Investment case

Tissue Regenix was spun-out from Leeds University in 2006 to exploit a patented decellularisation technology known as dCELL. It has since developed a range of regenerative solutions for a variety of replacement tissues using biological materials of both human and animal origin. The first product, DermaPure originally positioned for acute and chronic wounds, was launched in the US in 2014. A broad development pipeline addressing indications across wound care, sports medicine, and cardiac applications is set to be launched over the next five years. Commercialisation will be through a sales force to carry the scientific message of the technology platforms, bolstered by regional or national distributors and strategic partnerships in most geographies. A Human Tissue Authority license, which allows the import of its human tissue products from the US into the UK market, was recently granted. Tissue Regenix is based in Leeds (UK) and San Antonio (Texas). CellRight Technologies, a leader in bone-derived osteoinductive products, was acquired for up to $30m (c £23m) in August 2017. Tissue Regenix was listed on AIM in 2010, via its reverse takeover of Oxeco, and has raised c £87.2m to date. Cumulative R&D spend has been £19.7m.

Valuation

We value Tissue Regenix using a risk-adjusted DCF-based model for the cash flows for each business area. This yields a valuation of £245m, or 20.9p per share. We value the Biosurgery business at £128m and the Orthopaedics division (including CellRight) at £126m. There are a number of value-inflection points expected over the near- and medium-term, including the potential CE mark grant and launch of OrthoPure XT and US launch of OrthoPure HT via the HCTP pathway, which would result in an uplift to our valuation as the development risks subside. In line with our philosophy, we have employed conservative assumptions throughout.

Financials

Tissue Regenix reported a net cash balance of £16.4m at FY17, after raising £40m (gross) in equity to fund the CellRight acquisition (initial payment of £19.9m) and progress the operations of the core operations. We currently forecast, admittedly employing conservative assumptions, that the company, will achieve breakeven in late 2020 or possibly early 2021 (excluding additional potential synergies from the CellRight acquisition). There are still significant development costs for Tissue Regenix (notably for US registration studies, such as for OrthoPure XT), consequently we estimate the company will have to raise an additional £10m within the next 24 months. This could arise from distribution agreements, debt financing, or an equity raise.

Sensitivities

Our main sensitivities are detailed later however (in common with other medical and related products) managing regulatory matters, gaining adequate reimbursement and achieving meaningful market adoption are key factors. Tissue Regenix has dealt with all regulatory challenges to date, and its products appear to have compelling clinical and economic cases suggesting pricing should not be an issue. Nonetheless, they are entering competitive markets where sustained investment in development and marketing is necessary.

Tissue Regenix: Focused on regenerative medicine

Tissue Regenix is approaching a defining point as a number of key development programmes near commercialisation. The applications are diverse and address many critical clinical needs such as orthopaedic trauma, wound care, tendon repair, and heart valve replacement. The acquisition of CellRight Technologies helps address the issues of distribution and production for the key US market, as well as bringing a complementary regenerative technology (processing bone) and an attractive range of existing products. Historically the biosurgery division was the most advanced; however, the opportunities in orthopaedics, dental, and cardiovascular have the potential to create sizeable businesses. Our DCF-based model yields a valuation of £245m, or 20.9p/share.

The last three years have seen progress across all of Tissue Regenix’s existing business areas, with the focus now shifting to commercialisation. The aim is to exploit its proprietary technology platforms to build a broadly-based regenerative medicine business across a number of sizeable therapeutic areas in multiple soft tissue repair indications. Specifically, those including wound care, general surgery, and orthopaedics (notably sports medicine and spine). Other targeted indications are also being actively developed, particularly in dental and cardiovascular care. A mounting body of clinical evidence is demonstrating the value in creating a variety of tissue scaffolds that address intractable medical needs. The resulting products typically offer material benefits compared to the current standard therapies and/or offer demonstrable economic advantages.

Such tissue engineering differs from existing synthetic devices and conventional implants in that the scaffold becomes integrated with the patient’s own tissues and potentially affords a specific and permanent replacement, effectively a “living repair”. The novel product characteristics result in near-term clinical benefits, whilst the reduced need for additional corrective surgery (for example, greatly reduced calcification of heart valves) and no requirement for immunosuppressant therapy add significant long-term clinical and economic advantages.

Tissue Regenix is pursuing a dual tissue strategy, employing both human- and animal-derived soft tissue programmes. The reduced regulatory burdens for human tissue-derived products, especially in the US, provide a faster route to market. The animal-derived product ranges require the traditional medical device approval pathways, which are more costly and time-consuming, but have fewer supply constraints and so offer the attraction of commercial scale production. It is expected that the human-derived product ranges will drive revenues, and profit (break-even is forecast for late 2020), over the near term, with the animal-derived products being introduced as they complete their regulatory processes.

Last year Tissue Regenix acquired CellRight Technologies and with it a range of regenerative bone products, a dependable supply of allograft tissue in the US, and a state-of-the-art manufacturing facility. The strategic fit with Tissue Regenix is clear and brings not only a complementary product range and existing revenues and profit, but also provides an infrastructure that can be leveraged to advance Tissue Regenix’s ambitions in North America. Conversely, Tissue Regenix’s operations in Europe will be employed to introduce selected lines from the CellRight product range into Europe.

Commercially driven innovation and development

The primary aim of regenerative medicine is to restore the structure and function of damaged tissue. Whilst certain fields (such as those employing stem cell therapies) remain at the earlier stages of development, the use of tissue scaffolds has entered main stream usage for a variety of clinical and surgical procedures, having demonstrated clearly its potential advantages.

Such tissue engineering uses the biological scaffolds, cells, and biologically active molecules to assemble functional matrices that restore, maintain, or improve damaged tissue. Importantly, since these constructs are not themselves immunologically active and the procedures encourage re-population with the patient’s own cells, the issues of rejection and need for immune-suppressant therapy are bypassed.

Tissue Regenix has assembled two versatile technology platforms, dCELL and BioRinse, that can process soft tissue and bone. These have been used to create a suite of products addressing areas as diverse as wound care through to cardiovascular valves. The commercial strategy exploits the differing regulatory pathways for human-and animal-tissue derived products. The initial drive uses the more rapid route to market offered by human-tissue regulation (especially in the US), with the subsequent (and likely larger) revenues driven by animal-tissue derived products.

