This is a myopic piece, focused on a regulatory issue and targeted toward investors who may be long the stock or otherwise following OvaScience (OVAS). That is to say that I won't be discussing, except where highly relevant, the other issues surrounding the stock and its next-generation technologies for improving in vitro fertilization (IVF). For investors who are less familiar with the story and want to get up to speed, I refer you to a recent SA article by a long investor, which covers much of the basics, as well as initiation reports by sell-side analysts.
The pertinent background is that OVAS has been developing the science of using a patient's own mitochondria (the energy factories in our cells that make ATP) harvested from so-called "egg precursor cells" (or EPCs), which is a new proprietary technology in itself in addition to the overall procedure, to rejuvenate a patient's aging eggs. Why this is important is because, theoretically, these rejuvenated eggs could be used in "non-donor" IVF (where a patient's own eggs are fertilized to generate a potential offspring vs. doing donor-egg IVF) to increase the chances of success. By the way, OVAS' technology would significantly add to the cost of non-donor IVF, taking it from somewhere in the $15k range to nearly double and putting the entire non-donor procedure on par with donor-egg IVF. However, presumably this is worth it to many patients (who largely pay out-of-pocket for IVF in the US) to achieve donor procedure-like higher success rates and also have the benefit of all the genetic material in the offspring originating from the two parents, which is not the case in donor-egg procedures. Again, I'm not going to go into the rationale for the science or the prospects that a clinical trial called AUGMENT, comparing OVAS' technology to standard IVF, would succeed.
What happened in September? Prior to September, OVAS argued that its mitochondrial/EPC technology would not need FDA marketing approval since it qualified for the so-called "361 HCT/P" pathway. In that case, OVAS had previously planned to launch its AUGMENT service in 2H13. The AUGMENT trial was not intended to be necessary for securing a US marketing approval but was ostensibly to provide data for commercial/ competitive differentiation that an OVAS salesforce could detail. However, as most of us know, this was not allowed to happen, as OVAS was issued an "untitled letter" by the FDA in early September. The event caused OVAS shares to depreciate in value by ~30%. The letter informed the company that the agency "questions" the qualifications of the AUGMENT technology for the 361 HCT/P pathway and advises OVAS to file a typical IND application toward drug approval. As a result, the company has suspended the enrollment of the AUGMENT trial in the US, pending further clarification from the FDA, although enrollment into AUGMENT outside the US is continuing at select sites.
How could this happen? I believe that missing the FDA outcome mostly stemmed from investor unfamiliarity, even for healthcare specialists, with a relatively new regulatory pathway. The FDA officially formalized guidance for the 361 HCT/P pathway in 2007 (for further details, see the FDA site.). Since then, there have only been a few test cases that are available for scrutiny. The FDA's 361 HCT/P pathway is stated to apply to certain human cells, tissues, and related products "that are intended for implantation, transplantation, infusion, or transfer into a human recipient". As such, there are some obvious situations that the 361 HCT/P pathway applies to, such as embryonic stem cells, gene therapy, and bone marrow transplantation, so that if one is interested in investing in these things, one should care. Otherwise, I believe this pathway generally flies under most people's radar. (I myself only started doing real work into the situation in the two months before the negative announcement in September. Believe it or not, I was lucky and called this outcome.) The other reason why investors may have missed the negative outcome was their reliance on management's confidence that the AUGMENT technology would qualify for the 361 HCT/P pathway.
What is "minimal manipulation" and why does it matter? The four main criteria for 361 HCT/P products, which must all be met (under the federal code 21 CFR Part 1271), are the following (with important caveats in parentheses):
- "Minimally manipulated"
- Intended for "homologous use" (as determined by product labeling or marketing)
- Its manufacture does not involve combination with another "article" (except for water,
crystalloids, or a sterilizing, preserving, or storage agent; in other words, not in
conjunction with a drug or device and not raising new safety concerns because of the
agents used) - Does not have a systemic effect (except for autologous use or reproduction)
The following discussion focuses on the requirement for minimal manipulation, which I believe will ultimately make or break AUGMENT's prospects to be a 361 HCT/P. I also believe that it will be straightforward for AUGMENT to satisfy the other main criteria for 361 HCT/P. First, homologous use means that the tissue or cells must be used for the functions they serve endogenously in the body, and AUGMENT seems to fit the bill with its reproductive indication. Second, I do not believe that the AUGMENT process will use any disqualifying chemical or biological agents. Third, I note that FDA waives the lack of systemic effect requirement when dealing with reproductive tissues. Fourth, if it happens that AUGMENT is qualified for the pathway, it will only need to meet basic standards for clinical good manufacturing practices, which I believe should be a trivial issue.
