United Health Products Has An Absurd Valuation With Only A Me-Too Gauze Product From China
Summary
- United Health Products reached a $400M market valuation on speculative hopes related to its HemoStyp surgical gauze.
- UEEC’s only product, HemoStyp, is a 17-year-old, cheap commodity gauze made in China with no published data or clinicians supporting it.
- UEEC’s website discloses claims of pharmaceutical activity of its HemoStyp, which can compromise FDA 510K submission approval.
- The company has been operating from a PO Box with no staff and no R&D investment for many years.
- The company suggests a story of a product ready for FDA approval and a big money acquisition, with no factual support.
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We have come across a unique example of extreme market exuberance. United Health Products (OTCPK:UEEC), a little known distributor of a me-too surgical gauze, trading on the Pink Sheets, currently has a more than $350M market cap, all because of speculative news of a big acquisition actively promoted by the company. We believe this is a bubble getting ready to burst.
According to its profile, UEEC “develops, manufactures, and markets patented hemostatic gauze for the healthcare and wound care sectors.” UEEC’s only product is HemoStyp Gauze, which the company describes as "innovative". Our research has found that not to be true, and this type of gauze is actually quite common.
Our evidence shows that HemoStyp has been around for many years before UEEC acquired it and historically has had low sales. UEEC currently sells HemoStyp through retail channels, but its revenue is immaterial, and only generated $25K in revenues for Q219 (from just one customer). Right now, UEEC is attempting to get a Class III FDA 510K approval for HemoStyp. That will allow it to be used in the surgery room. But it will still be the same common, mediocre, gauze it always has been. We don't expect sales to increase much, even if it does get approval for this indication.
HemoStyp Is An Old Gauze Product
HemoStyp is described in UEEC’s recent Q2 2019 10-Q similar to how it has been described in older reports many years ago. It states:
HemoStyp Hemostatic Gauze is a collagen-like natural substance created from chemically treated cellulose. It is an effective hemostatic agent registered with the FDA to help control bleeding from open wounds and body cavities. The HemoStyp hemostatic material contains no chemical additives, thrombin or collagen, and is hypoallergenic. When the product comes in contact with blood it expands slightly and converts to an adhesive gel that subsequently dissolves into glucose and saline. Because of its purity and the fact that it simply degrades to non-toxic end products, HemoStyp does not cause significant delay in healing as do certain other hemostatic materials. Additional testing has shown HemoStyp to be 100% absorbable in 24 hours or less.
The description of HemoStyp in UEEC’s 2011 10-K on page 3 is almost exactly the same. It states:
HemoStyp™ Hemostatic Gauze is a collagen-like natural substance created from chemically treated cellulose. It is an effective hemostatic agent registered with the FDA to help control bleeding from open wounds and body cavities. The HemoStyp™ hemostatic material contains no chemical additives, thrombin or collagen, and is hypoallergenic. When it comes in contact with blood it expands slightly and converts to an adhesive gel that subsequently dissolves into glucose and saline. Because of its purity and the fact it simply degradates to these end products, it does not cause significant delay in healing as do other hemostatic materials that may have a similar appearance.
HemoStyp’s Origin
HemoStyp gauze was distributed by several related companies. One can easily trace it by looking at the assignment history of the patent which is used for HemoStyp manufacturing:
Legal Events
2009-05-22 Owner name: MEDSPRING GROUP, INC., UTAH
2009-06-12 Owner name: EPIC WOUND CARE, INC., FLORIDA
2014-11-14 Owner name: UNITED ECOENERGY CORP., FLORIDA
20100930 Owner name: UNITED HEALTH PRODUCTS, INC., NEVADA
UEEC’s 2009 10-K states:
United EcoEnergy Corp (OTCPK:UEEC) develops, manufactures and markets products and technologies in the healthcare sector. UEEC's principal operating subsidiary is Epic Wound Care, Inc. which produces homeostatic gauze, a collagen-like natural substance created from chemically treated cellulose that is designed to address severe bleeding in wound care applications.
As shown in the patent Legal Events above, UEEC’s subsidiary at the time, Epic Wound Care, took control of the patent from MedSpring Group in 2009, over ten years ago. As stated in a UEEC PR, Epic Wound Care acquired HemoStyp from MedSpring, but it doesn’t say for how much. We can assume that the amount paid was very small, because as stated in UEEC’s 2008 annual report:
The Company currently has no revenue and minimal cash reserves.
Since MedSpring was willing to sell Hemostyp cheaply to UEEC, after selling it for years, we can assume that its sales were low, and likely was a commercial flop.
