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Histogenics: A Diamond in The Rough

Histogenics Corporation: Deeply Undervalued Heading Into A Phase 3 Data Readout

  • Histogenics Corporation is due to release top-line results from their phase 3 trial evaluating Neocart against microfracture surgery for the treatment of knee cartilage damage.

  • Neocart could become the new standard of treatment for knee cartilage damage, tapping into a possible billion dollar market.

  • Existing data and physician opinions on the subject suggests that Neocart will likely succeed in their phase 3 trial.

  • Institutional flows have been largely bullish lately, with Perceptive Advisors notably owning a large stake in the company.

  • We believe that Histogenics' is deeply undervalued heading into their phase 3 data readout and assign a bullish rating on the stock with a short-term price target of $6.75.

Investment Thesis

Histogenics Corporation (HSGX) is a clinical-stage company focused on the development of restorative cell therapies in the United States and Japan. The company is in the late stage of development for their main product, Neocart, A chondrocyte cell-based therapy designed specifically for the treatment of cartilage damage in the knee. Neocart is currently being tested in a phase 3 clinical trial in the United States, and topline results from the study are expected by the end of the 3rd quarter in 2018.

At the time of writing, Histogenics has approximately 28.7 million shares outstanding which trade at roughly ~$2.49 per share giving the company a modest market capitalization of about $72,000,000. With a fully diluted share count (~45.5 million), the market capitalization would be roughly $113,000,000. In both cases, we believe that the stock is fundamentally undervalued and that the market is not fully pricing in the complete potential of Neocart. The current price per share simply does not reflect the probability of Neocart’s success in their phase 3 trial, let alone it’s full sales potential.

It can be argued that current valuation is very fair because the company has not actually yet revealed positive results from their blinded phase 3 trial. Without positive data, Histogenics will never be able to file a BLA for Neocart, and thus never be able to take it to the market. However, based on previous studies done on Neocart and the personal testimonies of those treated with Neocart, we believe that the chance of success for their phase 3 trial is very high.

Our confidence in the regulatory and commercial success of Neocart and Histogenics as a whole is further compounded by the high level of institutional and insider ownership of the company. Another important yet often overlooked part of the recipe for shareholder value generation is the management team. Histogenics, in our view, is blessed to have an experienced and talented management team with a proven record of success. Both the management team and board have the skills and experience needed to deal with the future regulatory and commercial challenges that Neocart will likely face down the road. Knowing that the company is in good hands should help any shareholder sleep better at night.

Since Histogenics Corporation had it’s initial public offering in 2014, the share price has decreased significantly. To give some perspective, they had their IPO at $11 a share and today the stock trades under $3. The sheer length and financial cost of the regulatory process which Neocart has had to go through has sapped the patience of countless shareholders. Constant shareholder dilution and debt financings have had their toll on shareholders, but we are at a critical inflection point. Everything has slowly been building up to this critical binary phase 3 trial. Histogenics has been preparing for this point for years now. They’ve set up the necessary production facilities, established a network of doctors from their previous trials, and have definitely done their research on the knee-cartilage repair market. The future success of the company is solely dependent on their phase 3 trial, a trial which we think will be a massive success.

We think Histogenics is undervalued in several aspects, and we think that the results from their phase 3 trial will awaken the market to it’s true value. Most of the risk from any investment in the company lies solely with the outcome of their blinded phase 3 trial. It is our belief that the existing scientific research done on Neocart, bullish physician opinions, and positive patient testimonials de-risks this trial immensely.

With a de-risked trial, the only question left is how successful Neocart will be commercially. Personally, we believe that Neocart could be the new standard of care for those who have knee cartilage damage. If they do not become the next standard of care, the sales potential is still massive. Histogenics themselves project that revenue from Neocart would likely exceed $240 million after the 3rd year it’s on the market in the US alone. Assuming Neocart is able to rake in $240 million a year, a low and simple sales multiple of 4 would give the company a market capitalization of just slightly below $1 billion. Of course, this hypothetical is dependent on the condition that Neocart is successful in their phase 3 trial. A condition which we think will be more than satisfied.

Neocart could also be approved in foreign countries with much larger knee cartilage repair markets. China, Japan, the European Union are just some eggs in a large basket. If the mechanism of action and methods which Neocart uses are effective in treating and restoring damaged knee cartilage tissue, then Neocart should be effective for the treatment of other different types of cartilage. Neocart’s restorative and analgesic properties are not only limited to the knee.

Fortune favors the bold, and Histogenics is a bold company. Histogenics is fundamentally undervalued in many different aspects. Heading into the eventual results of the trial, we expect the share price to gradually increase as the market becomes more aware of the opportunity at hand. If the trial yields a favorable safety profile and good data, then the stock should appreciate in value heavily.

How the Current Standard of Care is Lacking

To put it simply, the current standard of care is not good enough for those suffering from knee cartilage damage. Although the current treatment options may work for some people, there are too many people who are left in the dark because the options available aren’t suitable for them. Neocart is in a unique position to treat patients in an innovative way which produces more favorable results for the patient.

Microfracture surgery is the current standard of care for knee cartilage damage. It was first developed in the late 1980s by Dr. Richard Steadman, and has always been a controversial treatment method. The surgery involves creating tiny fractures in the underlying bone, with the hope of triggering a stem cell response from the bone marrow to regenerate the cartilage.