Management has identified five key imperatives to deliver on its stated objectives. We have reproduced these below, with additional relevant comments:

• Commercial execution – Build an effective direct sales and medical affairs team to deliver a differentiated scientific message to US decision makers. Broaden coverage and re-imbursement via additional IDN/GPO agreements. Grow commercial scale through further regional and national distribution partnerships.
• Strategic partnerships – Establish long-term scientific and commercial collaborations with acknowledged industry leaders in each field. Identify and target suitable partners for each of the four strategic focus areas: BioSurgery, Orthopaedics, Dental, and Cardiac.
• Clinical evidence – Create robust real-world clinical outcome data, coupled with compelling health economic evidence, to help drive adoption across the current target specialities. Partner with key opinion leaders to drive advocacy and identify new solutions to unique clinical needs.
• Geographic expansion – Drive sales of existing products in selected markets outside of the US. Exploit the opportunities to create a human tissue-based portfolio in Europe. Explore the potential of regional and global distribution partnerships.
• Portfolio development – Focus investment behind the priority product programmes with a clear commercial pathway and establish R&D collaborations with leading academic centres.

Progress to date has been encouraging, with the integration of CellRight on track and senior management roles clarified. The recently signed strategic partnerships with Arthrex and ARMS Medical are a welcome sign of the transition from an essentially development stage business to a more commercially minded company.

Scaffold platforms’ potential is increasingly visible

Tissue Regenix aims to exploit the versatility of the dCELL technology to develop new regenerative approaches across three key soft-tissue market segments: general surgery including wound care, sports medicine and cardiac. Last year’s acquisition of CellRight Technologies brings an additional, and complementary, technology (BioRinse) that addresses a number of bone applications, with the current focus on spine and reconstructive surgery indications.

dCELL is a versatile platform for creating tissue scaffolds

dCELL is a patented decellularisation platform that was originally developed at the University of Leeds. The procedure creates an acellular tissue scaffold which, once implanted, is repopulated with native cells during the healing process to regenerate healthy, living tissue. The donor grafts (whether of human or animal origin) undergo a multi-step process, known as decellularisation, that removes donor cells and cell remnants from the graft. The result is a room-temperature stable graft that consists of the structural proteins of the tissue matrix, including the original vascular channels, which encourage re-colonisation by the host’s cells, and the basement membrane, which facilitates the integration and re-epithelialisation of the graft.

Treating tissue with the dCELL process allows for the swift re-population by the patient’s own cells, whilst also achieving thorough removal of donor DNA and cells (for example, over 99% with DermaPure), which virtually eliminates potential rejection issues. Unlike many other scaffold materials, with the dCELL process there is no need to chemically cross-link the structure to enhance strength. Such chemical cross-linking can impact clinical outcomes as non-cross-linked materials show greater cellular infiltration, extracellular matrix deposition, and neovascularisation, with less encapsulation, compared with their chemically cross-linked equivalents. Importantly, the tissue’s native growth factors, elastin, and collagen are retained and these biochemical properties, coupled with the tissue-specific physical structure, encourage the rapid cell repopulation and integration of the tissue and effectively create a “living repair”.

dCELL’s versatility means it can be used to prepare a wide variety of tissues from almost any source. The initial focus was on a skin substitute, now known as DermaPure, from tissue collected from human cadavers. The process was pioneered by the NHS Blood & Transplant Tissue (NHSBT) service and they retain the usage rights to dCELL Human Dermis in the UK. Tissue Regenix has refined and optimised the procedures to enable a broad range of tissues to be processed, ranging from cardiovascular valves to joint components. The flexibility allows the creation of like-for-like structures that closely resemble the original tissues and hence are integrated to replicate the function and performance of the damaged or diseased tissues.

BioRinse is a similar multi-step technology for bone scaffolds

Similarly, CellRight employs a multi-step process, known as BioRinse, to create biological scaffolds from cadaver bone. A variety of proprietary rinsing agents are used according to the donated bone origin and desired end-product characteristics. Common to all processes is the need to remove cells and other debris, as well as blood, bone marrow, and lipids. This leaves a clean, decellularised scaffold that retains desired structures and native growth factors.

An example is Concelltrate, which may be hydrated with fluids such as saline, blood, Bone Marrow Aspirate (BMA), and Platelet Rich Plasma (PRP), and used in a variety of applications including spine, reconstructions, and bone voids. Here the native bone morphogenic proteins (BMPs) are retained to provide an excellent osteoactive grafting material. BMPs promote mesenchymal (BMA) cells to differentiate into chondrocytes and osteoblasts that lead to bone formation. The matrix can also be tailored for a specific need by hydrating it at the time of surgery with a variety of fluids (such as the patient’s own growth factors, mesenchymal cells, stem cells, or even an antibiotic solution) in accordance with the clinician’s informed medical judgement.

The BioRinse processes are carried out aseptically, with specific steps to kill pathogenic organisms (including spores) and all components associated with disease transmission. A final low dose sterilisation, at low temperatures, ensures the appropriate sterility for such implanted medical devices is achieved.

Extensive intellectual property protection in place

The principal dCELL patent covering decellularisation of tissue was granted in 2002 and expires in 2022; however, the patent estate has been extended continuously and now consists of c 60 granted patents (with more pending) across all the major markets. A total of four patent families cover the various use indications and production enhancements, with the earliest expiring in 2027. Arguably more important is the technical “know how” that has been accumulated over the past decade, particularly in optimising the manufacturing processes employed for the various uses (eg tendons behave differently to dermis tissue in subtle ways) in order to maintain product uniformity, consistency, and quality across batches.

Regulatory pathways differ for various products and markets

Tissue Regenix, along with all other medtech companies, operates in a highly regulated environment and all of its products, whether sourced from animal or human tissue, are subject to stringent external regulatory oversight. Although well documented, this is compounded by the differing treatments for human derived products in various markets.

For instance, in the US acellular dermal matrices (ADM) derived from human tissue (allografts), such as DermaPure, are classified by the FDA as minimally manipulated. Providing it is recovered, processed, stored and distributed in accordance with FDA requirements, a product can be commercialised under the HCT/P 361 pathway. In Europe the use of human derived tissue engineered products is covered by both European and country specific legislation. Tissue Regenix’s human derived products’ clearance is largely determined by the adherence of the tissue bank to the country specific standards for the donation, procurement, testing, processing, preservation, storage and distribution of human tissues, which can lead to a more complex approval process in some countries.

