I like to invest in stocks that have disruptive technology. These companies possess the potential to transform the status quo into the obsolete. Often chastised by investors and ignored by Wall Street analysts, several companies that I cover are on the verge of creating a market moving opportunity for investors. One such company is Arch Therapeutics (OTCQB:ARTH).
Arch Therapeutics is an emerging biotechnology company focused on developing innovative and transformative medical devices. The lead candidate that has captured the attention of investors is the AC5 Surgical Hemostat Device, a device intended to provide rapid cessation of bleeding and to control fluid leakage during surgery and trauma care.
Protecting its clinical and trial success of the product and device, the company enjoys an exclusive worldwide license to certain patent and patent applications assigned jointly to Massachusetts Institute of Technology and Versitech Limited, the technology transfer company of the University of Hong Kong. The company has recently been awarded several notice of allowances from the U.S. Patent office.
These allowances fortify an already strong intellectual property position that will protect the technology from potential competition for 20 years from issuance of the original patent. With the addition of allowances and improvements, the company starts the clock over on many of the innovative supplements to the device, granting protection into the foreseeable future.
The AC5 is a dynamic medical device utilizing a synthetic peptide comprised of naturally occurring amino acids. In clinical testing, the device has demonstrated significant benefits over existing methods of treatment to arrest bleeding and the flow of fluids during surgical or trauma situations. The importance of having the ability to control bleeding is obviously of paramount importance in many stages of medical treatment. For doctors, having a product that can help to manage and prevent both bleeding and fluid leakage is an invaluable and potentially life-saving tool during both procedure and triage situations.
The benefit of the AC5 is not limited to invasive surgical procedure, it can also be used as a sealant for additional and minimally invasive procedures such as colonoscopy biopsy, device implantation, and a number of additional procedures requiring either an intentional lesion within the body or to provide a controlled bleed as may be required by the treating physician.
With the clinical testing of the AC5 well underway and with human patient results projected to be released prior to the end of summer, investors are hoping for a long-awaited affirmation that the technology is viable and can be marketed as a necessary and vital technology to the future of hemostasis. The device stops bleeding promptly. Not only does the AC5 provide significant cessation of bleeding advantages over the current methods available, the product can uniquely conform to irregular wound geometry and allows for normal healing, while at the same time providing a clear field of vision into the wound area.
Because of the products visual transparency and lack of a sticky and glue like texture, the product offers significant advantages in various laparoscopic procedures, which are minimally invasive surgical procedures performed by introducing small incisions into the treated area. With its optic transparency, a surgeon is able to perform a surgical or medical procedure without visual impairment to the wound in order to stop undesirable bleeding as it starts.
The most significant aspect of the AC5 is the time to hemostasis, the stopping and prevention of bleeding from damaged blood vessels and tissues. The time to hemostasis for the AC5 has been measured in seconds, whereby the competing products have typically generated results of hemostasis in minutes, demonstrating a clear and compelling advantage to Arch technology.
The AC5 peptide can be a sprayed or squirted as a liquid that converts into a clear barrier layer to stop bleeding and other leakages in or on the body. ARCH is focusing on the surgical hemostat market first. As noted, a key advantage of using the AC5 technology is that unlike other hemostats that might impede the continuous surgical procedure, the AC5 peptide not only allows surgeons to work continuously by being able to see through the seal, it also allows the surgeon to work through the AC5 barrier layer, allowing a continuous surgical procedure. The peptide will vanish within a short period of time, typically three weeks or less. This provides less discomfort for the patient in comparison to stitch or staple removal and also reduces office visit time and cost.
Notably, AC5 is not a coagulant, which overcomes the challenge of stopping bleeding in people using prescribed blood thinners, such as those with heart disease. In fact, in animals first injected with Heparin, the blood thinner, this product sealed bleeding in the same short time frame of about 15 seconds. For patients on prescribed blood thinners who face surgery or traumatic situations, AC5 would potentially reduce risk and fulfill a critical need to effectively control bleeding.
In its pre-clinical testing, the AC5 has demonstrated its ease of use as well as its effectiveness and versatility. Testing has shown no adverse side effects or issues related to the hindrance of normal healing and recovery times.