Unfortunately, the success of the microfracture surgery is not always guaranteed. One of the key issues with microfracture surgery is that it is entirely dependent on the stem cell population present within the bone marrow and the intensity of the response of those cells. If the response is too strong, then there is overgrowth which can cause complications, if too weak then that’s a whole different basket of problems. Some patients see their cartilage tissue continue to degrade until they develop osteoarthritis.

Another issue with microfracture is that the tissue restored by the stem cells is not inherently the same as the tissue it is replacing. Instead of hyaline cartilage, fibrocartilage is often formed to fill the chondral defect. Fibrocartilage is much denser than hyaline cartilage and not able to withstand as much pressure as hyaline cartilage. This often thought of as the reason why cartilage deteriorates a few years after the surgery. At five years, the failure rate associated with microfracture is 23 percent.

Autologous chondrocyte implantation, better known as ACI, is considered another popular treatment option for knee cartilage damage. ACI was introduced in the 1980s and is intended to aid the patient in the natural regeneration of hyaline cartilage. It is a much more biological approach to knee cartilage repair compared to the mechanical approach microfracture takes.

As you might expect, this treatment also has its drawbacks. The most acute and straightforward issue is that the failure rate is 14.9 percent. ACI is notoriously known for its complications relating to hypertrophy and arthrofibrosis. So far, there is no existing public knowledge of any patient treated with Neocart having complications of hypertrophy or arthrofibrosis. Neither complication was recorded in either the phase 1 or phase 2 studies Histogenics conducted. The biggest issue with hypertrophy and arthrofibrosis is that it limits the function of the knee and can be quite painful for the person experiencing it. Being a victim of either complication often necessitates surgical removal/debridement of any growths, a process which can inflict an unnecessary burden on the patient. Spending more money and time on a second, possibly avoidable procedure is a scenario I’d imagine people would want to avoid.

Both methods of treatment have serious drawbacks tied to them, and patients are not satisfied with the options available to them. When a survey of 170 physicians was conducted, the vast majority of them reported that they were either dissatisfied with the current treatment or open to new therapies for treating damaged of knee cartilage. Even without conclusive phase 3 data, a survey of 79 physicians revealed that half of them were either likely or extremely likely to prescribe Neocart. 43 percent had a neutral stance, while 8 percent replied that they were unlikely.

We’ll cover the commercial potential of Neocart later, but it is important to recognize that Neocart is very much a needed product on the market. To put it simply, Neocart is in a unique position to fill the unmet demands left by the current treatment options on the market. By filling these unmet demands and providing a vastly better option for patients, Histogenics has the opportunity to become the first line of treatment for future knee-cartilage damage patients.

How NeoCart Works and Previous Trial Results

Neocart is a restorative cell-therapy product which uses the patient’s own cells to intensify the autologous cartilage repair process. A patient’s very own cells are merged with a 3-D scaffold specifically designed to both accelerate healing and reduce pain. The scaffold is meant to integrate with the patient’s own knee cartilage cells and then be implanted within the patient to act as a functional piece of cartilage upon implantation.

There are roughly 3 stages of this treatment, which take place over a course of 6-8 weeks. In the first stage, an orthopedic surgeon has to collect a sample of cartilage tissue from the surface of the patient’s femur in a biopsy. The tissue is then immediately sent to the Histogenics manufacturing facility for culturing and expansion.

In the next stage, the collected cartilage cells are then multiplied using conventional tissue culture methods. After that process, the cells are harvested and then seeded into a proprietary 3D collagen scaffold. When seeded, this new piece of neo-cartilage is then cultured under certain conditions maintained by their patented Tissue Engineering Processor. The replicated cells are subjected to the necessary conditions needed for continued replication and integration with the collagen scaffold. Their unique approach guarantees that the replicated cells produce the necessary matrix proteins which are needed to maintain cartilage function before it is implanted in the patient. It all ensures that eventually, the new piece of cartilage they produce can successfully integrate with a patient’s host cartilage.

In summary of the presentations and publications from 2017 provide additional evidence of NeoCart’s clear mechanism of action and physical characteristics. The broad conclusions from these studies remains that NeoCart has approximately 70% of the biomechanical components of native cartilage at the time of treatment, which we believe correlates to our ability to potentially treat pain at the source and get patients back to work and other activities more rapidly than other treatment alternatives.
— Source:  Q417 Conference Call, Adam Grindley

The end result of this process yields a new functioning piece of a patient’s very own neo-cartilage. A piece of cartilage which exhibits characteristics of a maturing articular cartilage. In the final stage, the newly constructed cartilage is sent to the orthopedic surgeon who made the initial diagnosis. When received, the orthopedic surgeon would then proceed to implant the neo-cartilage onto the defect in a procedure which usually takes less than half an hour. In the following months after the procedure, the scaffold remodels into the cartilage, the cells mature, and the neo-cartilage integrates with the host tissue.

As of the time of writing, the product is being evaluated against microfracture surgery—the current standard of care—in a 249 patient phase 3 clinical trial. Results from this trial are due by the end of the 3rd quarter in 2018. Histogenics expects to file a BLA for Neocart near the end of the 3rd quarter as well. If both go smoothly, commercialization is expected to happen in the 1st half of 2019.

