Andre Uddin 416.860.8675 [email protected]Mike Stevens 416.860.7614 [email protected]January 12, 2016 SPECTRAL MEDICAL INC. – SPECULATIVE BUY Ready For The Runup? It’s All Or None ACTION – Initiating Coverage With a SPECULATIVE BUY Rating We are initiating coverage of Spectral Medical Inc. (ETD-T) with a SPECULATIVE BUY recommendation and a 12-month target price of $2.50/share. The key catalyst is the outcome of their ongoing pivotal trial for Toraymyxin (PMX), with the hope of garnering approval of the only FDA-approved treatment for sepsis and septic shock. DETAILS – Large Market Opportunity – High Risk, High Reward Potential Unmet Medical Need: North America currently has no FDA-approved treatment for sepsis and septic shock, yet it claims victim to nearly 1 million people every year in the U.S. with over 30% of those cases leading to death. Not Its First Rodeo: Toraymyxin (PMX) is already approved in Europe and Japan, and has safely treated over 150,000 sepsis patients in those markets with success. There is also 22 years’ worth of clinical data for PMX treatment, including over 140 individual studies on over 4,400 patients. Reputable Management/High Inside Ownership: The management team boasts a wealth of experience in the area of sepsis treatment, including CEO Dr. Paul Walker, who is widely regarded as a pioneer in the field and has made large contributions (including developing Spectral’s EAA diagnostic). Also, 45% of ownership comes from the management and board, representing high confidence and commitment to corporate goals. Higher Risk High Reward Potential: The potential lofty reward doesn’t come without risk. Spectral’s success depends on PMX’s FDA-approval (given their lack of product diversity), but the complexity of sepsis makes it a high risk potential. IMPACT – A Runup Is Expected The key catalyst for the stock is the pivotal clinical trial results which are expected calendar Q3/Q4 2016 – we expect the stock to trade up into that catalyst. If the pivotal results are successful for PMX, we expect this stock to go through our current target price. We are applying a conservative 50% discount rate to our estimated 2018 EPS (first full year of estimated PMX sales) in our valuation, and using a 25x P/E multiple to derive our 12-month target price of $2.50. Thomson Chart – 1 Year Corporate Profile Spectral Medical Inc. is a therapeutic development company. Spectral is focused on the development and commercialization of a treatment for severe sepsis and septic shock. Spectral also manufactures and sells certain reagents, and their only clinical development program is for PMX. Key Events - Next reporting date: March, Expected pump approval Q2, Pivotal Trial enrolment completion June ’16, Pivotal data Q3 ’16, PMA filing of last (4th)module Q4 ‘16 This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. EDT - TSX $0.78 TARGET (CAD$): $2.50 PROJ. RETURN: 221% VALUATION: 2018 Discounted Earnings Share Data Basic Shares O/S (mm) 190.8 Fully Diluted (mm) 196.5 Market Cap (basic) ($mm) 148.8 Enterprise Value ($mm) 140.4 Debt ($mm) 0.0 Next Reporting Date March FYE Nov 30 2014A Q1/15A Q2/15A Q3/15A Q4/15E 2015E Q1/16E Q2/16E Q3/16E Q4/16E 2016E 2017E 2018E Revenue $ million 3.0 0.9 0.8 0.7 0.7 3.1 0.9 0.8 0.7 0.7 3.1 31.1 119.6 Basic EPS $/sh ($0.06) ($0.01) ($0.01) ($0.01) ($0.01) ($0.05) ($0.01) ($0.01) ($0.02) ($0.02) ($0.06) $0.00 $0.23 F.D. EPS $/sh ($0.06) ($0.01) ($0.01) ($0.01) ($0.01) ($0.05) ($0.01) ($0.01) ($0.02) ($0.02) ($0.06) $0.00 $0.23 CFPS $/sh $0.02 ($0.02) $0.02 ($0.01) ($0.01) ($0.02) $0.03 ($0.01) ($0.02) ($0.02) ($0.01) ($0.00) $0.23 P/Sales multiple 50.2x N/A N/A N/A N/A 48.4x N/A N/A N/A N/A 48.0x 4.8x 1.2x P/EPS multiple N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.4x P/CFPS multiple N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.4x
Ready For The Runup? It’s All Or None ACTION – Initiating Coverage With a SPECULATIVE BUY Rating
We are initiating coverage of Spectral Medical Inc. (ETD-T) with a SPECULATIVE BUY recommendation and a 12-month target price of $2.50/share. The key catalyst is the outcome of their ongoing pivotal trial for Toraymyxin (PMX), with the hope of garnering approval of the only FDA-approved treatment for sepsis and septic shock.
