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Initiating Coverage
May 2, 2016
STRATA Skin Sciences (SSKN)
Initiation Report
LifeSci Investment Abstract
STRATA Skin Sciences (NasdaqCM: SSKN) is a medical technology company
commercializing products for patients with serious dermatological disorders. In the US the
Company commercializes XTRAC, an ultraviolet light system primarily for the treatment of
psoriasis and vitiligo, using a pay-per-use model. XTRAC is broadly reimbursed for psoriasis
by private insurance companies and Medicare/Medicaid. Recurring revenue from XTRAC
in 2015 was $26.6 million, a 16% increase from 2014. VTRAC is a second ultraviolet light
system sold internationally through distributors. We believe STRATA Skin can achieve steady
recurring revenue growth going forward due its robust commercialization strategy.
Analysts
Key Points of Discussion
Market Data
■
■
■
STRATA Skin is a Revenue Generating Medical Technology Company. STRATA
Skin acquired a dermatology business in June 2015 that includes 2 ultraviolet (UV) light
systems for the treatment of psoriasis, vitiligo, atopic dermatitis, and leukoderma. The main
revenue driver is XTRAC, a laser that delivers targeted therapeutic light to the skin. It
generated $26.6 million in recurring revenue in 2015, and we estimate 17% annual revenue
growth going forward. A second UV light system called VTRAC is sold internationally.
International revenues from XTRAC, VTRAC, and related parts generated $6.3 million
in 2015 sales.
Robust Commercialization Strategy in Place for XTRAC. STRATA Skin has a
comprehensive commercialization plan in place to grow its recurring revenue business, in
which dermatologists pay on a per-use basis. XTRAC is commercialized in the US using
a 49-person sales and marketing team. The team is made up of direct sales representatives
to increase the number of XTRAC placements, clinical technicians to train the sales team,
a call center to drive new patients to existing XTRAC installments, and a reimbursement
team to help patients obtain coverage. Additionally there is a 13-person field service and
support personnel to conduct installations and provide routine maintenance.
Successful Advertising Campaign a Major Source of Patient Volume. STRATA Skin’s
call center and reimbursement team are part of a larger direct-to-patient outreach program
that includes targeted advertising on television, radio, and social media. The goal of the
program is to identify potential XTRAC users and send them to clinics or offices that
have installed systems. It generates approximately 3,000 leads per month, resulting in over
700 appointments. The amount of advertising capital allocated to each channel is adjusted
regularly to maximize the number of leads and appointments. Changes are made based on
how well a particular channel, geographical location, or target audience is responding to
the advertisements.
Jerry Isaacson, Ph.D. (AC)
(646) 597-6991
[email protected]
Adam Evertts, Ph.D.
(646) 597-6997
[email protected]
Price
Market Cap (M)
EV (M)
Shares Outstanding (M)
Fully Diluted Shares (M)
Avg Daily Vol
52-week Range:
Cash (M)
Net Cash/Share
Debt (M)*
Short Interest (M)
Short Interest (% of Float)
$0.93
$10
$71
10.5
78.9
81,962
$0.91 - $1.81
$3.3
$(0.83)
$12.0
0.40
5.0%
*Does not include convertible debentures.
Financials
FY Dec
EPS
Q1
Q2
Q3
Q4
FY
2013A
(1.66)A
(1.72)A
(1.72)A
NA
(6.05)A
2014A
(1.63)A
0.12A
(0.44)A
(1.09)A
(3.03)A
2015A
(1.12)A
(0.97)A
(1.26)A
(0.06)A
(3.27)A
Expected Upcoming Milestones
■
■
■
Continued growth of recurring revenue business.
Further optimization of manufacturing and utilization of XTRAC/VTRAC inventory.
Identify value from 3-D imaging technology.
Page 1
For analyst certification and disclosures please see page 27
May 2, 2016
§ Positive Dermatologist Feedback Regarding Partnership Model. STRATA Skin does not sell its XTRAC
system in the US, and instead charges dermatologists a fee each time they treat a patient. The physician retains the
difference between the fee and what he or she receives from the patient or insurance. As discussed above, STRATA
Skin refers patients to dermatology clinics via its direct to patient outreach program. One dermatologist we spoke to
has been practicing for over 30 years and runs 4 offices. He estimated that, depending on the office, 50-80% of
patients who use XTRAC come from referrals. In addition to supplying a recurring revenue stream from the
XTRAC treatments, referrals can also be a major source of new patients for the entire dermatology practice.
§ Universal Reimbursement for XTRAC use in Psoriasis. XTRAC is FDA cleared for use in patients with
psoriasis, vitiligo, atopic dermatitis, and leukoderma. The majority of XTRAC treatments are for psoriasis patients
due both to the larger number of patients and to near-universal reimbursement for this indication across private
insurance and Medicare/Medicaid. Three Current Procedural Terminology (CPT) codes can be used for
reimbursement and differ in the amount of body area that is targeted. Dermatologists receive from $157 to $240 per
treatment depending on the code, and pay STRATA Skin between $65 and $95. Our discussions with dermatologists
indicate that reimbursement of vitiligo and atopic dermatitis is limited but growing. The physicians also indicated
that many vitiligo patients often pay out of pocket due to the lack of treatment options and a strong personal desire
to address the condition.
§ Psoriasis and Vitiligo are Large Market Opportunities. More than 9 million patients in the US have psoriasis
and vitiligo, the two indications most commonly treated with XTRAC. The device is indicated for all levels of
psoriasis, mild, moderate, and severe. Several clinical trials have established the utility of excimer laser therapy for
psoriasis. Patients typically achieve 75% to 90% disease clearance after 6 to 15 treatments and may remain in
remission for 6 months or longer. Vitiligo impacts an estimated 400 per 100,000 individuals in the US, or
approximately 1.3 million people. Groups such as the National Vitiligo Foundation suggest that as many as 5 million
individuals in the US are living with the condition. Treatment options for vitiligo are limited and the emotional
damage from the condition can be high. This creates a group of patients highly motivated to seek treatment, and
light therapy is a cost effective, safe, and successful option for many patients.
§ Management Team is Familiar with XTRAC/VTRAC Devices. STRATA Skin acquired the XTRAC/VTRAC
devices in June 2015 from PhotoMedex. CEO Mike Stewart, CFO Christina Allgeier, and certain STRATA Skin
Board members held various senior management and Board roles at PhotoMedex in the past and have extensive
experience with the XTRAC/VTRAC product lines. At the time of acquisition, a total of 94 individuals were
offered employment at STRATA Skin, including sales, marketing, manufacturing, research, and engineering staff.
We confirmed that many staff were retained during our site visit to the Company’s manufacturing facility in
Carlsbad, California. The retention of skilled employees has led to a rapid changeover from PhotoMedex to
STRATA Skin. Our discussions with physicians have confirmed that other than a temporary drop in referrals, the
transition to STRATA Skin has been seamless.
§ Potential to Utilize 3-D Imaging Technology. STRATA Skin also owns the MelaFind device, which is a noninvasive imaging system used to assist dermatologists in diagnosing melanoma. It features a hand-held optical imager
that shines 10 bands of spectral light of multiple wavelengths to non-invasively extract 3-D images and digital data
from clinically irregular pigmented lesions, usually moles. The data are then analyzed utilizing sophisticated
classification algorithms that were trained on a proprietary database of over 10,000 pigmented lesions. The system
previously provided a binary yes/no result to dermatologists. In March 2016, STRATA Skin received FDA approval
for a PMA supplement that changed the result output to provide more meaningful information for dermatologists
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May 2, 2016
to use MelaFind in conjunction with other information about skin lesions. Positive reader studies supported the
PMA submission and indicated that when incorporating MelaFind into melanoma detection, both sensitivity and
specificity improved. STRATA Skin has the ability to harness this 3-D imaging technology for additional product
development as it seeks reimbursement for MelaFind.
