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A tissue repair breakthrough Allied Healthcare’s 77%-owned ADAPT technology is a tissue engineering process, that is, a method of fixing and sterilising animal tissue so that it can be used as implant material in humans. We argue that ADAPT represents a potential breakthrough in soft tissue repair with the potential for significant licensing deals from as early as next year. ADAPT overcomes a key issue in soft tissue repair. At present there are three main materials used in soft tissue repair – human tissue, animal tissue (mainly bovine and porcine) and synthetic tissue. In all cases what the surgeons want is a biological ‘matrix’ to act as a scaffold which, placed at the site of disease or injury, allows new vascularised human tissue to grow at the site, thereby effecting repair74. Generally speaking, animal tissue is better than human tissue because it is easier to source and, if treated correctly, less likely to provoke an immune reaction in the recipient. Moreover animal tissue is better than synthetic tissue since it is naturally more ‘physiological’75. The main problem with animal tissue, however, is that it is subject to calcium deposition76, which over time limits its usefulness by causing it to harden and become less flexible77. ADAPT-treated animal tissue, by contrast, has about the same level of calcification as regular human tissue, making it much better material in terms of elasticity/flexibility, strength, durability and ability to promote revascularisation when compared with existing biological soft tissue repair products. Tissue engineering is a growth area of modern medicine. Many medical conditions are the result of tissue that has died or been damaged. For example, heart failure is primarily the result of damaged heart tissue, often resulting from a heart attack while knee osteoarthritis is the result of damage to cartilage in the relevant joint. Consequently the ability to grow new tissue and implant it at the site of disease or injury can help fix the underlying problem for which drugs or devices can treat only the symptoms. The rise of adult stem cell technologies over the last decade has brought this prospect close to realisation78. We argue that the commercialisation of stem cell therapies addressing new billion dollar markets will also create strong demand for the kind of technologies represented by ADAPT, since biological scaffolding will likely be needed for many stem cell therapies so as to speed the healing process. Pre-clinical and clinical work on the ADAPT technology has demonstrated that it can do this, and Allied Healthcare is working on demonstrating that ADAPT can function as a good scaffold to grow mesenchymal stem cells79. ADAPT has been in development for around ten years now. The initial ADAPT technology was invented around 1999 by Professor Leon Neethling80, a cardiovascular medical scientist originally from South Africa who now does research in the field at Fremantle Hospital in Western Australia. Traditionally, animal tissue has been fixed for implantation purposes using glutaraldehyde, which, by cross-linking, prevents the rapid degeneration of collagen structures in the animal tissue. Glutaraldehyde also prevents tissue digestion by enzymes or bacteria and, by disinfecting the tissue, reduces its potential to provoke an immune reaction. The problem with glutaraldehyde, however, is that it increases its susceptibility to calcification, which ultimately makes the tissue rigid and 74 When human tissue is used the implant is either an ‘autograft’ (self tissue) or ‘allograft’ (donated tissue). When animal tissue is used the implant is called a ‘xenograft’. 75 Many synthetic products are biocompatible in the sense that the body does not reject them. That said, synthetics present potential problems that are not issues when natural products are used. 76 Needless to say, an additional problem with animal tissue is that certain people groups are not enamoured of the idea of pig parts going into their bodies. 77 This is because of the body’s ability to recognise animal tissue as foreign. For tissue recognised as ‘self’ the body has mechanisms to prevent this calcification from occurring. 78 We discuss this issue at length in our research on the stem cell company Mesoblast (Melbourne, Australia, ASX: MSB, www.mesoblast.com). In our opinion Mesoblast, is the world’s leading stem cell company. Our 27/9/2011 comprehensive note, headlined Mesoblast – the heart of the matter, is available at the Mesoblast web site. We initiated coverage on Mesoblast in January 2010. At the time MSB was $1.66. 79 The kind of stem cells Mesoblast is commercialising. 