In contrast, animal derived products (xenografts) are classified as medical devices. In the US, the FDA recognises three classes of medical devices (Class I, 2, and 3) and Tissue Regenix’s products would be classified as Class 2 or 3 devices. These would require either a 510(k) premarket submission (where a predicate device is already approved) or a Premarket Approval (PMA) application, with the chosen route depending on product specific criteria (including degree of novelty). In Europe the CE Mark guidelines classify devices in four main groups (Class I, IIa, IIb, and III), with the lowest risk being in Class I and the highest in Class III. Tissue Regenix’s products would require Class III certification, with appropriate clinical evidence to support the submissions.

Exhibit 1 summarises the current portfolio for dCELL products, regulatory pathways and likely market timings. The 510(k) market clearance for SurgiPure XD in March 2016 was significant as is marked the first time the FDA reviewed the full dCELL process, so establishing a regulatory precedent and facilitating future related product reviews.

Exhibit 1: dCell product pipeline summary – status and likely timings

Source: Tissue Regenix and Trinity Delta

To date, no details have been provided about the BioRinse product pipeline.

Strategy is to address both allograft and xenograft products

Tissue Regenix is committed to a dual tissue strategy, with both allograft (human) and xenograft (animal) product lines having important roles in the commercialisation plans for the dCELL technology. The regulatory requirements mean that, provided the tissue bank partner is accredited and well recognised, human dCELL tissues provide a faster route to market. Currently there is ample dermal tissue to satisfy foreseeable clinical demand; however, the supply constraints inherent in using donated human tissue could pose longer term limits to addressing the underlying market potential for other, more specialised, indications. It is for these uses that xenograft tissues are currently being developed and so allowing the scope for greater commercial scale.

In Europe Tissue Regenix has partnered with GTM-V, based in Rostock, Germany, to create the region’s first dedicated multi-tissue bank. The joint venture, known as GBM-V (Gewebebank), was formed in January 2016 and will allow for the deployment of human tissue products throughout Germany and the wider EU. GBM-V will pay an annual license fee per application and a processing fee (based on units/size) to Tissue Regenix and a reimbursement to GTM-V for the tissues provided. The initial licenses are for CardioPure HAV & HPV (Human Aortic & Pulmonary Valves) and DermaPure. The required manufacturing clearances for the first of the dCELL products are expected in late 2018, followed by marketing authorisations in H2 2019. Encouraging revenues (from cryo-preserved tissue such as corneas) are already posted. As Tissue Regenix has effective control of the joint venture, GBM-V’s results are consolidated in the accounts.

CellRight acquisition transforms US near-term prospects

In August 2017 Tissue Regenix acquired the US tissue bank CellRight Technologies for a total of up to $30m (c £23m), of which $25.9m (c £20m) was paid upfront and up to $4.1m (c £3m) is payable contingent of revenue targets being attained. The acquisiton was funded through a 400m share placing, at 10.0p, raising £40m (gross). Although the rationale may appear similar to the GBM-V joint venture in that it ensures allograft tissue supply in North America, the acquisition brings a number of additional opportunities.

CellRight, also based in San Antonio Texas, has developed a broad product range centred mainly on orthopaedic indications, with 16 products launched since its formation in 2012. These are based on a proprietary technology (BioRinse) that transforms human bone (both cortical and cancellous) into a mouldable matrix that can be processed into various physical forms to address differing clinical needs. The confidence in the quality and reproducibility of the process is such that CellRight’s products are verified to be osteoinductive.

The product range is versatile and employed in various clinical procedures in orthopaedics, spine, and dental; accounting for 40%, 40% and 20% of 2017 sales respectively. Two further product introductions were delivered in 2017, Matrix IQ and AmnioWorks. With the exception of strategic partnerships, CellRight has no direct sales team, instead using ten long-term distribution partners to reach its 111 active customers and 16 private label accounts. The approach has worked well, with revenues and profit growing consistently. This infrastructure complements the approach Tissue Regenix has adopted in the US and should result in valuable near-term commercial synergies.

CellRight has created a well-established and diverse supply chain, with donor recovery agreements in place with a number of organ procurement organisations (OPO). These tissues are processed in a modern state-of-the-art purpose built 13,650ft² wholly owned facility with ample scope for future expansion in an adjacent plot. The facility is registered with the FDA and has accreditation with American Association of Tissue Banks (AATB) and many similar state licenses. The aim will be for CellRight to form the nucleus of all the human tissue processing and product development for Tissue Regenix. Over time GBM-V is expected to use its resources to seek regulatory approvals and subsequently produce selected CellRight’s products for the European markets.

In the meantime, management is seeking authorisations to distribute selected San Antonio produced CellRight products into Europe. In June 2018 it received a Human Tissue Authority (HTA) license to import, store and distribute the portfolio of human tissue derived products for use in the UK market. The products will be processed in San Antonio and shipped to the Leeds facility for UK distribution initially and later into other European markets. A three-year, non-exclusive distribution agreement has been signed with Pennine Healthcare (a private UK company specialising in medical devices and equipment). Pennine will be able to distribute all of CellRight’s bone and soft tissue products alongside its existing range of spinal implants.

Crowded and competitive markets need a flexible approach

Whilst the market overall is dominated by a handful of large global players, helped in no small part by their established reputations and sales networks, there is also a noticeable receptiveness to new ideas from smaller companies. Companies that have successfully demonstrated their products’ value have been able to carve out sizeable and lasting market positions. This is typified by the success MiMedx has achieved with its amnion-based skin substitutes, KCI with negative pressure wound therapy, and Mölnlycke with its silicone wound dressings.

Nonetheless, the hurdles to rapid new product adoption are material. Addressing these requires a flexible approach and the business model is based on selling the dCELL products through a hybrid model, with a combination of a small direct sales team and distribution partners depending on the market characteristics. In the US, following the acquisition, the existing Tissue Regenix office has relocated to the CellRight site, with the comprehensive integration process on track.

