(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
When one first hears the term "nano-cap", the response is rarely positive. The initial reaction tends to be one of skepticism and dismissal. Whereas small cap investments tend to maintain an aura of opportunity at a bargain price, the idea of a nano-cap tends to bring with it far more negative connotations. When most people hear the term, they immediately think of two guys sitting in a garage with limited assets, no infrastructure, and little more than a subpar idea. In truth, this customary response isn't always misguided. In fact, in many instances, such an assessment can be closer to the truth than the alternative. However, on rare occasion, a nano-cap opportunity can present with significant upside, real infrastructure, a tangible business model, and reasonable protocols in place to protect against downside risk. In other words, once in a while, a company with a tiny market cap actually turns out to be just that; a real company, which presents real opportunity.
One such company is Medifocus Incorporated (OTCQB:MDFZF). Despite being qualified as a nano-cap (currently the company has a market cap of under 19 million) Medifocus is, in fact, a very real company. The Canadian based entity employs 25 full time employees, maintains a functional corporate headquarters in Toronto, is in possession of considerable intellectual property, and is managed by capable and experienced executives. Furthermore, functioning largely in the cancer space, Medifocus has a considerable potential market, and a viable long term plan to define its own space in said market. As a potential investment, Medifocus offers real, long term, possibilities.
Who is Medifocus?
Medifocus is a company with a clear, albeit unusual identity. Some people refer to them as a biotechnology entity, whereas others consider the company more of a medical device company. In truth, the company falls somewhere in between. Medifocus designs, develops, and commercializes minimally invasive systems designated for the treatment of cancerous tumors, benign tumors, and enlarged prostates. These proprietary systems are the result of two technology platforms owned by the company. The platforms, which constitute significant intellectual property, are fully developed and comprehensively protected by both U.S. and international patents.
These two platforms are;
• The Endo-Thermotherapy Platform
• The Adaptive Phased Array Microwave Focusing Platform
Based on these proprietary technology platforms, the company has developed two advanced therapeutic products; the Prolieve System as a treatment for enlarged prostate, and the APA-1000 system for the treatment of breast cancer.
The Prolieve System
The Prolieve System is one whose origins are largely clouded by confusion. In order to understand the system, as well as its potential, one must first understand the history and origins of the system. In order to do that however, one must possess a further understanding of the beginnings of Medifocus.
Medifocus was founded by Dr. Augustine Cheung, Ph.D. He earned a Bachelor of Science Degree from the University of Maryland in 1969; a Master's of Science from the University of Maryland in 1971, and received his PhD in Electrical Engineering, specializing in microwave technology, from the University of Maryland in 1973. Today, Dr. Cheung is a renowned expert in microwave technology, and has presented, as well as been cited in, numerous papers and publications internationally.
Shortly after earning his doctorate, Dr. Cheung founded the Celsion Corporation (NASDAQ:CLSN). It is here, at Celsion, where the story of the Prolieve System begins. At Celsion, Dr. Cheung worked alongside Mr. John Mon, the vice president of business and product development at Celsion at the time, who is now the COO at Medifocus. Together, these two men, and their team, were originally responsible for the Prolieve System. In fact, the system earned such high regard and acclaim, that it was purchased from Celsion in 2007 by Boston Scientific (NYSE:BSX) for 60 million dollars.
In June of 2012 however, Medifocus struck a deal with Boston Scientific in order to buy back all the assets of the Prolieve System. This purchase included all inventory, the mobile distribution assets, and all intellectual property associated with the Prolieve technology. This maneuver had an immediate impact on the revenues at Medifocus. Since then, quarterly revenues have grown exponentially;
• Revenues for the quarter ended in June 2012 were zero dollars
• Revenues for the quarter ended in September 2012 were 313,281 dollars
• Revenues for the quarter ended in December 2012 were 630,150 dollars
• Revenues for the quarter ended in March 2013 were 862,538 dollars
• Revenues for the quarter ended in June 2013 were 1,311,251 dollars
As it stands currently, Medifocus expects to become profitable in 2014 for the first time in the company's history. Furthermore, now that the technology and assets are back in the hands of the technology's original designers, Medifocus is confident it can successfully procure a larger market share of the eight billion dollar enlarged prostate market. In fact, steps to doing so have already been taken. Earlier this month, Medifocus entered into a joint venture agreement with a Hong Kong based entity to obtain approval for the Prolieve System from China's food and drug administration. This approval would open substantial revenue opportunities for the company in the Asia Pacific marketplace.