DETAILS – Large Market Opportunity – High Risk, High Reward Potential
Unmet Medical Need: North America currently has no FDA-approved treatment for sepsis and septic shock, yet it claims victim to nearly 1 million people every year in the U.S. with over 30% of those cases leading to death.
Not Its First Rodeo: Toraymyxin (PMX) is already approved in Europe and Japan, and has safely treated over 150,000 sepsis patients in those markets with success. There is also 22 years’ worth of clinical data for PMX treatment, including over 140 individual studies on over 4,400 patients.
Reputable Management/High Inside Ownership: The management team boasts a wealth of experience in the area of sepsis treatment, including CEO Dr. Paul Walker, who is widely regarded as a pioneer in the field and has made large contributions (including developing Spectral’s EAA diagnostic). Also, 45% of ownership comes from the management and board, representing high confidence and commitment to corporate goals.
Higher Risk High Reward Potential: The potential lofty reward doesn’t come without risk. Spectral’s success depends on PMX’s FDA-approval (given their lack of product diversity), but the complexity of sepsis makes it a high risk potential.
IMPACT – A Runup Is Expected
The key catalyst for the stock is the pivotal clinical trial results which are expected calendar Q3/Q4 2016 – we expect the stock to trade up into that catalyst. If the pivotal results are successful for PMX, we expect this stock to go through our current target price. We are applying a conservative 50% discount rate to our estimated 2018 EPS (first full year of estimated PMX sales) in our valuation, and using a 25x P/E multiple to derive our 12-month target price of $2.50.
Thomson Chart – 1 Year
Corporate Profile
Spectral Medical Inc. is a therapeutic development company. Spectral is focused on the development and commercialization of a treatment for severe sepsis and septic shock. Spectral also manufactures and sells certain reagents, and their only clinical development program is for PMX.
Key Events
- Next reporting date: March, Expected pump approval Q2, Pivotal Trial enrolment completion June ’16, Pivotal data Q3 ’16, PMA filing of last (4th)module Q4 ‘16
This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report.
COMPANY BACKGROUND ................................................................................................................................................................................ 4
What is Sepsis? ..................................................................................................................................................................................................... 4
EAA ........................................................................................................................................................................................................................ 5
Aethlon Medical ................................................................................................................................................................................................ 23
Alteco Medical .................................................................................................................................................................................................... 24
MANAGEMENT TEAM ...................................................................................................................................................................................... 27
Board of Directors .............................................................................................................................................................................................. 28
IMPORTANT DISCLOSURES ........................................................................................................................................................................... 32
Note: All financial figures in this report are in Canadian dollars, unless stated otherwise. Report pricing date: 12-1-16
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SPEC IALTY PHARMA
SPECTRAL MEDICAL INC. EXECUTIVE SUMMARY
COMPANY BACKGROUND
Founded in 1991 Headquartered in Toronto, Canada, Spectral Medical Inc. (“EDT”) is a clinical-stage medical device company focused
on the diagnoses and treatment of septic shock.
PMX – TARGETING A LARGE MARKET THAT HAS AN UNMET MEDICAL NEED
Sepsis has been a graveyard for product development. Why has there been such a high failure rate in treating sepsis? The failure of
past treatments can be attributed in part to a rudimentary understanding of complex sepsis pathophysiology, unsophisticated and
poor clinical trial design, and an over-reliance on preclinical models for proof-of-concept. There is currently no FDA-approved
treatment for sepsis.
LARGE CLINICAL USE OF PMX AND AMENDMENT OF PIVOTAL TRIAL POSITIONS SPECTRAL
WELL
Toraymyxin (PMX) is already approved in Europe and Japan, and has safely treated over 150,000 sepsis patients in those markets with
success. There is also 22 years’ worth of clinical data for PMX treatment, including over 140 individual studies on over 4,400 patients.
In late September 2014, pursuant to the protocol change in April 2014 to effect the exclusion criterion that further refined patient
selection to sicker patients, the FDA recommended that only data for those patients randomized after the change be considered in the
determination of whether a statistically significant outcome related to the primary end point of 28-day mortality had been achieved.
This also represents positive news for Spectral. That is, Spectral can use the post-amendment patients as the first analysis for the
primary endpoint but then add the patients prior to that with MODS score > 9, which could add power to the final results of the trial.
