Organogenesis Jumps -- but Should Investors Join the Party?

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By Andrew Morse
Staff Reporter

Investors in

Organogenesis

(ORG) - Get Report

, a Canton, Mass.-based maker of artificial skin, got a little good news from the Great White North on Monday -- and a lot of return.

The company's stock price jumped 21.2%, rising from 18 1/4 to 22 1/8, after it announced the

Canadian Health Protection Branch

had approved its Apligraf human skin equivalent for sale. The product, originally developed under the name Graftskin, is used to heal ulcers in the ankle.

"We are clearly very excited," said company spokeswoman Carol Hausner. "We look forward to becoming a commercial manufacturing entity."

But even as the company celebrates its first big regulatory breakthrough, analysts remain skeptical of the stock's long-term price potential. They fret that the Canadian approval, which took just about nine months, doesn't ensure a regulatory OK in the U.S. Organogenesis filed a premarket application for approval in October 1995 and is still waiting for regulators to rule on the application. Hausner declined to comment on the status of the application.

Hausner says a Canadian launch date for the product will be set by the company's marketing partner, Swiss pharmaceuticals giant

Novartis

(NVTSY:Nasdaq ADR), which will pay Organogenesis both a manufacturing and royalty fee for the product. Novartis did not return phone calls.

Organogenesis estimates the Canadian market is about one-tenth the size of the U.S. market, seen at between 900,000 and 1.5 million patients.

A market that large could be worth as much as $1 billion, says John McCamant, editor of

Medical Technology Stock Letter

. But with no evidence American approval is any closer and competition champing at the bit for a part of the huge market, McCamant says Monday's price run-up was overdone.

"The movement in the stock, which I think has been excessive, suggests someone out there" thinks Canadian approval is a first step to U.S. approval, he says. That's not necessarily so, he and others say.

Other analysts are even more pessimistic about the company's chances for U.S. approval.

"We are now confident that sales of Graftskin in 1997 will be zero" in the U.S., wrote Evan Sturza, who pens

Sturza's Medical Investment Letter

, in December. Sturza recommended selling the stock and set a price target of 3.

Sturza, who declined to comment for this story, was part of an inquiry by the

Securities and Exchange Commission

about a year ago into allegations that he and other short-sellers had conspired to send Organogenesis shares tumbling. He was never charged with any wrongdoing.

The company's main competitor, San Diego-based

Advanced Tissue Sciences

(ATIS) - Get Report

, filed a PMA for its Dermagraft product in December 1996. Dermagraft is similar to Apligraf, but treats diabetic, as opposed to venous, ulcers.

Advanced Tissue Sciences will release the results of a new study April 14 at a conference in New Orleans. The stock was up 13% to 12 from 10 5/8 Monday.