In addition to these steps, Medifocus is also, in conjunction with Boston Scientific, conducting a post-marketing phase four study to evaluate the long-term safety profile of the Prolieve System, as well as the re-electoral rate of usage among patients. The results of this study could significantly improve the marketability of the system to medical facilities and physicians in the United States and abroad. As a long-term study, the phase four trial will be active through 2018. In the meantime, as the system is already an FDA-approved, insurance approved, Medicare approved, revenue generating system, Medifocus is continuing its plans to expand marketability of the system in the United States. The system is already available in over 250 urologic offices throughout the country, and is poised for no less than 10% growth in 2014.
So how does the Prolieve System work?
"The Prolieve system provides a 45-minute in-office treatment that combines our microwave thermotherapy capability with a proprietary balloon compression technology to both heat the prostate and dilate the prostatic urethra. The purpose of the Prolieve system is to provide a relatively painless and effective alternative to drug therapy and certain types of surgical procedures to treat the symptoms of enlarged prostate.
The Prolieve system consists of a microwave generator and conductors, and a computer and software program, that control the focusing and application of heat, plus a specially designed balloon catheter, and consists of two fundamental elements:
The combined effect of this "heat plus compression" therapy is twofold; first, the heat denatures the proteins in the wall of the urethra, causing a stiffening of the opening created by the inflated balloon, forming a biological stent. Then, secondly, the heat serves effectively to kill off prostate cells outside the wall of the urethra, thereby creating sufficient space for the enlarged natural opening. In addition, the Prolieve system's temperature (46º C to 54º C) is sufficient to kill prostatic cells surrounding the urethra wall, thereby creating space for the enlargement of the urethra opening. However, the relatively low temperature is not sufficient to cause swelling in the urethra.
The Prolieve is designed with patients' needs and comfort in mind. Clinical studies have shown that Prolieve treatment can be done with topical sedation only and does not require post-treatment cauterization in 95% of the cases."
The APA-1000 System
The second platform at Medifocus is the Adaptive Phased Array Microwave Focusing Platform which has created the basis for the APA-1000 System.
While the Prolieve System is a high quality, FDA-Approved, revenue generating technology, which protects Medifocus against downside risk, the true upside of the company as an investment vehicle resides in its APA-1000 System. APA, or Adaptive Phased Array technology, was developed at the Massachusetts Institute of Technology as part of a missile defense system for the U.S. Department of Defense. As a defense mechanism, APA was designed to employ microwave control technologies capable of utilizing microwave energy to detect, isolate, and destroy enemy missiles. The technology effectively permits properly designed microwave devices to focus and concentrate energy as needed. Therefore, as a medicinal treatment device, APA technology can utilize the same science to target diseased and cancerous tissue deep within the body. This allows for specific targeted treatment, without adverse impact on surrounding healthy tissue.
Medifocus currently holds an exclusive worldwide license to use this technology for all medical applications. Using the APA technology, they have developed the APA-1000 breast cancer treatment system, intended to destroy localized breast tumors through the application of heat alone, or in combination with chemotherapy. The company has received regulatory approvals to start the APA-1000's pivotal phase three clinical trials.
It is the potential outcome of these phase three trials which could catapult Medifocus into another stratosphere. According to the World Health Organization, breast cancer is the most common form of cancer in women. The total addressable market for the disease annually, in just the United States and Europe alone, exceeds 10 billion dollars. According to mybreastcancertreatment.org, nearly 70% of women with breast cancer receive radiation and/or surgery. It is in this space, the chemotherapy and surgery space, where APA-1000 is most applicable.
