially from a modest contribution of revenue from sales of the next generation therapeutic laser technology, the TLC-2000.

Valuation

Theralase technology is currently well positioned in the market. The launch of a new product, an improving economy and an aggressive sales and marketing strategy will help boost their sales in the coming years.

Thus far, the sales of medical laser systems might have suffered to some degree due to the global economic downturn, especially in the U.S. since 2008 and Europe in 2012, although we think lack of sufficient capital and personnel to significantly increase sales might have also been a factor. Over the long term, the noninvasive application of the medical laser equipment business is projected to grow due to greater awareness and increased government budgets for healthcare. According to a new market report published by Transparency Market Research, the global market for medical laser systems was valued at $909 million in 2011 and it is expected to reach an estimated value of $2.0 billion in 2018, implying a CAGR of 12.5%.

The sole current contributor to our modeled revenue is from the TLC-2000. Revenue from the expanded markets from the pain therapy applications that may materialize would be incremental, and provide potential upside, to our model. Theralase currently has about 1,200 customers in the U.S., Canada and other international markets for the TLC-1000 product, with Canada contributing 72% of revenue. Starting in the fourth quarter of 2014, Theralase plans to begin phasing out the TLC-1000 product in Canada and the U.S. by converting existing customers currently using the TLC-1000 to trade-up to the TLC-2000 model. The sales effort will also target new customers with its TLC-2000 technology.

In the new revenue model, the practitioners enter into a 42-month lease structured payment plan (6 payments @ $99/month, followed by 36 months @ $500). Theralase allows unlimited use of the device and will provide unlimited warranty on the technology, training, ongoing service and marketing / customer referrals during the lease term. At the end of the term, the customer can choose to continue with monthly payments into perpetuity, sign another 42-month lease with the next generation smart laser system or return the device. The equipment will be billed through the internet; thus, allowing real-time payments and control over non-payment by practitioners.

Our financial model includes the assumption that 80% of current customers from Canada and the U.S. adopt this new technology over the course of two years, ending 2016. The short-term catalyst will be to successfully convince existing customers to upgrade to the new technology. A long-term goal might be to build a relationship to maintain the customer base so that they continue to lease the equipment to perpetuity or until the next generation laser system becomes commercial. We also assume 80% of the customer base renews their lease at the end of their 42-month lease term. Further, we expect Theralase to build a customer base of 6000 globally over the next decade for this device by targeting new customers in the U.S. and Canada from 2016 and in the European and international markets by 2017. In Europe and in the international market, the technology maturity, governmental regulations, and currency fluctuations influence the marketing strategy and as Theralase does not have a strong history in these markets, we project that the thrust of the sales and distribution may commence in 2017, growing at a rate of 12.5% per year over the next ten years.

R&D expense for 2013 was down 40% when compared to R&D expense for 2012. This was attributable to a decrease in expenditures and investment related to the commercialization of the TLC-2000. We look for aggregate Selling, General and Administrative (SG&A) expenses to increase as additional sales personnel are recruited for targeting new customers in the initial years; however, expenses relating to sales will stabilize over time as the product becomes more established in the market.

Debt

The company does not have material long-term financial liabilities. The short-term liabilities of $0.9 MM mostly comprise of payables and accrued liabilities.

Equity

Since 2011, Theralase has closed 4 non-brokered private placements raising a total of $5.08M. Theralase actively needs to pursue additional financing through a combination of the issuance of new equity or debt instruments, entering into joint venture arrangements and strategic alliances.

Recommendation

Investment Considerations

Strong advisory board and management team

Theralase is backed by a strong management team with significant knowledge and expertise along with a strong portfolio of IP and the ability to get regulatory approvals for therapeutic lasers.

Short-term catalysts

We believe that the company's focus on global market segments with significant unmet needs, the continued positive results from on-going pre-clinical trials and the upcoming TLC-2000 product launch bodes well for increased revenue coming from the laser therapy division in 2014. Expansion in international markets, the Brazil, Russia, India and China (BRIC) countries with emerging economies that are increasing their uptake of medical devices due largely to growing medical awareness and economic prosperity, an aging population, government focus on healthcare infrastructure and expansion of medical insurance coverage, represents one of the best potential avenues for growth in 2017 and beyond.