Two studies which evaluate the use of Neocart in humans have been completed so far, with both of them yielding positive results. In our view, both demonstrate that Neocart has a massive potential to become the new standard of care for damaged knee cartilage treatment.

For their phase 1 study, 8 patients with full-thickness cartilage injury were treated with Neocart and evaluated prospectively. A statistically significant reduction in pain compared to baseline was achieved at 12 and 24 months after implantation. Improved motion and function were specifically noted after 24 months, with six of the eight patients having a 67-100 percent defect fill at 24 months. Neocart demonstrated a positive safety profile with no cases of arthrofibrosis or implant hypertrophy, and successful tissue was demonstrated in the trial. No serious AE due to Neocart was reported either.

Trial participants were assessed by 3 main efficacy assessments, visual analog pain scale, the range of motion in degrees, and the international knee documentation score. The visual analog pain scale is a scale which measures the intensity of pain the responder is experiencing. It scales from 10-0, with 10 being the most intense feeling of pain and 0 being no pain experienced. The knee’s range of motion was also measured, along with the universal international knee documentation committee score; the international knee documentation committee score measures basic knee function.

Knee function improved when compared to baseline in 7 of the 8 patients treated, with a strong trend towards improvement being demonstrated by the end of the trial. At both the 12-month and 24-month mark, a statistically significant average reduction of VAS compared to baseline was demonstrated. The knee's range of motion improved in 7 of the 8 patients during the trial as well.

The one patient who did not manage to achieve an improvement in knee function suffered from a new meniscal tear of the index knee. Another one patient who did not manage to increase their range of motion I consider an outlier in the set, her IKDC score improved and her VAS score improved despite the decreased range of motion. All eight of the patients managed to demonstrate an improvement compared to baseline in at least two of the three key efficacy points regardless of their situation. Three of the eight patients in the trial improved in all 3 efficacy categories when compared to baseline by the end of 12-week mark. By the end of the trial, not only did those patients either maintain or increase their improvement in all 3 efficacy measurements but two patients managed to join them. Thus bringing the total number of patients who managed to demonstrate improvement in all 3 efficacy categories to five.

For six of the eight patients, good to complete defect fills (67%-100%) was observed through MRI at 24 months. One patient had a moderate defect fill (33%-66%), while another who had a complication had a poor defect fill (<33%). The patient which experienced a poor defect fill had developed a subchondral cyst, an unfortunate complication due to the development of osteoarthritis. This cyst likely contributed to the poor defect fill percentage and inhibited the effectiveness of Neocart. Make no mistake though, there is no evidence that a patient with this type of cyst would fare any better under conventional microfracture treatment. An MRI of 19 patients after an average of 3 years of microfracture treatment showed that only 42 percent of the patients managed to achieve a 67%-100% defect fill. Defect fills of 31%-66% was achieved by 21 percent of the patients in the trial, with the remaining 37 percent of patients managing to only achieve 0%-30% defect fills. Filling the defect site with new cartilage cells is essential to a positive clinical outcome, as the two are closely correlated.

After the conclusion of this phase 1 trial, Histogenics decided to proceed with a phase 2 trial. This time, 30 patients were enrolled in the trial and randomized into two different study arms. 21 patients were assigned Neocart treatment and the other 9 were assigned microfracture treatment. In many ways, this phase two trial is probably the most important data set to look at. Not only is its level of evidence higher, but it compares knee pain and function versus a baseline (microfracture treatment). And most obviously, the trial involves more patients reducing the statistical variance of the results. Efficacy was measured through the International Knee Documentation Committee Score (IKDC) and Knee Injury and Osteoarthritis Outcome Score (KOOS). The full analysis measured all five KOOS subscores, ADL, VAS scores, and an SF-36 score.

Patients given Neocart treatment saw significant improvements in all efficacy measurements at the 6, 12, and 24-month marks. As time went on, the Neocart group managed to show more improvement than the microfracture group. At 12 months, Neocart patients showed a greater improvement in IKDC, KOOS pain, KOOS sports, and VAS pain scores than those in the study treated with Microfracture. When the 24-month mark was hit, greater improvements in IKDC, KOOS pain, KOOS sports, KOOS QQl, and VAS pain scores was demonstrated with statistical significance.

Statistically significant improvements in IKDC and KOOS scores at the 12-month mark are the two co-primary endpoints for Histogenics’ phase 3 trial evaluating Neocart versus Microfracture. Both endpoints need to be hit if Histogenics wants any chance for Neocart to be approved by the FDA. Statistically significant improvements for both efficacy measurements was demonstrated at the 12-month mark in Histogenics’ phase 2 trial. All Histogenics needs to do is to replicate the same results it produced in their phase 2 trial for their phase 3 trial to be successful.

A responder analysis was done after the trial indicated that there was a clear trend of improvement which favored the Neocart study arm. To be classified as a responder, patients needed to demonstrate both an 8 point improvement in their KOOS score and a 20 point improvement in their IKDC score. Classifying responders in this way was done to detect a definite meaningful clinical improvement, accounting for both function and pain. Response rates for the Neocart improved as time went on, going from 43% at 6 months to 76% and 79% at 12 and 24 months respectively. On the other hand, the microfracture group reported response rates of 25%, 22% and 44% at the 6, 12, and 24 months respectively. When the proportion of Neocart responders and Microfracture responders were compared at the 6 and 12-month mark, it was found that the Neocart group had a statistically significant higher proportion of responders (P=0.0125).

An interesting thing to note about the patient selection for the two trial arms is that it seems like the Microfracture arm had a more favorable group of patients. They were on average more young, had a lower BMI, and smaller lesions. Symptom durations were also shorter and the age at the time of injury was also, as you can infer, younger. All of these characteristics tend to yield more favorable treatment outcomes.

It can be argued that because the baseline scores for Neocart were lower, the reason why they showed a greater improvement was because they had more room for improvement. However, an analysis of covariance (ANCOVA) was performed to take into account the slight variations in baseline scores. When adjusted, the IKDC score difference between Neocart and Microfracture patients was statistically significant (p=0.028). The difference in KOOS pain scores between the two study arms was also statistically significant when adjusted (p=0.016).

Histogenics’ much larger phase 3 trial should cancel out any conflicting variables and definitively prove which treatment is better. Conflicting factors and statistical variance will be limited by the sheer size of the trial, a much clearer and reliable picture will be provided. It is inherently impossible to predict the outcome of such a large blinded clinical trial, but we do know one thing for sure. We know what needs to happen in order for Neocart's phase 3 trial to exceed. Neocart needs to improve both the function and pain of patients at 12 months. Knee function will be evaluated through IKDC subjective scores and knee pain will be evaluated through KOOS pain scores. ≥20 point and ≥12 point improvements in IKDC subjective scores and KOOS pain scores respectively are needed in order to meet the primary endpoint. When patients from both the phase 2 and phase 1 trial were pooled together, we saw statistically significant improvements in both their KOOS pain scores and IKDC subjective scores at the 12-month mark. At 12 months, the mean IKDC score difference from baseline (microfracture) was 27.3±18.4 (P<0.001) and the mean KOOS pain score difference from baseline (microfracture) was 21.4 ± 10.4 (P<.001). (See Slides 13-16 From Corporate June Presentation For More Information) If the phase 3 results emulate the same results from the phase 1/2 trial, then the trial will be successful in hitting it's primary endpoint.

Patient Testimonials

Let’s dive right into the patient experience. The testimonials that have been given so far seems to support the idea that NeoCart will be successful in their phase 3 trial. For instance, in their last quarterly conference call, Histogenics was asked about the feedback they had heard so far through the trials. The response that was given definitely reinforces utmost confidence we have in NeoCart.

I would just add to that even from clinicians who are not on the official Clinical Advisory Board we’ve heard a lot of good feedback, we’ve got a guy in Southern California who I think I may have mentioned in the past who has run a marathon in five months after NeoCart implant. We’ve got day labor in just outside of Indianapolis who is back at his job full time three months after his NeoCart implant.
— Source: Q118 Conference Call, Adam Grindley, CEO

Grindley’s comments regarding the anticipated data from Neocart’s phase 3 trial are promising. Some of the examples he raises show that Neocart is definitely working for certain patients and doing exactly what it was meant to do. Neocart is allowing patients to get back to the lifestyle they want quickly. Being able to run a marathon 5 months after treatment is probably a sign that the treatment works.

On the 19th of June, Histogenics held their first investors day in New York City. One of the most interesting segments from the event occurred when George Pierce, a patient treated with Neocart, discussed his personal experience with Neocart. Unfortunately, Mr. Pierce needed to receive treatment for cartilage damage in both his knees. His left knee was first badly damaged, and he decided to go with microfracture treatment to try to repair the damage. While the microfracture surgery did improve his knee, it did not meet his expectations. So when his right knee became damaged, he was eager to find an alternate option suited for him. After meeting with a specialist and doing his own personal research, Mr. Pierce decided that NeoCart surgery was the best option for him.

Source:  Investor Day Presentation  (1:00:00 -1:30:00)

Source: Investor Day Presentation (1:00:00 -1:30:00)

From that point on, he has not looked back and has repeatedly made it clear that NeoCart worked better on every level when compared to microfracture. He has gone on the record and specifically stated that “The overall mechanical operation of my knee is much better with NeoCart then it is with microfracture” (1:12:46). When it comes to pain, he said that “there is significantly more pain and stiffness in my microfracture knee, it is apparent every day of my life. There is not a day that goes by that I am not aware of my microfracture knee.” (1:11:52).

Mr. Pierce noted that with microfracture it took more than a year for him to feel comfortable playing tennis but with NeoCart he was back on the court in 8 months (1:09:45). On top of that, Mr. Pierce stated that after all the stages of treatment have been completed for both treatments he still favors his NeoCart knee over his microfracture knee. In addition to this, his Neocart knee recovered quicker than his microfracture knee. We would encourage anyone to listen to the full presentation and to hear his story first-hand to get the full idea.

Due to certain complications with his microfracture knee, Mr. Pierce even said that he hopes NeoCart will become commercially available in 2019 because he hopes to undergo a NeoCart procedure with his left knee. All parts of his personal testimonial not only supports the idea that Neocart works effectively, but it suggests that Neocart is vastly superior to microfracture.

Of course, Mr. Pierce’s testimony is anecdotal evidence and does not guarantee the success of Neocart’s phase 3 trial. But it is a valuable perspective from a patient who has actually been healed with Neocart. A perspective which will hopefully help investors understand the positive personal impact Neocart can have on a patient. If every patient sees tangible benefits from Neocart like Mr. Pierce, then that’s a fantastic thing for the patient and a fantastic thing for shareholders.

Medinet Partnership

In the December of 2017, Histogenics entered a transformative licensing agreement with MEDINET for the development and commercialization of NeoCart in the Japanese Market. MEDINET is a biotechnology company that is a leading pioneer in cell-based therapies in Japan. The agreement stipulated that Histogenics would receive $10 million in an upfront payment, 87 million in potential milestone payments, and also future tiered royalties. This not only provided Histogenics with more funding for the development of NeoCart in the U.S but also vindicated the Neocart platform. MEDINET putting their weight behind Histogenics' before the release of their definitive phase 3 data demonstrates a high level of confidence in the Neocart platform.

A meeting between Histogenics and the PMDA of Japan also concluded that a 1 year 30 patient clinical trial comparing Neocart to Microfracture would be sufficient enough to warrant approval. If successful, the data from their United States phase 3 trial will be used in the application for approval. No phase 3 trial will need to be conducted in Japan. With this in mind, it is believed that commercialization will be accomplished in 2021 if the data provided about NeoCart is sufficient. Commercialization in Japan could possibly bring in an extra stream of steady revenue for Histogenics through royalties.

The licensing agreement also enlightens those of the fact that there are promising markets for NeoCart outside of the U.S. In this case, Japan, which is the second largest knee cartilage repair market behind the United States. Histogenics believes that there could be at least 10,000 NeoCart treatments per year in Japan alone. The potential for NeoCart in Japan is further backed up by a survey that Histogenics conducted on 80 of the leading orthopedic surgeons in Japan over the first half of 2017. Perhaps the most encouraging answer was provided when they were asked whether they would prescribe Neocart to patients with the data published so far, and over half of surgeons responded that they would. While at first glance, this may not seem like a good thing. After all, that means that there are still quite a lot of surgeons who would not prescribe Neocart. However, if one thinks more critically then it can be reasonably concluded that figure is actually quite high because it must be taken into consideration that NeoCart has not published it's phase three data yet. Thus the fact that already half of the leading surgeons in Japan would prescribe Neocart at this point in time is a true testament to the enthusiasm and excitement over Neocart. This is just Japan too, commercializing the product in Europe and other Asian countries could yield even more exciting opportunities for Histogenics. Neocart is not only limited to the United States or Japan. 

Institutional Ownership

Institutional ownership allows the investor to understand the sentiment held by professionals surrounding a company. This is an important metric for retail investors to take advantage of, especially when there is a binary event on the horizon. Seeing that funds are loading up on shares before one suggests that the event will likely produce a positive outcome. When this concept is applied to Histogenics' position, then a very bullish picture is painted. Institutional ownership has jumped since the last quarter reaching 53.8% with sixteen funds increasing their positions by over 4 million shares compared to only nine reducing their positions by a little over a million shares. This same trend is held up when looking at newly created/exited positions by funds. 10 new positions were initiated last quarter, with the total amount of shares being acquired by those funds exceeding 2.6 million. Six funds sold their positions entirely, resulting in outflows of nearly a million shares.

Source:  NASDAQ

Source: NASDAQ

One of the biggest shareholders of Histogenics is Perceptive Advisors, one of the best healthcare hedge funds in the world. Perceptive has one of the best records on Wall Street and has produced an annualized return of 30.2 percent net of fees since the fund was created. These returns make Perceptive one of the best hedge funds in the world. They are a long-heavy fund and have developed a good sense for separating the winners and the losers. And in this case, Histogenics for them is a clear winner. A 13F filing revealed that Perceptive increased their passive stake in Perceptive recently. The 13F was filed in the middle of March and shows that Perceptive owns about 2.2 million shares, up from 1.78 million from the previous quarter. With 2.2 million shares, Perceptive owns nearly 10 percent of the company.

NBIX  data by  YCharts

One of Perceptive's investing strategies includes buying small clinical-stage companies before commercialization and riding the winner as it slowly develops their assets are fully developed. They like to find winners early on to maximize their ROI, slowly adding to their position as the prospects get better. Neurocrine (NBIX) is a prime example of this investment strategy, with them first buying the stock 8 years ago. Today, the stock trades near all-time highs.

Some other more recent notable biotech picks that Perceptive have made include Madrigal Pharmaceuticals (MDGL) and CymaBay Therapeutics (CBAY). Madrigal has seen explosive growth recently with it's share price nearly tripling in the past few months, and CymaBay has seen steady growth in their stock price as their clinical asset shows more promise over time. It is very apparent that Perceptive has a knack for finding biotech companies with explosive potential. Thus Perceptive owning nearly 10% of Histogenics is very encouraging for any other investors of Histogenics.

Market Size

As of right now there are roughly 1 million patients with cartilage defects worldwide already making it a global multi-billion dollar industry. The knee cartilage repair market is growing every year and is expected to be worth around $6.7 billion by 2025 according to Grand View Research. Increases in joint disorders, injuries due to sports, and road accidents are all reasons for the growing market. An aging population, particularly in Europe, China, and Japan will create a huge demand for cartilage treatment.

With such a massive market available for Neocart to tap, a very serious question remains. How much market share can NeoCart capture? There are many aspects to look at. The strength of the upcoming results from their phase three trial and the pricing of NeoCart are uncertain and will obviously have major effects on the revenue it generates. These variables cannot be fully predicted. From the information available to Histogenics, they expect the cost of Neocart treatment to be ~$40,000.

Histogenics believes that within the first year NeoCart should bring in roughly 24 million dollars. The low initial number is because of the time it takes to penetrate the market. By the second year, Histogenics expects sales NeoCart to ramp up to around $140 million. That then rapidly increases again to $243 million by the end of the third year.

As more people and physicians become aware of Neocart and it's benefits, they will steadily gain market share. A marketing team will be put in place of course to generate awareness and to pitch to physicians. Histogenic's is a small company, so they will need to build a strong ground game in order to generate interest in Neocart. Initially, Histogenics plans to target clinics which have the highest volume of microfracture surgeries along with clinics which are currently key opinion leaders. Specific targeting of a few large clinics should give NeoCart deep market penetration; this will hopefully allow Neocart to quickly gain market share to maximize revenues.

Gross margins are also expected to increase in a steady manner as more units are sold. Histogenics is expected to maintain 60 percent margins when they first launch and steadily get that figure up possibly to 80 percent.

Besides Histogenics initial focus into specifically chosen clinics, Histogenics has laid out three main goals for marketing NeoCart. These being brand awareness, commercial infrastructure, and patient education. Spreading brand awareness for Neocart is already underway. When choosing locations for their large phase 3 trial, Histogenics made sure to pick some of the biggest sports medicines clinics around the U.S. Using their leverage in these clinics around the country they plan on supporting both clinician and education initiatives. Trade show exhibits will also be used to as a vehicle to increase awareness for Neocart.

Commercial infrastructure will be needed in order to effectively market Neocart. Thankfully, Histogenics has already established a network of doctors which have experience with the Neocart product from clinical trials. They also plan on hiring a large sales force to market Neocart aggressively.

The last major element of market penetration will be patient education. Here Histogenics will hopefully be able to solidify the market for smaller lesions by explaining to customers how Neocart will fill the unmet need in this area. To show this they will emphasize Neocart's possible 1-year clinical superiority. Specifics about Neocart's ease of implantation, safety, and greater efficacy will be marketed. Comparisons to other competing methods will be used to emphasize Neocart's unique properties.


There are a lot of different ways to measure the value of a company. For a clinical-stage biotech company like Histogenics, the most effective way in our opinion is to use a simple sales multiple of future revenues. We can use the multiple to determine the right market capitalization and then divide by the total number of shares outstanding to determine the appropriate price per share. It’s a basic method, but it works. Conservatively, assuming that Histogenics manages to only achieve half of their revenue target for the 3rd year, that would mean that they bring in about ~$120 million in annual revenues. A sales multiple of four would still give this company a valuation of nearly half a billion dollars, thus giving the stock a fully diluted price per share of about $10.50.

Even assuming that the product flops and at most brings in $70 million annually, ¼ of what Histogenics predicts it can bring in, there is still a lot of upside left for shareholders. A sales multiple of four would give the company a market cap of $280 million, giving the stock a fully diluted price per share of $6.10!

Let’s take these two situations and examine them closer. If the first case plays out, an investment in the company at $2.50 would yield an ROI that exceeds 400 percent. The latter investment scenario would generate an ROI of over 200 percent. Both of these revenue forecasts are extremely conservative and assume that Neocart severely underperforms on the market. Remember, Histogenics expects Neocart to generate $243 million in revenues by the end of 3rd-year Neocart is on the market. Applying a sales multiple of 4 onto that figure would give Histogenics a market capitalization of $972 million. Each share would be valued at $21.36 in that case, nearly representing a 9-fold increase from the current price per share of $2.50.

Sales multiples are great for valuing small companies, but at the end of the day, it doesn’t show the whole picture. Instead of using a basic sales multiple, let’s use a gross sales multiple and see what comes from that.

And RK just as a follow-up to Steve’s comments, what I would say is just as a reminder for everybody on the call actually. We think by the end of that first year of launch, we think we can be roughly at 60% gross margin and we’re sort of at that initial capacity. We think we can take that up further doing some of the things A, with more volume and B, doing some of the things that Steve just talked about. Because QC testing is a big element of cost candidly.
— Source: Q118 Conference Call, Adam Grindley, CEO

Adam Grindley, the CEO of Histogenics, has been very clear on the matter of gross margins. Right out of the gate, he expects gross margins to hover around 60 percent. As more units are sold, gross margins should improve as the benefits of scale kick in. Different techniques and tools can be applied to the production process to cut down costs gradually over time.

The most recent studies that we’ve done is actually to measure the biochemical constituent using non-invasive method. So there are these spectroscopic methods called FTII Vmans Spectroscopy [ph]. There are some very sophisticated methods for measuring tissue non-evasive with  the probe we can essentially probe the tissue, measure these biochemical constituents in the tissue and thereby know what - where the tissue is allowing its developmental or can’t.

So by incorporating that technology into a bioreactor we’ll be able to eliminate the need for offline measurements to eliminate the need for sampling, eliminate the need for some of the costs associated for the control testing, while at the same time optimize the production of the NeoCart.
— Source: Q118 Conference Call, Steve Kennedy, COO

Histogenics' guidance suggests that they will achieve gross margins of 70% sometime in between 2022-2024. These margins are very strong and will allow Histogenics to capture a lot of the value from their innovation. Value which can be reinvested back into the company to generate greater shareholder returns. Even if Histogenics peaks at 60% gross margins for Neocart, which is unlikely, the stock is still trading at a very cheap valuation.

Projections Are The Author's Opinion And Based Off Of Histogenics' Personal Guidance*&nbsp;&nbsp;

Projections Are The Author's Opinion And Based Off Of Histogenics' Personal Guidance*  

In the worst case scenario, where Neocart manages to only bring in ¼ of it’s projected revenues at 60% margins, a gross sales multiple of four would still give Histogenics a market capitalization of ~$145,000,000. Not much upside from the current valuation of the company, but certainly also not much downside. It’s also worth noting that in all 3 cases, the assumption is made that sales of Neocart peak after the 3rd year and remain stagnant. Something which is very unlikely, given the rapid growth of the knee cartilage repair/regeneration market in the United States alone.

In the best case scenario we have, Histogenics manages to meet their sales goal of $243 million and achieve gross margins of 75 percent. Of course, this scenario assumes that Neocart’s sales growth peaks in the third year and remain stagnant afterward. In this situation, Histogenics would bring in over $182 million in gross sales every single year. After applying a gross sales multiple of four on that figure, the market capitalization swells to $729,000,000. At that valuation, each share would be worth a little over $16.

Again, it cannot be emphasized enough that these revenue estimates are all very conservative. They all assume that revenues peak in the third year and remain constant afterward. It does not take into account the sales potential Neocart beyond the United States. Possible milestone payments and the steady stream of royalties from MEDINET, which would supplement Histogenics’ revenues greatly, are not baked into the revenue estimates either. Four is a very conservative sales multiple too, considering Histogenics’ patent life on Neocart extends through 2030.

Exact guidance on operating expenses has not been given, so it is difficult to specifically calculate indirect costs associated with Neocart. Once more clarity is given on the cost of the sales force and marketing, a more precise valuation can be made on the company. However, it is hard to imagine the costs somehow eclipsing the vast revenue potentials of Neocart. Costs associated with marketing and the sales force shouldn’t be seen as an expense in my view. It should be seen more as an investment by the company to increase the revenues from a product. In this case, the more aggressively Histogenics spends on Neocart, the more they can get out of it. It should not be seen as a negative that Histogenics would spend aggressively to fuel growth. 

If NeoCart earns approval, Gridley suspects the company will begin looking at other uses for the technology, particularly for ankle and shoulder injuries. ‘If you can fix cartilage in the knee, you can fix it elsewhere,’ Gridley said
— Source: Biospace Article, "Massachusetts' Histogenics Looks to Neocart for Replacing Knee Cartilage Loss"

Expanding Neocart to include more indications would also generate enormous amounts of shareholder value. At the moment, Neocart is only being evaluated in patients with knee cartilage damage. But it can be used for so much more. Histogenics is restricted right now because of the sheer financial cost and time it’s taken to advance Neocart through the regulatory process. Clinical trials are expensive, take an enormous amount of time, and are certainly not guaranteed to succeed. Histogenics hasn’t had the resources to test Neocart for other different types of cartilage damage.

But once profits from Neocart begins to trickle in, they can work towards reinvesting those products back into research and development. Research and development which will unlock more possibilities for Neocart which go far beyond the knee. Generating enormous amounts of shareholder value in the process.

These possibilities are not factored in at all in our revenue valuation. Our valuation method is tremendously conservative. The sales multiple is low, revenues from Japan are not factored in, and no intrinsic value of the pipeline is established. Revenues from countries other than Japan and the United States are not priced in, and the market capitalizations listed above assume that revenues peak and do not change after the 3rd year. Even after such conservative measures are taken, there is still massive upside for shareholders at the current price. The risk-reward profile is favorable at this point, and we predict the trial will ultimately produce positive results, clearing the way for Neocart’s sales to drive the share price higher. Maybe buying now heading into a binary phase 3 is too risky for some, but even buying after the trial results are released when Neocart becomes fully de-risked could be a good investment idea.

$6.75 is probably the most appropriate and safest short-term price target in our view. A price per share of $6.75 gives Histogenics a market capitalization of about $307,125,000. This price target roughly falls in line with the situation in which Neocart only achieves half it's projected sales at a 65 percent gross margin by the end of the 3rd year. Our price target is conservative to leave a large margin of error for the company. Before the data, we expect the stock to trade in the $3 dollar range. This is a critical moment for the company, and the scientific literature on Neocart suggests that the phase 3 trial will end up producing good data. Judging from the bullish institutional flow and the body of evidence from Histogenics' phase 1 and phase 2 trial, we think the sentiment will be bullish enough to spark a run-up into the release of phase 3 data. We would give a long-term price target, but it's probably wise to hold off on that until we get more guidance from Histogenics after the data is released.


Histogenics' talented management team is led by CEO Adam Gridley who has more than 20 years of experience with medical devices and biotechnology industry. Prior to working at Histogenics, Gridley worked at Merz, a privately-held healthcare company, where he was the Senior Vice President of Technical Operations. Gridley’s abundance of experience will benefit Histogenics considerably as NeoCart comes close to FDA approval. While the ultimate fate of NeoCart’s approval will rest in the hands of the FDA, an experienced management team will be able to make the right decisions throughout the process. The one thing which Histogenics does not lack is an abundance of experience in its management team.