80 Pronounced ‘Neet-ling’. ADAPT has been in development for around ten years now Page 17 Allied Healthcare (AHZ) 29 November 2011 inflexible. In the 1990s Neethling set out to create a better fixing solution than glutaraldehyde. Working initially with kangaroo tissue, and later with bovine tissue81, Neethling was eventually able to markedly reduce the use of glutaraldehyde by first treating the tissue with an alcohol solution. He filed for patent protection of the various steps in the ADAPT process as the technology developed, and brought in bioMD as a major partner in the project in late 2005. Allied Healthcare currently owns 77.35% of Celxcel Pty Ltd, which has rights to the ADAPT intellectual property. We see the lengthy development process for ADAPT as helping to iron out the bugs in the technology. The fact that Leon Neethling remains involved in the development is also encouraging, since it brings substantial intellectual capital that would be hard to replace in his absence. Allied Healthcare sees potential for ADAPT-treated mesh patches to be used in a variety of soft tissue repair situations including healing of burns and skin ulcers, repair of ligaments for joint reconstruction, pelvic floor reconstruction, plastic surgery and vascular repairs. There’s also the potential for ADAPT to be used to make tissue heart valves. ADAPT could help grow the biologics part of the soft tissue repair market. Around US$700m a year is spent in the US on various soft tissue repair products, both biological and synthetic. The animal side of the business has been building since the 1970s when porcine and bovine pericardium was first used to create prosthetic heart valves. However the calcification issue has traditionally limited the utility of animal tissue – for example, generally only older patients receive replacement heart valves while younger patients get mechanical valves. We argue that an animal product without calcification issues could seriously grow the use of animal tissue across the soft tissue repair market, and by extension the market as a whole, and that this prospect allows Allied Healthcare the potential to negotiate some lucrative deals for the technology. Some big companies play in soft tissue repair. Currently soft tissue repair is dominated by large American medical device companies such as Bard, J&J, Covidien and W.L. Gore as well as various emerging companies. We see the potential for Allied Healthcare to license ADAPT to one of these companies, or other companies in the medical device or biotech space looking to expand in the tissue repair area. There is plenty of upside for Allied Healthcare. In 2008 Covidien bought the UK’s Tissue Science Laboratories for around US$80m while an American medical device company called Kinetic Concepts bought a tissue engineering business called LifeCell for US$1.7bn. We think these deals are applicable to Allied Healthcare since they represent the kind of upside that medical device companies will pay to control good tissue engineering products and technologies. Animal studies have shown ADAPT’s basic effectiveness In 2005 and 2006 Celxcel conducted three animal studies where the subsequent histology studies showed ADAPT patches to be: • acceptable – able to avoid an immune response in the recipient of the implant; • functional – able to avoid fibrosis and thereby stay flexible, while at the same time allowing new cells to form within the structure of the implanted tissue; and • durable – able to promote revascularisation in the treated area. Sheep implant studies, in which ADAPT-treated tissues were used as patches to repair damaged jugular veins of sheep over a 150-day period (February 2006 announcement) and a 200-day period (January 2007), showed the basic power of the technology82. 81 Pericardial tissue and carotid artery tissue are the preferred tissues used by Neethling and his team. We understand he chose kangaroo tissue because of the ethical and diseasemanagement issues associated with porcine tissue and the vCJD issues that have emerged in recent years regarding bovine tissue. 82 The Neethling lab subsequently published the 200-day study. See J Heart Valve Dis. 2008 Jul;17(4):456-63; discussion 464. An animal product without calcification issues could seriously grow the soft tissue repair market Page 18 Allied Healthcare (AHZ) 29 November 2011 A rat implant study over a 120-day period showed that ADAPT patches worked well over a long period of time83 (September 2006 announcement). ADAPT is better than commercially available products. The 2006/2007 rat study. In 2007 a rat study compared ADAPT with two other commercially available patch materials in terms of its fibrosis and calcification experience, with favourable results: • At the 200-day mark ADAPT was performing much better over that period in terms of lower fibrosis and calcification issues (March 2007 announcement). • The same outperformance was noted at the 12-month point as well (September 2007 announcement)84. The 2009/2010 study of hernia in a rat model. In March 2010 Allied Healthcare announced the completion of another comparison trial, this one in a rat model of ventral hernia. This study found that, at twelve months, ADAPT patches had ‘no calcification, full flexibility and showed features of durability and remodelling’ whereas a