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New Growth Ideas For Biotech Investors

August 7th, 2014

biotechMedical technology is intimately linked to regenerative medicine. You could say these industries have a thunder-and-lightning relationship—you can’t have one without the other. Mark Landy, director of research for medical technology and regenerative medicine at Summer Street Research Partners, has staked out the intertwined sectors as his universe of coverage. In this interview with The Life Sciences Report, Landy discusses three companies with very distinct capabilities that could bring extraordinary rewards to investors who understand the value propositions.

The Life Sciences Report: Mark, you published a Q2/14 industry earnings preview on June 26, writing that you do not expect Q2 results to be stellar, in part, because procedure volumes are being affected by high-deductible health plans. Is this about employers cutting expenses with lower-priced healthcare plans? Or is it about employees not wanting to tap into their medical savings accounts? Describe the situation, and the issues that have given rise to this headwind.

Mark Landy: We’re entering what I call “a new normal of device utilization.” I’ve obviously borrowed that phrase from the Internet bubble of the late 1990s and early 2000s, which forced us to dramatically change the way we did things.

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Historically, hospitals, medical device investors and management teams—everybody, in fact—have traditionally viewed seasonality as follows: Q4 is the strongest quarter of the year, followed in strength by Q2, then Q1. Q3 is the weakest, driven by the summer vacation period.

This is the seasonality we investors are used to, and that the industry is comfortable with. Hospitals prepare budgets and utilization forecasts on this cycle. Management teams base their forecasts and provide financial guidance on this cycle. Investors build their models and expectations on this cycle. This seasonality expectation is, simply put, the way it is.

This pattern of utilization is driven by hospital-buying patterns, hospital budgets and scheduling, versus patient affordability.

TLSR: What has changed?

ML: Coming out of the economic downturn that started in 2008, we’ve seen companies push more and more of their healthcare burdens onto employees through the implementation of high-deductible healthcare plans. This, combined with elements of the Patient Protection and Affordable Care Act (ACA), which kicked in this year, has made affordability a much larger part of the healthcare utilization decision, and the timing of utilization, in my view. We learned, during the economic downturn, that healthcare spending is no longer a household priority, but is budgeted for alongside other household needs.

RepliCel Life Sciences Inc. is at the forefront of the utilization of stem cells to treat disorders and defects.

My thesis entering 2014 was that a new pattern of healthcare utilization would be established, driven by affordability. I expect H1 results will be weaker than guided to and expected, and H2 results will be stronger than guided to and expected. This is because patients will use the first half of the year to save for, or lower, their one-time, out-of-pocket costs for hospital-based procedures by paying down deductibles through cheaper utilization, and then have those procedures done in the second half of the year, before their deductibles reset at the beginning of next year.

I hold this view for 2014, as 2014 is the first year of change, and will be a “learning year” for the industry. I feel that 2015 will hold less surprise, as the industry will have a better utilization dataset to work from.

Going forward, I think we need to think more about Q1 and Q2 being weaker than before, with Q1 in line with Q3, or possibly weaker, and Q3 and Q4 being much stronger than before—especially Q4.

TLSR: Do you see this as a sustained pattern going forward?

ML: Yes. As long as we have high-deductible health plans, and patients have large out-of-pocket deductibles, I think this is a new sustainable pattern. Seasonality is going to be based more on patient affordability and deductibles, versus schedules and vacations.

TLSR: Your universe of coverage includes medical technology and regenerative medicine. Would you talk about some names, please? Do you have a regenerative medicine story you can share?

ML: While I don’t formally cover RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB), I do find it an interesting and exciting story. I have been doing diligence on the company to learn more about its technology and opportunities. It falls into a new category of medicine that is very intriguing to me: regenerative medicine and gene therapy. RepliCel and another company I follow, Harvard Apparatus Regenerative Technology Inc. (HART:NASDAQ), are at the forefront of the utilization of stem cells to treat disorders and defects, which is definitely the future of medicine.

TLSR: RepliCel has two proposed Phase 2 trials with its RCT-01 (non-bulbar dermal sheath fibroblasts) cells, which should be initiated before the end of this year. One trial will be for the Achilles tendinosis indication. I realize that as a Phase 2, this is not designed to be a pivotal trial. But will 82 patients, 41 of whom will receive RCT-01, be enough to get an indication of efficacy?

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