HemoStyp is an old gauze product that was developed in China by Beijing Textile Institute sometime before 2001. It’s over 18 years old without any evident changes or improvements. Insights about HemoStyp’s history can be learned from the MEDSPRING GROUP, INC. v. FENG litigation paper published in April 2005. It shows how long this gauze has been around, who developed it, how MedSpring became aware of it and what rights MedSpring had for distribution in the US. The background of the litigation states:
MedSpring's products include a Hemostatic Biodegradable Gauze (the "S-99 Gauze") and Hemostatic Satin Gauze (the "S-100 Gauze"), a medical device made out of a gauze material which speeds up bleeding coagulation and then dissolves at the bleeding wound.
One can see it’s the same description as UEEC gives for HemoStyp in its earnings reports. The paper further states:
MedSpring currently markets the S-99 Gauze and S-100 Gauze under the trade names of HemoStyp, ActCel, and M+D Gauze.
From the litigation paper, it appears that MedSpring, an early startup in 2002, hired Vicky Feng in May of 2002 to help find investors for its medtech venture.
During her fundraising efforts, Ms. Feng researched hemostatic gauze on the internet and learned that there were numerous manufacturers of hemostatic gauze in China. Her research further discovered that one of these manufacturers, Beijing Textile Research Institute ("Beijing Textile"), owns Chinese patents for the S-99 and S-100 Gauze and in April 2001 filed patent applications in Europe for the S-99 and S-100 Gauze.
On August 1, 2002, Feng resigned from MedSpring, as stated in the lawsuit. After resigning from her position with MedSpring, Feng started her own company, Regional Medical Solutions, Inc. ("Regional"). Regional negotiated an agreement with Beijing Textile to import and sell Beijing Textile's S-99 and S-100 hemostatic gauze products into the United States. Regional obtained FDA approval of its S-99 and S-100 hemostatic gauze products and is currently marketing these products under the name of "BloodSTOP." That’s what started the litigation between MedSpring and Feng.
MedSpring did not have an exclusive worldwide right to market the S-99 and S-100 Gauze. The S-99 and S-100 Gauze were subject to several patents, none of which was owned by MedSpring. Before 2005, MedSpring had never entered into an agreement with Beijing Textiles to purchase these patents and Beijing Textile has never given, licensed or assigned MedSpring the rights to any of its products, including the S-99 and S-100 Gauze.
In November 2007, MedSpring decided to file its own US patent application. The MedSpring application did not reference as a prior art the US Patent 7,262,181, filed by Beijing Textile Research Institute in 2001, 6 years earlier, but it looked very similar to it. MedSpring tried to go around Chinese prior art by changing the chemistry of modification from the ether derivative of cellulose in the Chinese patent to the ester derivative (see comparison of both patents below).
Beijing Textile Patent Claim | MedSpring Patent Claim |
A process for preparing medical and treatment products, comprising: (i) providing at least one oxidized-etherified cellulose derivative selected from …. | A hemostatic material, comprising: a polymer of oxidized derivatized esterified cellulose comprising…. |
Source: Patent Filings
Despite filing its own patent, there is no evidence that the chemistry of HemoStyp has changed after the fallout with Beijing Textile. For sure, the trade name did not change. We failed to find any announcement from MedSpring after 2005 that would state that HemoStyp has a new chemical nature and new unique properties, because it is a proprietary esterified cellulose, not previously marketed etherified cellulose.
We believe this suggests two possible scenarios:
- MedSpring never changed the chemistry of its gauze and is still using etherified cellulose as HemoStyp. If UEEC this is the case, then the US Patent 7,262,181 protection ends in 2021, two years from now. Patents last for 20 years before expiring.
- MedSpring changed the chemistry to its own esterified process, but kept it quiet. Why? Because a change in chemistry did not make the material better as a gauze. There was nothing to brag about. There was no benefit vs Beijing Textile’s gauze.
In both cases, there is no substantial difference between the HemoStyp and Beijing Textile’s S-99 and S-100. In fact, UEEC even stated on its own website that they conducted a study that shows:
the average time to achieve hemostasis using Hemostyp hemostatic gauze and the average time to achieve hemostasis using Bloodstop hemostatic gauze were statistically the same, indicating that their hemostatic effects are identical. Overall, these results show that Hemostyp hemostatic gauze is equally as efficacious in achieving hemostasis as Bloodstop hemostatic gaze, and that Hemostyp gauze is capable of promoting blood clotting in patients with coagulation dysfunction.
Remember, Bloodstop has been named in the court filing as the gauze manufactured by Beijing Textile and distributed by Vicky Feng’s company. So, in this study, UEEC compared their supposedly “innovative” esterified gauze to the original Beijing Textile’s etherified gauze and found no difference. Then, how can HemoStyp be given a $350M+ valuation?
