PolarityTE: Risk And Reward

Summary

• Like all microcap biotechs, PolarityTE is a very risky bet.
• But they have a product with the potential to revolutionize wound care. This is a giant addressable market.
• I go over the promise, the risks, recent trials, and future plans.

Photo by georgeclerk/iStock via Getty Images

PolarityTE

This is a company with short, tumultuous history, but they also have a product that may revolutionize the wound care industry. The price chart sums the tumult up well.

Data by YCharts

I have been a continuous shareholder since near the beginning of that chart. Has that been fun? No.

The reasons I don’t sell:

• I always knew there was a possibility of losing everything on this one, and I have already lost most of it.
• That revolutionize-wound-care thing.

I haven’t written about PolarityTE in a while. There’s been other stuff going on, and I can only pump out so many words. But a lot has happened since my last coverage.

• They shifted their regulatory path, with a bit of reorganization to match that.
• They reported out very impressive interim results on their first randomized controlled trial. They hit full enrollment earlier this year.
• New patent grants in Canada, New Zealand, the UK, Australia, Japan, Singapore, and advancements in their US and Malaysian patents.
• In 2018 they bought the contract lab in Utah where they did their work, and in 2020 they were able to pivot to COVID testing.

There was also this:

Data by YCharts

I used to model 75 million shares by 2024. They blew through that in Q1 this year. They say they now have cash to take them through Q3 2022. But an optimistic timeline for their new regulatory path is Q3 2023. That line may keep going up.

It was a busy year for PolarityTE. I’m going to start with the promise, and the recent very impressive interim trial results. But the risk of losing everything on this one remains, along with more dilution risk.

Diabetic Wounds Are A Huge Problem

Diabetes is one of the largest medical problems in the world. In 2019, the International Diabetes Foundation (IDF) estimates that there were 463 million diabetics in the world, and that number will grow to 700 million by 2045. There are 31 million diabetics are in the US, and as developing nations develop, they are adopting our bad lifestyle habits, and Type 2 diabetes prevalence is soaring. China has 116 million diabetics, India 77 million, and the top 10 is rounded out by Pakistan, Brazil, Mexico, Indonesia, Egypt and Bangladesh. Among smaller countries, there are large prevalence clusters in the Arab world, southeast Asia and the Pacific Islands.

The total price tag for diabetes globally in 2019 was $760 billion, or $1,673 per diabetic. In the US, that’s $9,505 per diabetic or $295 billion total.

One of the major complications for these diabetics is diabetic foot ulcers (DFUs). These are holes in diabetics’ feet that develop from vascular complications of the disease. These can range from small wounds to very deep holes exposing bone and tendon. They routinely get infected and even in advanced medical systems, often lead to amputation. There is something in the range of 45 million DFUs globally. At any given time, about 10% of diabetics have a DFU of some sort.

DFUs are the largest part of a group called chronic wounds that also includes venous leg ulcers (VLUs) and pressure wounds. If you put them all together, there is somewhere in the neighborhood of 80 million worldwide.

PolarityTE (NASDAQ:PTE) is a microcap biotech with a single product, SkinTE, though more are planned. It has the potential to be a revolutionary treatment for chronic wounds, which as the name suggests, tend to recur. They are currently running two controlled studies for SkinTE with similar designs, one for DFUs and a smaller one for VLUs. They reported out planned interim results from the DFU study and they are very encouraging. Enrollment is now complete.

DFUs Are a Huge Expensive Problem That Is Getting Worse

DFUs are now in the top ten of WHO’s measurement of disability burden, “Years Lived with Disability.”

Around the world every 1.2 seconds, someone is going to develop a diabetic foot ulcer. About half the time, those wounds get infected. A large proportion of those end up being hospitalized and that's why there is now an amputation every 20 seconds somewhere around the world. And this problem in terms of these ulcers are increasing… not decreasing. And even more importantly, this is constituting a massive burden not only in the US and North America and the EU, but really worldwide.