Financial Discussion
STRATA Skin reported total revenues of $18.5 million for the full year 2015 compared to $0.9 million in 2014. On a
pro forma basis, which includes revenue generated at PhotoMedex, total revenues were $33.3 million for 2015.
Recurring revenues accounted for $26.6 million and international and other revenues were $6.6 million. Pro forma
recurring revenue growth was 16% from 2014 to 2015. Engineering and product development costs were $2.0
million for 2015 compared to $1.6 million in 2014. Selling and marketing expenses were $9.2 million, and general
and administrative expenses were $10.0 million in 2015. Non-GAAP adjusted EBITDA was positive for the third
and fourth quarters of 2015. Net loss for the year was $27.5 million. STRATA Skin ended December 2015 with
cash, cash equivalents, and short-term investments of $3.3 million.
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May 2, 2016
Table of Contents
Company Description .................................................................................................................................................................... 5
XTRAC/VTRAC .......................................................................................................................................................................... 5
Mechanism of Excimer Laser .................................................................................................................................................. 6
Commercialization Strategy .......................................................................................................................................................... 7
Direct to Patient Outreach ....................................................................................................................................................... 9
Reimbursement......................................................................................................................................................................... 10
Plaque Psoriasis ............................................................................................................................................................................. 10
Treatments for Plaque Psoriasis ............................................................................................................................................ 12
Market Opportunity and Revenue Projections ........................................................................................................................ 14
Current Revenue Growth ....................................................................................................................................................... 17
Projected Revenue Growth .................................................................................................................................................... 18
XTRAC/VTRAC Clinical Data Discussion ........................................................................................................................... 20
Prospective Clinical Study of XTRAC Laser in Patients with Mild to Moderate Plaque Psoriasis ............................ 22
Retrospective Study of XTRAC Laser in Patients with Psoriasis Lesions on the Scalp .............................................. 24
Competing Light-based Treatments for Skin Conditions ...................................................................................................... 25
Intellectual Property ..................................................................................................................................................................... 25
Management Team ....................................................................................................................................................................... 25
Risk to an Investment .................................................................................................................................................................. 26
Analyst Certification ..................................................................................................................................................................... 27
Disclosure ...................................................................................................................................................................................... 27
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May 2, 2016
Company Description
STRATA Skin Sciences is a medical technology company commercializing products for patients with dermatological
disorders. The Company’s lead product and main source of revenue is XTRAC, an excimer laser that is
commercialized in the US using a pay-per-use model. XTRAC is an FDA cleared system used by clinical
dermatologists to primarily treat patients with psoriasis. It delivers targeted ultraviolet (UV) light at 308 nm.
Treatment sessions are reimbursed by Medicare/Medicaid and the majority of private insurance providers. STRATA
Skin also sells a similar system called VTRAC to international customers through a distributor. VTRAC generates
UV light using a lamp instead of a laser. The Company also owns MelaFind®, a non-invasive imaging system to assist
dermatologists in diagnosing melanoma at its most curable and cost-effective stage. Efforts are underway to obtain
reimbursement, lower the cost of device manufacturing, and identify new applications for the 3-D imaging
technology used in MelaFind.
XTRAC/VTRAC
STRATA Skin’s XTRAC product is an excimer laser system FDA cleared for the treatment of psoriasis, vitiligo,
atopic dermatitis, and leukoderma. It received marketing clearance in the US in March 2001 and is broadly
reimbursed by major insurance providers for psoriasis. XTRAC is a targeted light therapy that delivers narrowband
UVB directly to the site of disease, while sparing healthy skin from light exposure. VTRAC is an excimer lamp
system used for the same diseases as XTRAC and is sold outside the US via STRATA Skin’s master distributor,
GlobalMed, which reaches 25 countries. Both systems were acquired in June 2015 from PhotoMedex (NasdaqCM:
PHMD) in a $42.5 million deal. Total pro forma revenue from both devices in 2015 was $32.9 million, including
recurring revenues from XTRAC of $26.6 million, a 16% increase from the prior year. STRATA Skin has a
comprehensive and targeted commercialization plan to maintain steady revenue growth.
The XTRAC system is an FDA cleared device that uses xenon chloride (XeCl) gas to produce 308 nm light waves.
A picture of an assembled system is shown in Figure 1. The gas is stored in a small tank in the bottom of the
housing unit. During operation, gas is injected into a chamber where it is excited by an electrical current. Light is
produced as electrons move from an excited energy state to a normal energy level. The light is transferred from the
chamber to the patient using the liquid light guide shown in the image. The laser spot size is 4 cm2. STRATA Skin
currently ships the assembled system and gas tank separately to dermatologists’ offices and a field support specialist
conducts the installation. XTRAC is powered using a relatively common 110 volt outlet and does not require special
electrical infrastructure or significant space in dermatology clinics.
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echnology
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May 2, 2016
Figure 1. External View of the XTRAC System
s
virtually no side effects as
s and other therapies
soriasis by virtually all health
rates established and
ent
6
Source: STRATA Skin Reports
We had the opportunity to visit STRATA Skin’s manufacturing facility in Carlsbad, California. Several members of
the manufacturing team have been employed with STRATA Skin and/or the prior owner PhotoMedex for more
than a decade, and they have invaluable experience with the systems. There are teams responsible for assembly,
research and development, and refurbishing. Although the existing operation is efficient, the general manager of the
facility indicated that several efforts are underway to improve the efficiency. STRATA Skin is responsible for the
cost of the device and servicing. All systems and system refurbishments go through rigorous testing procedures to
ensure that all systems placed in dermatologists’ offices or sold throughout the world adhere to strict specifications.
This leads to proper energy output from the systems, resulting in effective treatments.
STRATA Skin also manufactures the VTRAC system at the Carlsbad facility. Between the XTRAC and VTRAC
devices, the Company ships approximately 100 units per quarter. Following our site visit, we are confident that the
manufacturing operations are robust and cost effective, and new initiatives could improve efficiency even further.
Mechanism of Excimer Laser
STRATA Skin’s XTRAC system has activity across a group of skin conditions, and is approved for the treatment of
psoriasis, vitiligo, atopic dermatitis, and leukoderma. The light therapy can treat these seemingly unrelated conditions
via the ability to kill T-cells and stimulate melanin production from melanocytes. The cytotoxic effect on T-cells is
helpful for patients with psoriasis and atopic dermatitis, and the melanin production benefits vitiligo and leukoderma
patients. Below we discuss the mechanisms in more detail, using psoriasis and vitiligo as example diseases.
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May 2, 2016
Psoriasis results from the excess growth of epithelial cells that form red, inflamed patches on the skin.1 T-cell
infiltration is characteristic of the disease and infusing susceptible individuals with activated T-cells can trigger
plaque formation.2 Invading T-cells secrete cytokines that promote inflammation and stimulate the aberrant growth
and division of keratinocytes, making T-cells a good therapeutic target. The importance of T-cells in disease
pathology is validated by approved therapeutics that modulate the immune system. TNF-α inhibitors broadly
dampen the immune system and subsequently limit T-cell activation, and Stelara (ustekinumab) blocks IL-12/23, a
pair of cytokines that are secreted by T-cells and promote inflammation. Light therapy also impacts psoriasis via Tcell targeting, and published data suggest that it directly kills T-cells via apoptosis.
