2013 was a great year for Life Sciences stocks and the momentum created last year is being carried into 2014 - with a flurry of successful IPOs and financings. According to organizers at the JP Morgan Health Care Conference in January attendance was much higher than what they had anticipated and bankers were eager to do deals as more dollars flow into the space. As the wider market draws its attention to the sector the hunt for underexposed and undervalued companies is fast on. One such company is Theralase Technologies Inc. (TSX-V: TLT, US-OTCBB: TLTFF); Theralase designs, develops, manufactures and markets, patented, super-pulsed laser technology used in biostimulative and biodestructive clinical applications. With a strong pipeline of developments leading to a Phase I clinical trial in 2015 the company looks to have a promising 2014.
The Theralase technology platform targets three key indications:
1. Combining proprietary photodynamic compounds (PDCs) with super-pulsed, biofeedback laser technology to attack specifically targeted cancers, bacteria and viruses (preclinical);
2. Wound care and healing (including non-healing fractures and bone fracture regeneration (preclinical);
3. Non-invasive pain management and clinical therapy, used in neural muscular skeletal conditions, including arthritis and osteoarthritis (commercial).
Key Investment Highlights:
- Developing a therapeutic compound for the $3.9 billion bladder cancer market
- Proven ability to develop and commercialize technologies: TLC-1000 cold laser technology for non-invasive pain management currently generates ~$2 million of revenue annually through 1200 practitioners
- Platform technology for development of additional cancer therapeutics
- Favourable preclinical data (vitro and in-vitro) in bladder and breast cancer cell lines
- Partnership validation: Ontario Cancer Institute at Princess Margaret Hospital University Health Network
- Second generation (TLC-2000) launch in 2014, along with a new recurring revenue business model
- Competitive technical advantages (Cellular pathways: iNOS, ATP, Na+ / K+)
- Proprietary technology with strong IP portfolio: patented biofeedback technology and patented PDC cancer destruction, multiple issued patents
- Large addressable US and World markets (several billions of dollars)
- Strong financials: No debt, positive cash flow / double digit growth
- Experienced leadership team (20+ years)
ANTI-CANCER PLATFORM TECHNOLOGY
Theralase has patented anti-cancer drugs known as Photo Dynamic Compounds (PDCs) which localize the DNA of cancer cells and when irradiated, destroy the DNA resulting in apoptosis (natural cell death). While PDCs are used in Photodynamic Therapy (PDT) as a potential treatment regime for a number of conditions, Theralase has discovered that they hold particular promise as treatment to particular cancers. Through studies conducted internally and independently Theralase's PDCs have proven successful in destroying breast, colon, brain and bladder cancer cells. A recent mouse model demonstrated complete destruction of subcutaneous bladder cancer tumours. The study was an important milestone signifying that the company's leading drug candidate is effective in the destruction of cancer in a live animal model and can prevent the cancer from recurring.
Favourable preclinical data:
- Up to 100% cancer cell kill at very low concentrations (< 0.8μM)
- More effective at killing cancer cells than already approved therapies: (668,000x ALA, 198x Photofrin)
- Survival of mice up to 20 months (50 human years) after a single Theralase PDT treatment
Key Bladder Cancer Statistics:
- US bladder cancer treatment annual spending was $3.9 billion in 2012
- 70,000 new cases and over 14,000 deaths in the US each year
- 386,000 new cases are diagnosed worldwide annually
- Standard treatment unchanged with no new drugs approved since 1998
- 5th most common cancer, 4th in men, 8th in women
- Most expensive cancer to treat with a recurrence rate up to 80%
In 2012, annual spending for bladder cancer treatment in the US was $3.9 billion, and the current standard of care has been unchanged with no new drugs approved since 1998. Bladder cancer is one of the most expensive cancers to treat, and has a recurrence rate up to 80%. In the mice model all mice that showed an initial response remained cancer free, healed without scarring, and developed normally after a single Theralase PDC treatment. The company is also developing further PDCs that can be used to treat a wide variety of other cancers (breast, colon, brain and lung), as well as bacteria and viruses.
Once further validated Theralase's platform technology could be a big pharma target for acquisition. An analysis of the recent M&A action in the space shows that many of the deals are being done in the $466 million to +$1 billion plus royalties.
Bottom line, Theralase's PDCs have the potential to be game changers, better yet, life changers within the medical community - a literal cure for cancer. It will take 2 - 3 years to play out in its entirely, but for a biotech company with revolutionary technology aggressively targeting a multi-billion market it really seems like a smart investment for the future. Significant room for upside appreciation, with limited downside risk.
THERAPEAUTIC LASER PLATFORM TECHNOLOGY
The company has commercialized the TLC-1000 Superpulsed Laser Technology for non-invasive pain management and has over 1200 chiropractors and other health practitioners in the North America using the device on a daily basis. Cold laser technology is used to heal a wide range of nerve, muscle and joint conditions (i.e.: lower back pain, knee osteoarthritis, shoulder tendonitis). TLC-1000 generates $2 million annually in revenue with strong short-term growth projections and the company will be launching the next generation of the device (TLC-2000) in 2014.