Q2 2019 Revenues Were From Only One Customer
Q219 revenues for UEEC were small, only $25K, but it was a big increase over Q218. However, the $25K in quarterly revenue may not be sustainable, because it was only from one customer. From the Q219 report:
During the three months ended June 30, 2019 and 2018, the Company had $25,009 and $1,851 of revenues, respectively. The increase in revenues is due to the Company having one customer order product during the current year compared to minimal revenues in the comparable quarter of the prior year.
We Bought The Hemostyp Gauze For Hands-On Research
To test it, we purchased the HemoStyp gauze which was available through a US retail channel. Then, we compared this HemoStyp gauze with one of many similar looking products available at Alibaba, such as Madicare Gauze.
HemoStyp Gauze from United Health Products | Madicare Gauze from Shanghai Madicare Co |
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The hemostatic gauze derived from regenerated oxidized/cellulose, which is all natural and designed to absorb exudate/drainage from superficial wounds and helps to control bleeding. Once bleeding has ceased and coagulation has occurred, the product can be rinsed away with saline solution or lukewarm water. | Soluble Hemostatic Gauze is a white or light yellow sterile fabric prepared by special formulation of regenerated cellulose into water soluble gauze. It is an effective and innovative soluble hemostat widely used in first-aid and surgery hemostasia. When the gauze contacts with blood or exudates, it can quickly transform into clear viscous gel, which fills wound voids, seals capillary ends, activates the clotting system and thereby helps to stop the bleeding. |
Source: Alibaba.com
We do not see much difference in the packaging style, gauze textile appearance or descriptions between these two products. There are additional similar looking gauzes at Alibaba, such as this hemostatic gauze from FarmaSino Pharmaceuticals Co,. Ltd, or this one from a Turkish manufacturer.
United Health Product’s Scientific Pages Show Unfounded Statements And Red Flags
So, what is really known about UEEC’s “innovative” wound care product, HemoStyp?
UEEC’s website is dated and provides very little technical and product info. We found many unfounded statements and red flags in the Medical Professionals section of the site.
A Product Testing page on the site provides a brief list of studies with nothing referenced as a peer reviewed publication. There are two briefly described comparative studies with other gauze materials.
- Study 1. The first study compared HemoStyp to a Lap Sponge, which is a standard non-degradable Cotton Gauze and, therefore, is not an advanced gauze type. The study confirmed that the Hemostyp gauze was as efficacious as standard Cotton Gauze, but didn’t confirm that it’s definitely more efficacious.
- Study 2 (we quoted it above). The second study compared HemoStyp Hemostatic Gauze to Bloodstop Hemostatic Gauze. This study concluded that the average time to achieve hemostasis using the Hemostyp hemostatic gauze and the average time to achieve hemostasis using Bloodstop hemostatic gauze were statistically the same, indicating that their hemostatic effects are identical.
So, based on these unpublished, UEEC sponsored studies, HemoStyp is statistically similar to both the etherified cellulose gauze from Beijing Textile and the common Cotton gauze. Not good news for an almost $400M market cap company.
This Technical Info page from UEEC’s website does not really provide any technical information but contains generic types of product features without any reference to studies supporting them. It also uses words and phrases that we find to be incorrect.
The Technical Info page starts with this statement:
HemoStyp® Hemostatic Gauze is a collagen-like natural substance created from chemically treated cellulose.
Cellulose (sugar) is nothing like collagen (protein), and chemically treated cellulose is nothing like a natural substance. The quality of this technical info is below even a modest standard of scientific description (but this is how Hemostyp has been described every year since 2009).
This page also states:
When it comes in contact with blood it expands slightly and converts to a gel that subsequently dissolves into glucose and saline. Because of its purity and the fact it simply degradates to these end products, it does not cause significant delay in healing as do other hemostatic materials that may have a similar appearance.
The word “degradates” is not an English word as stated in dictionary.com. The correct word is “degrades”. The author of this technical info is obviously unfamiliar with technical English words.
Then, there is a strong statement that HemoStyp "does not cause significant delay in healing as other hemostatic materials that may have a similar appearance".
It is not clear what this statement is based on. There is absolutely no reference for any data supporting this statement or further discussion of healing in the technical info.
