On December 16, 2013 I recommended a speculative position in Arch Therapeutics (ARTH). Back then the stock price was $0.21. On January 3, we saw a high of $0.42 and now the stock is traded around $0.40.
As said in my prior article here on SmallCap Network, a talented management team is an important asset for a company to execute its business plan. Seasoned professionals who have started or managed successful companies before is one of the most important criteria. The pre-existence of an experienced management team in a startup life science company increases credibility and improves the chances of getting funding.
But without a unique product or therapy, a life science company cannot succeed. Investors feel more confident if a proof of concept has been demonstrated, at least in preliminary experiments. In the case of Arch Therapeutics (ARTH) the proof of concept has been demonstrated through experiments performed on animals, resulting in data that can reasonably be extrapolated to realistic predictions of significance and human trial results.
The company’s lead product candidate-- one that stops bleeding-- is called AC5™. This hemostasis product keeps the blood within the body wound and seals it.
For investors not familiar with hemostasis I will explain it briefly. Hemostasis is the act of restricting or stopping blood flow from a damaged vessel or organ. Effective management of bleeding is critical for promoting positive outcomes in the surgical patient. Throughout a surgical procedure, bleeding must be controlled, not only to provide the best view of the operation site, but also to prevent the adverse physiological effects associated with blood loss. When the natural process of blood clotting does not occur or is adversely affected by surgery, other methods of achieving and maintaining surgical hemostasis are often indicated.
The methods currently available to effectively manage surgical hemostasis have many common drawbacks (see picture below.
As shown in the sheet above, many available hemostatic and sealant agents possess a combination of limitations, including slow onset of action, general unreliability, user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection, and other safety concerns.
The leading product of Arch Therapeutics doesn’t have these common drawbacks; that’s why we think the company’s AC5 product could capture a large chunk of the wound closure and management market, when available.
The Market Size
According to a 2012 report produced by MedMarket Diligence, LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery in the U.S. Arch Therapeutics estimates that 20%-25% of those surgeries are performed using minimally invasive procedures. Basically more than 25 million wounds could benefit from sealants and hemostatic agents, such as AC5. Additional trends that support a demand for hemostatic and sealant products include the following:
Overall procedure volume growth;
Ambulatory same day surgery volume growth;
Laparoscopic procedure volume growth;
and Efforts to reduce operating room time.
According to the same report of MedMarket Diligence, the market for these products achieved approximately $3.4 billion in 2010 worldwide sales and will surpass the $6.5 billion mark in 2017. Over two-thirds of those sales are for hemostats. Further, the projected growth rate for sealants may be even higher than that for hemostats due to a general lack of available products and potentially larger unmet need.
From inception Arch didn’t have any revenues and the company had incurred a net loss of $4,631,871. Of course the company needs to raise additional funds to continue the business. This is nothing strange and is normal for biotechs in the development stage. We think Arch Therapeutics could be open to in-licensing activities and collaborations. It makes sense for the company to seek deals with pharmaceuticals that are sitting on huge piles of cash.
Lead Product AC5™
Investors that didn’t read my first article about Arch Therapeutics are, of course, not familiar with the product. That’s why I will describe it here again.
AC5 is designed to accomplish hemostasis in minimally invasive and open surgical procedures. The product is a biocompatible synthetic peptide containing naturally occurring amino acids. When applied to the wound, AC5 intercalates into the interstices of the connective tissue where it self-amasses into a physical, mechanical nanoscale structure that provides a fence to leaking substances, such as blood.
The results of early data from preclinical animal tests have shown that AC5 achieves hemostasis quickly and effectively. Hemostasis occurred over 30 times faster than control use of saline and 10 times faster than the use of cauterization. AC5 can be applied right away as a liquid or a spray, making it user-friendly and able to conform to irregular wound geometry. Because it is not sticky or glue-like, AC5 is perfect for use in the setting of minimally invasive laparoscopic surgeries. Further, AC5 is transparent, which should make it easier for a surgeon to maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts. This procedure is called Crystal Clear Surgery™.
From The Biotech Showcase™ 2014 presentation I copied this good overview of the company’s achievements so far. The Biotech Showcase™ is an investor and partnering conference devoted to providing private and public biotechnology and life sciences companies an opportunity to present to and meet with investors and pharmaceutical executives during the course of one of the industry's largest annual healthcare investor conferences.
The success of any surgical procedure depends on a surgeon’s ability to effectively and efficiently manage hemostasis to provide an optimal view of the surgical field and to prevent the adverse physiological effects associated with blood loss.
That said, the benefits of the AC5 Surgical Hemostatic Device™, aimed at controlling bleeding and fluid loss in order to provide faster and safer surgical and interventional care, it far outshines any current available options.
Over the coming weeks, the company will further discuss the upcoming milestones for 2014.
Arch Therapeutics is currently one of the most promising small cap ideas in the life science field. Investors can still anticipate and invest before any milestone is presented. One thing seems for sure: the stock price will appreciate going forward.
Sources: Company's presentation Biotech Showcase, 10-K filing, MedMarket Diligence