Biosurgery: sizeable commercial opportunities

The Biosurgery division was previously known as Tissue Regenix Woundcare Inc but was renamed as the commercial opportunities moved beyond simply treating hard-to-heal wounds. The growth is now expected to arise from a combination of broadening clinical application areas as well as geographic expansion. In terms of additional markets, the key focus is on evaluating best methods of realising the potential in Canada, Mexico, and South America. Meanwhile, partnering discussions have been initiated for markets in other geographies.

The broadening of the product offering has largely been enabled by the transfer of the dCELL technology into the CellRight facility. This allows greater control of the manufacturing operations and, importantly, more flexibility. Initially this will result in larger sizes being produced, and so allowing use for broader applications, such as surgical reconstruction. However, over time, it will also allow more sophisticated uses, such as fenestrated products for exuding wounds and meshed products for optimal coverage.

Until the acquisition of CellRight, Tissue Regenix BioSurgery was the most commercially advanced of Tissue Regenix’s businesses. DermaPure was launched in the US, through the subsidiary TRX Wound Care Inc (established in 2012), in 2014. Importantly, SurgiPure XD, a decellularised porcine dermis for surgical repairs, was the first dCELL-based product to receive 510(k) market clearance by the FDA.

A growing body of clinical evidence, helped by rising key opinion leader (KOL) support (14 clinical abstracts presented to date), is showing how DermaPure helps to restore the normal healing processes. In most cases this results in fully re-vascularised tissue within weeks, with the large majority of patients requiring only one application. The health economic benefits, coupled with the ease of use and handling, should help differentiate DermaPure in a highly competitive and fragmented market.

The launch efforts focussed on in-patient wound care facilities, which represent c 20% of the addressable market. Achieving Medicare coverage across the country is acknowledged as being a time-consuming process but it has now reached 100%, allowing for re-imbursement in the out-patient settings. We believe the in-patient market will remain a key focus as the efficacy of a single DermaPure application is a major differentiator and is particularly appealing in this setting. This segment can be addressed by a smaller, well-targeted sales team and Tissue Regenix is pursuing ‘narrow and deep’ sales approach to drive advocacy and penetration by KOLs in targeted institutions.

Group Purchasing Organizations (GPOs) are an increasingly important driver of new product uptake, negotiating product and service supply contracts and pricing on behalf of their members (e.g. physicians, acute care hospitals, and regional health systems). Gaining access to GPO members is a major hurdle where success can materially influence a product’s clinical and commercial adoption.

These are being addressed actively, with the first contract, with Magnet, signed in July 2016. Magnet is ranked 6^th, with its membership covering more than 760 long-term care facilities, 600 acute care hospitals and 186 different health systems across 43 states. The second contract, with Premier, was signed under a Breakthrough Technology Agreement in December 2016. Premier is the second largest GPO by annual spend, with a membership of c 3,750 hospitals and more than 130,000 other healthcare providers. In March 2017 Vizient, the largest GPO, announced it had reviewed DermaPure and also awarded it an Innovative Technology contract. This means that DermaPure is now accessible to over 75% of the total hospital beds under GPO agreements. TRX BioSurgery was also recognised by Premier at their annual Breakthrough conference in 2018 with the ‘Horizon’ award, received for exceptional local customer service and engagement, value creation through clinical excellence and commitment to lower costs.

In February 2017 DermaPure was added to the Federal Supply Schedule (FSS), allowing access across 152 hospitals and 800 community based out-patient clinics which cover almost 9m lives, mostly military veterans. Wound care is an important segment in this patient group as around 1 in 4 veterans suffer from diabetes, much higher than the US average of 9% of the total population.

Despite the complexities in negotiating the re-imbursement and access hurdles, DermaPure has gained market traction and posted 2017 sales of £1.9m (+46%), against £1.3m in 2016 and £0.8m in 2015. Management expects Biosurgery sales to accelerate significantly during 2018.

SurgiPure XD is the first dCELL process reviewed by FDA

SurgiPure XD is a decellularised porcine dermis for use in the surgical repair of difficult hernias. Due to its porcine origin it is classed as medical device and subject to regulatory approval. The presence of a predicate device (Acelity’s Strattice) meant that in the US it followed the 510(k) route; with submission in June 2015 and approval granted in March 2016. Although we forecast only modest sales for SurgiPure XD, its importance to Tissue Regenix lies in its pathfinder role since it represents the first time the FDA reviewed the complete dCELL process. The tissue for SurgiPure XD is processed and packaged at the approved facility in Leeds.

The market opportunity for SurgiPure XD is relatively small (biological meshes account for c $300m of the $1bn hernia market in the US). Nonetheless, SurgiPure XD’s marketing and re-imbursement strategy is being prepared and first launch is planned for 2018.

The wound care market is a tale of two segments

Estimates for the value of the wound care market tend to vary according to the definitions and classifications included but $14.6bn^[1] to $17.0bn^[2] are good approximations. The growth rates are around 4% pa but this average tends to mask how the expansion in certain advanced and biologic therapies is offset by sustained price pressure in more basic and commoditised product ranges. The market is fragmented and crowded, being dominated by large multinational companies such as 3M (US), Acelity (US), Baxter (US), Coloplast (Denmark), Convatec (US), Covidien (Ireland), Derma Sciences (US), Ethicon (US), Hollister (US), Johnson & Johnson (US), Mölnlycke (Sweden), and Smith & Nephew (UK).

The market for hard-to-heal wounds (typically defined as not reducing by 50% over 4 weeks of treatment) is large and growing, being driven by demographic factors such as the ageing population[3] and increasing incidence of diabetes[4] (and its complications), as well as rising prevalence of surgical site infections caused by resistant bacterial strains. Globally c 2.5m patients annually suffer from hard-to-heal ulcers of the lower limbs (such as diabetic foot ulcers and venous leg ulcers), caused by vascular insufficiency associated with diabetes and obesity (with c 1.5m new cases pa in the US alone). Currently the standard treatment is sharp debridement followed increasingly by negative pressure wound therapy (NPWT), which is successful in around 40% of cases. However, many wounds remain persistent and failure to heal can lead to serious infection, limb amputation and even death. Understandably, managing these patients demands vast human and financial resources.