Instead, the technical info goes into claims of significant pharmaceutical activity of HemoStyp. We believe the FDA reviewers of UEEC’s 510K submission shall be alarmed, because if HemoStyp has pharmaceutical activity, then it must be considered new drug and filed through a much more rigorous NDA (New Drug Application) path, not a “me-too” 510K process. Here are the claims of pharmaceutical activity of HemoStyp:
- As HemoStyp® dissolves and comes in contact with iron in red blood cells, it forms negatively charged colloidal particles that promote the activation of blood coagulation factor XII
- In research studies, the texture and initial solid state of HemoStyp slowed the blood flow and reduced the time in which thrombin was released into the wound.
- In research studies, HemoStyp not only adhered to calcium ions, but because its surface area initially increases as it dissolves, it also expanded contact surfaces with blood coagulation factors needing calcium
There are no research studies referenced for the above claims.
Finally, we read the White paper section which provides an article written by Merriall Bone, NREMT-P. The NREMT-P degree stands for “National Registry of Emergency Medical Technicians-Paramedic”. We find it unusual that an “innovative” technology would not be presented by a medical doctor or at least a biomedical scientist, especially because this white paper goes into details of coagulation, a highly complicated biochemical topic.
The white paper contains four references: two general Encyclopedia articles and two old product reports (reports from 2001 and 2004). This is another telling moment about the lack of originality of HemoStyp. If these two reports from 2001 and 2004 are relevant to the current version of HemoStyp, then the current HemoStyp product must be the original etherified product from the Beijing Textile Research Institute, not the new esterified version covered by the patent application in 2007.
In the Q219 quarterly report, UEEC states that it recruited a team of leading surgeons to conduct a study for Class III approval. However, no surgeon names or organizations/hospitals conducting the study were given. It only states:
We have recruited a team of leading surgeons to conduct the study, and our lead investigator has successfully conducted over 20 medical device studies.
United Health Products Does Not Burn A Lot Of Cash, But Does Not Have A Foundation Either
UEEC is a thrifty company. It only has four employees, and its headquarters is a PO Box as shown here (it's suite A209 is a UPS Mailbox store). It has low cash burn, which is good news for some investors who hate executives of unprofitable companies, paying themselves millions in salaries. Yet, for UEEC, it has another facet. It did not spend money on R&D for many years. For example, in fiscal 2018 and 2017, UEEC incurred $76,951 and $19,936, respectively, in research and development expenditures as stated in the 2018 annual report. More money has been spent recently in R&D, but it appears that this money was for support of the FDA submission, which includes payment for the clinical study.
UEEC explains:
The increase in research and development expenses is due to the Company going through the process to obtain FDA class III approval during the current period and not having these expenses in the prior year.
Buyout Rumors Could Be What Has Led To An Absurd Valuation
Although we think that FDA approval is unlikely, it is still possible. After all, 510K applications are relatively easy to get, because it is just a confirmation of substantial equivalence, not superior performance required for a late market entry win.
Therefore, by itself, 510K approval is not a justification for a $350M+ market cap. What is? Why are investors paying top dollars for UEEC shares at a valuation of $350M+?
What would be another reason for long investors right now? Perhaps the hope that UEEC can be acquired for $500M? UEEC's investor relations has issued several press releases that may have brewed optimism among investors regarding a potential acquisition. Just look at all the propaganda the company has put out regarding a possible future acquisition.
On 10/25/18, UEEC announced it hired Societe Generale to advise the Company on strategic alternatives. It states:
In connection with the FDA PMA Class III approval process for HemoStyp, UHP has been contacted by several medical technology companies that are active in the surgical equipment and hemostatic products sectors, and who have expressed an interest in the Company's products and business strategy.
On 11/2/18, UEEC announced it retained counsel of a law firm for a review of strategic alternatives.
Both of these strategic alternative reviews happened over a year ago. How long will it take for shareholders to realize that this company won't be acquired, in our opinion?
But history provides no precedent of acquisition at such a ridiculous valuation. If we were to find so many red flags so easily, why would an established and experienced medtech firm pay half a billion dollars for an FDA approved Chinese made commodity gauze? For a 17-year-old product that had revenue of $25K in the last quarter? For a company that has no office, no staff, no R&D, one irrelevant patent and a legal nightmare style website?
We think that a more plausible scenario is that in the unlikely event of 510K approval, investors shall buckle up for a bumpy downhill ride as UEEC tries to sell its me-too gauze product against J&J (JNJ) and other medtech product titans.
Let’s be frank, the situation is quite hazardous. With the stock thinly traded, the share price can plummet 90% in a matter of days should any seriously negative information spread about UEEC and its HemoStyp product. Or, if insiders decide they want to cash in and massively sell their shares, it could cause a significant downtrend. Therefore, we advise shareholders to ring the register and cash their paper gains while they still can.
This article was written by
Analyst’s Disclosure: I am/we are short UEEC. 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.
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