Dr. Haut is a perfect example of this, Haut has over 20 years of executive management experience and is currently the CBO of Histogenics. Over those 20 years, Dr. Haut has mastered his craft he has been involved in over 4 billion dollars worth of transactions. Dr. Haut’s effect has already been shown at Histogenics when just after arriving in 2017, he orchestrated the licensing agreement with MEDINET.

The list goes on and on with every single member of Histogenics management team harnessing 15 years or more of experience and countless outstanding achievements. All coming together to construct an exceptional management team that investors can trust to make the right decisions when they are needed the most.

The Risks

There are a lot of risks associated with small biotechnology companies such as Histogenics Corp. The biotechnology sector is thought of one of the most volatile if not the most volatile sector on the stock market. Unpredictable binary events can cause these companies to collapse overnight. In this case for Histogenics, if the phase 3 trial is not a success then their stock price would plummet. And even if the phase three trial is successful there are still many risks associated with the company. The most immediate being the fact that Histogenics would likely need to dilute so they have the funds to push Neocart through the final regulatory phase and commercialize it. After all, Histogenics only expects themselves to have enough cash on hand to last until the fourth quarter of 2018.

This brings us to the next set of obstacles that stand between Histogenics and them actually turning a profit. Even with good phase three results, Histogenics still has to get NeoCart approved. They will do so by filing a BLA which has no 100 percent guarantee of getting accepted. Assuming it does get accepted, costs of commercialization along with the increased costs of a salesforce might force Histogenics to dilute again. Many small biotechs struggle to reach a positive cash flows even with an approved product. Synergy Pharmaceuticals (SGYP) and their struggle to sell Trulance has devastated shareholders and prompted the formation of a retail activist group. An interesting story for those interested in the nightmarish stories associated with the biotech sector.

Ultimately while it is important to see how much potential upside there is in Histogenics, investors must also see the potential downsides. Thus I would not recommend buying shares of Histogenics if as an investor you cannot handle the high volatility and uncertainty that comes along with it. Being stubborn, yet flexible and open-minded, is perhaps the most important trait needed when it comes to investing in development stage biotechs.


Nowadays, with the emergence of advanced stock screeners, the rise of quants, and an endlessly growing crowd in the street, it is difficult to find undervalued jewels in the market. The market environment which allowed Peter Lynch to continually find ten-baggers and twenty-baggers is not the environment we find ourselves in today. And that makes this situation all the more unique and interesting. Histogenics is on the verge of possibly changing the standard of care for damaged knee cartilage, and there seems to be not much coverage on the company. Analysts have been quiet, with no serious coverage, and chatter on investing boards is essentially non-existent compared to some other small-cap companies.

Other than the very bullish institutional flows of capital into the company, the signs suggest that most people are simply not aware of Histogenics’ existence. This lack of awareness seems to have caused a deep misvaluation of the company. The current price per share offered by Mr. Market does not reflect the true value of the company and their Neocart platform.

Neocart has been vindicated twice already through a phase 1 trial and a phase 2 trial. Pain and function improvements are the two primary endpoints which need to be hit, and both endpoints were hit with statistical significance in the phase two trial. All Histogenics’ needs to do is to replicate the same results in their phase 2 trial but on a much larger scale. If that’s done, it’s very likely that the FDA will accept a BLA for Neocart, allowing it to shine on the market. Any regulatory risks baked into the Histogenics’ valuation will be evaporated following a positive phase 3 trial, which will then, in turn, cause the price per share to increase. And if the revenue projections which Histogenics’ projects hold up, then the share price will appreciate even more rapidly.

Sure, Histogenics’ definitely has a shortage of cash at the moment, but that doesn’t take away from the long-term prospects of the company. One way Histogenics could solve their shortage is by diluting shareholders which would have a bearish effect on the stock, but it would provide the necessary fuel to make Neocart a commercially successful product. The potential revenues of a fully-commercialized Neocart are well-worth any costs associated with it. If Histogenics can find a willing partner, it's possible that they could choose partner with them to split some of the costs associated with commercialization. An agreement like this would likely give Histogenics a short-term cash infusion and could mitigate the size of any secondary offerings or ward it off completely.

As we approach the end of the 3rd quarter, I expect to see the share price at least run up to the anticipated data readout. If not, then the company still has very good chances at success in their phase 3 trial. It all comes down to this trial, and we think that there is a very high likelihood of success. Success which will greatly reward shareholders for their patience and grit. Assuming all goes as anticipated, our price target is $3 before the data readout, and $6.75 in the short term after the data is released.  

DISCLAIMER: The authors of this article have a conflict of interest and will realize a material gain/loss if the stock price moves. As of the publication date of this work, the authors of this article have a long position in HSGX and will benefit financially if the stock price increases. The authors of this article reserve the right to modify their position at any time. You should consult certified professionals before making any investments. This document does not constitute investment advice and is merely a demonstration of the author's opinions and analysis. If the stock price of Histogenics moves significantly after the publication of this article, causality cannot be determined by the appearance of this article alone. We do not undertake any responsibility for actions any reader may take and losses that extend and result from reading this article. Please read our disclaimer section on our website for more information. 




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