commerciallyavailable, FDA approved patch was ‘partially calcified and encapsulated’ while ‘surface thickening suggested the formation of fibrosis’85. ADAPT has demonstrated its effectiveness in the clinic A trial in patients with Congenital Heart Disease generated favourable results. In 2010 Allied Healthcare announced the results of a Phase II trial of ADAPT where the patches were used in reconstructive surgery to correct various congenital heart deformities such as atrial and ventricular septal defects, aortic root enlargements and outflow tract reconstructions. The trial, which was conducted at Universitas Hospital in the South African city of Bloemfontein, recruited 30 patients (average age 3 years) between May 2008 and July 200986, with follow-up at six and twelve months. Favourable six month data from the first ten treated patients was reported in July 2009, and in March 2010 the investigators were able to report that ADAPT patches after six and in many cases twelve months had ‘demonstrated reliable tissue strength and constant stitching characteristics with no reported leakages’ and ‘no reported patch-related mortalities/morbidities’, indicating that in this trial the clinical experience matched the pre-clinical. MRI data on five patients at twelve months confirmed this outcome, as did 12-month follow-up on the remaining patients completed in October 2010. This trial positions Celxcel to sell into a reasonably sized initial market - with annual incidence today around 0.6% of live births87 in the US, we estimate that around 0.3% of the population is living today after having survived a congenital heart disorder88. A trial in pelvic floor reconstruction is planned for 2012. In 2009 and 2010 Celxcel sought to trial ADAPT in pelvic floor reconstruction, a procedure used when a woman experiences a vaginal prolapse, however this trial was cancelled due to post operative infections that were not caused by ADAPT89. Celxcel is reviewing its experiences in this trial and is seeking to re-initiate a pelvic floor reconstruction trial in 2012. 83 The life expectancy of a domestic rat is around 2-3.5 years. 120 days of functionality in a rat is therefore worth something like 7-8 human years. 84 This work was published in November 2010 – see J Heart Valve Dis. 2010 Nov;19(6):778-85. Leon Neethling had already done comparison studies of ADAPT in 2004, with favourable results - see J Heart Valve Dis. 2004 Jul;13(4):689-96; discussion 696. 85 Allied Healthcare is considering initiating a clinical trial in hernia repair patients. Hernia is probably the biggest opportunity in soft tissue repair given its high incidence in Western world populations, where around 1-2% of the population have had a hernia, partly as a result of high obesity rates. 86 The trial had been unveiled in May 2007. There was initially expected to be 50 patients in all but Allied Healthcare decided at the 30-patient mark that this number would generate sufficient data to demonstrate the effectiveness of ADAPT. 87 See J Am Coll Cardiol, 2002; 39:1890-1900. 88 Estimated using data from Am Heart J. 2004 Mar;147(3):425-39. 89 This trial, announced in August 2009, was intended to study ADAPT in 20 patients undergoing pelvic floor reconstruction at St George Public Hospital in Sydney’s south. The study was discontinued after 4 patients. A trial of ADAPT in patients with heart deformities generated favourable results Page 19 Allied Healthcare (AHZ) 29 November 2011 ADAPT could be the first 3-D matrix for growing mesenchymal stem cells Allied Healthcare indicated at its November 2009 AGM that it was working on growing stem cells and keratinocytes using ADAPT as the 3-D scaffold for cell expansion. This work, if successful, could lead to the use of ADAPT as a key part of stem cell therapies given the importance of tissue remodelling for a successful outcome. Appreciating the importance of stem cells to the future of medicine, we see this work as being potentially very valuable in terms of the licensing opportunities. ADAPT is close to commercial usage, thanks to tissue heart valves What are tissue heart valves? Heart valves are the tissue flaps that control the flow of blood through the heart in the correct direction. The mitral and tricuspid valves let blood flow from the atria (the heart’s two upper chambers) into the ventricles (the two lower chambers) while the pulmonary and aortic valves let blood flow from the ventricles out to the rest of the body. When the flaps of these valves, called ‘leaflets’, thicken, stiffen, or fuse together, the result is a partial closure of the valve for which heart valves made out of bovine tissue are used as stents. Tissue heart valves may generate Celxcel’s first licensee. Some major medical device companies make tissue heart valves, including Medtronic90 Edwards Lifesciences and St. Jude Medical91, and in May 2010 Allied Healthcare announced that it was working with ‘a leading global tissue heart valve company’ on the feasibility of using ADAPT to make