IPO Watch: Oculus Seeks Foothold In Wound Healing

| About: Sonoma Pharmaceuticals, (SNOA)

Looking for an example of the convergence of medical devices and drug development? Oculus Innovative Sciences (OCLS) might be the poster child for this convergence. Oculus, which is scheduled to make its IPO this week, has won approval for Dermacyn as a device, with a CE Mark in Europe and 510(k) clearance in the US.

As a device, it is approved for wound cleaning, or debridement, lubricating, moistening and dressing wounds. But the compound is also undergoing clinical trials so that it can be approved as a drug, in which case it would be indicated for wound healing.

The Product
The platform technology for Oculus is called Microcyn. Available under several different names (in the US, Dermacyn for people and Vetericyn for animals), it is an electrically charged, or super-oxidized, water-based solution. It has been shown to be effective against a wide range of organisms that cause disease, including antibiotic-resistant strains of bacteria.

Unlike earlier formulations of super-oxidized water, Microcyn has a low concentration of free available chlorine, which would otherwise cause skin reactions. Also, the product is very stable, with a shelf life of over 1 year at room temperature. Previous versions were viable for only up to a few days.

The company is seeking to win approval for Dermacyn, the name of the wound care product, as a drug that promotes wound healing. Recently, a scientific study showed the compound was more effective against diabetic foot ulcers than the current standard of care, a 10% povidone iodine solution. Dermacyn decreased the median length of time needed for healing from 55 days to 43 days, and it did not cause any skin reactions, which were a problem in 17% of the iodine-treated patients. Because Microcyn is a relatively benign substance, it is expected to be very compatible with other technologies that are already available for wound healing.

Somewhere between 14% and 20% of patients with foot ulcers will have to undergo amputation, and infection adds to the risk, so this is not a minor problem.

In July 2006, Oculus finished a clinical trial of Microcyn in patients who needed a pre-op skin preparation. Unfortunately for Oculus, the FDA is currently considering new procedures for approval of pre-op skin preparations. Until the FDA decides whether it will require two clinical trials for this indication, Oculus has put this initiative on hold.

The company will begin a pilot study in early 2007 that tests Microcyn in patient with infections in open wounds. The pilot study is expected to lead to a Phase IIb trial in the second half of 2007, a study that will have a 12-month duration.

Oculus began selling Microcyn in Europe and Mexico in 2004. The US launch was June 2005.

In its IPO, Oculus is offering 3.5 million shares in an $8-$12 range. That represents a 33% haircut from the original range, which was $12-$14. After the IPO, Oculus will have 11.9 million shares outstanding, giving the company a market cap of $107 million at the midpoint. There are options for an additional 2.3 million shares at a weighted average of $5.04 apiece and warrants (from convertible preferred stock) for 1.1 million shares at a weighted average of $10.18. Existing shareholders paid an average of $7.43 for their shares.

Oculus operates on a fiscal year that ends on March 31. In FY 2006, it had revenues of $2.6 million, which was slightly better than the cost of sales. Overall, it lost $23.1 million. Revenues for the first six months of 2007 (through September 30, 2006), are doubling from the previous year, coming in at $2.3 million. And the six-month loss of $8.9 million is running lower than in 2006.

The company has cash of just $2 million, and that sum is the benefit of a bridge loan which will be repaid out of the proceeds of the offering. Also, Oculus will spend $6.3 million to build a direct sales force in the US and Europe and another $13 million on research and clinical development projects. Given its precarious cash position, Oculus says the offering will provide enough cash for only 12 months of operations.
There are a number of issues facing the company. Its auditors, PriceWaterhouseCooper, have told it that its reporting standards are subpar. And Oculus is fighting with Coherent Technologies of Japan over the license to an earlier version of Microcyn.

According to sources quoted by Oculus, the chronic and acute wound care market totaled $9.6 billion in product sales in 2005. Oculus believes its market is $1.3 billion for skin ulcers, $300 million for burns, and $700 million for wounds. Their biggest competitive advantage may be the benign side effect profile of Microcyn. In recalcitrant cases, physicians may feel it necessary to try everything possible to cure the patients, which will help Oculus gain a foothold in the market.

Disclosure: none.

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