On March 21, 2010, Oxygen Bio (OXBT) reported financial results for the fiscal third quarter ended January 31, 2011. The company reported revenues of $52,562 during the quarter, all from OTC sales of Dermacyte products. Sales of Dermacyte products increased 71% from the $30,768 reported in the fiscal third quarter 2010. Sales were generally in-line with our expectations for $55,000. Dermacyte revenues so far in fiscal 2011 have totaled $95,543, up an impressive 156% YTD from fiscal 2010.
Revenues from Dermacyte were derived roughly 50/50 between the U.S. and Europe (U.S. was $26,712 / EU was $25,850). Sales of Dermacyte in Europe were recorded via the distribution agreement with Dermacyte Switzerland, Limited (DSL). This was the initial 1,000 unit order placed by DSL upon initiation of the agreement signed in December 2010. The price of $25.85 per unit was in-line with our expectations. We note that Oxygen Bio and DSL have an agreement for which an additional 39,000 units will be purchased before the end of the year 2011. In fact, on the fiscal third quarter call, management noted that DSL recently placed an order for 10,000 units. This should generate just over $0.25 million in revenues to Oxygen Bio alone. Add in the recently signed agreement with Comercial Uni2 for 10,000 units for sale in Mexico in calendar 2011, and we are expecting a dramatic ramp in revenues over the next several quarters in Dermacyte sales outside the U.S.
Back in the U.S., Dermacyte sales are being driven by a mix of online sales and direct marketing. The majority of the sales are coming in areas where management has sales managers, including New York City, Michigan, and Arizona. We note that in October 2010, management hired a sales director with 15 years of experience in dermatological and skin care sales to elevate Dermacyte’s effort to date and focus on increasing sales in the future. The company currently has 3 full-time reps in the field promoting Dermacyte skin care products to dermatologists and plastic surgeons.
Net loss reported during the fiscal third quarter 2011 totaled $2.54 million, or 11 cents per share. This was generally in-line with our forecast for a loss of 10 cents per share. Oxygen Bio exited the fiscal third quarter 2011 with $0.52 million in cash and investments. In October 2010, management entered into an agreement with Vatea Fund to issue an aggregate of $5M senior unsecured promissory notes, of which $2.0 million had been issued prior to the end of the fiscal third quarter (January 31, 2011). In March 2011, management issued another $861,000 to Vatea. Another $2.139 million remains to be issued, which we expect to take place in the next few months.
Oxygen Bio burned approximately $2.3 million during the fiscal third quarter. We believe the current cash balance, along with the ability to issue another $2.1 million in promissory notes over the next few months, is sufficient to fund operations to June 30, 2011. Unless management can secure significant non-dilutive cash in April or May 2011, we expect a dilutive offering to take place in June 2011. Future dilution is our major concern for the stock right now.
Neutral for Now
We currently rate shares of Oxygen Bio 'Neutral'. There are clearly signs of progress and things to get excited about, specifically with Dermacyte. Total Ex-U.S. Dermacyte order commitments in 2011 total 50,000 units. This includes the deal with DSL for Europe and Russia for 40,000 units and the deal with Commercial Uni2 for Mexico for 10,000 units. At roughly $26 per unit, Dermacyte sales in 2011 should be roughly $1.3 million. This is a substantial increase from the $52,562 reported for the quarter ended January 31, 2010. DSL has the right to expand their agreement into South America. Commercial Uni2 has the right to expand the agreement into Central America.
This presents upside to the current Ex-U.S. Dermacyte revenue in 2011. We note that management is also entertaining discussions for distribution of Dermacyte in Asia as well. We suspect that an Asia/Japan Dermacyte deal in 2011 could bring another 10,000+ units to the market.
We think Dermacyte has the potential to generate $2 million in revenues in 2012. Back in the U.S., sales remain low. However, management is expanding its marketing and promotional activities and is entering new markets such as dermatologists and plastic surgeons. Until recently the majority of Dermacyte sales in the U.S. have come from online retails, such as www.dermstore.com. We think as the medical community begins to take interest in Dermacyte, high-margin sales will follow and help drive profitability for the product.
