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  • Arch Therapeutics, Where To Go From Here?

    On December 12, 2013 I recommended a speculative position in Arch Therapeutics (OTCQB:ARTH). Back then the stock price was $0.21. On January 3, we saw a high of $0.42 and now the stock is traded around $0.40.

    As said in my prior article, a talented management team is an important asset for a company to execute its business plan. Seasoned professionals who have started or managed successful companies before is one of the most important criteria. The pre-existence of an experienced management team in a startup life science company increases credibility and improves the chances of getting funding.

    But without a unique product or therapy, a life science company cannot succeed. Investors feel more confident if a proof of concept has been demonstrated, at least in preliminary experiments. In the case of Arch Therapeutics (OTCQB:ARTH) the proof of concept has been demonstrated through experiments performed on animals, resulting in data that can reasonably be extrapolated to realistic predictions of significance and human trial results.

    The company's lead product candidate-- one that stops bleeding-- is called AC5™. This hemostasis product keeps the blood within the body wound and seals it.

    For investors not familiar with hemostasis I will explain it briefly. Hemostasis is the act of restricting or stopping blood flow from a damaged vessel or organ. Effective management of bleeding is critical for promoting positive outcomes in the surgical patient. Throughout a surgical procedure, bleeding must be controlled, not only to provide the best view of the operation site, but also to prevent the adverse physiological effects associated with blood loss. When the natural process of blood clotting does not occur or is adversely affected by surgery, other methods of achieving and maintaining surgical hemostasis are often indicated.

    The methods currently available to effectively manage surgical hemostasis have many common drawbacks (see picture below.

    (click to enlarge)

    As shown in the sheet above, many available hemostatic and sealant agents possess a combination of limitations, including slow onset of action, general unreliability, user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection, and other safety concerns.

    The leading product of Arch Therapeutics doesn't have these common drawbacks; that's why we think the company's AC5 product could capture a large chunk of the wound closure and management market, when available.

    The Market Size

    According to a 2012 report produced by MedMarket Diligence, LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery in the U.S. Arch Therapeutics estimates that 20%-25% of those surgeries are performed using minimally invasive procedures. Basically more than 25 million wounds could benefit from sealants and hemostatic agents, such as AC5. Additional trends that support a demand for hemostatic and sealant products include the following:

    • Overall procedure volume growth;
    • Ambulatory same day surgery volume growth;
    • Laparoscopic procedure volume growth;
    • and Efforts to reduce operating room time.

    According to the same report of MedMarket Diligence, the market for these products achieved approximately $3.4 billion in 2010 worldwide sales and will surpass the $6.5 billion mark in 2017. Over two-thirds of those sales are for hemostats. Further, the projected growth rate for sealants may be even higher than that for hemostats due to a general lack of available products and potentially larger unmet need.

    (click to enlarge)

    From inception Arch didn't have any revenues and the company had incurred a net loss of $4,631,871. Of course the company needs to raise additional funds to continue the business. This is nothing strange and is normal for biotechs in the development stage. We think Arch Therapeutics could be open to in-licensing activities and collaborations. It makes sense for the company to seek deals with pharmaceuticals that are sitting on huge piles of cash.

    Lead Product AC5™

    Investors that didn't read my first article about Arch Therapeutics are, of course, not familiar with the product. That's why I will describe it here again.

    AC5 is designed to accomplish hemostasis in minimally invasive and open surgical procedures. The product is a biocompatible synthetic peptide containing naturally occurring amino acids. When applied to the wound, AC5 intercalates into the interstices of the connective tissue where it self-amasses into a physical, mechanical nanoscale structure that provides a fence to leaking substances, such as blood.

    The results of early data from preclinical animal tests have shown that AC5 achieves hemostasis quickly and effectively. Hemostasis occurred over 30 times faster than control use of saline and 10 times faster than the use of cauterization. AC5 can be applied right away as a liquid or a spray, making it user-friendly and able to conform to irregular wound geometry. Because it is not sticky or glue-like, AC5 is perfect for use in the setting of minimally invasive laparoscopic surgeries. Further, AC5 is transparent, which should make it easier for a surgeon to maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts. This procedure is called Crystal Clear Surgery™.