a better version of one of that company’s FDA-approved tissue heart valves. This is a significant opportunity for Allied Healthcare, since the global market for tissue heart valves is estimated to be around US$700m, growing at 7% pa due to aging Western world populations with higher levels of cardiovascular disease. The feasibility work on ADAPT-prepared valves is going well. In November 2010 Allied Healthcare indicated that its valve feasibility study had passed a key milestone, with ADAPT able to sterilise the valve inside its final packaging. In March 2011 the study progressed to a second stage, involving a rat comparison study and an in vitro fatigue testing calcification study92. Celxcel is planning a Phase II clinical trial of its valves in 2012. We see strong potential for this study to ultimately lead to a licensing agreement given the competitive advantage it would yield to the licensee. Celxcel has handled the scale-up and regulatory issues well Manufacturing expertise is being gained. Tissue for each trial is manufactured at Royal Perth Hospital. The facilities here have allowed Allied Healthcare to go down the learning curve regarding tissue manufacturing, as well as build the necessary dossiers to go for regulatory approval of ADAPT. We understand no major issues have occurred in scaling up for tissue production. Allied Healthcare is preparing to seek regulatory approval for ADAPT. In December 2009 Allied Healthcare announced that biocompatibility testing of ADAPT was being undertaken by NAMSA, a US contract research organisation that specialises in the safety evaluation of medical devices93. The NAMSA work, in preparation for the various regulatory filings for ADAPT from late this year, generated favourable interim results in March 2010. 90 For an assessment of Medtronic's Mosaic porcine heart valves see J Thorac Cardiovasc Surg. 2011 Aug;142(2):302-7.e2. Epub 2011 Feb 1. 91 For a comparison between the Edwards Perimount valve and the St. Jude Medical Epic valve see J Card Surg. 2009 May-Jun;24(3):260-4. 92 Allied Healthcare indicated in June 2011 that the ADAPT valves were performing well in the rat study compared to comparator valves. 93 Northwood, Ohio, www.namsa.com. A ‘leading global tissue heart valve company’ is evaluating ADAPT Page 20 Allied Healthcare (AHZ) 29 November 2011 Regulatory filings from 2012. With the completion of the heart deformities trial Allied Healthcare intends to go for regulatory approval first in Australia – an application is expected next year - then in the US in 2012, where a simple 510(k) filing with the FDA is all that will be necessary. This means that the product could be cleared to sell in the US market in 2013. CE marking is also likely to happen in 2013 as well. Some big companies play in soft tissue repair Currently soft tissue repair is dominated by large American medical device companies: • C.R. Bard94 (2010 revenue US$2.72bn, up 7%), the world leader in soft tissue repair products through its Davol unit95, whose main product is various meshes for hernia repair; • J&J96 (2009 revenue US$61.6bn, down 0.5%), whose Ethicon and Gynecare businesses are important players in hernia repair and pelvic floor reconstruction respectively; • Covidien97 (2010 revenue US$10.4bn, up 1%), which bought the UK’s Tissue Science Laboratories for around US$80m in early 2008, mainly to get hold of that company’s Permacol surgical implant. Permacol is based on collagen derived from pig skins and is used in hernia repair; • Kinetic Concepts98 (2010 revenue US$2.02bn, up 1%), mainly known as a maker of advanced wound-care products, bought LifeCell99 in 2008 for US$1.7bn, primarily because of AlloDerm, which is a technology to process human skin for use in hernia repair and breast reconstruction; • Endo Pharmaceuticals100 (2010 revenue US$1.7bn, up 17%), primarily a specialty pharma company, bought American Medical Systems in mid-2011 for $2.9bn in order to grow that company’s business in urological medical devices, which specialises in material for pelvic floor reconstruction; • W.L. Gore101 (annual sales around US$2bn), whose Gore Medical Products business is big in hernia repair; There are also various emerging companies playing in the space: • RTI Biologics102 (2010 revenue US$166m, up 1%), whose business is the sterilisation of tissue for implantation purposes; • Synovis Life Technologies103 (2010 revenue US$69m, up 18%), a medical device company whose Synovis Surgical Innovations business makes soft tissue repair patches. Synovis bought Pegasus Biologics, a developer of collagen-based bioimplants for orthopaedic, spine, and neurosurgery applications, in mid-2009. We see the potential for Allied Healthcare to license ADAPT to one of these companies, or other companies in the medical device or biotech space looking to expand their tissue repair offering such as Boston Scientific, the Genzyme division of Sanofi-aventis, Stryker, Wright Medical and Zimmer.
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