DS Healthcare's New IND Should Boost Its Valuation In Line With Specialty Pharma

| About: DS Healthcare (DSKX)

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DS Healthcare Group (NASDAQ:DSKX) is preparing an Investigational New Drug (IND) application for a topical treatment created in its own laboratories and, if successful, could be a landmark decision - there has not been an approval of this nature since 1988 when the agency gave the nod for a 2% solution of minoxidil, or Rogaine, a Johnson & Johnson (NYSE:JNJ) formulation for men with androgenic alopecia. This submission puts DS Healthcare in a new league - that of a specialty pharmaceutical company.

Despite the lamentations of balding males, FDA endorsement has been granted to only three products for preventing diminished hair or its restoration. Besides Rogaine with its messy application and inconvenience, there has been finasteride, or propecia, sold as a tablet by Merck & Co. (NYSE:MRK) and used to prevent future hair loss. Sadly, reduction of libido and impotence in users adds to the plight of this medicine. Erectile dysfunction occurs in up to 38% of patients early in treatment, in addition to mood changes and abdominal weight gain. Propecia was approved in the US for male pattern baldness in 1998, 16 years ago, and has remained a standard of care despite its drawbacks.

The third FDA approval is for the HairMax LaserComb, cleared by the agency in 2007 for alopecia. Evidence of its effectiveness is not clear, however, because there are no placebo controlled studies that show it works. Lasers are traditionally used for hair removal, not replacement.

This leaves men to wonder - does everyone at the FDA have a full mane of glorious hair, or are they just mean?

DS Healthcare's news comes soon after the topical treatment's US composition and method patent filing. The only other patents for hair restoration were awarded to prescription products Rogaine and propecia.

Virtually all of the company's formulations have been created by scientists, pulling from biochemical research on hair and skin. Clinical trials have been used extensively in the past. A double-blind study of Spectral DNC-S on thinning hair done at Miami Dade Medical Center showed that 85% of participants gained hair density. One of the principal active ingredients in Spectral DNC-L, another top-selling product, is procyanidin B-2 complex, recognized by the British Journal of Dermatology for its critical role in hair cycle progression. A key ingredient of Revita shampoo is caffeine whose effect was first observed by German scientists on balding subjects where hair loss was hormone-dependent and where hair growth of 46% was recorded. Last summer the company announced work on a new OTC pain reliever to enter the multi-billion non-narcotic market.

Although hair loss is seen across all age groups, demographics will drive the market for hair restoration, estimated in this country alone at $3.5 billion, and touching the lives of 66% of men over 35, a number estimated to reach 85% by age 50. Choices are limited - hair follicle transplant, at a cost up to $14,000, is a painful procedure that involves scars and does not prevent loss in other areas of the scalp. Hair plugs, a vestige of the 1980s are not widely used and, while intended to look natural, are sometimes 30 times larger than the original hair replaced. Rogaine represents a palatable alternative to surgery, but most men shy away under the widespread fear that if use is stopped, lost hair that has been treated and replaced will fall out. Stem cells counting on wound-healing principals have been tried using a patient's own plasma, but the scientific leap from regenerating heart and muscle tissue to growing hair has not proved feasible and nothing has been approved via a regulatory pathway.

Hair loss leans heavy on an individual's psychological make-up. A seminal study done in 1988 had subjects view slides of bald and haired men, rating for qualities like social attractiveness, success in life, confidence, and perceived personality. Bald and balding men were seen as the most negative. Another widespread study by Hunt and McHale in 2005 concluded that lost hair focuses attention on the forehead and gives the appearance of age, spelling the end of youth, vitality and sexual attraction. Levels of self-esteem drop profoundly. All age groups are affected.

Women are not immune to the misery of losing hair; the American Academy of Dermatology claims that due to genetic and environment reasons, 50% of females worldwide over 40 years old experience hair loss or thinning. DS Healthcare recognizes this and makes sure women are not excluded in targeted marketing. The only solution available to women now is Rogaine, in a lower FDA approved dosage than recommended for men.

With its new direction into prescription medicine, DS Healthcare's valuation with respect to comparable companies should shift away from consumer products to specialty pharmaceutical firms. I revised my earlier discounted cash flow model to reflect this, and by adjusting the model using an average price/earnings multiple for more appropriate comparables, present value of the shares now stands at $10.00. Further, DS Healthcare has a beefed-up balance sheet - two separate raises totaling $3.1 gross proceeds give it room to conduct trials under the IND, which I believe will not be lengthy considering the number of subjects available.

A new set of risks will follow DS Healthcare in its endeavor with the FDA. The choice of a contract research organization (CRO) can be tricky, expensive, and involve the establishment of a relationship that the company may not be equipped for. However, executive board management with vast industry experience had been put in place over the last several years that should guide them effectively. Also, DS Healthcare will need to manage investor perception of the changing nature of its business, but as a relatively young company this should not be hard.

Hair restoration has needed a new champion, one with scientific muscle and marketing reach, and now has one. There are a lot of benefits to having hair and DS Healthcare understands them, moving ahead with solutions that are transforming the company to one along the lines of a specialty pharmaceutical outfit. Sizable markets and a willing audience with pent-up demand can provide a strong push to current and future products. Most importantly, the company should be valued in a different light with shares rising accordingly as its potential unfolds.

Disclosure: I am long DSKX. 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.

Additional disclosure: I have been given products (Shampoo and hair treatment samples) by the company after I wrote a previous article. I have also purchased products at local retail store.

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