I found that the FDA provided some further clarification to minimal manipulation in a 2009 guidance document. The official FDA definition is: "processing that does not alter the original relevant characteristics of the tissue relating to the tissue's utility for reconstruction, repair, or replacement." At one end of the spectrum, FDA leaves no doubt whether a product qualifies when the agency considers the tissue to be "original"- in other words, "if it is present in the tissue in the donor." This is apparent from the FDA's examples of qualified products (that the agency provides in its 361 HCT/P guidance), in which the designated products are all intact tissues or cells:
- Amniotic membrane when used alone or without added cells
- Bone
- Cartilage
- Cornea
- Fascia
- Ligament
- Pericardium
- Peripheral or umbilical cord blood stem cells (for autologous use or use in a first or second
degree blood relative) - Sclera
- Skin
- Tendon
- Vascular graft
- Heart valves
- Dura mater
- Reproductive cells and tissues (e.g., semen, oocytes, embryos)
At the other end of the spectrum, the FDA considers there to be more than minimal manipulation when "processing has altered an original characteristic of a structural tissue, and that the characteristic is relevant in that it has a potential effect on the utility of the tissue for reconstruction, repair, or replacement." I believe that outside of intact tissues and cells, the statutory language still leaves room for interpretation of when "originality" and "relevance" apply to processed cells and tissues. The regulatory concern is for the theoretical potential to create a new safety risk. For example, in the case of gene therapy, a common fear is of oncogenic (cancerous) transformation of the manipulated cells.
At this point, I looked for regulatory language or precedents to create an operational definition of the minimal manipulation that the FDA allows for processed cells. I note that on different occasions, the FDA has "ruled out" and "ruled in" different behaviors as minimal manipulation. For tissues, the FDA allows basic cutting, scraping, shaping, shaping, soaking in antibiotic solution, sterilization by gamma irradiation, lyophilization, and freezing. Demineralization of bone is also allowed as a minimal manipulation. Types of procedures that are expressly excluded by the minimal manipulation rule include encapsulation by scaffolding (as in the case of autologous bone marrow stromal cells with synthetic scaffolding) and genetic modification (e.g., gene therapy) of the cells. These restrictions do not seem to apply in the case of AUGMENT. There also cannot be significant cell culture expansion (i.e., increasing the numbers by cell culture) or activation of cells (i.e., by a growth factor) in vitro. These requirements do not appear to be an issue for AUGMENT because I understand that the EPCs are not cultured or stimulated with growth media (only cryopreserved, which is allowed). For the use of cells, the FDA allows density gradient separation, cell selection, centrifugation, and cryopreservation, all of which AUGMENT employs.
The outstanding risk to me of violating the minimal manipulation rule is because of the process of cell extraction that AUGMENT requires to isolate mitochondria. In the rest of the FDA guidance, there is no explicit indication that disrupted cells and isolated cellular organelles are allowed. This opens the OVAS technology to FDA scrutiny since the AUGMENT procedure cannot avoid disrupting a cellular membrane to isolate mitochondria from EPCs. On the positive front, some cell disruption is expected to occur naturally during the centrifugation through qualified crystalloid solutions, which the FDA should allow. However, it sounds like the cell extraction is intended to be highly efficient to achieve the desired cell yield, since the procedure does not involve expansion of EPCs in cell culture. A more vigorous extraction could be considered by the FDA more likely to alter the "original", "relevant" characteristics of the mitochondria. Furthermore, as a potentially negative precedent, the FDA previously rejected the extraction of collagen from skin cells as a 361 HCT/P, although the disqualifier in that case could have been the non-homologous nature or the fact that collagen is a secreted substance.
My call. Prior to the September announcement, I thought that it was a hard call as to how the FDA would rule on the minimal manipulation issue, which is why I didn't invest at that time. I believe that the current stock valuation does not yet reflect a final negative FDA outcome, as OVAS last said it still believes AUGMENT qualifies for the 361 HCT/P designation. This remains important because a final negative outcome on 361 HCT/P could mean a significant multi-year delay to launch expectations for the AUGMENT service in the US. If the regulatory outcome is favorable, I believe there could be a significant market/valuation for the OVAS product based on the US opportunity alone. However, at this point, especially with little visibility into such regulatory decisions, I still believe that it is a hard call on an outcome with uncertain timing, making the stock likely to be "dead money" in the interim. In my model, I do not as yet ascribe any significant value to the ex-US opportunity or to the OVATURE product.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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