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Arch Therapeutics Inc (OTCMKTS:ARTH) Is 60% Cheaper Than It Should Be

Arch Therapeutics Inc (OTCMKTS:ARTH) Is 60% Cheaper Than It Should Be
Written by
Chris Sandburg
Published on
June 8, 2017
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Sometimes an exposure to the biotechnology space is nothing more than a drawn out waiting game. Especially with regards to the smaller end of the sector, management timeframes and their resulting milestones will often be optimistic, or impacted negatively by an unforeseen event, and this can extend the time to catalyst that a trader or an investor banked on when he or she opened the position.As generally happens when we see delays in the development of an asset, sentiment weakens further as the delay extends, and the company slowly trades to the downside.In certain situations, this phenomenon can be an opportunity.The question to ask is has anything changed outside of the catalyst timeframe. If yes, if there's been a trial failure or some safety concerns or anything like that is causing the delay, an initial thesis is invalid and has to be revisited. If the answer is no – if, as described above, it's the result of management optimism or an unforeseen event that has no other impact other than to add a little time on to the program – then these are the ones we like.And here's one that fits the bill: Arch Therapeutics Inc (OTCMKTS:ARTH).The company is trying to bring an asset to market that's designed to stem bleeding in a variety of instances – wounds, while a patient is undergoing surgery, that sort of thing. It's called AC5 and it's basically a gel type product that is made up of synthetic self-assembling peptides. A physician applies the gel using a syringe-type applicator to a wound or a surgical incision or otherwise, and it seals the opening, stopping the bleeding.Studies have shown it's far superior to current sealants of this type (well, not of this type, as there are no self-assembly peptide-based type sealants on the market right now, but comparable SOCs) and that it can score a 41% improvement in median time to hemostasis (TTH) versus control, inducing TTH ≤30 seconds in groups of AC5 treated wounds. It also avoids many of the common side effects of the current sealant type products – foreign body reaction, inflammatory responses, antibody formation, etc.So what's the issue?Well, back at the end of 2016, markets were expecting that the company would file a 501(K) in the US to get the asset on the shelves in an external use application (trauma wounds, burns, etc.) by March this year. That, and shortly after we would see a CE application in Europe for the same indication. The external use approval serves as a sort of stepping stone to an internal use approval (surgery use), which requires further clinical studies and a PMA approval pathway as opposed to the far simpler 501(K).It's now June, and we’ve not yet seen the 501(K) filing. As far as we can tell, there have been some changes to the submission process (industry wide) and this has caused a delay on the application. There's been no indication that these changes are anything more than standard procedure, however, and management expects to file for external use approval mid-year. CE filing should come at some point during the second half of the year. The delay on this is rooted in some manufacturing issues (not safety or efficacy) keeping the company within the criteria outlined above as fitting in with our opportunity framework.So basically, the company is behind by a quarter, perhaps a few weeks more. On its 505(K) and similar on its CE filing.Sure, these things increase cash requirement. The company is burning around $1.5 million a quarter, so a delay like this is going to cost between $1.5-$3 million in unexpected burn. With a little over $7.2 million cash on hand at May 2, this means we're probably going to see a raise before the end of the year or at the latest end first quarter next. Again, a bit disappointing, but the key thing here is that the investment thesis that existed at the end of January this year, when this company traded for close to 60% premium on its current pricing, remains unchanged.We will be updating our subscribers as soon as we know more. For the latest updates on ARTH, sign up below!Disclosure: We have no position in ARTH and have not been compensated for this article.

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