To be clear, only patients with MODS score > 9 are to be used for the primary endpoint that the FDA would be reviewing. All patients
enrolled in the EUPHRATES trial would be reviewed for safety and secondary endpoints. We believe these amendments should give
Spectral a decent shot of hitting its primary endpoint. Based on historical safety of the PMX device we do not believe safety would
pose a risk in this trial.
HIGH INSIDE OWNERSHIP – MANAGEMENT TEAM VERY SEPSIS-EXPERIENCED
The management team at Spectral boasts a wealth of experience in the industry as well as considerable familiarity with the treatment
of sepsis. In particular, CEO Paul Walker is a pioneer in the field and has made large contributions (eg. developer of EAA diagnostic
for measuring endotoxin levels). Forty-five percent of ownership is occupied by the board and management, which demonstrates
both their commitment to accomplish Spectral’s mission of bringing PMX to the North American market and their confidence in doing
so.
READY FOR THE RUNUP? – A HIGH RISK, POTENTIAL HIGH REWARD
Any late-stage trial has risk, particularly if it is in a high risk disease like sepsis. However, based on all the safety data of PMX
and clinical results, we expect the device has a decent shot at obtaining FDA approval. Spectral is not a diversified entity, their
primary success is dependent upon their ongoing PMX clinical trials.
RECOMMENDATION AND TARGET
We are initiating coverage of Spectral Medical Inc. with a Speculative Buy recommendation and a 12-month target price of
C$2.50/share. We expect the share price to run-up in anticipation of the pivotal EUPHRATES clinical trial results. Assuming
clinical success and FDA approval, Spectral could turn into a large capitalized company if it is not acquired in that process.
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COMPANY BACKGROUND
The company was formerly known as Spectral Diagnostics Inc. and changed its name to Spectral Medical Inc. (“Spectral”) in December 2014. Spectral was founded in 1991 and is headquartered in Toronto, Canada. Spectral is a therapeutic development company focused on the development and commercialization of a treatment for severe sepsis and septic shock utilizing its Endotoxin Activity Assay (EAA) and the Toraymyxin (PMX) therapeutic. Spectral is also involved in the development, production, and marketing of recombinant cardiac proteins, antibodies, and calibrators for use in research and development; some of which are used in products manufactured by other diagnostic companies.
In May 2006, Spectral announced a partnership with Toray Medical Products to launch a combined diagnostic and therapeutic strategic alliance for the management of severe sepsis. Toray Medical is the developer of Toraymyxin (PMX), which has already been used for many years in Europe and Japan to treat patients with sepsis. Not long after the 2006 announced partnership, Spectral announced the signing of a distribution agreement with Estor S.p.A. for the commercial sale of its EAA and its reagents in Italy. Estor is the exclusive Italian distributor of Toray’s PMX device. In March 2009, Spectral obtained the exclusive development and commercial rights in the U.S. for PMX, and in November 2010, signed an exclusive distribution agreement for this product in Canada. Spectral started the pivotal clinical development program for PMX in 2010 and is still underway. This pivotal trial (called EUPHRATES) is expected to be completed enrolment in June 2016 (further details on clinical trials are found in the Products section).
Given that sepsis and septic shock are the conditions that Spectral’s products treat, it’s prudent to examine sepsis in more detail before going further.
What is Sepsis?
Sepsis is an inflammatory reaction to systemic infection that can quickly lead to acute organ dysfunction and death. It is difficult to predict, diagnose, and treat. Patients who develop sepsis have an increased risk of complications and death, as well as face higher healthcare costs, and longer treatment.
Severe sepsis is more likely to occur in patients with chronic diseases, those who use immuno-suppressive agents, the elderly, and patients with certain genetic predispositions to infection. It is a multi-process disease involving both pro-inflammatory signals and anti-inflammatory signals. Primary treatment of severe sepsis requires antibiotics targeting the source of the infection. This is augmented with drugs such as low-dose corticosteroids to manage the inflammation, and procedures such as haemodialysis to assist failing organs.
Diagnosis of Sepsis
Sepsis, the leading cause of death in non-cardiac ICUs (Intensive Care Units), is an under-recognized condition. The failure to recognize the connections between infection, secondary organ failure, and sepsis can lead to delayed recognition and treatment, which can end up being fatal.