Advanced products deliver economic benefits

DermaPure competes in the skin/dermal substitutes segment, which consists of a heterogeneous group of coverage materials that aid in would closure and replace the functions of the skin, either temporarily or permanently, depending on the product’s characteristics. Global market estimates vary from $0.8bn (BioMedGPS) to $1.2bn (Transparency Market Research), with growth rates ranging from 9.8% to 17.2% CAGR (to 2019 and 2023 respectively) reflecting mainly the differing forecast periods and the assumptions made for growth in Europe, Asia-Pacific and Japan. The US represents the bulk of the market, around $0.6bn to $0.8bn, with over 200,000 patients treated annually. Other geographies are still largely nascent, as the awareness of the economic benefits[5] from the improved clinical outcomes will take time to alter treatment practices.

The skin/dermal substitutes (SDS) sector consists of four tissue types:

• amniotic tissue, derived from human placental tissue, such as MiMedx’s EpiFix, Integra LifeSciences’ BioFix, and CellRight Technologies’ AmnioWorks;
• allografts, from human dermis, such as Synthes’s DermaMatrix and DermaPure;
• xenografts, from animal tissue, such as TEI Biosciences’ PriMatrix; and
• bioengineered tissue, synthetic cell-based products such as Organogenesis’ Dermagraft & Apligraf.

This segment is particularly crowded and competitive, with c 70 products of various kinds available; however, four companies (MiMedix c 27%; Organogenesis c 20%; Integra c 14%; Osiris c 13%) dominate the market.

Recent years have seen cell-based products decline, from a 33% share in 2014 to 21% in 2015; principally driven by re-imbursement changes implemented by the CMS late in 2014. Amniotic tissue products exploited the situation to become the segment leaders with market share rising from 29% to 40%. In October 2015 the FDA introduced a degree of uncertainty over the use of such amniotic tissue products as draft guidance suggested they may require additional regulation. Nonetheless, industry observers continue to believe human placenta-based tissues will continue to grow and remain market leaders through to 2020, with a 49% share. Human dermis allografts currently hold around 6% market share, with values rising in line with the overall segment of c 13.8% CAGR.

Exhibit 2: Forecasts for BioSurgery division

Source: Tissue Regenix and Trinity Delta; Note: *FY16 was only 11 months through to 31 December 2016

Our forecasts are based on: an estimated potential market opportunity for DermaPure of $1.4bn (7% of $20bn, skin substitutes currently account for c 7% of the total wound care market, which is estimated to be worth c $20bn in 2020), with DermaPure achieving 7.5% penetration of the market (peak sales of $105m over 12 years; and SurgiPure gaining 1% of the $2.1bn global hernia market (peak sales of $21m) over 12 years.

Orthopaedics & dental: addressing a clear need

The CellRight business transforms the outlook for the Orthopaedics business, notably in the commercially important US market. The acquisition brings an established, and profitable, portfolio of products addressing the orthopaedics, spine and general surgery markets and complements Tissue Regenix’s emerging presence in this field.

Initially this division’s focus will be on two distinct segments: Spine, which is essentially the CellRight portfolio being sold through OEM contracts and distributors, and Sports Medicine, principally the dCELL tendon products and CellRight’s sports medicine grafts. An additional commercial opportunity has been identified as Dental, where both dCELL- and BioRinse-derived treatments have significant potential, and indeed c 20% of CellRight 2017 revenues were generated from dental procedures.

Tissue Regenix’s dCELL technology is being developed to create regenerative therapies that address joint-related problems. The initial focus is on the knee, where a combination of rising obesity rates and increasing sports-related injuries are driving demand. Tendon problems, notably rupture of the anterior cruciate ligament (ACL), are increasingly frequent, as are meniscus injuries. These are either through wear or damage, particularly greater and more sustained participation in sports. Knee stability and a pain-free range of motion are important in maintaining daily function, with sustained impairment having sizeable economic, social and health costs. A greater understanding of the longer term consequences, notably osteoarthritis, has seen a shift towards earlier intervention and minimally invasive surgeries.

In these orthopaedic applications, the dCELL process is used to decellularise tendons and menisci (of both human and animal origin) to create scaffolds that are implanted and allowed to repopulate with the patient’s own cells to create a structure equivalent to the original. Once healed, these “living repairs” have comparable bio-properties and demonstrate equivalent physical performance to the native tissues.

The pains of ACL rupture is well known to sports lovers

The reconstruction of the anterior cruciate ligament (ACL) is one of the most common procedures performed by orthopaedic surgeons. Its impact has resulted in the ACL being the most researched ligament in the human body. There are estimated to be c 550,000 ACL injuries in the US, with the number of cases growing at c 5% per year (Millennium Research Group [MRG]) and between 180,000 and 275,000 in Europe (based on Scandinavian and French registries, respectively); mostly caused (about 70%) by active participation in sport, notably football, skiing, and (in the US) American football. Many of these ACL cases may respond positively to conservative treatment but a sizeable element, c 130,000 in the US and c 100,000 in Europe (but data here does vary), require a surgical reconstruction. Interestingly, a meniscus tear accompanies an ACL rupture in around 75% of all such ACL injuries.

Autograft[6] reconstruction (harvesting of the patient’s own tissue) is still considered by many to be the gold standard, with allograft tissues a controversial option for ACL reconstruction. Yet growing experience over the past fifteen years has seen allografts increase in popularity and are now estimated to be used in 20–30% of primary reconstructions in the US. In Europe, the picture is clouded by a lack of robust data, but a more conservative approach is preferred. Clinical reviews of autografts versus allograft (and to a much lesser extent xenografts) consistently show better results with autografts, but they are acknowledged as being small differences. Currently the surgeons’, and to a lesser extent the patients’, preferences are the key determinants of the source of the graft employed.

A variety of products to access markets more quickly

Tissue Regenix has developed both OrthoPure XT and OrthoPure HT, decellularised anterior cruciate ligament (ACL) structures from porcine and human sources, for the opportunities in ACL rupture, revision, and multi-ligament restructure. Similarly, OrthoPure XM and OrthoPure HM, decellularised menisci from porcine and human sources, are being developed to address these market opportunities. They are designed to be used initially in partial meniscectomies, which represents around three-quarters of the procedures.