A study published in 1999 showed that narrowband UVB treatment led to depletion of T-cells in the dermis and
epidermis.3 The treatment was also correlated with high levels of DNA fragmentation, suggesting that the UV light
was depleting T-cells via apoptosis. More specific methods of measuring apoptosis confirmed that treated skin sites
contained apoptotic T-cells. Other studies have indicated that 308 nm laser treatment is more effective at inducing
T-cell apoptosis, which may be responsible for its robust clinical activity.4,5
The mechanism of action for XTRAC treatment of vitiligo is relatively well established and based on the natural
tanning, or pigmentation, phenomenon from sunlight exposure. Vitiligo is due to depigmentation of the skin, and is
especially problematic when it presents on the face, neck, and hands. UV light triggers several responses in
melanocytes such as enhanced DNA repair to protect against mutagenesis, and stimulation of melanogenesis to
produce melanin.6 The production of melanin pigments the skin and restores natural color in vitiligo patients.
Commercialization Strategy
XTRAC is commercialized in the US using a 49-person sales and marketing team. The team is made up of the
following groups:
§
§
§
§
Direct sales representatives to increase the number of XTRAC placements.
Clinical technicians to conduct training and handle clinical questions.
A call center to drive new patients to existing XTRAC installments.
A reimbursement team to help patients understand their coverage status.
The geographical distribution of the team is shown in Figure 2. Sales and field service staff are positioned in areas
of high population density. STRATA Skin also uses an agency to place advertisements on TV, radio, and social
Krueger, J.G. & Bowcock, A., 2005. Psoriasis pathophysiology: current concepts of pathogenesis. Annals of the Rheumatic
Diseases, 64 (Suppl 2), ppii30-ii36.
2 Wrone-Smith, T. & Nickoloff, B.J. et al., 1996. Dermal injection of immunocytes induces psoriasis. The Journal of Clinical
Investigation, 98(8), pp1878-1887.
3 Ozawa, M. et al., 1999. 312-nanometer ultraviolet B light (narrow-band UVB) induces apoptosis of T cells with psoriatic
lesions. The Journal of Experimental Medicine, 189(4), pp711-718.
4 Novák, Z. et al., 2002. Xenon chloride ultraviolet B laser is more effective in treating psoriasis and in inducing T cell apoptosis
than narrow-band ultraviolet B. Journal of Photochemistry and Photobiology B: Biology, 67(1), pp32-38.
5 Bianchi, B. et al., 2003. Monochromatic excimer light (308 nm): an immunohistochemical study of cutaneous T cells and
apoptosis-related molecules in psoriasis. Journal of the European Academy of Dermatology and Venereology, 17(4), pp408-413.
6 Gilchrest, B.A. et al., 1996. Mechanisms of ultraviolet light-induced pigmentation. Photochemistry and Photobiology, 63(1), pp1-10.
1
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media, which encourages potential patients to engage the call center. At the end of 2015 there were 718 systems
placed in the US compared to 620 at the end of 2014. An estimated 3,500 dermatologists have access to an XTAC
machine since many systems are placed in dermatology clinics. The average system produces annualized revenues of
over $40,000.
Figure 2. Distribution of Commercialization Team Within the US
Source: STRATA Skin Presentation
The majority of XTRAC systems are provided to dermatologists at no up-front cost, and STRATA Skin receives its
revenue as treatments are purchased and performed. This recurring revenue model has several advantages:
§
§
§
There is an economic incentive for dermatologists to use the device. XTRAC is reimbursed through 3
CPT codes at a range of $157 to $240 per procedure. Dermatologists pay STRATA Skin between $65 and
$95 per treatment, and do so via the purchase of codes that unlock the machine for use. The difference
between the cost per code and reimbursement is profit for the physician. Typical psoriasis patients receive 6
to 15 treatments to achieve a 75% or greater improvement in the disease. This means that depending on the
amount of body surface area and number of treatments per patient, profit to the physician is between $500
to $2,200.
The dermatologists are not responsible for upfront capital cost of the device. STRATA Skin supplies
the XTRAC system to the clinic or office and STRATA retains ownership of the device. This approach
allows the dermatologist to avoid a major capital purchase. All costs per treatment cover the use of the
system, maintenance of the system, and access to all of STRATA’s resources for training, service,
advertising, and reimbursement services.
Dermatologists are not responsible for a maintenance contract. Since STRATA Skin owns the
XTRAC systems in use. It conducts regular maintenance such as refilling the XeCl gas canister when
necessary, and performs other repairs as issues arise. From our discussions with physicians, the lack of
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major upfront and unpredictable ongoing costs is an attractive and differentiating feature of the XTRAC
system.
These advantages of STRATA Skin’s recurring revenue model help to drive new placements, since dermatologists
have fewer barriers to overcome in the sign up process, and help to increase use of each placed system, since
dermatologists benefit from the marketing and other services provided by STRATA. A major component of the
commercialization plan that has helped transform sales growth is a direct to patient outreach program.
Direct to Patient Outreach
STRATA Skin has a direct to patient outreach program that includes targeted advertising, a patient advocate call
center, and a reimbursement support team. The goal of the program is to identify potential XTRAC users via
advertising and send them to clinics or offices that have installed systems. STRATA Skin uses an outside agency to
place advertisements on television, radio, and social media. The advertisements direct potential XTRAC users to call
a number or send an email for more information.
We had the opportunity to visit STRATA Skin’s call center in Carlsbad, California. There is a team of approximately
15 employees who handle inbound calls and conduct follow up outreach to maintain a steady flow of patients to
clinics with XTRAC systems. Agents help inbound callers identify a clinic in their geographical region that offers
XTRAC, and assist with appointment booking. For callers that have reimbursement questions, the agent enlists a
reimbursement specialist. Follow up calls are conducted to remind patients of their appointment, and to track
whether the patient visited the dermatologist and received XTRAC treatment.
Dermatologist Perspective: Referrals can be a major source of new patients for dermatologists that have an
XTRAC device. One dermatologist we spoke to has been practicing for over 30 years and runs 4 offices. He
estimated that depending on the office, 50-80% of patients who use XTRAC come from referrals.
The direct to patient outreach campaign generates approximately 3,000 leads per month, resulting in over 700
appointments per month. Each channel is associated with a unique phone number so that the number of leads per
channel can be easily tracked. STRATA Skin currently spends about $75,000 to $100,000 per week on advertising.
The amount of advertising capital allocated to each channel is adjusted regularly to maximize the number of leads
and appointments. Changes are made based on how well a particular channel, geographical location, or target
audience is responding to the advertisements. Areas where the leads per dollar spent are low are deemphasized, and
more capital is used in places where the leads per dollar spent are high. Agents are also rigorously analyzed for their
performance and provided training to maximize leads and successful appointments.
The data collected from incoming calls can also help the sales force place additional systems. For example, if there
are many calls from a geographical location where no XTRAC systems are placed, there is likely a need for such
treatment and an opportunity for dermatologists to generate new income. The sales team can use this information
when engaging dermatologists in that region of the country.
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May 2, 2016
Reimbursement
STRATA Skin has a team of reimbursement specialists that help individuals better understand and navigate the
reimbursement landscape. XTRAC is reimbursed broadly by private insurance companies and Medicare/Medicaid
for psoriasis. Three Current Procedural Terminology (CPT) codes can be used for reimbursement and differ in the
amount of body area that is targeted. The reimbursement level ranges based on the code as shown in Figure 3.
Subject to geographical and specific insurer policy, national average reimbursement rates range between $157 to
$240 per treatment.
Figure 3. CPT Codes for XTRAC Treatment
CPT Code
Total treatment area
Reimbursement
96920
96921
96922
<250 m2
250-500 m2
>500 m2
$157.18
$172.93
$239.89
Source: Centers for Medicare and Medicaid Services
Dermatologist Perspective: Indications such as vitiligo and atopic dermatitis are not always reimbursed,
although our discussions with physicians indicate that this is slowly changing. The dermatologists also indicated
that many vitiligo patients often pay out of pocket due to the lack of treatment options and emotional damage
associated with the condition.
As in any medical procedure, there are several variables associated with reimbursement of XTRAC such as the copay amount, the maximum number of allowable treatments, and which insurance plans are accepted by participating
dermatologists. The reimbursement professionals provide patients with this information to remove any barriers to
getting treatment.
VTRAC is not sold within the US due to low reimbursement levels for lamp-directed treatment of psoriasis. Only
laser procedures are eligible for reimbursement through the CPT codes listed above.
Plaque Psoriasis
Plaque psoriasis is a chronic autoimmune disorder that affects the surface of the skin. It is characterized by areas of
dry, raised and inflamed clusters of epithelial cells called plaques, which are most commonly found on the elbows,
knees, and scalp. Plaques appear in cycles known as flares, and can be triggered by bacterial or viral infections, stress,
medications, and smoking. Psoriasis is rarely life threatening, however it causes emotional stress and significantly
affects quality of life. The condition usually presents at the time of adolescence, although it may appear at any age,
and is estimated to affect roughly 8 million individuals in the US.7,8,9
7
https://www.psoriasis.org/cure_known_statistics
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There is no cure for psoriasis, although several treatment options can reduce the frequency and duration of flares.
Topical treatments and light-based therapy such as XTRAC are used to treat mild and moderate forms of the
disease, while XTRAC and systemic biologics including Humira (adalimumab), Enbrel (etanercept), and Remicade
(infliximab) are commonly used for treatment of moderate-to-severe cases. Light therapy is also used in cases when
biologics are unable to treat difficult plaques such as those on the scalp.
Causes and Pathogenesis of Plaque Psoriasis. Plaque psoriasis is caused by the rapid turnover of epithelial cells.
Figure 4 shows that these cells initially develop deep within the layer of the skin called the dermis, and then rise to
the surface or epidermis as older cells die and are shed from the body. The process of cell turnover usually takes a
month in healthy individuals. Psoriasis greatly accelerates cell turnover and causes clusters of epithelial cells to
accumulate and form plaques.10
Figure 4. Schematic of Normal Skin and Psoriatic Skin
Source: Food and Drug Administration
The autoimmune response that triggers psoriasis is likely mediated by T-cells. The current model posits that T-cells
patrolling the dermis respond to an unidentified self-antigen, and become activated. These activated cells secrete
cytokines including IL-1, IL-6, IL-8, and TNF-α. The cytokines stimulate cells in the epidermis to rapidly divide and
ultimately result in plaques.11
Types of Psoriasis. There are several forms of psoriasis. Each type is listed and described below.
§
Plaque psoriasis. This form is characterized by skin lesions that are red at the base and covered by silvery
scales.
Kircik, L.H., 2009. Anti-TNF agents for the treatment of psoriasis. Journal of Drugs in Dermatology, 8(6), pp546-559.
Lowes, M.A. et al., 2007. Pathogenesis and therapy of psoriasis. Nature, 445(7130), pp866-873.
10 http://www.niams.nih.gov/Health_Info/Psoriasis/psoriasis_ff.asp
11 Al-Shobaili, H.A. & Qureshi, M.H., 2013. Pathophysiology of psoriasis: current concepts. Psoriasis- Types, Causes and Medication,
Chapter 4.
8
9
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May 2, 2016
§
§
§
§
Guttate psoriasis. This form involves small, drop-shaped lesions that appear on the trunk, limbs, and
scalp. Guttate psoriasis is most often triggered by upper respiratory infections.
Pustular psoriasis. This form presents with blisters of noninfectious pus surrounded by irritated skin.
Attacks of pustular psoriasis may be triggered by medications, infections, stress, or exposure to certain
chemicals.
Inverse psoriasis. This form involves smooth, red patches that occur in the folds of the skin near the
genitals, under the breasts, or in the armpits. The symptoms may be worsened by friction and sweating.
Erythrodermic psoriasis. This form of psoriasis can be very serious and requires immediate medical
attention. It involves widespread reddening and scaling of the skin, and may be triggered by a reaction to
severe sunburn or to taking corticosteroids or other medications. It can also be caused by a prolonged
period of increased activity of psoriasis that is poorly controlled.
Another condition associated with psoriasis is psoriatic arthritis (PsA), a form that produces joint inflammation and
pain. It is worth noting that the skin lesions and joint pain do not necessarily have to occur at the same time. PsA
will develop in roughly 40% of people with psoriasis,12 and due to its internal manifestation, is untreatable by light
therapy.
Symptoms and Diagnosis of Plaque Psoriasis. Plaque psoriasis is diagnosed following a physical examination.
The main symptom of plaque psoriasis is development of thick, inflamed clusters of epithelial cells called plaques.
Plaques are dry, cracked, and occasionally bloody skin deposits that can be associated with burning or itchy
sensations. The elbows and knees are common sites of plaque flares, and chronic inflammation in these areas can
lead to psoriatic arthritis. Clinicians will examine the plaques, and may perform a skin biopsy to rule out other
related disorders.
Quantifying Responses to Psoriasis Treatments. Clinicians use the Psoriasis Area and Severity Index (PASI) to
quantify the response to therapy. This index takes into account the affected body surface area (BSA) and the severity
of the plaques as measured by the redness, thickness, and scaling of the skin. The two assessments are combined
and assigned a number that ranges from 0 to 72, with 0 indicating no psoriasis, and 72 indicating maximal disease.
PASI75, which is a typical endpoint for clinical trials, refers to a 75% improvement in the PASI score.
Treatments for Plaque Psoriasis
Treatment for plaque psoriasis is determined by the severity of the disease. Typical treatments for mild to moderate
cases involve topical corticosteroids, topical vitamin D analogues, and light therapy. For moderate to severe disease,
which involves greater than 20% body surface area, the treatment options include the XTRAC and biologic
therapeutics such as TNF-α and IL-12/23 inhibitors, Otezla (apremilast), or a combination of one or more of these
agents.13 In the sections below we highlight commonly used treatments for plaque psoriasis.
Topical Treatments. Corticosteroids are the most common topical therapy for mild to moderate psoriasis
patients.14 They have anti-inflammatory properties and are available in many strengths and formulations. More
Mease, P.J. et al., 2014. Managing Patients with Psoriatic Disease: The Diagnosis and Pharmacologic Treatment of Psoriatic
Arthritis in Patients with Psoriasis. Drugs, 74(4), pp423-441.
13 Feldman, S.R., 2015. Treatment of Psoriasis. UpToDate.
14 Afifi, T. et al., 2005. Topical therapies for psoriasis. Evidence-based review. Canadian Family Physician, 51(4), pp519-525.
12
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potent formulations are better at reducing psoriasis symptoms,15 but come with a greater risk of side effects. Side
effects include skin thinning, dilated blood vessels, stretch marks, and pigmentation changes. Many patients
ultimately fail corticosteroid therapy.
The other common topical treatment for mild to moderate psoriasis patients is the use of vitamin D analogues. They
are as active as certain corticosteroid strengths and the tolerability profile is favorable. Patients often use a
combination of topical corticosteroids and vitamin D analogues to manage disease. Other agents are available
although used less frequently, which include retinoids, anthralin, and a by-product of coal tar.
Light Therapy. Light therapy involves targeted or systemic exposure to light from the ultraviolet spectrum. The
ultraviolet range is from 10 nm to 400 nm. UVA is between 315 and 400 nm and UVB is between 280 and 315 nm.
UV light therapy works by altering the cytokine profile in the skin, causing apoptosis of activated T-cells, and
promoting immunosuppression.16 Broadband UVB was the initial spectrum used for psoriasis and light was
generated using mercury vapor lamps. PUVA is a type of UVA therapy that involves oral ingestion of 8methoxypsoralen (8-MOP) to improve DNA crosslinking in T-cells and promote greater cell death. It is particularly
effective, but comes with the risk of significant burns and cutaneous malignancy. Narrow band UVB between 300
and 320 nm is the most common type of light therapy. The narrow bandwidth strikes a balance between maximal
activity and minimizing side effects such as redness and burns. It requires multiple treatments to clear lesions.
STRATA Skin’s XTRAC system is a narrow band UV laser that delivers 308 nm light in a targeted fashion.
Systemic Therapy. Systematic therapies are used to treat patients with moderate-to-severe plaque psoriasis. They
include both immunosuppressive and immuno-modulatory drugs like methotrexate (MTX) and cyclosporine A
(CsA). MTX and CsA are effective treatments, however their long-term use is associated with significant toxicity.
CsA use is limited to one year in the US due to potential irreversible vascular abnormalities, interstitial fibrosis, and
renal toxicity.17 Patients treated with MTX may develop liver and bone marrow toxicity, which can be lethal.
Biologics. The biologic therapies for moderate-to-severe plaque psoriasis inhibit TNF-α, a key inflammatory
cytokine. Humira (adalimumab), Enbrel (etanercept), and Remicade (infliximab) all target TNF-α and have been
approved for treatment of psoriasis. The anti-TNF-α therapies are effective, and can lead to PASI75 scores of
greater than 70% after 12 weeks of treatment. Although the side effect profile for these agents is mild compared to
other treatment options like MTX or CsA, they increase the risk of serious infection, heart failure, and lymphoma.
In addition, approximately 40% patients do not respond to anti-TNF-α or lose response after over time.
Another biologic therapy that has gained market share since approval in 2009 is Stelara (ustekinumab), which is an
IL-12/23 inhibitor. Stelera is similar in efficacy to the anti-TNF-α agents, and produces PASI75 scores in 60-70% of
patients after 12 weeks of treatment. The compound is administered via subcutaneous injection and costs
approximately $50,000 per year. Similar to TNF-α inhibitors, the side effect profile includes a risk for severe
opportunistic infections.
Mason, J. et al., 2002. Topical preparations for the treatment of psoriasis: a systemic review. British Journal of Dermatology,
146(3), pp351-364.
16 Wong, T. et al., 2013. Phototherapy in psoriasis: a review of mechanisms of action. Journal of Cutaneous Medicine and Surgery,
17(1), pp6-12.
17 Vorhees, A.V., 2009. The psoriasis and psoriatic arthritis pocket guide. National Psoriasis Foundation.
15
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May 2, 2016
Dermatologist Perspective: One of the dermatologists we spoke with found the hurdle of reimbursement and
risk of severe infections too high, and personally does not prescribe biologics. This clinical dermatologist, who
has been practicing for more than 30 years, refers patients who may need biologics to a rheumatologist. He treats
all mild to moderate psoriasis patients who have failed topical treatments with XTRAC.
PDE4 Inhibitors. Celgene’s twice daily oral therapy for psoriasis, Otezla (apremilast), is a small molecule inhibitor
of the enzyme phosphodiesterase 4. In the pivotal trial for apremilast, 33.1% of subjects receiving drug achieved
PASI75, compared to 5.3% for patients on placebo. Apremilast is generally well tolerated, although some patients
experience gastrointestinal side effects, including diarrhea, nausea, and vomiting. Treatment is estimated to cost
approximately $22,500 per year.
Summary. There are many treatment options for patients with psoriasis. Some target the same patient population,
and each one has a different safety and efficacy profile. Figure 5 shows the four main categories of treatments and
our opinion of how well they perform on cost, safety, and efficacy. Green indicates that the treatment is positive for
that feature and red indicates a weakness. Targeted phototherapy is especially promising for mild, moderate, and
severe patients since it strikes the right balance between cost, safety, and efficacy.
Figure 5. Balance Between Target Population, Cost, Safety, and Efficacy for Psoriasis Treatments
Treatment
Over-the-counter topicals
Prescription topicals
Targeted phototherapy
Biologics
Target population
Mild to moderate
Mild to moderate
Mild to severe
Moderate to severe
Cost
Safety
Efficacy
Source: LifeSci Capital
Market Opportunity and Revenue Projections
There is a large market opportunity for STRATA Skin’s XTRAC device in the US, and recurring revenues in 2015
were $26.6 million, a 16% increase from 2014. More than 9 million patients in the US have psoriasis and vitiligo, the
two indications most commonly treated with XTRAC. The US prevalence of psoriasis is approximately 3.2% in
adults, which translates to approximately 7.8 million affected individuals.18 These patients place a large burden on
the economy, with direct and indirect annual costs of more than $112 billion in the US.19 75% of psoriasis cases are
Rachakonda, T.D. et al., 2014. Psoriasis prevalence among adults in the United States. Journal of the American Academy of
Dermatology, 70(3), pp512-516.
19 Carpentieri, A. et al., 2016. Retrospective analysis of the effectiveness and costs of traditional treatments for moderate-tosevere psoriasis: A single-center, Italian study. Journal of Dermatological Treatment, 28, pp1-7.
18
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May 2, 2016
mild to moderate, which is what we consider to be the main target population for XTRAC.20 Vitiligo impacts an
estimated 400 per 100,000 individuals in the US, or approximately 1.3 million people.21 Other reports by groups
such as the National Vitiligo Foundation suggest that as many as 5 million individuals in the US are living with
vitiligo. Treatment options for vitiligo are limited and the emotional damage from the condition can be high.22 This
creates a group of patients highly motivated to seek treatment, and STRATA’s XTRAC therapy is a cost effective,
safe, and effective option for many patients.
In Figure 6 we outline the total number of psoriasis and vitiligo patients in the US that could benefit from XTRAC.
For the addressable psoriasis patients we excluded the patients with severe disease who also suffer from psoriatic
arthritis and have no skin involvement. The remaining patients with severe psoriasis may be candidates for XTRAC
upon disease presentation, or they may receive therapy for difficult-to-treat areas such as the scalp following
biologics. For the addressable vitiligo patients we included only individuals with involvement of the head and neck
since this location tends to respond best to therapy. The total number of addressable population of psoriasis and
vitiligo patients in the US is 8 million. The estimate does not account for the subgroup of patients who do not seek
treatment for mild forms of psoriasis, or patients who are responding to first-line topical treatments and may not
require light therapy.
Mason, J. et al., 2002. Topical preparations for the treatment of psoriasis: a systemic review. British Journal of Dermatology,
146(3), pp351-364.
21 Jacobson, D.L. et al., 1997. Epidemiology and estimated population burden of selected autoimmune diseases in the United
States. Clinical Immunology and Immunopathology, 84(3), pp223-243.
22 Parsad, D. et al., 2003. Quality of life in patients with vitiligo. Health and Quality of Life Outcomes, 1:58.
20
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May 2, 2016
Figure 6. Target Population for XTRAC in Psoriasis and Vitiligo
Psoriasis
Vitiligo
US adult population (2014)
245 million
US population (2014)
318.9 million
Prevalence
3.2%
Prevalence
400 per 100,000
Total psoriasis patients
7.8 million
Total vitiligo patients
1.3 million
Percentage of mild and moderate
75%
Patients with face
involvement
28-50% (midpoint 39%)23,24,25
Percentage of severe patients
with psoriatic arthritis and no
skin involvement
15%
-
-
Addressable psoriasis patients
7.5 million
Addressable vitiligo
patients
500,000
Total addressable patients: 8 million
Source: LifeSci Capital
In 2015 XTRAC systems were used in approximately 354,000 treatments. Each psoriasis patient typically receives
between 6 and 15 treatments to put their disease in remission, which can last up to 6 months or more. Vitiligo
patients may require 20 treatments to correct their condition. If assuming that 70% of XTRAC users have psoriasis
and 30% have vitiligo, it would suggest that approximately 25,000 psoriasis patients and 5,000 vitiligo patients were
treated in 2015. The analysis suggests that a substantial number of individuals with disease that are not being treated
with XTRAC, and that STRATA Skin can significantly grow revenues going forward.
STRATA Skin is expanding the use of XTRAC in two ways: 1) placing new systems in dermatology offices and
clinics, and 2) increasing the number of patients treated per system. The commercialization strategy is outlined in
more detail earlier in this report, and includes:
§
§
§
§
§
Direct sales representatives to increase the number of XTRAC placements.
Field service and clinical support personnel to conduct installations, training and provide routine
maintenance.
Targeted advertising via TV, radio, and social media to identify and engage new patients.
A call center to drive new patients to existing XTRAC installments.
A reimbursement team to help patients understand their coverage status.
Habib, A. & Raza, N., 2012. Clinical pattern of vitiligo. Journal of the College of Physicians and Surgeons—Pakistan, 22(1), pp61-62.
Fatani, M.I. et al., 2014. The clinical patterns of vitiligo “hospital-based study” in Makkah region, Saudi Arabia. Journal of
Dermatology & Dermatologic Surgery, 18(1-2), pp17-21.
25 Vora, R.V. et al., 2014. A clinical study of vitiligo in a rural set up of Gujarat. Indian Journal of Community Medicine, 39(3), pp143146.
23
24
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May 2, 2016
The direct-to-patient campaign, which includes the advertisements, call center, and reimbursement support, was
implemented in 2012. As a result, STRATA Skin has experienced significant growth in XTRAC installments and
revenue per system. Figure 7 shows the increase in installed XTRAC systems since the beginning of 2012. There
were 268 systems installed at the beginning of 2012 and 718 at the end of 2015. STRATA Skin expects to increase
installments by 25 systems per quarter going forward. This goal seems reasonable considering the growth in the last
2 years.
Figure 7. Increase in Placed XTRAC Systems
800
718
700
XTRAC Systems Installed
620
600
501
500
400
300
350
268
200
100
0
2011
2012
2013
2014
2015
Source: STRATA Skin Reports
Average revenue per system has increased considerably since the direct-to-patient campaign was launched. In 2012
the average revenue per system per quarter was $6,300, which has grown to $10,400 in 2015, or approximately
$42,000 per year. STRATA Skin estimates that the average revenue per system will continue to increase over the
next several years. Our estimates suggest that at the current level of revenue per system, each XTRAC is being used
for two treatments per business day. Considering that a treatment typically lasts less than 15 minutes, it is reasonable
to expect that revenues per system will continue to increase.
Current Revenue Growth
STRATA Skin reported 2015 revenues of $18.5 million, which includes revenue from XTRAC/VTAC since the
products were acquired in June 2015. Pro forma total sales in 2015 were $33.2 million, consisting of $26.6 million in
recurring revenue and $6.6 million from international and other product sales. Recurring revenues from XTRAC
grew 16% from 2014 to 2015, as shown in Figure 8. The quarterly recurring revenues for 2015 are also shown.
There is always a decrease in revenues in the first quarter of the year since most insurance companies reset their
deductables. Patients often spread out the cost of their deductable over the course of the year and so fewer
treatments are performed at the beginning of the year.
Page 17
May 2, 2016
Figure 8. Recurring Revenue of XTRAC System
$30,000
16% year over year growth
Recurring Revenue
$25,000
$20,000
$15,000
$10,000
$5,000
$FY 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015
Source: LifeSci Capital
Projected Revenue Growth
STRATA Skin’s revenue is derived of recurring revenues from its US-based XTRAC business and from system and
parts sales in international markets. Each segment of the business has a unique growth rate and gross margin. We
constructed a revenue model based on potential growth rates for each business segment. Revenues are shown in
Figure 9 and are based on the following assumptions:
§
§
§
§
Growth of XTRAC System Placements: We estimate that STRATA Skin will increase the net number
of XTRAC systems in the US by 100 per year. STRATA Skin management have guided that they believe
XTRAC installments could eventually reach 2,500. There are approximately 11,000 clinical dermatologists
in the US, suggesting that this number of installments is feasible.
Number of Treatments per XTRAC System: The revenue per XTRAC system has increased by a
compound annual growth rate of 18% since 2012, which is primarily driven by a greater number of
treatments per system. We conservatively assume that treatments per system will increase by 7.5% per
year.
Average Revenue per Treatment: STRATA Skin receives between $65 and $95 per treatment depending
on the reimbursement code used. We assume that the average revenue will be $75 per treatment.
Dermatology Equipment Sales Growth: We assumed that international sales of XTRAC and VTRAC
will remain steady.
The other revenue category is from sales of the MelaFind system, and we do not model additional sales in 2016 and
beyond. Our estimates suggest that total revenues will grow approximately 17% per year and double before 2020.
Recurring revenues will grow at a slightly higher rate and double before 2019.
Page 18
May 2, 2016
Figure 9. Forward Revenue Estimates
2015
2016
2017
2018
2019
2020
718
493
818
530
918
570
1,018
613
1,118
659
1,218
708
354,200
$75
$26.6 M
433,796
$75
$32.5 M
523,340
$75
$39.3 M
623,875
$75
$46.8 M
736,546
$75
$55.2 M
862,608
$75
$64.7 M
Dermatology Procedures Equipment
Revenue
Growth per year: flat
$6.0 M
$6.0 M
$6.0 M
$6.0 M
$6.0 M
$6.0 M
Other Revenue
$0.3 M
-
-
-
-
-
Total Revenue
$32.9 M
$38.5 M
$45.3 M
$52.8 M
$61.3 M
$70.7 M
Dermatology Recurring Procedures
System Placements in US at end of year
Number of Treatments per System
Growth per year: 7.5%
Total number of Treatments
Average Revenue per Treatment
Recurring Revenue
Source: LifeSci Capital
Using the revenue assumptions above, we constructed a model to estimate forward EBITDA that is shown in
Figure 10. The recurring revenue business and equipment sales through distributors each have a different cost of
revenue. The gross margin in 2015 was approximately 68% for recurring revenue and 45% for equipment sales.
Those assumptions were used to calculate the gross margin across all revenues. In 2015 there were $7 million in
costs associated with the MelaFind system, including a $4.8 million write-off for excess and obsolete inventory. We
expect minimal costs associated with MelaFind going forward.
In the figure we included STRATA Skin’s reported revenues and expenses for 2015. Considering that XTRAC and
VTRAC were acquired in mid-2015, we also included an estimated 2015 column to get a better understanding of the
COGS and operating expenses associated with these new assets. The estimate column shows the total 2015 revenues
from XTRAC and VTRAC. COGS and operating expenses were estimated by projecting values from the fourth
quarter of 2015 to the rest of the fiscal year. We believe that the expenses incurred during the fourth quarter of 2015
are more representative of the real costs associated with the XTRAC and VTRAC businesses and can provide a
better launching point for estimating future expenses. The model for future expenses assumes that as a percentage
of revenue, all expenses will decline, including engineering and product development costs, marketing expenses, and
general and administrative costs. Our estimates suggest that EBITDA will be positive for the full year 2016 and
grow to over $20 million by 2020.
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May 2, 2016
Figure 10. Forward EBITDA Estimates
Total Revenue
$18.5 M
2015
estimate
$32.9 M
COGS
$13.7 M
$13.8 M
$13.7 M
$15.9 M
$18.3 M
$21.0 M
$24.0 M
$4.8 M
26%
$19.1 M
58%
$24.8 M
64%
$29.4 M
65%
$34.5 M
65%
$40.3 M
65%
$46.7 M
66%
$2.0 M
$2.0 M
$2.3 M
$2.3 M
$2.6 M
$2.5 M
$2.8 M
11%
6%
6%
5%
5%
4%
4%
$9.2 M
$12.8 M
$15.0 M
$16.7 M
$18.5 M
$20.2 M
$21.9 M
50%
39%
39%
37%
35%
33%
31%
$10.0 M
$11.2 M
$10.8 M
$11.8 M
$12.7 M
$13.5 M
$14.1 M
54%
34%
28%
26%
24%
22%
20%
($7.4 M)
($6.9 M)
($3.3 M)
($1.4 M)
$0.7 M
$4.1 M
$7.8 M
$4.1 M
$6.8 M
$8.0 M
$9.4 M
$10.9 M
$12.7 M
$14.7 M
12%
21%
21%
21%
21%
21%
21%
($3.4 M)
($0.04 M)
$4.7 M
$8.0 M
$11.7 M
$16.8 M
$22.5 M
2015 actual
Gross Profit
Gross Margin
Operating Expenses
Engineering and Product
Development
% of Revenue
Selling and Marketing
Expenses
% of Revenue
General &
Administrative Expenses
% of Revenue
EBIT
Plus Depreciation and
Amortization
% of Revenue
EBITDA
2016
2017
2018
2019
2020
$38.5 M
$45.3 M
$52.8 M
$61.3 M
$70.7 M
Source: LifeSci Capital
We note that there are ongoing interest payments associated with STRATA Skin’s acquisition of the
XTRAC/VTRAC assets. The acquisition was funded via a private placement. The deal included senior secured
notes, and convertible debentures and warrants to purchase $3.0 million shares of common stock that are
convertible at $0.75 per share. There was $10 million in senior secured notes that was subsequently replaced with
long-term debt in December 2015. The new debt of $12 million carries an interest rate of LIBOR plus 8.25% and
payments are interest only for the first 18 months. The remaining cost of the acquisition was financed with $32.5
million in convertible debentures that can convert into 43.3 million shares at a price of $0.75 per share. The
debentures carry an interest rate of 2.25%. These ongoing interest payments will impact the ability to generate
positive net income.
XTRAC/VTRAC Clinical Data Discussion
The utility of 308 nm laser treatment of psoriasis plaques has been demonstrated in several clinical studies, dating
back to 1997. Figure 11 lists 10 such studies and their topline results. The data indicate that treatment of plaque
Page 20
May 2, 2016
psoriasis with XTRAC results in sustained resolution of plaques with minimal AEs. When compared to existing
treatment modalities, the XTRAC offers several advantages, including fewer adverse events, improved plaque
clearing, and fewer total treatments. Below we present data from two clinical studies that helped to establish the
safety and efficacy profile of XTRAC. The first demonstrates its generalized application and the second addresses
treatment of scalp psoriasis.
Figure 11. Clinical Studies Supporting the Use of an Excimer Laser for Psoriasis
Trial
# of Subjects
Result
Bonis, B. et al.,
199726
10
Complete plaque psoriasis resolution after mean 8 treatments with
308 nm laser versus mean 30 treatments with narrowband UVB
therapy; 8 patients symptom free 2-years after laser treatment.
Trehan, M. &
Taylor, C.R., 200227
16
Significant clearing of plaques in 11 of 16 subjects treated with 308nm
laser; 4 month remission in 5 patients.
Novak, Z. et al.,
200228
21
Resolution of plaques regardless of impulse frequency.
Feldman, S.R. et al.,
200229
92
Trehan, M &
Taylor, C.R., 200230
15
Taneja, A. et al.,
200331
14
Fikrle, T. &
Pizinger, K., 200332
28
Patients who received 10 treatments with 308 nm laser had 84%
chance of achieving 75% improvement; 72% of patients achieved
75% improvement with median of 6.2 treatments.
All subjects achieved 95% improvement after a median of 10.6
treatments; significant improvement at 4, 8, and 16 weeks posttreatment (p<0.01).
Significant improvement in plaques with 308 nm laser treatment
compared to control in treatment-resistant patients (p<0.001); mean
of 81% improvement after mean of 10 treatments.
13 of 14 patients treated 308 nm laser achieved 50% reduction of
psoriasis severity index score.
Bonis, B. et al., 1997. 308nm excimer laser for psoriasis. Lancet, 350, pg1522.
Trehan, M. & Taylor, C.R., 2002. High-dose 308-nm excimer laser for the treatment of psoriasis. Journal of the American
Academy of Dermatology, 46(5), pp732-737.
28 Novák, Z. et al., 2002. Xenon chloride ultraviolet B laser is more effective in treating psoriasis and in inducing T cell
apoptosis than narrow-band ultraviolet B. Journal of Photochemistry and Photobiology B: Biology, 67(1), pp32-38.
29 Feldman, S.R. et al., 2002. Efficacy of the 308-nm excimer laser for treatment of psoriasis: results of a multicenter study.
Journal of the American Academy of Dermatology, 46(6), pp900-906.
30 Medium-dose 308-nm excimer laser for the treatment of psoriasis. Journal of the American Academy of Dermatology, 47(5), pp701708.
31 Taneja, A. et al., 2003. 308-nm excimer laser for the treatment of psoriasis: induration-based dosimetry. Archives of Dermatology,
139(6), pp759-764.
32 Fikrle, T. & Pizinger, K., 2003. The use of 308 nm excimer laser for the treatment of psoriasis. Journal der Deutschen
Dermatologischen Gesellschaft, 1(7), pp559-563.
26
27
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May 2, 2016
Gerber, W. et al.,
200333
142
85% of 102 patients treated with 308 nm laser using standard dosing
protocol had 90% of greater improvement with a median of 10.8
treatments.
Pahlajani, N. et al.,
200534
16
91% improvement in 4 children treated with 308nm laser after mean
of 12.5 treatments.
Morison, W.L. et al.,
200635
35
49% of patients with scalp plaques achieved 95% or greater
improvement after a mean of 21 treatments.
Source: LifeSci Capital
Prospective Clinical Study of XTRAC Laser in Patients with Mild to Moderate Plaque Psoriasis
A post-approval study (PAS) was conducted to support the use of XTRAC as a treatment of psoriasis plaques. The
XTRAC system was able to reduce psoriasis lesions and their severity in the majority of patients without significant
side effects. It achieved this activity using 10 or fewer treatments. Broadband UVB therapy, on the other hand,
typically takes 25 or more treatments.
Post-Approval Study Design. This was a multicenter study conducted in 5 dermatology offices in the US and
included 124 individuals with stable, mild to moderate plaque psoriasis involving less than 10% body surface area.36
Patients were excluded if they had received systemic treatment within the past 8 weeks or phototherapy or topical
treatment within the past 4 weeks. Patients were treated twice per week for a maximum of 10 treatments. Dosing
was determined by first establishing the minimal erythemal dose (MED), which is defined as the minimal laser
energy required to produce well defined redness of uninvolved skin. Starting doses were 3 times the MED.
Patients were evaluated using PASI criteria at baseline and after the 4th, 5th, and 10th treatments, and upon lesion
clearing.
Trial Results. Treatment with the XTRAC 308-nm excimer laser led to a substantial improvement in plaque
severity and amount of body surface area affected by plaques. Out of the 124 patients enrolled, 92 completed 10
treatments and/or achieved PASI75. 72% of the 92 (66/92) achieved PASI75 with an average of only 6.2 treatments
required. 80 patients completed 10 treatments and/or achieved PASI90. 35% of the 80 (28/80) achieved PASI90,
which required an average of 7.5 treatments. There were 2 psoriasis patients who required only 2 treatments to
achieve a 90% resolution of their plaques.
Gerber, W. et al., 2003. Ultraviolet B 308-nm excimer laser treatment of psoriasis: a new phototherapeutic approach. The
British Journal of Dermatology, 149(6), pp1250-1258.
34 Pahlajani, N. et al., 2005. Comparison of the efficacy and safety of the 308 nm excimer laser for the treatment of localized
psoriasis in adults and in children: a pilot study. Pediatric Dermatology, 22(2), pp161-165.
35 Morison, W.L. et al., 2006. Effective treatment of scalp psoriasis using the excimer (308 nm) laser. Photodermatology,
Photoimmunology & Photomedicine, 22(4), pp181-183.
