Artes Medical: Long-lasting wrinkle correction

Ian Wyatt | Apr 24, 2007 11:27am EDT | 1 Comment

Rating:

Artes Medical, Inc. (ARTE)
San Diego, CA
Rating: Buy
Initial Coverage: $7.75 – March 19, 2007
Price Target: $10.50
52-week low / high: $7.01 / $10.50
Shares Outstanding: 15.7 million
Market Capitalization: $ 121.7 million

Why We Like Artes Medical:

Breakthrough, long-lasting injectable dermal filler
Excellent safety and efficacy reported in just completed 5-year clinical trial
Potential to dominate injectable dermal filler market within 3 years

Artes Medical is a medical technology company developing a new category of aesthetic injectable products for the dermatology and plastic surgery markets. Artes Medical’s initial product is ArteFill, a “non-resorbable” (not absorbed into the body), injectable implant for the correction of facial wrinkles and other aesthetic uses.

ArteFill consists of a proprietary combination of microspheres made of Polymethylmethacrylate (PMMA), widely used in implantable medical devices, and highly purified bovine collagen. Artes Medical’s product is unique in terms of duration of effect. ArteFill treatments yield a near-permanent result, as has been demonstrated by a 5-year clinical trial, recently concluded. In contrast, competitive offerings, including the industry-leading Restylane (Medicis), last as little as 6 months and thus require continual treatments. This, in turn, results in demonstrated fall-off from: 1) injection fatigue, where patients become tired of repeated injection treatments, and 2) credit card fatigue, where patients become tired of repeated payments resulting from repeated treatments.

According to the American Society of Plastic Surgeons (ASPS), 10.2 million cosmetic/aesthetic procedures were performed in the United States in 2005. Minimally-invasive procedures, such as injectable aesthetic product treatments, i.e., collagen and Botox injections, accounted for the bulk of those procedures. The ASPS estimates sales of injectable products of more than $2.2 billion dollars in the United States in 2005. Cowen & Co. estimates that sales of products by manufacturers within this market approached $600 million in 2006. Further, Cowen & Co. estimates that expenditures on procedures using temporary dermal fillers could reach $800 million worldwide in 2007, and run as high as $1.5 billion in the United States over the next five to 10 years. This translates into a compound annual growth rate of between a 20-25% through 2011).

5-Year, Peer-Reviewed Clinical Study

The company’s 5-year clinical study – the results of which were released Feb. 1, 2007 – should help drive interest for ArteFill and allay concerns among physicians. For the study, 119 patients who received ArteFill treatment were evaluated after approximately 5.4 years. The results showed continued wrinkle correction at six months, 1 year and after 5 years, and the results were proven as statistically significant. The study also showed that patients continued to improve throughout the study as compared to the initial and 6-month evaluation period. This is because the body’s natural collagen coalesces around the micro PMMA beads in ArteFill.

The incidence of adverse events associated with ArteFill was in line with that seen with other dermal fillers. Participants in the study were asked to provide their own assessment; over 90% indicated that they were either "very satisfied" or "satisfied." Over 90% of the physician assessments indicated that the procedures were either "completely successful" or "very successful." What’s more, at the end of the trials, 106 of 116 patients in the control group chose to receive a complementary ArteFill treatment.

Competitive Environment

There are two categories of competition facing ArteFill - those that are made with bovine collagen and another group made from Hyaluronic acid. In recent history, the dermal filler market has moved away from animal-based collagen, primarily because of concerns over the remote possibility of contracting bovine spongiform encephalopathy, commonly known as “mad cow disease.”

As a result, hyaluronic acid (a component of connective tissue whose function is to cushion and lubricate) derived products such as Restylane (Medicis) are now the dominant products in the dermal filler market. However, Restylane is shown to last no more than 6 months before requiring additional treatment. A new product, Juvederm (Allergan), also made with hyaluronic acid, promises longer-lasting effects with a duration slightly over 6 months.

ArteFill is a move back toward animal-based collagen. In order to address concerns related to mad cow disease, Artes Medical harvests its collagen from a closed U.S. herd and employs a proprietary process that yields a highly purified collagen that is partially denatured, making it less allergenic. In the general population, 3% of patients have tested positive for allergies to bovine-based collagen products. However, none of the 391 patients in the ArteFill clinical trials has tested positive for allergic reactions to the purified collagen used in ArteFill.