APA-1000 utilizes microwave technology to specifically target deep tissue tumors with heat. Now, at first glance, the idea of simply utilizing heat to target a cancerous tumor may appear over simplified. However, under the right conditions, and with the right delivery technology, microwave heat is capable of extraordinary things. Microwave is a form of electromagnetic radiation. Microwaves focused on tumors in the breast result in localized heating of the cancer cells. Higher water content of the breast tumor, relative to the surrounding fatty tissue, results in preferential heating of the tumor, and minimal damage to healthy tissue. Microwave treatment can result in tumor necrosis, induced apoptosis (programmed cell death), or cell death, and the heat enhances the effects of the chemotherapy drug. The end result is tumor shrinkage within a matter of weeks. Furthermore, the system can be used to eradicate microscopic breast tumors that cannot be seen by surgeons. As a result, not only is the principal tumor being shrunk considerably in the preparation of surgery, but the elimination of microscopic tumors in the vicinity dramatically decreases the likelihood of cancerous recurrence.
In accordance with the Medifocus website, clinical studies have already supported the validity of APA-1000 as a supplementary treatment in such instances;
"Clinical studies have demonstrated that when used in conjunction with chemotherapy, Medifocus' patented system can significantly enhance outcome, improving the expected tumor shrinkage rate by about 50 percent. When using Medifocus' patented focused-microwave technology, a minimally invasive disposable catheter sensor is inserted into the breast under ultrasound guidance to provide feedback signals for microwave focusing and temperature measurement. The breast is then immobilized by compression, which also serves to reduce blood-flow and increase the efficiency of heat delivery for effective treatment, and microwave energy is applied to the breast via two parallel-opposed microwave applicators. A proprietary feedback, tracking, and control mechanism ensures that the microwave energy is focused on the center of the tumor, while a computer algorithm controls the amount of energy applied to the tumor, and monitors the temperature to ensure optimum effectiveness."
With over 1.4 million new cases of breast cancer diagnosed each year, Medifocus hopes to raise the standards of care and treatment by using their focused, microwave heat technology, to enhance neo-adjuvant chemotherapy to provide better tumor shrinkage and control. This would ultimately lead to improved surgery outcomes and a greater propensity of breast preservation. Upon the receipt of regulatory approval for commercialization, Medifocus plans to market the APA-1000 system as a tool for breast surgeons to improve treatment outcome for patients and increase their revenue. As is the case with the Prolieve System, Medifocus plans to capture revolving revenue streams by selling treatment disposable probes.
Potential of Medifocus as an Investment Vehicle
Combined, the addressable markets for Prolieve (enlarged prostate) and APA-1000 (breast cancer) are nearly 20 billion dollars. Admittedly, while this sum represents the total addressable markets of the combined diseases, any markets susceptible to capitalization by Medifocus would be considerably smaller. For the purposes of offering any sort of forecast (despite being quite premature) one would have to consider the applicable markets, not the total addressable markets.
One can't just say that since Medifocus has an enlarged prostate treatment that they could capitalize on the entirety of the 8 billion dollar enlarged prostate market. The market is already highly competitive, and as this is being written, additional treatments are preparing to enter the marketplace. The Prolieve System would appeal to a specific type of enlarged prostate sufferer. They would have to be willing to subject themselves to regular treatments (frequency varies), and would have to show positive reception to the treatment in order to elect to continue. That very concept is one of the focus points in the company's phase four post-marketing study. However, the non-invasive nature of the treatment, coupled with the high safety profile, considerable rate of success, and preparation for entrance into the Asian-Pacific market, all indicate that capitalizing on 2.5% of the market is a reasonable expectation. That would enable Medifocus to claim a market cap attributed to Prolieve alone of nearly 200 million dollars.