Unfortunately, sepsis doesn’t produce obvious symptoms. Although it claims almost as many lives as acute myocardial infarction (MI), the initial symptoms of sepsis are much more subtle. Common symptoms of sepsis are fever, chills, rapid breathing and heart rate, rash, confusion and disorientation. Many of these symptoms, such as fever and difficulty breathing, mimic other conditions, making sepsis hard to diagnose in its early stages. Sepsis arises unpredictably and can progress rapidly.
When patients with sepsis die, they do so in the ICU, but sepsis typically begins in the home or on the medical-surgical unit; some causes are infection, trauma, surgery, renal failure, burns, or any immune suppression. Thus, all clinicians must know how to recognize the signs and symptoms of sepsis. Physicians diagnose sepsis by examining patients for fever, increased heart rate and increased respiratory rate. They often perform a blood test to see if a patient has an abnormal number of white blood cells, a common sign of sepsis, or an elevated lactate level, which correlates with severity of the condition. Physicians also test blood and other bodily fluids such as urine and sputum for the presence of infectious agents. In addition, a chest X-ray or a CT scan can help identify the site of infection. Some hospitals now have rapid-response teams that help bedside nurses rapidly assess and treat patients with life-threatening conditions such as sepsis. These teams are usually made up of an ICU nurse and other clinicians, such as a physician, and a respiratory therapist.
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Figure 1: Sepsis: Progressive Clinical Syndrome
Source: Spectral Medical Inc.
Current Treatment of Sepsis
Rapid initiation of aggressive care should begin as soon as sepsis is suspected, with subsequent management in an ICU setting as soon as possible. In order to achieve the most optimal outcome, adequate resuscitation of blood pressure as well as efforts to restore tissue perfusion should be accomplished within the first 6 hours of presentation. The most important consideration in the treatment of sepsis is aggressive and timely efforts to identify and control the source of infection with antibiotics. Therapy should be implemented without delay. Effective, appropriate parenteral antimicrobials should be given within the first hour of recognition of severe sepsis or septic shock. Therapy typically includes more than one drug against potential pathogens. Two Gram negative agents (i.e. extended spectrum beta-lactam and either an aminoglycoside or fluoroquinolone) may be used empirically in order to increase the likelihood of treating multidrug-resistant bacteria (i.e. Pseudomonas, Acinetobacter). A combination of beta-lactam and macrolide may be used in patients with septic shock from bacteremic Streptococcus pneumonia infections. Antimicrobial therapy should be reassessed daily for potential de-escalation in order to reduce healthcare cost, potential adverse effects, and development of antimicrobial resistance.
PRODUCTS
Endotoxin Activity Assay (EAA)
Historically, the detection of bacterial endotoxin has been performed by the LAL-test, which was introduced in the 1970s. Limulus Amebocyte Lysate (LAL) is derived from the blood cells, or amebocytes, of the horseshoe crab, which clots in the presence of endotoxin. The LAL-test has some serious limitations; one of the most important was a poor specificity for LPS (also known as Lipopolysaccharides; synonymous with endotoxins).
In 2003, Spectral’s Endotoxin Activity Assay was approved by the FDA, Health Canada, and European CE, as the first rapid in vitro (technique of performing a given procedure in a controlled environment outside of a living organism) diagnostic test for the risk of developing sepsis in the ICU. The EAA test utilizes a specific monoclonal antibody to measure the endotoxin activity from a blood sample.
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Detailed Scientific Explanation of Spectral’s EAA
Endotoxin (LPS), is found on Gram negative bacteria and is one of the key triggers that causes septic shock and multiple organ dysfunction. Endotoxin exposure can induce systemic inflammation, progressing to sepsis that results in shock and multi-organ failure. By measuring levels of LPS in the blood with Spectral’s EAA, physicians have one more tool to aid in the risk assessment of patients on their first day of admission to the ICU for progression to severe sepsis.
Figure 2: Endotoxin, also known as Lipopolysaccharide (LPS), is a key component believed to trigger
septic shock
Source: Spectral Medical
Spectral’s EAA reacts specifically with LPS of Gram negative bacteria and does not cross-react with Gram positive bacteria and other micro-organisms. The EAA is based on the reaction of endotoxin with a specific anti-endotoxin antibody. Complement proteins opsonize (the process by which the bacteria is marked for ingestion and eliminated by a phagocyte) the endotoxin-antibody complex. Note that complement proteins are a part of the immune system that helps antibodies and phagocytic cells to clear pathogens (bacteria). Phagocytes are cells that protect the body by ingesting (phagocytosing) harmful foreign particles, bacteria, and dead (or dying) cells. The opsonized immune complex primes neutrophils in the blood to enhance their respiratory burst in response to zymosan (which is used to induce experimental inflammation). The respiratory burst of the neutrophils yields oxidants that react with luminol (a chemical that exhibits chemiluminescence with a blue glow) in the reaction mixture to emit chemiluminescence. Note that respiratory burst (sometimes called oxidative burst) is the rapid release of reactive oxygen species (superoxide radical and hydrogen peroxide) from cells. The chemiluminescence can then be detected in a photon counting luminometer. A basal activity measurement (Tube 1) in the absence of the specific anti-endotoxin antibody measures the non-specific oxidative burst of the patient’s neutrophils – this is the control sample. An additional control measurement involves including the specific anti-endotoxin antibody and an excess of exogenous endotoxin (Tube 3) to measure the maximum oxidative burst of the patient’s neutrophils. The test measurement (Tube 2) includes the specific antibody to measure the neat level of endotoxin activity. The EAA level is calculated by normalizing the chemiluminescence in the test sample (Tube 2) against the maximum chemiluminescence (Tube 3), correcting both measurements for the basal activity chemiluminescence (Tube 1).
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EAA - Clinical Studies
The Multi-Center Endotoxin Detection in Critical illness (MEDIC) trial was a multi-center, prospective observational study, performed in 10 ICUs of academic hospital settings in North America and Europe. While increased levels of endotoxin may not be the only risk factor for severe sepsis, its presence in graded levels, low (0.00-0.39 EAA units), intermediate (0.40-0.59 EAA units) and high ( ≥0.60 EAA units) has a strong association with the presence of the disease. The presence of endotoxemia was evaluated on the first day of the patients’ ICU stay to determine the odds of developing severe sepsis within 24 hours of ICU admission. The target population for the Risk Assessment Study included all eligible patients enrolled in the MEDIC trial on first day of ICU admission who had evaluable samples, N=857. The MEDIC clinical trial demonstrated that higher EAA levels were correlated with a higher risk of mortality, as well as an increasing risk for developing sepsis (Figure 3).
Figure 3: Odds Ratio for Severe Sepsis and Level of Endotoxemia
Source: Spectral Medical
In a healthy population, it was shown that an EAA level of 0.40 represents a value that is +2 standard deviations above the mean; 93% of subjects had an EAA level below this value. It is reasonable to assume that a level of 0.40 represents a conservative cut-off below which most individuals should be “healthy”. An EAA level of 0.60 represents a value of +4 standard deviations above the mean (in healthy subjects); individual baseline variations may occur. There was an unexpected finding of slight elevations of endotoxin reported in ambulatory conditions such as during periodontitis, or cigarette smoking. No volunteers had a measured EAA level of ≥ 0.60 – this represents a significant level above where an EAA level may be indicative of an underlying adverse process.
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Figure 4: Histogram of EAA values in Healthy Subjects
Source: Spectral Medical
EAA distribution reach extended
In October 2015, Spectral expanded its business alliance with the Toray Medical Co., Ltd. through an exclusive agreement to distribute Spectral’s EAA diagnostic across fifteen countries in the Middle and Far East: India, South Korea, Taiwan, Singapore, Thailand, Malaysia, Indonesia, Philippines, Vietnam, Cambodia, Myanmar, Brunei, Laos, the Kingdom of Saudi Arabia, and the Republic of Turkey. Revenues from this agreement are expected to be generated in Q1 2016.
On November 10, 2015, Spectral announced a non-exclusive European distribution agreement for its EAA diagnostic with Fresenius Medical Care in eight countries – Germany, Denmark , Sweden, Finland, Norway, Poland, Hungary, and the Czech Republic.
Synergies between EAA and Toraymyxin (PMX)
We believe the use of EAA adds another layer which could improve the clinical outcome of the EUPHRATES trial (discussed in next product section on Toraymyxin). A looming incentive for drug and medical device manufacturers is to develop a proprietary diagnostic test to increase the success rate of clinical trials and maximize therapy efficacy. Before the initiation of clinical trials, the diagnostic test can be used to determine and optimize trial eligibility and enrollment by confirming the presence and quantity of a molecular target in an individual patient – that is, only patients with certain levels of disease biomarkers measured by the diagnostic test will be recruited in a clinical trial. Then during the clinical trial, the diagnostic test can be used to monitor treatment responses and patient outcomes by identifying and predicting patient subpopulations that are most likely to respond to a given treatment. In Spectral’s on-going EUPHRATES trial, only patients with endotoxin activity ≥ 0.60 measured by EAA are enrolled. EAA ≥ 0.60 ensures all patients have severe sepsis or septic shock with high risk of death. Clinical data has implied this patient population benefits the most from unconventional sepsis therapy. We believe if PMX is approved by the FDA, the measurement of endotoxin activity (through the EAA) before treatment is likely also going to be recommended as a product compliment.