Key Market Statistics:
- More than 56 million patients suffer from acute and chronic pain in the U.S.
- U.S. pain market exceeds $100 Billion annually and is growing rapidly
- Aging population and rapidly rising healthcare costs lead to large market opportunity
- Therapeutic lasers are used daily by thousands of practitioners worldwide with millions of patients successfully treated
Theralase Laser Technology Highlights:
- Superpulsed technology with best‐in‐class tissue penetration: up to 4" into tissue
- Only technology proven to eliminate pain, reduce inflammation and accelerate tissue healing through 3 independent cellular pathways (iNOS, ATP, & Na+ / K+))
- Cleared by FDA, Health Canada and CE for sale in 180 countries
- Proven extremely safe and effective (> 90% efficacy) in blinded, randomized, controlled clinical studies
- Patented laser technology (patent No. US 6,413, 267)
- Large installed base of over 800 systems sold in Canada
- Solid business built in Ontario over the last 20 years consistently producing annual revenues of approximately $2M (580 systems or 72% of sales completed in Ontario)
- New multidisciplinary therapeutic laser centre and corporate head office is both cost effective and adds a significant revenue stream
- Endorsed by professional sports teams including the Toronto Blue Jays, Montreal Canadians, Washington Wizards and Toronto FC.
- Research and development of patented next generation therapeutic laser technology, the TLC-2000, completed and moving to commercialization in 2014
Theralase currently generates $2 million in annual revenue from the laser therapy division of the company, and has a strategy in place to increase that figure by 300-400% in 2014. The growth strategy includes expansion across Canada and aggressively into major U.S. markets, as well as introducing a recurring revenue model with the release of the TLC-2000. The company has outsourced clinical studies to the University of Buffalo to demonstrate the efficacy of the new biofeedback technology. Theralase expects an installed base of 400 units at $16,500 each, which equates to $6.6 million in revenue.
Industry Comparable Laser Technology
When looking at industry peers, Theralase technology appears to be far superior. It is adaptable for many different purposes, can operate on two different wavelengths, has a significantly higher power output, and has the best price/value ratio - not only in terms of functionality, but also capital and operating cost. In fact, Theralase has structured a payment plan where practitioners sign a 42-month lease (6 payments @ $99/month, followed by 36 months @ $500). At the end of the term, the customer must continue with monthly payments into perpetuity or the system ceases to operate. The average practitioner performs 200 treatments a month at $50 per treatment, which equates to $10,000 monthly revenue. Each practitioner is generating ~20x ROI per month. Each unit costs Theralase ~$3500, which is >75% margin.
Therapeutic Laser Comparison
Risk Assessment Chart
The therapeutic laser division of Theralase provides steady cash flow and revenue that will continue to grow and fund the development of the company's lead cancer therapeutic. The PLC technology is extremely reliable and has significant growth potential, with an extremely low risk profile. This division isn't what's going to make shareholders rich - but it is going to add millions of dollars into company coffers. The revenue from the cold laser sales will limit the need for further dilution.
Theralase has a very experienced and diverse management team with a strong background in medicine, engineering, technology, and finance.
Roger Dumoulin-White, P.Eng. (Electrical) is the company's founder, President and CEO. Roger previously occupied a senior management position at an international auto manufacturer, before inventing the company's laser technology (patent No. US 6,413, 267).
Dr. Arkady Mandel, M.D., Ph.D., DSc., Chief Scientific Officer of Theralase. Dr. Mandel is one of the key founders of the therapeutic use of lasers in dermatology and other areas of clinical medicine, as well as the originator and developer of phototherapy methods. He has over 100 original papers and scientific monographs to his name, and over 200 international patents attributed to his research, Dr. Mandel will lead the research and development of the Theralase's technologies through to commercialization.
Also worth mentioning, is that in addition to its Board of Directors, Theralase has a Scientific and Medical Advisory Board (SMAB), comprised of international key opinion leaders and esteemed scientists with broad expertise in biomedical and clinical research, drug discovery and development, as well as, medical device engineering and manufacturing. The Board's most esteemed member is Dr. James Andrews, world renowned orthopedic surgeon. "[Andrews] is the alpha doc at the center of a sports-medicine network that extends well beyond doctors. Every athletic trainer, physical therapist, strength-and-conditioning coach in the land seems to have Andrews' cell phone number", reads an excerpt from ESPN magazine. Among others, Dr. Andrews long list of patients includes star athletes: Michael Jordan, Troy Aikman, Charles Barkley, Tom Brady, Brett Favre, Drew Brees, and Albert Pujols, and currently he serves as the team doctor for the NFL's Washington Redskins.
In November 2013, Theralase closed an oversubscribed equity financing raising $3.15M through a private-placement offering. Attached to the shares were 21 million (now in-the-money) warrants which when exercised will generate another $4M for the company.