As it pertains to APA-1000, the potential is considerably larger. Assume the aforementioned statistics pertaining to breast cancer are indeed accurate. If the addressable market is in fact no less than 10 billion, and if approximately 70% of those cases are eventually treated with chemotherapy and/or surgery, then the addressable market for that segment equates to about 7 billion dollars. Of those cases where the APA-1000 treatment is most viable (locally advanced breast cancer, or LABC) the applicable market is then cut in half. Thus, one would now be looking at a potential market of 3.5 billion dollars. If the clinical results and expectations for the phase three trial are indeed comparable, weighed against the proportion of breast cancer surgeries where the tumors are first shrunk in an effort to exercise breast conservation (24%), then a potentially capitalized market of 840 million for Medifocus as it pertains to APA-1000 would appear reasonable.
Combined then, the speculative future market capitalization for Medifocus could potentially equate to approximately 1.04 billion dollars. Based on the current outstanding share count at Medifocus (117 million) the potential long term share value could eventually see upwards of nine dollars per. One would be wise, of course, to realize that, that number is one used solely as an example representative of potential earnings potential, and is not, in any way, a formal price target.
As one can imagine, the risks associated with any nano-cap investment are considerable. In fact, in taking one look at the company's financials there would be more than enough reason to opt for other investment options. The deficit is increasing quarterly, they have considerable long term debts in continuing to pay Boston Scientific for the Prolieve assets, and their cash position, simply put, is not good. The chance of future dilution is, at the very least, probable.
Furthermore, the phase three trial for APA-1000 has been "on the books" since 2011, and is only now starting to get some traction. Thus, not only are continued delays a legitimate concern, but the means by which to finance the trial is equally daunting. Of course, lastly, there is the fact that the stock currently trades in the vicinity of 15 cents per share. "Penny stocks" always carry short interest and investor skepticism. The stock has never, at any point since 2010, traded above 40 cents.
This article was entitled "Not Your Typical Nano-Cap", and that was a title the company earned. This is not your typical nano-cap company. Medifocus has a real product (Prolieve) which generates real revenue. The company has real employees, and works in real offices. They also have a product (APA-1000) on the verge of a phase three trial which could potentially address a significant market. The company has management with considerable experience, and a revenue strategy that has been proven in the field.
Including the patents acquired when Medifocus purchased the Prolieve assets, the company has considerable intellectual property. That list includes, but is not limited to, all the medical applications associated with the APA technology designed at the Massachusetts Institute of Technology. Furthermore, previous clinical results have already demonstrated that the company's combined heat and neo-adjuvant chemotherapy increases breast tumor shrinkage by 50% when compared to chemotherapy alone. That is statistically significant, and applicably relevant. Lastly, the same joint venture partner in Hong Kong helping Medifocus get Prolieve through the Chinese food and drug administration, are also assisting in procuring sites in China for the phase three trial for APA-1000. This should offer financial benefits as well as expedite the process.
Evaluating a nano-cap company, especially in the biotechnology / life sciences / medical device sector, is an unconventional task. The regular metrics one would consider (P/E, P/B, PEG, Run Rate, EPS, and so on) are largely obsolete. More relevant at this stage are intellectual property, insider ownership, clinical indicators, and float. In other words, potential outweighs statistics at this juncture. Medifocus has strong intellectual property, nearly 50% insider ownership, positive clinical indicators as it pertains to APA-1000, and a float of 77 million compared to total outstanding shares of 117 million. In context, the company truly is, rather incomparable.
Between the companies emerging profitability, and the prospects of Prolieve's approval in China, there could be considerable growth in 2014. The share price potentially flirting with 50 cents per, within a years' time, is not out of the question. However, it is the long play here that is enticing. A positive result in the phase three trial for APA-1000 could turn the company, its revenues, and shareholder value, in an entirely new direction. A statement made by Medifocus COO John Won back in June summarizes the insider perspective on potential growth;
"The key here is treatment. With the two platform technologies that we've fully developed, we can actually develop future products to treat almost any site within the body and not harm normal tissue……because of the star wars technology we possess (making reference to the APA technology) it nulls out energy to normal tissue, and we can target cancer anywhere."
So, for the long term investor, with a moderate risk tolerance, and an opportunistic attitude, ask yourself this question; what else are you going to buy with 15 cents? Why not consider picking up some shares of Medifocus, and seeing where it takes you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.