-Dr. David Armstrong, Lead Investigator, PTE DFU trial

The diabetes medical complex is massive, and affects every level of the health care system from large hospitals to country practitioners. According to the IDF, global spending on diabetes care in 2019 was $760 billion, with 39% of that, $295 billion coming in the US alone. China spent $109 billion on diabetes care, but that is up from $5 billion — yes, up 2094% — since 2010. That’s 41% a year. Indonesia, Brazil, Vietnam, Pakistan, South Africa, Malaysia, Thailand, Egypt, Turkey, Saudi Arabia, Mexico, Russia, the UAE and India all saw their diabetes care expenses increase by triple or quadruple digits in this period. That’s a partial list.

The best recent broad epidemiological data we have on DFUs is a little stale, based off 2007-2013 data in the US, but the more general data on diabetes shows the problem is getting worse since that period. According to the 2007-2013 data, there were 6.7 million US emergency room visits for DFUs in that period. But the problems begin once they come through the doors. Compared to all other ER visits, DFU patients:

• are 240% more likely to get admitted to the ER or in-patient;
• see 40% more time with ER doctors;
• are 110% more likely to get referred to another doctor;
• have 90% more previous visits.

They are a huge and growing problem for hospitals and emergency departments.

• 80% of DFU patients in ERs are admitted to in-patient.
• In a 2012 study, the average bill for each of these admissions was almost $132,000, for a total hospital bill of $19 billion in 2012. It is likely much higher now.
• At least 30% will see a recurrence within a year. 60% within 3 years.
• Approximately 60% become infected.
• 20% of those infections lead to amputations.

Putting that together with the IDF prevalence numbers, that means current diabetics will see 750,000 DFU amputations in the US over their lifetimes. There will be millions more worldwide.

Mortality rates among patients with amputations related to DFUs parallel pancreatic and lung cancer, with only a 20–61% 5-year survival rate.

- Skrepnek, et al (2017)

Whatever you think of nationalized medicine, the big advantage for us is the data they produce on a national scale. UK’s National Health Service published a paper this year estimating that the cost of DFU care to the service was £1 billion in the 2014-2015 fiscal year, or about 0.8% of the entire NHS budget. But the US has 12 times as many diabetics as the UK, and 20 times the overall costs. My own estimate of total cost to the US for DFU care is somewhere in the neighborhood of $50-$70 billion in 2019.

This is a huge, expensive problem that is getting worse.

SkinTE

Company Presentation

SkinTE is a regenerative medicine technology meant primarily to replace split-thickness skin grafts (STSGs), but also other treatments in the burn and wound care segments.

• Burns: These come in all sizes, but tend to be the largest of the treated indications.
• Traumatic wounds: Wounds from auto accidents and similar.
• Chronic wounds: This is what we will be mostly discussing.

STSGs have the advantage of being from the patient (the alternative being corpse-skin transplant), and not requiring a full-thickness harvest. They have been used for many years now, so doctors have experience with them and trust in the procedures. From the doctor's perspective, the most important thing is getting that wound closed quickly, and preventing amputation or death.

However, STSGs lead to very poor post-operative quality of life for patients. The grafts do not have the fat layer, hair follicles, sweat and sebaceous glands, etc. They are very tight and dry, itch constantly, and in the worst cases, restrict movement and cause pain. Many current procedures use a scaffolding grid under the graft to aid in uptake during the crucial first 48 hours, and it gives the wound the look of scarred reverse alligator skin once healed.

For SkinTE, the doctor takes a small full-thickness skin biopsy from the patient, usually on the inner thigh, about 1.5 square centimeters. It is transported to the PolarityTE labs where it is processed and turned around the next day, or at the time of the doctor's choosing. The treatment is in a white pasty medium which comes back to the doctor in a syringe. They spread it on the wound and it is dressed normally.

I view it as a hybrid of a traditional skin graft and this minimally manipulated aspect of it… But it is skin. It's skin popping in and it's skin components filling up space in the wound. And that space is waiting to heal. So that was pretty awesome. And I'll say I'm more sanguine now in terms of my assessment of this [SkinTE] than I was before, because there's a lot more proof of principle right now. That's just that's really hard to refute so far. But we'll see. Again, it's early days. But when you see this pattern happening now, that part looks pretty convincing.