The OrthoPure XT (porcine tendon) programme is most advanced in Europe, where the key clinical study was started in December 2015. Encouragingly, the early results required to support the CE Mark application have already demonstrated clinically relevant outcomes. The European distributors for the major markets have been appointed and are being trained. The results have formed the basis of a discussion with the FDA and a pilot US clinical study has been proposed.

Initial plans are underway for OrthoPure HT (human tendon) to be marketed in both the US and selected European markets through the HCT/P 361 pathways and EU Tissue Directives respectively. In Europe the regulatory and supply aspects will be addressed through the recently established GBM-V joint venture, whilst in the US these responsibilities lie with CellRight, which should expedite the route to market with a US launch of OrthoPure HT expected in late 2018. These human-tissue products would form a useful bridging strategy until the xenograft equivalents have received the appropriate geographic regulatory approvals.

Meniscal issues on the rise due to demographics and sports

Meniscal damage is common across the world, with the incidence of meniscal tears being 60-70 per 100,000 pa, and seen in patients of all ages due to causes such as degeneration, trauma, and discoid meniscus. There are c 25,000 hospital admissions annually in England and Wales for meniscal tears, whilst in the US arthroscopic partial meniscectomy after meniscal tear is the most frequent orthopaedic surgical procedure. Until relatively recently (late 1970s) the traditional approach was a total meniscectomy for all tears; fortunately, clinical practice has changed and preservation and repair, rather than excision, is now advocated wherever possible.

The menisci are responsible for load transmission and shock absorption of the tibio-femoral joint in the human knee. They also contribute to joint stability, lubrication, and nutrition of the chondrocytes. The meniscus has a relatively poor blood supply, with only the outer edges being well perfused. The poor circulation to the inner portion makes it difficult for damage to this part to heal, which means that when any injury has occurred the knee usually degenerates over time. The success of any strategy to preserve the menisci is highly dependent on maintaining its distinctive composition and organization.

OrthoPure XM (porcine meniscus) is less commercially important but its development is still progressing. The clinical study in Europe started enrolment in March 2015. Initial results showed good biocompatibility and integration with the patient’s tissues. Feedback from the trial participants gave insights into how the implant could be considerably improved with little modification. This work is being carried out and the revised product will be used in future European and US studies.

CellRight brings complementary bone scaffolds

CellRight brings a portfolio of 13 regenerative bone scaffold products (plus the additional soft tissue applications) that address orthopaedic, spine, and general surgery applications. Importantly, and in common with the dCELL technology, the natural growth factors are preserved.

The markets opportunity for bone grafts and its substitutes is large and growing. Reports by Grand View Research and Global Industry Analysts[7] show how a rise in joint reconstructive surgeries coupled with continuing demand for spinal, dental, craniomaxillofacial and other related procedures is driving underlying growth over the next decade at c 5.2% CAGR. Although Asia Pacific is expected to show the fastest growth, North America is forecast to remain the largest, and most profitable, market. Estimates for the current market size centre around $2.3bn, of which the US is c $1.7bn, with expectations of about $3.5bn by 2023. Bone allograft products are expected to grow more quickly despite their cost being higher than synthetic substitutes such as ceramics, composites, and polymers. However, due to improved clinical outcomes that should result in overall cost benefits due to reduced hospital stays, fewer revisions, and faster recoveries.

Dental commercial opportunity being developed

Currently a sizeable part (c 20%) of CellRight’s sales arise from the use of its products in dental indications. These range from filling a bone void following an extraction to assisting in facial reconstruction. The plan is to develop and optimise these products further, both in terms of performance features and applicators. Meanwhile, the dCELL soft tissue technology will be employed to develop products ranging from relatively simple coverings for extraction sockets to periodontal tissue replacement. The benefits of the products should result in reductions in procedure times, improved outcomes, faster healing, and better cosmetic results.

Exhibit 3: Forecasts for orthopaedic division

Source: Tissue Regenix and Trinity Delta;  Note: *FY16 was only 11 months through to 31 December 2016

Our forecasts for the orthopaedic division are based on the projected sales of OrthoPure HT/XT and from CellRight’s products, to be conservative we are currently excluding potential sales of OrthoPure HM/XM. We estimate that the total market opportunity for OrthoPure HT/XT is $1.4bn in US and Europe (based on the MRG and Scandinavian registry data, respectively), with Tissue Regenix achieving 10% penetration of the market over 10 years. For sales from CellRight’s bone products, our forecasts are based on the revenue growth delivered since 2013; CellRight increased sales by a CAGR of 61.3% to $5.4m between 2013 and 2016 and we forecast that they will grow at a CAGR of 28.1% over the next four years to $14.6m.

Cardiac care: encouraging Brazilian experience

The Cardiac division is the least commercially advanced, but preparations to commercialise decellularised human donor heart valves that will be known as CardioPure HAV and HPV (Human Aortic and Pulmonary Valves respectively) are well underway. They were largely developed by Pontificia Universidade Catolica do Parana (PUCPR) in Brazil using dCELL technology and over the past decade over 1,500 patients have been implanted with a variety of dCELL valves. The long history has produced a significant body of clinical evidence, the results of which are quite compelling.

Replacing the various diseased heart valves has become routine over the past 50 years, with successive advances in both the valves and the surgical techniques resulting in improved clinical outcomes. The combination of demographics, coupled with improved surgical techniques, is expected to drive the number of heart valve interventions from the current 290,000 annually to 850,000 globally by 2050. Typically the replacement valves can be classified into three segments: mechanical, tissue, and, more recently for aortic defects, transcatheter aortic valves[8].

Human tissue valves are themselves broken into two groups: allografts are valves (usually implanted including the aortic root and without a stent) that have been procured from donors (cadavers); and autografts, where the patient’s own valve is taken from site and implanted at another (typically a pulmonary valve into the aortic site[9]). Cryo-preserved allografts have been used clinically since the mid-1960s and, despite the more complicated surgical procedures required, have been shown to offer excellent outcomes. The leading product is CryoLife’s CryoValve, with over 35,000 valves implanted, but the supply constraints remain the major limiting factor.

The estimates for the value of the world-wide market vary from $1.8bn[10] to $5.3bn[11], reflecting differing inclusion criteria, with growth rate forecasts from 9.9% to 12.2% CAGR over the next five years.