    Current Achievements

    From The Biotech Showcase™ 2014 presentation I copied this good overview of the company's achievements so far. The Biotech Showcase™ is an investor and partnering conference devoted to providing private and public biotechnology and life sciences companies an opportunity to present to and meet with investors and pharmaceutical executives during the course of one of the industry's largest annual healthcare investor conferences.

    (click to enlarge)

    Final Note

    The success of any surgical procedure depends on a surgeon's ability to effectively and efficiently manage hemostasis to provide an optimal view of the surgical field and to prevent the adverse physiological effects associated with blood loss.

    That said, the benefits of the AC5 Surgical Hemostatic Device™, aimed at controlling bleeding and fluid loss in order to provide faster and safer surgical and interventional care, it far outshines any current available options.

    Over the coming weeks, the company will further discuss the upcoming milestones for 2014.

    Arch Therapeutics is currently one of the most promising small cap ideas in the life science field. Investors can still anticipate and invest before any milestone is presented. One thing seems for sure: the stock price will appreciate going forward.

    Sources: Company's presentation Biotech Showcase, 10-K filing, MedMarket Diligence

    Disclosure: I am long ARTH, .

    Jan 20 4:35 AM | Link | 2 Comments
  • Arch Therapeutics, A Promising New Life Science Company

    A versatile and talented management team is a very important factor for building a great company, especially in the life science sector. I think Arch Therapeutics, Inc. (OTCQB:ARTH) provides a compelling opportunity for high-risk investors to profit from an emerging life science company that has the ability to execute.

    A stock price of $0.21 doesn't tell you the whole story. The average volume for the last 3 months is relatively low at 197,784. But I think investors that are looking for a rather new company with an experienced management team, a great advisory board, and a promising lead product candidate may be interested in having a look at Arch Therapeutics.

    The company transferred itself to a life science company from selling automobile spare parts online. On June 26, 2013, the current company saw the light and changed its operations to develop polymers containing synthetic peptides designed to form gel-like barriers over wounds to stop or control bleeding and seal wounds. This process is called hemostasis.

    Description of Hemostasis

    According to Wikipedia, hemostasis or haemostasis (from the Ancient Greek: αἱμόστασις haimóstasis "styptic (drug)") is a process that causes bleeding to stop, meaning to keep blood within a damaged blood vessel (the opposite of hemostasis is hemorrhage). It is the first stage of wound healing. Most of the time this includes blood changing from a liquid to a solid state. All situations that may lead to hemostasis are portrayed by the Virchow's triad. Intact blood vessels are central to moderating blood's tendency to clot. The endothelial cells of intact vessels prevent blood clotting with a heparin-like molecule and thrombomodulin and prevent platelet aggregation with nitric oxide and prostacyclin. When endothelial injury occurs, the endothelial cells stop secretion of coagulation and aggregation inhibitors and instead secrete von Willebrand factor, which initiate the maintenance of hemostasis after injury. Hemostasis has three major steps: 1) vasoconstriction, 2) temporary blockage of a break by a platelet plug, and 3) blood coagulation, or formation of a clot that seals the hole until tissues are repaired.

    The evolved ability of the human body to stop bleeding has limits when the size and/or nature of the wound overwhelms the clotting process. Additionally, patients with compromised abilities in their clotting process can be at extreme risk from relatively minor wounds. As a result, hemostasis products have seen and will continue to see strong growth in the overall wound closure and management market.

    Given the opportunity and the relatively low barrier to market entry, Arch Therapeutics could become an important player in the hemostasis market.

    (click to enlarge)

    Source: MedMarket Diligence, LLC; "Worldwide Surgical Sealants, Glues, Wound Closure and Anti-Adhesion Markets, 2010-2017." Report #S190.

    Growth in the global hemostasis market is near 10% with some of the highest growth seen in the U.S. and Asia/Pacific markets, although driven by different dynamics.