-Dr. David Armstrong

Little white "islands" of new full-thickness skin grow on the wound. These islands get bigger, form archipelagos, connect to each other, and eventually fill in the wound bed. Small wounds are as quick as 2-3 weeks for closure. The large burns can take much longer. All the layers and structures of the skin develop over time including pores, sensitivity and hair. Lighter-skinned patients see their natural skin pigment return pretty quickly, while darker-skinned patients have to wait much longer, but it does seem to come back eventually.

I'm not going to put up “before” pictures, as these wounds are a little grizzly, but you can see some of the progression on its study posters. Don't click that link if you don't like grizzly clinical photos. Here, however, are a couple of "after" photos from one of the early SkinTE patients.

Company Presentation

James was in a motorcycle accident. The STSG took on his left leg and healed, but there were multiple failed surgeries on his right leg before his surgeon tried SkinTE, and you can see the result. I met James along with another early SkinTE patient, Natasha, and their surgeons at a medical conference in San Antonio. James told me the difference to him is night-and-day, with the right leg being close to his real skin, and the left leg giving him all sorts of problems. You can see hair and his natural pigmentation coming back on the right leg.

Natasha had burns on 75% of her body. The doctors put STSGs on her arms, but quickly ran out of donor site for her legs and went with SkinTE. She reported the same experience as James, and you can see her tell her own story in the video above.

So as you can see, most of their early patients and studies involved burns and acute wounds, and the DFU study we are discussing is their first large controlled study. Margins are much larger on the large acute wounds and burns, but the chronic wound market is massive.

Interim Results Are Not Final

A word of caution before we begin looking at the study. These are interim results. They broke the blind on the first 50 enrollees of a 100-patient controlled study. The final results are due at the Symposium on Advanced Wound Care conference in May. This remains virtual.

The Study

This is a randomized single-blind trial. Since the SkinTE procedure involves taking a small full-thickness skin biopsy from the patient, patients knew which arm they were in, and so did the first set of clinicians who performed the procedures. But the evaluating physicians were blind.

The standard-of-care (SOC) arm:

• Advanced dressings for moisture retention and compression. Clinicians were given a range of choices for varying patient circumstances.
• Fibracol dressing
• Protective boot or cast

Experimental arm:

• SkinTE
• Advanced dressings for moisture retention and compression
• Protective boot or cast

Enrollment:

• Patients with at least 1 DFU that went below the skin, with sizes between 1 and 25 centimeters squared, present for 4 weeks to a year.
• No active infections.
• No other experimental treatment within 30 days.
• No very high creatine or hemoglobin levels.

Primary Endpoint

• Closure at 12 weeks as determined by a panel of 3 plastic surgeons (the blinded clinicians), and a confirmation visit to the treating clinician 2 weeks later.

Secondary Endpoints

• Percent area reduction as measured by 3D digital planimetry at 4, 6, 8 and 12 weeks.
• There are others, like Wound Quality of Life Score, but they were not included in the interim results.

Beginning with the demographics of how the randomization of the first 50 patients went, it’s mostly a very even split:

PTE Slide

As you can see, the only real differences is that hemoglobin (HbA1c) levels were a little higher in the SkinTE arm, and the wounds were actually quite larger than in the SOC arm, especially looking at those medians. So the SkinTE patients were actually a little more problematic than the SOC patients.

The primary endpoint shows a huge improvement over the SOC:

PTE slide. One patient in the SkinTE arm developed cardiac issues and later COVID-19, and was pulled from the study early, so the number is more like 18/24 or 75%.

As someone who does a lot of these clinical studies... this was fascinating to see this very rapid separation between the active group and the standard-of-care group.

-Dr. David Armstrong

We’ll discuss it more below, but what got the doctors running the study excited is how fast that blue line goes up in the first 4 weeks, topping out at 72% at 10 weeks. They are very attuned to early intervention and getting these things closed quickly.

We already saw how well split the random sample was on the small 50-person population, but two other details pop up that match the broader literature on DFUs, and provide some base validity.

• The very expensive surgical intervention for DFUs is STSGs. About 70% of these grafts take on DFUs, which is very close to the 72% of SkinTE closures in the interim results. This may be some upper limit to grafts on DFUs generally that is caused by co-morbidities, of which these patients have many.
• The SOC arm closure rate of 32% at 12 weeks is within the closure rate range from the US Wound Registry of 25-35%, adding some base validity to the SOC arm.

The secondary endpoint shows the same fast take off:

They also reported that of the wounds what did not fully close, the 6 remaining SkinTE patients had 84% closure at 12 weeks, while the 17 remaining SOC patients had only 34% closure. Additionally, 40% of the SkinTE arm had at least 1 adverse event, while 56% of the SOC arm did. They’re going to break those out in the final study.

Discussion

On the call with PolarityTE were Dr. David Armstrong, the lead investigator on the study, and Dr. Lawrence DiDomenico, a podiatric surgeon in Ohio with the most patients in the multicenter study.

Google Scholar screenshot

According to Google Scholar, Dr. Armstrong is the author or co-author of 907 scholarly papers or book chapters with 49,280 citations. When I asked him how many he’d written, he told me “around 520,” which means he’s literally forgotten about more things he’s worked on than most scientists will ever publish in their lifetimes.

He is one of the leaders in DFU epidemiology and treatment. He currently is at USC-Keck Medical Center in Los Angeles, which also houses the Southwestern Academic Limb Salvage Alliance (yes, SALSA), where he is founder and director. It is not an overstatement to say his life’s mission is to end these DFU amputations.

Dr. DiDomenico is on the front line of this battle. He co-founded the NOMS Ankle and Foot Care Centers, which has 17 doctors splitting their time over 19 locations spread out in eastern Ohio. They service the Youngstown area, and the many surrounding rural communities in the Mahoning River Valley, including over the border in Pennsylvania.

So the two doctors have very different perspectives, and both were kind enough to allow me to interview them. Dr. Armstrong is an academic, and very cautious about making overly broad statements about interim results. He says things like this:

I would say that I am pleasantly surprised by these data. This is relatively unusual to see this kind of signal early on, but... I just want to stress that this is early on, this is a planned interim analysis. Things can change. But what I can tell you is that these data are promising and I'm cautiously optimistic by this.

Dr. DiDomenico fights this battle one patient at a time, and had fewer qualifiers.

Our experience has been phenomenal, actually, with the use of the product thus far. We've used quite a different modalities over the years and our patients seem to be responding relatively quickly and in a very positive way… They just seem to be responding very, very well up front in their treatment which some treatment options that we've used in the past do also. But they take longer, it seems like, and/or they will struggle first and then they'll catch on… It’s a very unique process for sure. So not sure if I’m being clear enough with that, but in general it's been very, very — I've been optimistic with it and I'm pleased, pleasantly surprised, and the patients have been as well. As well as our staff, who's been doing this for quite some time.

Both in the conference call and discussions, two issues kept popping up:

1. Early intervention and getting these things closed quickly is crucial. Every day brings potential complications, and increases the chance of infection, hospitalization and amputation.
2. Getting the site of care out of ERs, hospitals and surgical centers, and into clinics and the home. In a pandemic situation, it is even more crucial, since ERs expose these patients to great risk. A recent unpublished study show diabetics are 10 times more likely to die from COVID than average.

So what it looks like from the doctors’ perspective is that this can solve both these thorny issues for them:

That separation is happening sooner than you would normally see with other types of, say, biologics or other products with which I'm familiar and have used over the last generation. Usually we tend to see no change at all for the first month, maybe three, four weeks. And then we start to see some separation with active versus control, with best available care. Here, we're starting to see a little bit more of that earlier.

-Dr David Armstrong

The big advantage they kept coming back to was being able to do this in an office, with large parts of the procedure that can be done by nurses and nurse practitioners.

These can be done very, very well, and successfully, in an office location or a clinic-type scenario or you know, facility or suite is one of the major advantages I see potentially down the road… But I think if we can deliver good results and the ease of getting the product back to you and doing that, and especially in the outpatient setting, it's going to be much, much less expensive for the insurance carrier to do this in an office and go into the surgical suite or a surgical hospital, surgical center or a full blown hospital.

-Dr. Lawrence DiDomenico

Dr. Armstrong followed up on that:

We're going to need to maximize the site of service, whether that's a patient's home for a lot of these things, that's where remote patient monitoring, a lot of other things come into play. Or a doctor, clinician's office or clinic. Or an ambulatory surgery center or what's called an OBL, outpatient-based-lab. And then finally and only in the very small fraction of 1% of these patients, an actual hospital.

So the bottom line is that SkinTE has the potential to solve both these very thorny problems, and save the diabetes medical complex lots of money in the process. The full cost of the SkinTE treatment for these sized wounds is $1000 plus the cost of office visits for biopsy, application, and follow-up.

The Competition

People talk about wound care and -- and there are so many different wound care products… If you've done even a superficial dive, not just a deep dive, you'd see that there is — there's a lot of noise out there. Many of these things are like dressings or commodities or things.

-Dr. David Armstrong

Having been to several wound care conferences, I can tell you that there is a ton of product out there. Again, tens of billions were spent on US chronic wound care in 2019, so there are a lot of bulls chasing the red flag. As Dr. Armstrong points out, most don’t do much and don’t have a lot of research to behind them. A lot of it is glorified gauze.

But there is one competing product from Australia called RECELL from Avita Medical (RCEL), that garners a lot of attention, and it has been in use for a decade down under, more recently in the US. They have recently re-domiciled in the US. There seems to be a lot of confusion about the two products, as they are similar. Both take a harvest of skin from the patient, process it, and apply it to the wound or burn area where it regenerates.

This differences can be summed up pretty simply:

The one big advantage for RECELL here is that Avita sells an in-office device with a 30 minute turnaround. The SkinTE biopsy gets sent to a lab and turned around requiring a second visit. But the advantages for DFUs end there.

And this technology, SkinTE, probably one of its greatest advantages is… you have a skin construct now that can be delivered to a wound relatively efficiently, that then can have some element of take like a skin graft even with some potentially full thickness components to it, which is very different from other technologies that have existed including many of the cultured tissue products that exists and biologics that exist right now.

-Dr. David Armstrong

Mostly what RECELL has been used for clinically is to make for smaller harvests of STSGs on large burns, and most of their trials in the past have been along these lines, and for vitiligo, a skin-pigmentation disease.

They have two recent trials for DFUs. One was a large randomized controlled study in Australia that ran out of money and was never fully enrolled. Of the 49 enrollees, they reported no statistical difference with the control group. I’m curious why the company wouldn’t fund it, as it was a well-designed study that was already up and running on someone else’s dime. It had a fairly similar setup as the SkinTE DFU study and a higher enrollment target.

The other was a pilot feasibility study — remember DFUs are off-label for RECELL — from the UK in 2019. Here’s a quick comparison of the studies:

There were some pretty big differences in design.

• The SkinTE study was controlled and even in the interim results, larger.
• The SkinTE study was much shorter, with positive results coming much quicker.
• The RECELL study did not use 3D planimetry, but rather more traditional methods of measuring wounds.
• The RECELL study did not provide time-series on closures, just area reduction.
• But the RECELL study recruited more problematic patients with larger wounds, 1 with a mild infection and 3 more with quiescent infections.

So comparing these two studies may not be that helpful. One thing that both doctors stressed is that every patient is very different, and so too needs to be the approach of the clinician. The more problematic RECELL patients may have been a really bad choice, according to Dr. Armstrong.

I'm very familiar with RECELL. It's different than this [SkinTE]. And it's probably better for healthier patients maybe that have had burns. Right? That are otherwise healthy. And because they're epidermal cells that are sort of suspended and delivered over a wound, they're a little more fragile, a little more friable as we say medically.

Later, we were discussing how to measure the severity of DFU infection and inflammation, which is actually fairly tricky, and he talked about measuring protease levels. When I asked him to elaborate, he brought up RECELL:

So in some cases proteases are early custodians for a wound, because they destroy proteins and release them. But what happens in chronic wounds is they remain elevated in most people, so you get this soup of just bad, ugly persistent inflammation. So imagine you took a poor unsuspecting isolated epidermal cell [i.e., RECELL] or you took a protein growth factor off the shelf and put it in there. Those things get mugged and cleaved by the proteases.

So we are really comparing apples to oranges here with these studies, because the patient populations are so different, and RECELL may be particularly unsuited for the population they chose. We know that 7 of the original 16 RECELL participants experienced closure in the 26 weeks, and that 1 reopened before the end of the study, but we don’t know how that progressed over time. So the 38% closure rate at 26 weeks is not that much higher than the SkinTE SOC arm (32%) at 12 weeks, or the data from the US Wound Registry (25%-35%).

But both studies provide charts on wound reduction, the secondary endpoint for the SkinTE study, and the primary for the RECELL study. If we overlay them and scale the axes, this is what it looks like:

Full apples versus oranges caveats apply, but very clearly the green SkinTE line goes up much faster in those crucial first few weeks. Through 12 weeks, the blue RECELL line more resembles the pink SOC arm than the SkinTE arm.

The New Regulatory Path

This is at the core of all the risk here, so let’s look at that. SkinTE began life as a “361” product. This is a regulatory self-designation for “Human Cells, Tissues, and Cellular and Tissue-Based Products.” SkinTE has been a commercial product for several years now.

There were two problems with the 361 pathway. The first is that the FDA was giving them the side-eye, and it looked very much like they might shut it down at some point. But that was actually the lesser of the two problems.

The bigger problem was their customers — doctors. My number one metric for all companies is customer satisfaction, and I try as much as possible to talk to a company’s customers. So I’ve been to a few conferences where PolarityTE was presenting, and chatted up the surgeons in attendance afterwards. Here’s a sample conversation, that was repeated a couple of dozen times

Me: What did you think?

Surgeon: Pretty impressive.

Me: What would it take for you to integrate it...

Surgeon: I need to see controlled trials.

A lot of the time, I didn’t even get that second question out before they started talk about controlled trials. The allure of the 361 pathway — commercial sales before a full suite of trials are done — is also its primary weakness with these doctors, who are also the customers.

While they pursue the new “351” regulatory path for a Therapeutic Biological Product, they have been allowed to continue sales under the 361 registration though May of this year. It has already been extended once, and maybe again, but no one is counting on it. They had $3.7 million in SkinTE revenue in 2020, up 59% from 2019, but that may be going to zero soon.

The new 351 pathway takes a long time to get back to commercial sales once they lose their 361 forbearance from FDA. The first step is to start with a single indication, focus on that, and develop trials in consultation with the FDA — an Investigative New Drug application, or IND. They are going to focus on DFUs, ones that are much more problematic than the ones in the current study results we looked at.

So they are planning three new IND trials — one for small but very deep DFUs, and one for large and deep DFUs. In addition, they are also going to pursue an IND for a pressure wound study in early 2022. After that, they will be pursuing the acute wound indications.

So, a very optimistic timeline would be that the first DFU study IND is approved Q3 2021, enrollment begins shortly thereafter, and the study is complete and reported 2 years later, or Q3 2023. From there, they can file their application to the FDA for commercial approval.

And there’s the rub. Even with all the equity sales in the last year, they have cash to get them to Q3 2022, including assumptions about the costs of the trials, and the end of SkinTE commercial sales. There is more cash to be raised, likely in 2022.

The bigger issue here is that these trials may not be as successful as their interim results, or previous non-controlled studies, which have all shown great results. Or the FDA may decide to not approve SkinTE for any number of reasons. A lot can happen in the next 30-36 months, which is the general time frame we are talking about.

Tail Risk: Dr. Denver Lough

The risk here seems to have subsided, but it warrants mentioning anyway. Dr. Lough is the inventor of SkinTE, and PolarityTE's original CEO and founder. But he was a terrible CEO who burned through cash, focused on the wrong things, and was trying to pump out new products before they could even get SkinTE off the ground. In August 2019, the board removed him as CEO, while asking him to remain on as Chief Science Officer.

Lough declined and sued. The parties settled with Lough receiving cash and restricted units. He still owns over 7 million shares. At the time, that was about a quarter of shares, and there were fears that Lough would use his shares to cause trouble, or try and take back the company.

But at the new share count, Lough has under 10% of shares, so he can make much less trouble than before. Also, a lot of time has passed, and if he was going to do something, he likely would have already done it. He seems to have moved on, having run for Utah State Senate in the 2020 election. He dropped out before the Republican primary.

I think this risk is pretty much subsided, but if you are considering buying the stock, you should know that there is a disgruntled founder/CEO with 7.2 million shares. He also believes he is entitled to more. He files a new Form 4 every month for his RSU grants, and this is in the footnotes of every one:

PRIOR SHARE AWARDS & DISPUTE: As of this filing, the Reporting Person remains in dispute with the Issuer regarding delivery and access to PRIOR Share Awards that were previously granted to him as a Director and Officer of the Company during 2016 - 2018 and which were included as consideration for the reduction of the summative cash "Separation Payment" as defined within his three year Executive Employment Agreement and other formal public filings by the Issuer. These "Dispute Shares" include approximately an additional 1,673,750 shares of the Issuer's common stock. The RP will publicly file detailed information, actions and disclosures for shareholders and regulators with the U.S. Security & Exchange Commission in an updated Schedule 13D/A (Amendment No. 6).

He has yet to file that 13D , and his last one was in December 2019. In any event, even if he sued and won, it would only be a small dilution now, and take Lough up to 11% of shares outstanding. I have much less concern about all this than I did in 2019. An indication that the risk has subsided is that new management has dispensed with their “Shareholders’ Rights Plan,” which was a poison pill should Lough try and make a move to retake the company.

Financials

I’m tempted to skip this, because all this will change drastically in 2021.

• Likely soon, they will have to cease sales of SkinTE.
• The surge in COVID testing revenue, $4.5 million in 2020, will begin tailing off, beginning with a large customer, a nursing home, which looks to start doing their own testing on-site.

But for the record, 2020 saw a ton of growth:

The big story is that lab testing block, but SkinTE revenue grew by 59% YoY. Again, that may go to zero soon.

The other thing that you very much have to know is that SkinTE had a 71% gross margin in 2020. That’s not a typo.

High Risk, High Reward

PolarityTE is a high risk, high reward proposition. The timeline for success has been extended by years by the new regulatory path, and a lot can happen in the interim that can derail the plan.

I used to do 5-year DCF models for PTE. As difficult as it was to game out 5 years when they actually had a product for sale, it’s pretty much impossible now with the new regulatory path.

But the rough math is compelling if they can pull off becoming the standard of care for wound care, beginning with DFUs. There are roughly 45 million current DFUs worldwide, with many millions more coming every year, at an accelerating pace. Even a 5% market share would be $2.25 billion in revenue, with a very high gross margin. Margins are lower than the consolidated 71% on these smaller wounds, but still very high.

And that’s just DFUs. If we add in the other chronic wounds, that’s $4 billion in revenue with a 5% share.

And that’s just chronic wounds. Burns and acute wounds have the potential to be just as much, even with a very small market share. Should they really become the standard of care, with something like a 20% global market share, this is a giant company.

But between now and then, a lot can go wrong. Despite the bullish call, I am going to recommend you wait until 2022 when there will likely be another dilution event. Any way you decide to play it, keep your investment limited to what you are willing to lose entirely, because that is a possible outcome in 2021. With the price as low as it is, I treat it as a long-dated option.

Analyst’s Disclosure: I am/we are long PTE. 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.