With respect to Oxycyte, the company is continuing work with Oxycyte for traumatic brain injury (TBI). In March 2011, Oxygen Bio was awarded a 2-year, $2.075 million grant from the U.S. Army to study the safety and pharmacokinetics of Oxycyte for use in patients with TBI. We think this is a significant market opportunity and are encouraged by the fact that the U.S. Army has taken interest in the drug. Likewise, the U.S. Navy continues to look at Oxycyte for potential use in decompression sickness (DCS). The Navy has conducted two dose-ranging studies with Oxycyte that we expect to see data on later this year. Two additional (hyperbaric oxygen) programs are under way. In December 2010, Oxygen Bio announced that they have signed an agreement with privately held Sarasota Medical Products, Inc to determine the feasibility of pursuing a joint research and development venture for treating chronic ischemic wounds based on Oxygen Bio’s Wundecyte formulation. These wounds can include diabetic ulcers, decubitus ulcers (bed sores or pressure ulcers), and stasis dermatitis (inflammatory skin disease associated with chronic venous insufficiency with venous hypertension).
We are excited about the potential for Oxycyte use with the military. According to the Department of Defense (DOD) statistics, 75% of all U.S. military casualties of Operation Enduring Freedom and Operation Iraqi Freedom are caused by explosive weaponry, resulting in TBIs and blast-induced neurotrauma. They estimate that TBI accounts for ~22% of all combat casualties. According to the Centers for Disease Control (CDC), there are approximately 1.5 million people who suffer from a traumatic brain injury in the U.S. each year, about 20% of which are severe and result in hospitalization (250k) or death (50k). With respect to DCS, the U.S. Navy has 250-300 submarines that could stock Oxycyte for use in an emergency situation.
Unfortunately, the key driver of Oxycyte data s the currently "on hold" phase 2b STOP-TBI program. The trial is on hold while management finalizes the new protocol and sites for enrollment in the second cohort. The company changed the enrollment criteria to include patients with mild-to-moderate TBI, down from the severe TBI criteria in the first cohort, and also opened up new sites in India. We are disappointed with the pace of the trial. Funding also remains a key hurdle to re-initiating the program. Management is hoping to re-initiate enrollment, including new sites in India, in the next few months, although visibility remains low at this point. We remind investors that this is a randomized, double-blind program, and we will not see data from STOP-TBI until all subjects have been treated and analyze. This will most likely not be until the second half of 2012. Until then, we expect Oxycyte to remain under-the-radar on Wall Street.
Finally, with respect to Wundecyte, collaborative activities continue. In January 2011, Oxygen Bio announced it has signed a research contract with Hackensack University Medical Center to research the healing properties of Wundecyte and its novel oxygen-producing bandage for the treatment of full-thickness excisional wounds and partial thickness burns. The goal of the preclinical study will be to evaluate the ability of Wundecyte to prevent scar formation and improve infection control. The project is funded by the U.S. Department of Defense.
In December 2010, Oxygen Bio announced that they have signed an agreement with privately held Sarasota Medical Products, Inc to determine the feasibility of pursuing a joint research and development venture for treating chronic ischemic wounds based on Oxygen Bio’s Wundecyte formulation. These wounds can include diabetic ulcers, decubitus ulcers (bed sores or pressure ulcers), and stasis dermatitis (inflammatory skin disease associated with chronic venous insufficiency with venous hypertension).
We see Wundecyte as significant opportunity. There are an estimated 20 million diabetics in the U.S., roughly 15% of which go on to develop foot ulcers, with 1-2% requiring amputation. Decubitus ulcers are common on the scalp, back, buttocks, tailbone, hip heel or any other area to which pressure is applied while a person is lying down for extended periods of time. According to the 1999 National Pressure Ulcer Prevalence Survey, intensive care units have the highest prevalence rates among different hospital settings. The survey also found pressure ulcer prevalence in long-term care facilities is an estimated 10-30% of patients. Stasis dermatitis affects a significant portion of the elderly population. Studies have estimated the prevalence of stasis dermatitis affects 15 to 20 million people over age 50.
What Makes OXBT A Buy?
We would like to see the following things happen at Oxygen Bio before we can recommend the stock:
- Improvement in the financial position. The company will run-out of cash by the end of June 2011 based on the current burn rate and existing balance. We expect management to raise cash through an equity and/or debt offering in April / May 2011.
- Dermacyte sales ramp to over $1 million. Based on firm commitments from distribution partners, such as DSL and Commercial Uni2, this could take place by the end of 2011. We think Dermacyte can achieve $2 million in sales in 2012 if the company can expand its reach in the U.S. to include more medical professionals.
- Progress with Oxycyte or Wundecyte. Both products offer big potential in our view. We are pleased to see the U.S. Army and U.S. Navy both looking at Oxycte for potential indications. Contracts become meaningful and lucrative when the DOD gets involved. However, we would like to see the phase 2b STOP-TBI program re-initiate enrollment, and we would like to see meaningful progress with Wundecyte before we start modeling potential sales of either product.
These are things to keep an eye on over the next few months at Oxygen Bio.