Toraymyxin (PMX)
Spectral is seeking U.S. FDA approval for its lead product, Toraymyxin (PMX), a treatment for severe sepsis and septic shock (Spectral is currently conducting a pivotal clinical trial – details appear later in section). PMX is a therapeutic hemoperfusion device that removes endotoxin (> 90% of endotoxin) from the bloodstream. PMX has been used globally in more than 150,000 patients to date and has demonstrated in clinical trials that it safely and effectively removes endotoxin and reduces mortality in patients with severe sepsis and septic shock. The safety and use of the device has been established in Japan and Europe.
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Toray Medical developed the product, and Estor has distributed it in these markets. Spectral hopes to continue this success in North American markets.
Figure 5: PMX Is A Non-Invasive Treatment – Making Device Safety a Non-Issue
Source: Spectral Medical
How Does PMX Work?
Spectral Medical’s PMX device targets septic shock that is due to toxicity caused by endotoxin in the bloodstream. Endotoxin (Lipopolysaccharide, or LPS), a component of the cell wall of Gram negative bacteria, is one of the main triggers of the pathogenesis of septic shock and multiple organ failure.
Polymyxin B (used in PMX) is a cationic cyclic polypeptide antibiotic that binds strongly to the lipid A portion of Gram negative bacterial LPS (endotoxin). The hydrophobic amino acids (Phe, Leu) of polymyxin B interact with hydrophobic bonds of the fatty acid part of the lipid A. Polymyxin B binds to LPS via hydrophobic and ionic bonds, as noted in the molecular model below (Figure 6). In the PMX column that is used to filter a patient’s blood, polymyxin B is covalently bound to the inert beads, thereby binding the endoxin.
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Figure 6: Mechanism of Action of Polymyxcin B binding Endotoxin
Source: Spectral Medical
Clinical Background: EUPHAS Trial - a small clinical trial that showed promising efficacy of PMX
Results of the EUPHAS trial were published in the Journal of the American Medical Association (JAMA, 2009; Vol. 301 No. 23, 2445-2452). A prospective, multicenter, randomized, controlled trial (EUPHAS Trial) was completed at 10 Italian tertiary care intensive care units between December 2004 and December 2007. A total of 64 patients with severe sepsis, or septic shock, who underwent emergency surgery for intra-abdominal infection, were randomized: 34 subjects received PMX plus conventional therapy and 30 subjects received conventional therapy. The primary endpoints were changes from baseline to 72 hours in mean arterial pressure (MAP) and vasopressor requirements. The secondary endpoints included PaO2/FIO2 (fraction of inspired oxygen) ratio, change in organ dysfunction (measured by delta SOFA scores), and 28-day mortality. The Sepsis-related Organ Failure Assessment score, or just SOFA score, is used to track a patient's status during the stay in an ICU. It is one of several ICU scoring systems. The SOFA score helps to determine the extent of a person's organ function, or rate of failure, and is based on six different scores: respiratory, cardiovascular, hepatic, coagulation, renal, and neurological systems. Other measures were also reported, including the need for renal replacement therapy (RRT), the length of stay in ICU, the length of hospital stay, and all-cause hospital mortality.
The results showed that PMX significantly improved mean arterial pressure (MAP) and the vasopressor dependency index, while conventional therapy did not. The PMX group also achieved significant improvement on secondary endpoints, including the PaO2/FIO2 (fraction of inspired oxygen) ratio and delta SOFA scores. The 28-day all-cause mortality was 32% (11/34 patients) in the PMX group and 53% (16/30 patients) in the conventional therapy group. The PMX group also had a significantly better survival curve. With univariable analysis, only the treatment group and the SOFA score were independently associated with mortality. After adjusting for SOFA score, the PMX group had a significant reduction in 28-day mortality (adjusted HR, 0.36; P = 0.01). In a further analysis of hospital mortality, 20 of 30 patients (67%) died in the conventional therapy group compared with 14 of 34 patients (41%) in the PMX group, which represents a significant reduction in hospital mortality rate. In terms of RRT (renal replacement therapy), length of ICU stay, and hospital stay, both groups had similar results. The results demonstrated that when PMX is added to conventional therapy, there is significantly improved
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hemodynamics and organ function, and reduced 28-day mortality in patients with severe sepsis and septic shock, in comparison to those patients in the conventional therapy group.
EUPHRATES trial – pivotal trial for PMA (Premarket Approval) filing
In October 2010, Spectral announced the initiation of its pivotal clinical trial called EUPHRATES (Evaluating the Use of Polymyxin B Hemoperfusion in a Randomized controlled trial of Adults Treated for Endotoxemia and Septic shock) in the U.S. comparing standard of care versus PMX (Toraymyxin) plus standard of care. The trial is still ongoing. The target population is critically ill patients with septic shock and endotoxemia (as measured by the EAA). The trial is to enroll approximately 446 patients at 50 sites throughout the U.S. and Canada, and will have a primary end point of 28-day mortality – the trial is to compare the safety and efficacy of the PMX cartridge based on mortality at 28-days in subjects with septic shock ,who have high levels of endotoxin and are treated with standard medical care plus use of the PMX cartridge, versus subjects who receive standard medical care alone. A secondary end point is to compare mortality between the two groups at 90 days, 6 months, and 12 months post-start of treatment. This trial is expected to be completed enrolment in June 2016, but final data collection from the primary endpoint should conclude in July 2016. The EUPHRATES trial is over 90% enrolled implying the trial should be completed on time. The submission of the final module (fourth) in the PMA (premarket approval) should be made in Q4 2016.
The EUPHRATES trial is the world’s first theranostics trial conducted in the area of sepsis. Theranostics is a term coined to represent more specific, or individualized, therapies to treat patients, combining a diagnostic and therapeutic approach into a single agent. In Spectral’s EUPHRATES trial, the EAA will be used to determine the level of endotoxin in the bloodstream of a patient with septic shock, and if EAA is elevated (≥ 0.6 EAA units) the patient is eligible to be randomized to Toraymyxin plus standard of care, or standard of care alone. This two-step process, guided by the EAA detection process, allows physicians to target patients most likely to benefit.
Figure 7: Spectral Medical Taking a Theranostic Approach
Source: Spectral Medical
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Figure 8: Sepsis Patient Screening in the EUPHRATES Pivotal Trial
Source: Spectral Medical
In January 2013, an interim analysis was conducted on the first 76 randomized patients who were followed for 28 days. The Data Safety and Monitoring Board (DSMB), consisting of experts in the fields of critical care medicine, infectious disease, nephrology, biostatistics and regulatory affairs, reviewed the data set for evidence of safety concerns, such as adverse events and/or adverse device effects, related to the use of the PMX cartridge. The results from the first interim safety analysis by the DSMB stated that there were no safety issues.
On January 27, 2014, the DSMB reviewed the results of the second interim analysis after 184 patients had been randomized and followed for 28 days in accordance with the Statistical Analysis Plan agreed on with the FDA. On that date, the DSMB reported that stopping rules for safety, efficacy and futility were not met and that the trial should continue. The DSMB did not, however, provide the planned sample size recalculation at that time. The DSMB requested that additional analysis be performed by the Contract Research Organization on the original 184 patients prior to the recalculation.
Spectral received the recommendations of the DSMB pursuant to its analysis on April 10, 2014, which included a recommendation of an additional exclusion criterion. The DSMB recommended that patients with a Multiple Organ Dysfunction Score (MODS) score of ≤ 9 no longer be eligible for randomization in the trial. The MODS score is a recognized scoring system used to evaluate the degree of organ dysfunction which exists in patients with sepsis (refer to subsequent section on MODS for more insight). This recommendation was consistent with data from previous PMX trials, which demonstrated that the PMX column is most effective in reducing mortality rates of sicker patients. We believe this should have a positive impact on the final efficacy analysis.
In late September 2014, pursuant to the protocol change in April 2014 to effect the exclusion criterion that further refined patient selection to sicker patients, the FDA recommended that only data for those patients randomized after the change be considered in the determination of whether a statistically significant outcome related to the primary end point of 28-day mortality had been achieved. This also represents positive news for Spectral. That is, Spectral can use the post-amendment patients as the first analysis for the primary endpoint but then add the patients prior to that with MODS scores > 9, which could add power to the final results of the trial. To be clear, only patients with MODS scores >9 are to be used for the primary endpoint that the FDA would be reviewing. All patients enrolled in the EUPHRATES trial would
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be reviewed for safety and secondary endpoints. We believe these amendments should give Spectral a decent shot of hitting its primary endpoint. Based on historical safety of the PMX device we do not believe safety would pose a risk in this trial.