As of the most recent Q3 2013 financial report, Theralase increased its profitability by 40% year over year, even as we saw revenue decrease 25% year over year. The net loss of $596,873 through nine months ended Sept. 30, 2013 is a reflection of the continuing commitment of Theralase to reinvest in the next generation of therapeutic laser and cancer destruction technologies from existing therapeutic laser sales.
Theralase will use all cash on hand as working capital to develop the company's strategic initiatives in a number of areas, specifically:
- Completion of patented PDC bladder cancer technology preclinical investigation and commencement of phase 1/2a human clinical study in 2014
- Canadian and United States sales and marketing expansion
- Launch of patented next-generation Theralase TLC-2000 therapeutic laser in 2014
Upcoming short-term catalysts:
- Orthotopic rat model data
- Dose toxicity study
- GMP drug manufacture
- FDA Investigational New Drug (IND) application
- TLC-2000 launch
There are currently ~66 million shares issued and trading, and ~91 million shares on a fully diluted basis. That gives Theralase a market capitalization of ~31M today (~$43M fully diluted).
If you consider the laser therapy division alone, Theralase plans to sell about $6.6M of TLC-2000s in 2014, and projects cumulative ROI of 300% in the third year, and 500% in the fifth year (margins are ~75%). So, there should be a steady stream of cash coming into Theralase with the upcoming launch of the TLC-2000, which will see the company through 2014, in addition to the cash already in the bank from the recent financing.
Even though the PDCs don't generate any revenue yet, the payoff is potentially MASSIVE. Theralase projects that if the trials go well and they receive FDA approval, cumulative ROI will be 1100% in the third year, and 1200% the fifth year. Given that just the U.S. bladder cancer treatment market in 2012 was $3.9B, and there have been no new drugs approved by the FDA since 1998, Theralase has the potential to capture a SIGNIFICANT PORTION of the steadily growing marketplace.
In general, the valuation of biotech companies has been a complicated business for investors - especially early development stage companies such as Theralase. Analysis of financial history gives us little indication of future performance, and non-risk adjusted forecast models underestimate the inherent risk in drug development.
Due to the hybrid business model of Theralase, it's necessary to look at each division separately and then as a whole.
We've performed a sensitivity analysis on the laser therapy division of Theralase to gauge the value of just that aspect of the business:
Presuming that all of the in-the-money warrants are executed, using an industry standard metric of 10x revenue, the value of just the laser division of Theralase should be worth between $0.44 and $0.88 per share depending on the execution of management.
That's not factoring in the potential of the PDCs, which will be in the hundreds of millions dollar range if approved by the FDA. When looking at the industry comparables chart above, big pharma deals have ranged anywhere from $466M to $1B plus royalties. That is a significant amount of money, which leaves significant upside potential for an investment made today.
The thing is, by the time clinical trials have been completed (assuming they're successful), Theralase will be trading many multiples higher than today. Look how excited investors got when Theralase first released PDC breast cancer results during January 2010, the intraday high for TLT was $1.39/share.
Investors saw the potential back then, but when the market peaked and dried up near the beginning of 2011. Global indices and markets were hit hard, along with the share price of Theralase and the entire TSX Venture.
However, all that has changed.
As mentioned at the beginning of this article, there was a quite the buzz at the investor conferences over the past 4-5 weeks, one that many investors haven't seen in years, and retail investors were flocking booth to booth, eager to hear about the emerging technology and the potential for returns. If anything, I might even say that there is so much money available in the biotech marketplace that the valuation of good projects is going to be driven up because there is so much more competition among venture capitalists.
Biotech companies confront unique problems and circumstances, including high cash-burn rates, lengthy product development cycles, and uncertain and often unreceptive capital markets.
That isn't the case for Theralase. The company has a low cash-burn rate and expects significantly higher revenue in 2014 from its laser therapy division. Theralase has a focused product development plan, and most importantly, a management team with the necessary knowledge and expertise to see the drug through clinical trials and FDA approval. And lastly, the company is well financed having just completed an oversubscribed private placement.
The new laser technology is nearing commercialization and we should expect to see at least a few years of solid Y/Y growth and revenue out of it. With the expected ramp up in sales and marketing, the opening of new offices across North America, and the new business model that focuses on generating recurring revenue, Theralase is well poised to have steady cash flow.
Meanwhile, and this is the really exciting part, Theralase management can focus on the research and development of its PDCs - which is where the BIG MONEY is at. Theralase is focussed on getting to FDA phase 1/2a human clinical trials and expects to have initiated them before the year is out.
Theralase's current valuation makes for an attractive entry point for investors as it could see significant increase over the course of 2014 - if the company continues to generate the type of favourable data it has historically seen from the bladder cancer program and with the exciting second-generation launch of the already commercially successful PTC cold laser technology. Further fuelling the biotech feeding frenzy is the fact that many small-cap US companies are already seeing inflated valuations which makes their undervalued Canadian counterparts with solid assets that much more attractive for investors. Now is the time to be investing in Theralase before this underexposed story becomes a household name amongst investors.
Below are two links to two recent video clips on Theralase: