One of the most lucrative yet under-the-radar industries in healthcare might be wound management and hemostasis (stop bleeding). It is a secular industry, but one that grows with the rate of population, and is expected to top $40 billion by 2015. Johnson & Johnson (JNJ) is perhaps the most well-known in this space, as its wound care space creates sales over $1 billion per year, including Band-Aid. Then, there are other companies such as Boston Scientific (BSX), Abbot Labs (ABT), and even industrial companies such as 3M (MMM) that have products in this space. However, revenue in this space is spread thoroughly, as there is no one product that has successfully penetrated all wound management segments, such as home, first-aid, surgery, etc. Therefore, a breakthrough in wound management could create large revenue and could become highly useful, although the market has little knowledge of its existence.
Several years back, MIT developed a synthetic peptide of naturally occurring amino acids in a gel-like form. That peptide, now called AC5, is being developed by a small company called Arch Therapeutics (ARTH.OB), and is actually squirted or sprayed onto a wound or incision which then hardens in seconds. Currently, Arch is testing the product as a medical device in operating rooms with surgery, but theoretically, AC5 could be used in place of Band-Aids, in the military, etc.
Thus, Arch's targeted market is hemostasis, which is estimated to be a $4 billion market, or one-tenth the wound management industry. Although, I do expect that in time, AC5 will branch out into other segments of the space. Essentially, AC5 stops blood flow faster, in seconds rather than minutes. It is safe, cheap to administer and manufacture, and it is not sticky nor does it leak like many other products in the hemostasis market.
Right now, shares of Arch are trading at just $0.25 with a market cap of about $25 million. Hence, it is a very small company. However, much of its valuation is tied to the fact that its lead product is for wound healing. To many investors, wound healing does not have the same appeal as a cancer vaccine, hepatitis C medication, or a drug to treat genetic diseases. Yet, the wound management market is about as large as any industry in the market, and we have seen very few, if any, innovations within the space for many years. Moreover, instead of viewing its industry as a negative, I think it should be viewed as a positive.
Take a look at a company such as Verastem (VSTM) for example. Verastem is developing next generation chemotherapies, which also help to prevent recurrence. Back in 2012, the company filed for its IPO, began trading with a market cap near $300 million, but was yet to begin clinical testing. Moreover, we've seen a slew of companies in 2013 file IPOs without having any human testing. Bind Therapeutics priced its IPO at $15 last week, but its nanoparticle delivery technology is yet to reach human studies, but that doesn't stop the company being awarded a $700 million market cap plus.
The point to mentioning Verastem, Bind, and biotech IPOs of 2013 is to show the valuation awarded to preclinical companies, the different levels of optimism for drugs/vaccines, but to also explain clinical process. For example, Verastem has now begun clinical testing, but the company has to go through Phase 1, 2, and 3 trials, which all include long periods of time to both determine if there is a statistical difference between its products versus chemotherapy and if it's safe.