Placenta-Based Treatments Crowding Out Legacy Products In Wound Care

| About: Alliqua BioMedical, (ALQA)
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As per Kalorma Information, the global market for wound care products is projected to grow from $16.8B in 2012, to approximately $21B by 2015 (a CAGR of 7.7%). Demand is rising due to an aging population, higher rates of obesity and longer life expectancies. The market for tissue-based wound care products is estimated to be $400 million, with Shire's (NASDAQ:SHPG) Dermagraft and Organogenesis' Apligraf accounting for about 60% of sales in the category. However, there is an ongoing shift toward the fast-growing regenerative wound care treatments. MiMedx's (NASDAQ:MDXG) amniotic membrane products are seeing triple-digit demand growth as they continue to seize market share from legacy products. Giant pharma Celgene (NASDAQ:CELG) will also target this emerging segment of the wound care market through their Alliqua (NASDAQ:ALQA) extension. The advantage of natural tissue-based collagen and wound healing factors contained in placenta-based treatments will leave two major players in the segment as others will be crowded out.

Out With the Old

Earlier in January, Shire sold its Dermagraft assets to Organogenesis. As Shire CEO Ornskov put it, the company is prioritizing investments that are of greatest strategic, clinical and commercial value. Dermagraft no longer met these criteria due to recent Medicare reimbursement reducing prospects. As a result, Shire took a $650M loss on the product it bought fewer than three years ago.

For the first 9 months of 2013, Dermagraft sales were $65M, compared with $135M for the same period a year ago. Seeing Dermagraft's struggles, it comes as no surprise that Shire received no upfront payments from Organogenesis, only settling for up to $300M in milestone payments conditional on sales targets till 2018. The failed regenerative medicine branch was a direct result of placenta-based products taking market share from the less advanced tissue-based competitors. This shift will have two main beneficiaries.

In With the New

Placenta-based products, such as MiMedx's AmnioFix and EpiFix, are overtaking the market and on their way to becoming first line therapies in wound care. Relative to other tissue-based products, placenta-based treatments recruit factors that promote natural tissue growth and enhance wound healing. Unlike non-amniotic biologic scaffold materials, placenta-based products generally lack immune responses that can result in inflammation, fibrosis and scarring which deter proper healing and wound closure. Due to these advantages, the demand for wound healing products derived from human amniotic tissue should continue to grow.

The triple digit revenue growth that MiMedx has experienced depicts the surge in demand for placenta-based treatments. Investors in the company are anxiously awaiting the FY2013 report to see final quarter results and 2014 guidance. This upcoming catalyst should support this emerging trend as 2014 could be the year the MiMedx products outsells conventional treatments like Dermagraft. When comparing the growth of MiMedx revenue with Dermagraft's falling sales, one can easily predict where the future of wound care is headed.

Celgene Entering Fastest Growing Wound Care Space through Alliqua

In November 2013, Celgene entered into a licensing agreement with Alliqua whereby the emerging company received the right to develop and market Celgene's Biovance and Extracellular Matrix (ECM) wound care products derived from human placental tissue.

Biovance, a decellurized, dehydrated wound covering derivative of human amniotic membrane, will penetrate the same high growth market segment as MiMedx. Biovance is differentiated from other regenerative therapies, however, due to being decellurized. Essentially, this should result in fewer immune reactions such as inflammation and irritation, which slow wound healing. Biovance's makeup and the fact that it is penetrating the budding placenta-based space ought to result in making the product competitive with leading rivals.

Alliqua plans to launch Biovance in Q2 2014, as the company is finalizing the manufacturing validation, inventory and development of a marketing program. Outpatient reimbursement will be through a temporary C-code expected by 2H 2014 and permanent Q-code by 2015 (see below).

The advantages of placenta-based wound healing products relative to other tissue-based products are significant enough to continue the shift towards this emerging wound care trend, as showed above. Though Alliqua lags MiMedx by about 3 years on the launch of such placenta-based treatments, the growing market segment will have enough room for at least two major players to achieve significant sales.

The experience of Alliqua's management team, which previously grew leading BMY wound care division ConvaTec to approximately $1.7B in revenues and orchestrated its sale for $4.1B, should provide investors with the confidence of a successful Biovance launch. Furthermore, Celgene's association will ensure that the necessary resources are provided for this whole process to go according to plan. Alliqua's management and Celgene's presence offer extensive validation of a successful biological product.

Exposure to potentially breakthrough generic drug candidate

Alliqua can be viewed as an extension of Celgene, focused primarily in the fast growing space of artificial skin substitutes. In conjunction with the licensing deal, Celgene made a $6M investment with additional warrants to invest another $6M. This gives Celgene an approximate 14.5% ownership of Alliqua. Additionally, two members of Alliqua's board, including the Chairman, are executives at Celgene, while the newly appointed Chief Medical Officer was a former Clinical R&D director at Celgene. Interestingly enough, CMO Smiell has more than two decades of experience with clinical trial design, development and submissions. Why is this extensive clinical trial background significant?

Alliqua is in the process of developing a lidocaine hydrogel patch indicated for treatment of post-herpetic neuralgia (PHN), also called post-shingles pain. Currently, Endo's (NASDAQ:ENDP) Lidoderm is the standard of care for PHN. In 2012, Lidoderm had sales of $950M (or approximately 31% of Endo's total revenues). In preclinical studies, Alliqua's patch was able to deliver slightly higher amounts of lidocaine than Lidoderm and reached maximum delivery within comparable period. Further development could result in Alliqua creating a generic version of Lidoderm, which loses exclusive licensing patent October 27th, 2015. Advancing its own version of lidocaine hydrogel patch into clinical trials, the company is guaranteeing trials are controlled by one of the top clinical trial experts. In my opinion, CMO Smiell's main objective will be to get Alliqua's generic version lidocaine to the market.

Taking Advantage of the Shift in Tissue-Based Wound Care

Dermagraft's disappointing sales caused Shire to sell the product for pennies on the dollar. Odds are, 2013 was the last year where conventional products like Dermagraft and Apligraf would account for the majority of market share in the segment. A new wave of placenta-based products is quickly gaining popularity as a potential first line therapy in wound care. Look no further than MiMedx revenue growth for proof. Investors looking to capitalize on this shift should look at the other beneficiary. Alliqua offers the upside of being a player in the fastest growing wound care segment, the validation of a large pharma like Celgene and an attractive sub $100M valuation. This current opportunity is best described by the old saying; out with the old and in with the new.

Disclosure: I am long ALQA. 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.