A couple of weeks ago, I wrote a post on Admedus (ASX : AHZ). As usual, I got a fair amount of blowback, which surprised me really because I was generally positive about the company. To summarise my stance on AHZ:
1) I think it is a slightly confusing basket of activities (at least to me, but then as I am reminded on a daily basis, I am an idiot) and possibly a poorly focused business. Way too much stuff going on, some of it not high value.
2) But I also think it is great that it has some early revenues, even if most of those revenues come from commodity products. This does, however, throw into question the enterprise value of the company since the majority of revenues come from “low value” products. Thus it is my view is that AHZ is overvalued.
3) I am negative about the HSV-2 program based on Prof. Ian Frazer’s work. Not that it isn’t great science – it is – but it’s probably not the right science to solve this problem and the product probably needs to treat both HSV-1 and HSV-2 to be competitive. In my opinion, this program is just a money pit and AHZ could better use its financial resources elsewhere.
4) I am ambivalent about the CardioCel product because it is just simply not that differentiated.
It is this last point that seems to have people all upset, because somehow I didn’t buy into the big story of CardioCel, obviously because (again) I am mostly an idiot. Fair enough. But if there is one thing I have noticed about the devout and passionate shareholders that loiter around trading forums, is anyone with a contrary opinion to the preferred direction of their stock price is toast. I also note that those shareholders are extremely adroit at rabbiting on about their favourite company, like a little legion of macrophages, combating any bad share price karma out there. Honestly, some of them are so accomplished at regurgitating company propaganda, they should just be hired by the companies they flount. Or maybe some of them already are… (ooh, conspiracy theory).
Back to CardioCel…
So, I never said I disliked the product. I merely said it wasn’t a product that set my heart on fire (pardon the pun). Despite all the fanfare about the unique manufacturing process, and all the amazing clinical data that led up to FDA marketing clearance, one cannot deny that this product is – at its heart – a piece of bovine pericardium (BP). It comes in the usual size(s), the usual shape and the usual thickness. The best evidence that I can offer you for this statement is the substantial equivalency Class II 510(k) summary (K130872) in which the CardioCel product derives its indication for use from the Edwards and the Synovis (Baxter) product. Specifically:
COMPARATIVE ANALYSIS: CardioCel is manufactured from glutaraldehyde crosslinked bovine pericardium, which is the same material used for the predicate devices. CardioCel is considered to be substantially equivalent to the predicates for the following reasons:
Same raw material.
Same intended use.
Used in the same patient population.
Used in the same clinical environment.
Manufactured using the same principles of crosslinking with glutaraldehyde.
Used in the same anatomical region (cardiovascular system).
Intended to perform as a long term implant, maintaining the integrity of the area repaired.
Operates using the same fundamental scientific technology.
Supplied in several sizes.
Similar manufacturing process.
Similar sterilisation method to one predicate.
Similar packaging and labeling.
In other words, it is … er… similar. This is not a new biomaterial. This is not a new implant strategy. This is not a new technology paradigm in cardiovascular surgery. It is a substantially equivalent piece of processed cow. Whenever you want to understand the marketing claims of a new device, always start with what the company told the FDA, and take it from there. I should note that the claims made to the FDA for the 510(k) filing did not include anything qualitative in relation to handling characteristics, rinsing, etc. and even specifically mentions a similar manufacturing and sterilisation method. I will get back to that in a minute.
There are three major claims associated with the CardioCel product, according to the company. The first claim relates to its superior handling, flexibility and durability. I can’t comment on the handling or flexibility because I am not a surgeon, but the durability claim is probably just puff because in the FDA application, the company claims that the material performed comparably to the predicates. That may mean that it is more durable (if one piece of 0.5mm BP can be more durable than another) but the fact is that the predicate products are sufficiently durable otherwise predication wouldn’t exist. Basically, although the company has got some nice soundbites out of users (which I fully believe, incidentally) anyone that has ever marketed a product in the medical space knows that these are the types of “soft” claims that don’t get regulators upset, but don’t have a lot of meaning either.
The second claim relates to preparation and “off the shelf” ease-of-use, specifically that there is “no specific preparation or rinsing process ” required. Well, again, the regulatory filing makes it clear that the packaging and sterilisation is similar to competing products. This means that in all probability, just like competitor products, the surgeon is going to rinse the product for 3-6 minutes in order to make sure that no free glutaraldehyde/aldehyde or packaging solutes (i.e. the propylene oxide, a known irritant and probable carcinogen) are present on the surface of the implanted material. By the way, to be clear, we have known about glutaraldehyde toxicity since the mid-80s, it’s not a big deal, it just needs to be managed during product processing (more in a minute). To note, it is a standard surgical safety procedure of ANY implanted material, unless specifically counter-indicated, to rinse it with saline and possibly antibiotics before putting it into a patient.
The third – and major claim – relates to calcification. When Admedus filed its 510(k) it referred to both animal studies and a 30 patient pediatric study as indicative of superior calcification performance. The original follow-up period was only 36 months, which is relatively short – for example even in the early days of pediatric BP implants, 50% of pediatric patients would need additional intervention within a 10 year period (i.e. not a 3 year period). I also note that recent noise from the company relates to an astonishingly small number of patients in long-term follow-up, despite positive results (I also note that companies like Edwards have been following patients as part of marketing surveillance for two decades).
What I don’t like about AHZ’s breezy claims around this product is the reduced need for “re-op”, a claim they have actually have no data to support. Also, this is not the 1980s, where 20-25% of adult patients and half of pediatric patients would experience implant calcification/failure. BP implants are a lot better than they used to be and virtually every manufacturer has their own calcification mitigation strategy, whether it is some kind of surface modification, the use of an antioxidant or a capping agent. It is also true that performance seems to vary between manufacturers but since this is a problem that has been understood for a couple of decades, most manufacturers have made significant progress developing solutions that reduce phospholipid levels / calcium binding sites, for example Edwards’ competing XenoLogiX “anti-calcification” technology. To be clear, none of this is new technology, not even AHZ’s “ADAPT“.
So this is why I think CardioCel is a “humdrum” product. Most of its marketing claims are exactly that, marketing. I am not saying that the product doesn’t have good science to it, it may well do. I am not saying that the company hasn’t undertaken reasonable measures to clinically validate its product (it has). I’m not even saying that it will not be successful. What I am saying is that its not strongly enough differentiated to get all excited.
… and so I am not.
I also note that the reason why cardiovascular devices and materials have enjoyed such an intensive M&A and consolidation commercial landscape over the last decade is because it is all about channel management, offering comprehensive product portfolios, and bundle selling. Going out and pushing a product outside of the powerhouse sales channels of Edwards or Medtronic is a tough battle, especially for a “me too” product. This needs to be factored into the probable success of this product.
It doesn’t make it impossible (and clearly the company has some talent) but it does make it harder.
Awesome Photo Credit: Ryan McGuire. http://www.gratisography.com/