36 Feldman, S.R. et al., 2002. Efficacy of the 308-nm excimer laser for treatment of psoriasis: results of a multicenter study.
Journal of the American Academy of Dermatology, 46(6), pp900-906.
33
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May 2, 2016
The study data indicate that as patients received additional XTRAC laser treatments, the probability of achieving
PASI75 or PASI90 increased. Figure 12 shows the Kaplan-Meier curves for probability of having less than 75% or
90% PASI score improvement after 0 to 10 treatments. The curves are derived from 116 patients who completed 1
or more treatments and were evaluated for response. The top panel represents the probability of patients not
achieving PASI75. As the treatment number increases, so does the likelihood of disease resolution, and patients who
received 10 treatments had an 84% chance of achieving PASI75. The bottom panel represents the probability of
patients not reaching the PASI90, a more difficult endpoint to achieve. After 10 treatments, there was a greater than
40% chance of achieving PASI90.
Figure 12. Probability of Not Achieving PASI75 or PASI90 After up to 10 XTRAC Laser Treatments
Source: Feldman, S.R. et al., 2002
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May 2, 2016
The extensor surfaces such as the elbow are notoriously difficult to treat, and an example of treatment success with
the XTRAC laser is shown in Figure 13. The before image on the left is the elbow of an 11-year-old girl showing a
plaque. The image on the right shows near-complete clearing after only 4 treatments with the XTRAC excimer laser.
These areas in particular are places XTRAC can be useful for patients who have received biologics.
Figure 13. Treatment of Elbow Psoriasis Plaques with XTRAC
Source: Feldman, S.R. et al., 2002
The safety profile of XTRAC was favorable, especially when compared to systemic agents such as methotrexate.
The most common adverse events were skin redness (51%), blisters (45%), hyperpigmentation (38%), and erosion
(25%). Side effect such as pain, itching, and peeling occurred in less than 10% of patients. No patients discontinued
the study due to adverse events.
Retrospective Study of XTRAC Laser in Patients with Psoriasis Lesions on the Scalp
A retrospective study was conducted to understand the effectiveness of the XTRAC 308-nm excimer laser as a
treatment of scalp psoriasis. As a background, scalp psoriasis is typically resistant to topical and ultraviolet light
treatments. It is thought that the hair shaft acts as a physical barrier to prevent the passage of photons to the
affected area. The purpose of this study was to evaluate the ability of XTRAC to circumvent this issue by allowing
for targeted delivery of UV light.
Trial Results. Thirty-five patients with psoriasis who had failed intensive topical therapy and were treated with
XTRAC were analyzed retrospectively.37 All patients experienced symptom improvement such as reduction in
Morison, W.L. et al., 2006. Effective treatment of scalp psoriasis using the excimer (308 nm) laser. Photodermatology,
Photoimmunology & Photomedicine, 22(4), pp181-183.
37
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May 2, 2016
discomfort and itching. Of the 35 patients, 49% achieved greater than 95% clearing, and 94% had between 50% and
90% clearing. The average number of treatments required for clearing was 21. All patients experienced some degree
of phototoxicity such as blistering and redness, but recovery was rapid.
Competing Light-based Treatments for Skin Conditions
There are several ultraviolet lamp systems that deliver UVA and UVB light for the treatment of skin conditions like
psoriasis. Broadband UV therapy can be less desirable than targeted laser machines due to exposure to non-diseased
skin, which also limits the ability deliver high intensity light. One company, other than STRATA, markets an
excimer laser that competes with the XTRAC. RA Medical Systems (private) markets the Pharos device. From our
research, there appears to be minimal clinical data supporting Pharos as a treatment for psoriasis and vitiligo. In fact,
we identified only 2 studies in psoriasis patients.38,39 The other differences between XTRAC and Pharos is that RA
Medical Systems sells the Pharos device, requires dermatologists to carry a service contract, and does not provide a
source of patient referrals to clinics. As discussed below, this model may be less desirable to dermatologists.
Dermatologist Perspective. Our discussions with dermatologists suggest that STRATA Skin’s partnership
model is substantially more attractive than the model of purchasing a competing device and carrying a service
contract. The partnership model reduces upfront costs, does not require the dermatologist to hold a service
contract, and provides a source of new patients via STRATA Skin’s advertising and call center.
Intellectual Property
STRATA Skin has 10 issued US patents and 1 German patent related to its XTRAC and VTRAC products. The
Company also has trade secrets and technical know-how related to the manufacture and marketing of the systems.
Management Team
Michael Stewart
President and Chief Executive Officer
Michael Stewart became the President and Chief Executive Officer of STRATA Skin Sciences on December 15,
2014 and has been a member of the Company’s board of directors since August 5, 2014. Mr. Stewart previously
served as president, chief executive officer and board member of NASDAQ-traded Surgical Laser Technologies,
Inc. from 1999 until its sale in 2002 to global medical device and skin health company PhotoMedex. During his
Goldberg, D.J. et al., 2011. 308-nm excimer laser treatment of palmoplantar psoriasis. Journal of Cosmetic and Laser Therapy,
13(2), pp47-49.
39 Kagen, M. et al., 2012. Single administration of lesion-limited high-dose (TURBO) ultraviolet B using the excimer laser:
clinical clearing in association with apoptosis of epidermal and dermal T cell subsets in psoriasis. Photodermatology, Photoimmunology
& Photomedicine, 28(6), pp293-298.
38
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May 2, 2016
tenure as CEO of Surgical Laser, Mr. Stewart led all executive and internal operations, successfully transforming the
company from a product sales model to a service model driving revenue and profit growth that positioned Surgical
Laser Technologies for its ultimate sale to PhotoMedex, Inc.
Post-acquisition and during his continuing tenure with PhotoMedex, Mr. Stewart held the positions of chief
operating officer and executive vice president and led the domestic and international sales organizations, marketing,
product development and engineering, manufacturing and service operations. He successfully developed and
executed a reimbursement strategy for the company’s flagship dermatology product that resulted in the issuance of
new Current Procedural Terminology (CPT) codes and reimbursement by the Centers for Medicare and Medicaid
Services (CMS) and coverage policies with virtually all major insurance companies.
Christina Allgeier
Chief Financial Officer
Christina L. Allgeier was appointed to the position of Chief Financial Officer of STRATA Skin Sciences in
November, 2015. Ms. Allgeier has served as the Company’s Chief Accounting Officer and has over 15 years of
experience in the medical laser field. Ms. Allgeier joined STRATA Skin Sciences as a result of the recent acquisition
of the XTRAC and VTRAC business.
Ms. Allgeier graduated with a B.S. in accounting from Penn State University and holds a license from the
Commonwealth of Pennsylvania as a certified public accountant. For the past fifteen years Ms. Allgeier had been
employed by PhotoMedex, Inc., including a period with Surgical Laser Technologies, Inc. which was acquired by
PhotoMedex in 2002. Ms. Allgeier served as Chief Accounting Officer of PhotoMedex from December 2011 until
the purchase of the assets from PhotoMedex in June 2015. From November 2009 until the reverse acquisition of
Radiancy, Inc. by PhotoMedex in December 2011, Ms. Allgeier served as Chief Financial Officer of PhotoMedex.
Risk to an Investment
An investment in Strata Skin Sciences is considered to be a high-risk investment. Strata Skin commercializes light
therapy systems in the US via an internal sales and marketing team, and internationally through distributors.
Regulatory approval to market a product does not guarantee that it will penetrate the market, and sales may not meet
the expectations of investors. Furthermore, unknown competitors may emerge and Strata Skin, like any company,
may be required to spend significant capital to maintain its position within the market. Strata Skin also has
substantial ongoing interest payments derived from long-term debt and convertible notes that may impact its ability
to generate positive net income in the future.
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May 2, 2016
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