A wealth of clinical experience to support dCELL valves

The CardioPure HAV and HPV heart valve products are based on the pioneering work of Dr Francisco da Costa and his team at the Pontificia Universidade Catolica do Parana (PUCPR). The long experience across a broad range of patient groups has generated a significant body of clinical data demonstrating impressive long term outcomes. Recent studies have shown:

• A 10-year follow-up of 155 younger patients, with a mean age of 30.8 (+/- 13.1 years), receiving dCELL pulmonary valves for RVOT (Right Ventricular Outflow Tract) reconstruction during the Ross procedure was performed. This showed the CardioPure HV valve to be more efficient than standard cryo-preserved valves with fewer immunogenic reactions, no increase of pressure gradients over time, minimal or absence of calcification, a lower incidence of SVD (structural valve deterioration), and greater freedom from re-operations.
• A similar 10-year follow-up of 103 high risk patients with aortic valve disease, with a mean age of 41 (+/- 17 years and with an age range of 0.1 to 81 years), who received dCELL aortic valves also showed the pressure gradient remained stable over time, there was absent or minimal calcification, and, tellingly, there was evidence of partial cellular repopulation, endothelisation, and minimal intimal hyperplasia. During the follow up period only 3 patients required a re-operation.
• A 10-year retrospective analysis of c 100 paediatric patients, under 12 years of age, who had complex congenital heart defects is still continuing. Preliminary results have shown very encouraging outcomes, with excellent haemodynamics, no calcification, and no re-operations for up to nine years.

Initial commercialisation of CardioPure will be focussed on Europe, where the GBM-V (Gewebebank) joint venture will source and process the valves. The manufacturing license is expected to be received in H218, which (assuming the marketing authorisation is granted in H219) means we expect the first launch in late 2019 or, more likely, 2020. Although the US opportunity is clearly attractive, especially following the CellRight acquisition, the recent changes to the regulatory pathway for human-sourced heart valves (there are no longer approvable through the HCT/P 361 route) means they are classified as a medical device and would require an appropriate clinical trial programme.

Exhibit 4: Forecasts for cardiac division

Source: Tissue Regenix and Trinity Delta; Note: *FY16 was only 11 months through to 31 December 2016

Our forecasts for the cardiac division are based on continued modest investment in CardioPure HV, as it prepares to bring the product to market in Europe only. We estimate that the European opportunity is worth c $720m and that Tissue Regenix will gain 5% market share after 10 years. To be conservative, we only forecast the first meaningful revenues to be in FY21, although the company could launch CardioPure HV in FY19.

Sensitivities

In common with most innovative healthcare companies the three main sensitivities relate to the clinical and regulatory aspects, the execution of the commercialisation plans, and the financial resources required to accomplish these. More specifically, the key near- and medium-term sensitivities include execution of the BioSurgery commercial strategy and the rate of regulatory and commercial progress in orthopaedics and cardiac care.

Addressing the important US market will require sizeable investments, notably in extensive clinical trials to support registration and to differentiate the dCELL products from current treatments. This could be achieved through self-funding, partnerships, or a combination of the two on a case by case basis.

The matter of ensuring appropriate tissue supply, both in terms of quality and volume, has been addressed for the European markets through the creation of the GBM-V joint venture and for the North American market through the acquisition of CellRight Technologies. In both cases the sensitivities now shift to successful execution of the commercialisation plans and, specifically the realisation of the expected synergies from the acquisition.

Funding does remain an issue. Development and commercialisation of innovative biological products is both time- and cash-intensive. Last year’s £40m (gross) equity raise included c £12.5m to support the enlarged group’s development. Our forecasts suggest that Tissue Regenix has a requirement of around £10m before self-sustainability is reached (expected around 2020). The actual amount will also depend on the registration pathways selected for the key orthopaedics, and to a lesser extent, heart valve products.

Tissue Regenix operates in competitive markets where sustained investment in development and marketing is required to maintain the profile of the products amongst its target audience. Additionally, we expect all players in the soft tissue and orthopaedics markets to face continuing pricing pressures as cost-containment measures remain a primary factor. We believe these factors can only be mitigated by positive and meaningful clinical data that can support the cost effectiveness and value of new, premium priced products.

Valuation

We consider a sum-of-the-parts DCF-based methodology (including rNPV where relevant) to be the most appropriate way to value Tissue Regenix. As always, we employ conservative assumptions regarding market sizes and growth rates, net pricing, adoption curves, and peak market penetration Additionally, we have only valued the company’s most visible assets, as indicated in Exhibit 5. This results in a valuation of £245m, or 20.9p per share, for Tissue Regenix.

Exhibit 5: DCF-based valuation of Tissue Regenix

Source: Trinity Delta; Note: GBM-V is run on a not-for-profit basis and hence is excluded from the valuation

We have not separated out the value of the human tissue or xenograft lines for OrthoPure, as they are essentially being developed for the same market. A proportion of physicians will prefer human tissue, but this will vary over time with xenograft implants expected to gain greater acceptance. We have risk adjusted all developing products, using standard med-tech probabilities of success. Similarly, we have risk-adjusted the value of the CellRight products to reflect the remaining integration risks to be prudent.

Our valuation only includes products that are on the market or that are due to be launched in the coming years. In keeping with our conservative approach, we do not include line extensions or markets beyond the initial focus, eg OrthoPure HT/XT could be used to repair ligaments other than the ACL. Similarly, we do not currently include any potential commercial synergies from the CellRight acquisition or the contributions from the sale of selected bone products in Europe.

Our valuation of Tissue Regenix is 99% above the current share price. We expect this difference to diminish as there is more evidence that DermaPure is gaining commercial traction and as more products are launched.

Financials

Over the last 18 months Tissue Regenix has made material progress, both organically and through acquisition, in creating the infrastructure required to commercialise its development pipeline. The recent acquisition of CellRight Technologies addresses a number of strategic factors but also brings forward the expected point of self-sustainability to around 2020/21.

For the 12 months to December 2017 revenues were £5.2m, of which £3.1m were from the existing Tissue Regenix operations (against £1.4m for the 11 months to December 2016) and £2.1m was the CellRight contribution since August 2017. Gross profit increased to £2.6m, from £0.7m, with operating costs of £13.4m (including £1.1m of exceptional costs), from £11.8m. The £0.3m contribution from CellRight resulted in the operating loss falling to £10.8m, from £11.1m. Finance income was £47k, from £0.1m, and the R&D tax credit increased to £1.3m, from £1.0m, which meant the net loss was £9.4m, from £9.9m in the previous 11 months. Cash at December 2017 was £16.4m, reflecting the equity raise of £37.7m to fund the CellRight acquisition, versus£8.2m in 2016.