The other advantage of ArteFill is that the bovine collagen dissipates over time and is replaced with the body’s naturally occurring collagen, which bonds to the PMMA microspheres, a process that takes only two to four weeks. The microspheres in ArteFill remain intact at the injection site and provide a structure to support the skin and help prevent further wrinkling.

As is the case with most elective medical treatments, safety is of the utmost concern to most patients. According to the clinical data, adverse events associated with ArteFill were mild to moderate and were fewer than in the collagen control group.

In addition, there is a 10-plus year history of use in Europe of predecessor products created by ArteFill’s original inventor (who is not affiliated with Artes Medical). Those products, Arteplast and Artecoll, showed incidence of granulomas, which are sub-dermal irritations resulting in redness or the formation of bumps or the hardening of tissue at the injection site. These issues were largely resolved by improvements in the purification and washing technique used on the PMMA microspheres. The improved process results in rounder, smoother beads of a more uniform size, as well as fewer nanoparticles, which are thought to be the irritants that caused the inflammatory reactions. There was no incidence of granulomas in the ArteFill 5-year clinical study.

After receiving FDA approval of ArteFill on October 27, 2006, for the treatment of nasolabial folds (smile lines), Artes Medical is launching ArteFill in the U.S. market, targeting approximately 600 doctors, high-volume practitioners concentrated in California, Florida, and New York. The total dermal filler market is comprised of approximately 23,000 cosmetic and plastic surgeons and dermatologists, with the top 1,000 of these doctors performing an estimated 50% of all dermal filler procedures.

There appears to be a clear opportunity to acquire patients from current dermal filler populations as well as patients that have discontinued due to injection fatigue or credit card fatigue. There also appears to be the potential for “off label” usage – where doctors use ArteFill for treatments other than it was specifically approved for by the FDA, such as the treatment of acne scars and other types of traumatic scars or facial defects. Doctors are likely to present various case studies on alternative uses for ArteFill, which may offer the necessary data and experience to drive off-label usage of ArteFill.

Financial Results

Artes Medical is pre revenue – sort of. The company started shipping ArteFill only in February of this year, meaning that although there are revenues, they are yet to be reported. The preliminary indicators are promising. Cowen & Co.’s check with physicians suggests pent up demand for ArteFill by patients and also a clear willingness by physicians to sign up for the required training.

Sales estimates for Artes Medical, Inc. range from $69 million to $78 million by 2009, with initial 2007 sales of between $13.8 million and $16.7 million. These are figures are based on research conducted by Stifel Nicolaus and Cowen & Co., respectively.

Though the company is not profitable at the current time, it’s estimated that Artes Medical will either be at profitability or near-profitability by 2009. Thus, analysts at both Stifel Nicolaus and Cowen & Co. believe Artes Medical will be a ripe take-over target.

Outlook and Prospects

The dermal filler market is becoming increasingly crowded. Recent approvals of Juvéderm and ArteFill are expected to have a major impact on relative market shares in 2007. The high profile launch of Juvéderm (Allergan) could actually help Artes by driving additional traffic to the doctor’s office.

The company came public by way of its Dec 20, 2006, IPO, issuing 4.6 million shares at a price of $6.00 per share, for a total of $26.6 million prior to fees. Because of Artes Medical’s limited resources the company will rely on physician contact and training, and significant in-office advertising, despite the fact that the product is an ideal candidate for a Direct-to-Consumer advertising campaign.

Some patients may remain leery of the permanent effects of the ArteFill product, while others will find its long-lasting effects compelling. In addition, ArteFill’s use of bovine collagen is at odds with industry trends because of fear of mad cow disease, as previously noted. The product’s safety as suggested by the 5-year study should alleviate many of these concerns.

To investors, a valid concern is the lack of near-term profit prospects, not to mention the significant expenses associated with marketing ArteFill. However, all things considered, we’re highly optimistic about the prospects for Artes Medical. On that note we are initiating coverage of Artes Medical with a Buy rating and price target of $10.50, derived from applying a multiple of 4X to the enterprise value/2008 average revenue estimate. From the current price of $7.75, this represents price appreciation potential of 35%.

Note: This article is from the April 2007 issue of Rising Star Stocks, an independent investment advisory focusing on uncovering potential investments that are poised to revolutionize their industries. Rising Star Stocks is published monthly with an intra-month update and periodic special reports. For more information visit http://www.risingstarstocks.com

About the Author
Ian Wyatt is a co-founder and President of Business Financial Publishing and the Chief Investment Strategist and Publisher of SmallCapInvestor.com. Read More