    Lead product AC5™

    As mentioned before, Arch Therapeutics is a life science medical device company that aims to develop products that make surgery and interventional care faster and safer by utilizing a novel approach that stops bleeding ("hemostasis"), controls leaking, and provides other advantages during surgery and trauma care. The leading product candidate, AC5™, is designed to accomplish hemostasis in minimally invasive and open surgical procedures.

    AC5™ is a biocompatible synthetic peptide containing naturally occurring amino acids. When applied to the wound, AC5™ intercalates into the interstices of the connective tissue where it self-amasses into a physical, mechanical nanoscale structure that provides a fence to leaking substances, such as blood.

    The results of early data from preclinical animal tests have shown that AC5™ achieves hemostasis quickly and effectively. Hemostasis occurred over 30 times faster than control use of saline and 10 times faster than the use of cauterization. AC5™ can be applied right away as a liquid or a spray, making it user-friendly and able to conform to irregular wound geometry. Because it is not sticky or glue-like, AC5™ is perfect for use in the setting of minimally invasive laparoscopic surgeries. Further, AC5™ is transparent, which should make it easier for a surgeon to maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts. This procedure is called Crystal Clear Surgery™.

    Business Plan and Catalysts

    (click to enlarge)

    Source: Company's website

    In the company's 10-Q filing, we can distillate the long-term business plan. The plan includes the following goals:

    • Expanding intellectual property portfolio
    • Conducting successful clinical trials on AC5™
    • Obtaining regulatory approval or certification of AC5™ in the European Union, the U.S., and other jurisdictions
    • Developing appropriate third party relationships to manufacture, distribute, market and otherwise commercialize AC5™
    • Develop additional product candidates in the hemostatic and sealant field.

    It's good that the company described their long time business plan, but many investors are looking for short-term catalysts. The following catalysts for the remainder of 2013 and 2014 can be found below.

    • Further developing and securing intellectual property rights
    • Engaging a large scale manufacturing partner to produce cGMP product for clinical trials
    • Participating in EU and, subsequently, U.S. regulatory meetings
    • Preparing for initial clinical trials, including developing clinical trial protocols
    • Conducting formal biocompatibility studies
    • Commencing human clinical trials.

    A Great Management Team

    Making judgments about management is important before you invest in a company, especially when it is a start-up. A company is nothing without a CEO. The CEO of Arch is Terrence W. Norchi, MD. He co-founded the company in 2006. Dr. Norchi has a medical analytical investment background as a portfolio manager, but also as a pharmaceutical analyst at Putnam Investments, Citigroup Asset Management, and Sanford C. Bernstein. He earned an M.B.A. from the MIT Sloan School of Management in 1996 and completed internal medicine residency in 1994 at Baystate Medical Center, Tufts University School of Medicine, where he was selected to serve as Chief Medical Resident. He earned an M.D. degree in 1990 from Northeast Ohio Medical University.

    The Head of Operations and Manufacturing is Mr. William M. Cotter. He has been advising Arch Therapeutics since 2011 and is an industry veteran who brings expertise in operations and product development. Mr. Cotter has over 30 years of operational experience in Medical Devices, Diagnostics, Biologics and Life Science companies, ranging from early stage startups to large multinationals. Mr. Cotter has served in senior operations and development roles for companies including Cohera Medical, Helicos Biosciences, Closure Medical Corporation (Johnson & Johnson), Sanofi Diagnostics Pasteur (Beckman Coulter), Genetic Systems Corporation (Bio-Rad) and Advanced Technology Laboratories (Phillips HealthCare).

    For more on the management team, look here.

    Final Note

    Great emerging ideas are the lifeblood of investing. I think Arch Therapeutics offers a compelling opportunity to those who are patient and are familiar with the life science space.

    The company is currently devoting most all of its efforts toward product research and development. In light of that, the company will require new financing for its research, development, and commercialization of its potential products. I think the current stock price doesn't reflect the future value of the company.