In August 2017 Tissue Regenix acquired CellRight Technologies for up to $30m (c £23m) on a cash free debt free basis. The initial amount was $25.9m, with up to a further $4.1m payable over two years if sales targets are met. The first milestone is payable, on a sliding scale, with up to $2.04m payable if revenues of between $6m and $7m are achieved by the 12-month anniversary of the deal completion. The second milestone, again of up to $2.04m on a sliding scale, is payable if revenues are between $10m and $12m on the second 12-month anniversary. $1m of the second milestone can be brought forward if sales reach $10m in the first 12-month period. Tissue Regenix is expecting to pay these milestones in full.

For context, CellRight posted sales of $5.4m in 2016, a 16.6% increase over 2015. Gross profit was $3.4m, an increase of 18.7%, with margin of 62.0%, up from 60.9% in 2015. EDITDA was £1.6m, an increase of 8.4%, with margin of 29.2%, down from 31.4%, as a result of the proprietors taking market-based salaries for the first time and a change to the accounting treatment of doubtful debts. Sales growth has been driven by 13 products being launched since 2012. In 2016 the top ten customers accounted for $3.1m of sales, $3.3m in 2015, and the private label distributors sales were $2.5m, versus $3.0m in 2015. Over 90% of sales arise from North America. Unaudited sales for the five months to May 2017 were $2.6m, an increase of 20.7%.

Looking ahead, our forecasts are based on those of each of the businesses detailed previously, combined with our estimates for GBM-V and the central costs. The net result is that we forecast sales to more than double to £10.8m in FY18, then increase by half to £16.3m in FY19 and rise by 42% to £23.2m in FY20. Clearly the inclusion of the CellRight sales, which are expected to contribute strongly to the top line during the period, are a major factor but there should also be a rapidly growing contribution from DermaPure and OrthoPure XT, in particular, as they gain commercial traction. Whilst we acknowledge that it is notoriously difficult to predict the adoption rates of new products, we believe that our forecasts are conservative.

The gross profit is expected to match this strong growth, with £5.4m, £8.2m and £11.8m forecast for FY18, FY19 and FY20 respectively, but the rise in operating expenditures to support the product roll-outs and geographic expansion means we expect an operating loss of £9.4m, £6.7m and £4.6m over the period. The impact of the net financials and the tax lines is minor and so we expect a net loss of £8.6m in FY18, £6.2m in FY19 and £4.5m in FY20. On our, admittedly conservative, forecasts we envisage cash flow break-even happening in late FY20 or early FY21.

Exploring the cash needs further, Tissue Regenix raised £40m (gross) at 10p/share in July 2017 to fund the acquisition of CellRight and to advance the commercialisation of the dCELL products. We forecast that this will enable Tissue Regenix to operate well into FY19, but that additional funds will be required within the next 18-24 months before profitability is achieved. Much clearly depends on how actual revenues and, importantly, spend turn out against our forecasts but we currently expect around £10m additional funding will be required. This could arise from further distribution and licensing deals, debt financing, or an equity raise. The indicative funding requirement is shown as short-term debt in our forecasts overleaf.

Exhibit 6: Summary of financials

Source: Tissue Regenix, Trinity Delta  Note: Adjusted numbers exclude exceptionals. * FY15 refers to the 12 months ending on 31 January 2016; **FY16 refers to the 11 months ending on 31 December 2016. The short-term debt in FY19 and FY20 are indicative of the company’s funding requirement.

[1] Wound Care Market: Growth, Future Prospects and Competitive Analysis, 2016-2022 Credence Research Inc.

[2] Wound Care Market by Product, Wound Type, and End User – Global Forecast to 2021 Markets & Markets Inc.

[3] WHO estimates the number of people over 60 will rise by 2.5% CAGR globally from approximately 610m people in 2015 to approximately 1.2bn people by 2035 with Western markets such as North America, Japan and Europe most affected.

[4] WHO estimates the number of diabetics will rise from 415m in 2015 to 642m by 2040, with a corresponding rise in the incidence and complexity of chronic wounds.

[5] In the US the cost of chronic wound treatment, chiefly associated with nursing resources, hospital admittance and complications such as infection, is c $25bn pa. In Europe, chronic wound care costs represent around 3-4% of healthcare budgets. Smith & Nephew estimates the cost of materials to be 15-20% of total care costs. Globally the treatment cost per patient varies widely depending on duration and severity, ranging from $10,500 to $33,900 for a VLU and from $1,890 to $27,700 per DFU episode.

[6] Autograft reconstruction sees a graft transferred from one part of a patient’s body to another, such as a patellar or hamstring tendon to replace a torn ACL. Reconstructions using bone-patellar-tendon-bone (BPTB) autografts, fixed with metal interference screws (IS), have been the gold standard to which other technologies are compared.

[7] Bone Graft and Substitutes Market Analysis, Grand View Research October 2016 and Bone Graft Substitutes: Global Strategic Report, Global Industry Analysts Inc. April 2016

[8] Transcatherter aortic valve implantation (TAVI) is a less invasive technique originally developed for patients unable to undergo open heart surgery. The replacement valve is inserted with a catheter (often via a femoral artery) and guided to its location. Although relatively new (first used in 2002), many see TAVI as becoming the standard of care for aortic valve replacement once the longer-term clinical evidence begins to accrue.

[9] The Ross Procedure is where the patient’s diseased aortic valve is replaced with his/her own pulmonary valve. This is then typically replaced with a cadaveric pulmonary valve. In children and young adults, or older particularly active patients, this procedure offers advantages over traditional aortic valve replacement with manufactured prostheses.

[10] Edwards Life Sciences 2016 Investor Conference 8th December 2016

[11] Global Heart Valves Market 2016-2020, Zion Market Research

Contact details

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Leeds, LS26 8XT
United Kingdom
Tel: +44 (0) 330 430 3052

www.tissueregenix.com

Key personnel