Tissue Therapies (ASX: TIS) has had a bit of a rough time the last month or so. They mostly have my sympathies. This is a company that, on the whole, appears to have to have done some things in a fairly grown up fashion and, quite frankly, it should be thoroughly unsurprising to experience some regulatory glitches in getting a product like this out the door. Especially from European regulators. Based on everything I have been able to read in the public domain, the issue is not one of clinical data or safety, but rather something to do with the manufacturing of their flagship VitroGro product. Those, of course, can be some of the biggest last-minute headaches with a product release process and can really delay launch if a particular manufacturing step needs to be changed (triggers all kinds of product comparability work, which can be a total nightmare). I think it’s also reasonable to say that some of the most complex regulatory challenges arise at the interface between devices and biopharma and you typically end up dealing with “hybrid” expertise within a regulatory agency, which can also be a pain.
I suppose the biggest hassle for TIS is the fact that it’s a public company and essentially has to disclose the minutiae of it’s regulatory challenges. A private company wouldn’t worry about it and since the company probably has enough cash to weather this storm, it wouldn’t have (likely) been a big deal from a shareholder perspective. That’s the challenge for these small-cap equities. It also demands a more sophisticated level of communication from the company when, actually, there isn’t a whole lot of detail to share with the market. It’s actually quite hard hard to add colour to a regulatory glitch like this without making it a tougher process for the company.
In my view, the issue with TIS is probably not the manufacturing and regulatory headaches of a product launch. I think it’s the overall market itself. It’s highly fragmented and there is no real dominant player in wound care. Although that opens up the potential for the acquisition of good products, it also means that a lot of pretty hard-core companies like J&J, Smith & Nephew, Cook, ConvaTec (BMS), 3M, etc. are all throwing big $$$s at a problem that is expected to be worth several 10s of $Bn and is high growth (double digits), given our ageing populations and an almost epidemic growth in diabetes / diabetes-related complications.
The market is also incredibly diverse in terms of product solutions and showing clinical efficacy is not just about running an effective trial against a somewhat basic standard of care, but also accepting that there are a lot of different strategies – devices, biomaterials, bio-pharma – that are all adding value to the problem in different ways. Some are very VERY high tech, and some are comparatively low-tech but quite effective. I focused on the big guns above but there are also over 200 smaller companies in the US alone that are vying for attention in this space. This means a major noise to overcome and a sophisticated business development team is needed for success, to get above the noise. I am not sure that TIS has this in their management team right now. Having said this, I do think that TIS has taken the right approach for its early product championing strategy. A distribution partner is certainly required to reach the customer in an effective way, but by not partnering too early, TIS has a chance of capturing some of the early value creation in initial sales – and if the marketplace validates the product, it will be a great thing for shareholders.
I think the real challenge for the TIS VitroGro product is going to be the profitability of the business. Ultimately, the big guns are going to win because they have the manufacturing scale to address the market need up-front. This in turn gives them a huge edge in dealing with a market that is extremely price sensitive. The volume is huge, but the unit cost is tricky. The big players will also take a portfolio approach by offering products in the “traditional”, “advanced” (i.e. VitroGro) and “active” (combination of devices and biopharma) segments. This reflects the fact that physicians use a fairly wide range of technologies, in concert, in order to manage the patient and so there is significant strategic value in being a one-stop shop. This also clearly extrapolates to some real marketing cost advantages if you can spruik a product portfolio (i.e. better per-product use of a dedicated sales force).
The good news is, I don’t think TIS is overpriced relative to its stage of product development and its current balance sheet. With the current correction it might even be cheap. It’s probably not going to be a fast recovery with EMA but they can afford to weather it out and everyone basically just needs to hunker down and wait. I would be much more comfortable if they had more sophisticated manufacturing partners – Catalent or Eurogentec (part of Kaneka) are merely “adequate” in terms of capability (people and infrastructure) and if there are problems with the manufacturing processes, it could be a real headache for TIS. BUT – If they succeed in getting some market traction in the first year of product launch, then M&A is a genuine possibility for this company. This means that we need to start seeing some evidence of traction with potential partners, even if it is just clinical feasibility.
I still think that VitroGro sounds like a brand of plant fertilizer but it may yet be a success.