    Arch Therapeutics lead product, AC5™, will capture the hemostasis market. With a great management team in place, we will hear more of this company going forward.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQB:ARTH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Dec 16 7:28 AM | Link | Comment!
  • American Lorain, Forgotten And Despised

    One stock that's on my watchlist again is a company that I have been following for quite a long time in my past life. Unfortunately I lost faith and I sold out my position with a loss. Faith can come back, but I guess it takes time.

    One of my first PREMIUM articles on Seeking Alpha titled The Long Case Of American Lorain describes the company in detail. A long time ago February 1, 2011.

    A company, forgotten and despised, but suddenly on November 27 something showed up. A press release with the title American Lorain Corporation to Commence Product Sales in Family-Mart Japan.

    More than one year of silence, no press releases, no conference calls only SEC filings and then suddenly something odd happens.

    To celebrate this news I bought a small position. Speculative I guess, but if you don't have faith anymore you don't make profit.

    Why the company was in the graveyard?

    I think we have to go back to the beginning of last year. The biggest shareholder in American Lorain was Guerrilla Capital Management. A fund run by notorious fund manager Peter Siris.

    Siris managed two New York-based funds that were heavily invested in US-listed Chinese small caps. The funds Guerrilla Capital and a related firm, Hua Mei 21st Century LLC., had about $160 million under management in 2010.

    From 2007 to 2010, Siris and his firms sold unregistered securities and engaged in unregistered broker-dealer activity and illegal insider trading tied to China Yingxia International Inc., the SEC said in a complaint filed last year.

    China Yingxia a was a nutritional health food business which entered the U.S. capital market through a reverse merger deal in 2006, according to court filings. The company collapsed in 2009 amid allegations that its China-based CEO had engaged in illegal fund- raising activities.

    Additionally, Siris, who was regularly asked to participate in Chinese company securities offerings, engaged in insider trading involving other companies, including China Green Agriculture Inc. (NYSE:CGA), SmartHeat Inc. (NASDAQ:HEAT) and Puda Coal Inc. (OTC:PUDA).

    Consequently, Siris is barred from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock.

    All this criminal behavior had enormous impact on American Lorain because his Guerrilla Capital fund has been wind down and the fund's positions have been liquidated.

    (click to enlarge)

    source: www.nasdaq.com

    The interesting part is that Morgan Stanley seems to have faith and is building up a position.

    But the question remains: Why the company didn't connect with the investment public?

    Maybe it had to do something with the going private proposal the company received on October 15, 2012. It is a non-binding proposal but already pending for more than one year. Maybe he or management thought there is no need to inform investors anymore.

    Personally I don't think CEO Mr. Si Chen is going to offer $1.60 per ordinary share in cash anymore, despite he already owns approximately 46.5% of the company's shares.

    The stock trades at $0.75 and with current international expansion plans, read Japan, American Lorain will need to have new exposure. One of the best ways to get exposure is a listing on a stock exchange. Of course you could have negative exposure but also positive. Let's be positive and give the company the benefit of the doubt.

    Valuation

    With $1,36 in cash and a book value of $5.18 high risk investors have some margin of safety. Quarterly results were mixed but the first nine months American Lorain raked in $0.27. Diluted earnings per share this fiscal year could be more than $0.40, because Q4 is traditionally their strongest quarter. Basically we are looking at a company with a P/E ratio below 2.

    Is this low valuation justified?

    When you lost faith in humanity and don't believe anymore in Chinese companies I would say yes. My faith is coming back and that's why I bought a small position below $0.80.

    Final Note

    American Lorain Corporation (NYSEMKT:ALN) is a food manufacturer. The company's products include chestnut products, convenience food products and frozen food products. They currently sell over 240 products to 26 provinces and administrative regions in China as well as to 42 foreign countries.

    The management of American Lorain has to show itself on a prudent way and explain the situation. You are Not Forgotten And Despised!

    Disclosure: I am long ALN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CGA, HEAT, PUDA, ALN, long-ideas
    Dec 02 9:56 AM | Link | 3 Comments
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