Leading up to the summer release of trial data, the company has proven clinical efficacy in animal proof of concept studies, has been granted significant patent protection for the product and has developed its manufacturing methods to meet safe production requirements. The company has also advanced the regulatory process by meeting with both the EU and US regulatory agencies overseeing the clinical trial. They have also been stamped with a GMP clinical product designation and have provided definitive biocompatibility studies prior to entering its human trials.
In the US alone, there are over 51 million surgical procedures per year. Worldwide, that number balloons to over 100 million surgical and laparoscopic procedures. Of these procedures, over 100 million of these require procedure-based wounds which can benefit from sealants and hemostatic agents, which the AC5 delivers. Delivering hemostasis in seconds, the AC5 may reduce operating times and more importantly allow a surgeon to meet and overcome greater challenges required to provide a more involved medical procedure, due to the AC5 ability to control bleeding.
The AC5 can address an estimated $7 billion market in 2017. Sales for hemostat products reached over $4 billion in 2015, up from $2 billion in 2010. Over two-thirds of the market sales were for hemostatic products and the company is projecting an even greater growth rate for sealants that meet a larger and unmet medical need, which plays into the strength of the AC5.
Surgeons have been reluctant to use the current options for hemostatic agents due to cost and product limitations. However, this can be a benefit to Arch if the pending results are similar to already published data. The opportunity to reintroduce the medical community to a superior advancement of the hemostasis technology offers a huge upside potential for the company.
Regardless of the type of surgery, bleeding risk and vessel leakage complications remain a concern. Even with non-invasive procedures, surgeons must be prepared to treat unintended consequences of providing lesions and to address unexpected bleeds during a surgical procedure. Having an effective product available to control these events can potentially play into the hands of the AC5 product.
With the growing number of surgical procedures being performed as out-patient service, medical practitioners must be even more prepared to address medical emergency and complications because they are often without the benefit of the extensive resources available to them in a larger hospital-based setting. Doctors have also commented on the importance to effectively control postoperative bleeding during recovery and have indicated interest in utilizing a product that can accomplish that goal.
From a financial position, the company recently completed a $3.4 million private placement that provides ample funds to progress through the remainder of the clinical trial. Being designated as a medical device allows the company an expedited pathway for approval by the FDA. In 2015, the majority of medical devices were cleared within nine months. There has been additional oversight of the trials from The International Organization of Standardization, The United States Pharmacopeia, The American National Standards Institute, and the Association for the Advancement of Medical Instrumentation.
The company has 116 million shares outstanding and has a fully diluted share count of approximately 125 million shares when including options and warrants. The share price has increased by over 50% since March of this year as investors continue to digest positive clinical data and the fortification of its IP portfolio.
I have found few, if any, missteps thus far on its path toward approval. As with most clinical trials, the time required to get to this stage of the process has taken longer than expected. But investors need to understand the complexities associated with advancing any medical trial through the regulatory process.
Risk is always a factor when investing in small and emerging companies. With the share price below a dollar, the company is not widely followed by large institutional investors. But, the lack of exposure may offer an opportunity to small and retail investors to take a position in an emerging technology positioned to provide far superior benefit to physician and patient alike.
With a focus on the summer of 2016 as being a pivotal data release period for the company, the event is not a make or break result for the company. The product has clearly demonstrated significant benefit over existing products and has been proven safe, tolerable, and effective in several trial and application studies. With both the EU and US receptive to the benefits that the AC5 can offer, and with the designation as a medical device, the AC5 has promising potential.
With a respectable balance sheet and the recent dilutive financing complete, investors can look forward to an event, that if positive, would not be a "sell the news" event.
With the stock being relatively unknown and with a lack of institutional ownership, the recent rise in volume is encouraging. As volume historically precedes price, the increased volume associated with an advancing share price is sometimes indicative of good news for the future. However, investors should watch this investment closely, especially during the first few weeks of July as a data release is imminent.
With the stock trading at microcap levels, the data can move the stock significantly in either direction. If positive, I would expect a sustained uptrend in the price per share. With disappointing data, I expect a 50% haircut to the share price.
In either case, investing in potentially disruptive and revolutionary companies usually requires some antacid. I have mine ready to open in early July and will be watching ARTH closely... hoping that Arch Therapeutics can literally stop the bleeding.
Disclosure: I am/we are long ARTH, INO, CTIX.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.