Theralase will validate its PDC technology in this animal cancer orthopedic model to support an Investigational New Drug application that will allow Theralase to commence a Phase I/IIa human clinical trial to prove the safety and efficacy of its PDC technology in Q1 2015. The Company hopes to enter the cancer destruction market after having success in clinical trials using PDCs to destroy: breast, colon, brain and bladder cancer cells.

Sales and Revenue

We view Theralase's pipeline as holding significant potential. While revenue has been modest to-date, particularly relative to future potential, it has helped fund the company's R&D efforts. Theralase needs to strengthen its implementation of the logistical and servicing issues to handle all the necessary sales and promotion until international operations become more mature and profitable.

Theralase is well positioned to deliver increasing revenue and earnings per share due to expanding use of its cold laser therapy system. The company's portfolio of high margin products targets attractive growth areas such as chiropractic and physical therapy centers. We also expect to see positive results from clinical trials employing the PDT technology that could drive upside to out-year estimates. Lastly, we view Theralase as an attractive acquisition target given its position as a laser therapeutics company with a unique technology, expanding menu and growing installed base.

Valuation

TLT.V currently trades at $0.23, well below our calculated and targeted fair value. We utilized a risk-adjusted net present value analysis to determine our price target objective. Using a discounted cash flow analysis, we derive the total equity value of approximately $66.5 million, assuming 68.5 million fully-diluted shares outstanding and roughly $2.00 million in cash by end of 2015. This projection is based solely on projected sales of the TLC 2000 device. At this point we do not consider sales of the TLC-3000 device as it is in pre-clinical stage and not likely to reach commercialization in the near term; however, we do acknowledge that the TLC-3000 could be a potential driver of revenue post 2017. We are initiating coverage of Theralase Technologies with an Outperform rating and a $1.00 per share price target.

Risk Factors

Sole product: In view of the technological progress in the medical device field, research and product development life-cycles can become a lengthy process. Theralase has invested a significant amount of time in getting each of their products commercialized; hence, a majority of their revenue will be generated from the TLC-2000 for the foreseeable future, as the TLC-3000 PDC technology is still in the pre-clinical stages of development.

Medical Reimbursement: Insurance companies consider laser therapy as belonging to the category of alternative therapy that is in the experimental and investigational stage because there is inadequate evidence of its effectiveness. Laser therapy methodologies are not standardized for the treatment of wound healing, or pain of various etiologies in various anatomical sites and the physiological effects from photobiomodulation are not completely understood. The major concern is in its parameters of use, such as: wavelength, power, irradiation dose, and effects on different medical conditions. The studies involving LLLT may not be in conflict, and may represent fundamental, but poorly understood, differences in treatment approaches.

Furthermore, although positive effects were found in studies, it was not clear that the pain relief achieved was large enough to replace conventional therapies that impact reimbursement amounts. Thus far, there has been very little indication of reimbursement amounts from public or private insurance companies for cold laser therapy. The U.S. government is the leading payer for most of healthcare, and under PPACA, the government's role in reimbursing for medical technology may increase. Yet two-thirds of all requests for reimbursement are denied today, and the time frame to process the reimbursement requests and the approved amounts are big unknowns for such companies introducing new devices.

Model-Based Assumptions are prone to large variations: The growth of innovation and development of technology in the field of medical devices and healthcare is enormous. The medical device market changes frequently in terms of technology and marketing. Lack of adequate planning and regulatory strategy for a chosen market can cause higher development costs and unexpected delays resulting in a longer development cycle.

The estimated financial model entails assumptions based on available current information, best-guesses and management's publicly available reports. Our projected revenue growth from the sales of TLC-2000 from the current year and beyond is largely best-guesses based on existing customers upgrading from TLC-1000 to TLC-2000 as well as growth in the customer base. Revenue could underperform relative to our model if the customer base does not grow at our assumed forecast or is less correlated to revenue growth than what we are assuming. As cold laser therapies become more prevalent among practitioners, it is very difficult to gauge whether our estimates (particularly in the out-years) will prove accurate. Achieving our price objective includes, but is not limited to, clinical, regulatory, competitive, reimbursement and financial risks. Theralase may require substantial funding to advance the clinical progress of its candidates, which could be dilutive to current shareholders.

Financial Model

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1 Burnstock, Geoffrey. "Purinergic receptors and pain." Current pharmaceutical design 15, no. 15 (2009): 1717-1735.

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