In March 2015, Spectral announced that the DSMB recommended the EUPHRATES trial continue and recommended subsequent interim results analysis based on the new criteria set in April 2014. Spectral was also set to submit an amended statistical analysis plan (SAP) to the FDA incorporating an interim analysis, including new stopping rules for safety and efficacy, with results anticipated in late fourth quarter of 2015.
In April, 2015, the FDA accepted the company’s plan for a Premarket Approval (PMA) submission, which consists of four separate modules and has the potential to significantly reduce the time to commercialization. To date, Spectral has filed three of the four modules to the FDA, with the fourth and final module expected to be submitted no later than fourth quarter 2016. The EUPHRATES trial is now over 90% enrolled and is expected to be completed enrolment in June 2016, but final data collection from the primary endpoint should finish in July 2016. Top-line results of the EUPHRATES trial are expected in late Q3/early Q4 2016 (calendar year). We expect the clinical results to be first presented at the Society of Critical Care Medicine conference to be held between January 21-25, 2017 in Hawaii.
MODS (Multiple Organ Dysfunction Syndrome) and the MODS Score
Multiple organ dysfunction syndrome (MODS) is a hypometabolic, immunodepressed state with clinical and biochemical evidence of decreased functioning of the body’s organ systems that develops subsequent to an acute injury or illness. Almost any disease that results in tissue injury may result in MODS; this includes sepsis, major trauma, burns, pancreatitis, aspiration syndromes, extracorporeal circulation (eg. cardiac bypass), multiple blood transfusion, ischaemia-reperfusion injury, autoimmune disease, head-induced illness, eclampsia, and poisoning/toxicity. MODS contributes to about 50% of all ICU deaths. That being said, patients without a pre-existing organ disease have a decent chance of organ recovery.
Variations of the term used to include the word ‘failure’ instead of ‘dysfunction’ (eg. multiple organ failure – MOF), but ‘dysfunction’ is preferred over failure, as the latter implies a sort of “all or none” functioning, while also implying irreversibility. In contrast, ‘dysfunction’ implies a spectrum, more in tune with reality.
The concept surrounding a ‘MODS score’ involves the findings that death, when it occurs, is not the consequence of isolated lung, heart, or renal failure, but rather reflects the necessary interdependence of multiple organ systems involved in the maintenance of homeostasis. Given that organ dysfunction is a potentially preventable complication of critical illness, and in particular of the sequelae of infection, ischemia, and injury, there became a need for reliable and validated measures of organ dysfunction to be developed and tested.
The MODS score was developed in the mid 1990’s, using a formal methodologic approach to maximize construct, content, and criterion validity. The MODS score is the sum of 6 different categorical scores representing 6 organ systems (respiratory, renal, hepatic, cardiovascular, hematologic, and neurologic) (see Figure 9). Scoring is performed on a daily basis and so allows a day-by-day prediction for patients.
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Figure 9: MODS Scoring System
Source: J.C. Marshall, Multiple Organ Dysfunction Score, Critical Care Medicine, 1995; (23): 1638-52
Accumulative scores of 9-12 points represent an approximate 25% ICU mortality rate, 50% at 13-16 points, 75% at 17-20 points, and a 100% mortality rate at levels more than 20 points.
To reiterate, only those patients in Spectral’s EUPHRATES trial with scores above 9 points (an approximate ≥ 25% ICU mortality rate) will be used by Spectral to achieve their primary endpoint – and considering the statistical evidence supporting PMX’s increased effectiveness treating more severely ill patients, this amendment could improve Spectral’s chances of PMX approval.
Spectral’s Standalone Pump – Used in Conjunction with the PMX device
The PMX column can be used with existing dialysis or blood pump machines that are equipped at hospitals. For example, the PMX column can be used with Baxter’s (formerly Gambro) Prismaflex system.
Figure 10: Baxter’s Prismaflex pump
Source: Baxter website
Spectral Medical has developed a standalone pump that was developed specifically for the PMX column. Spectral’s proprietary stand-alone pump should reduce reliance on third party pump machines such as Gambro’s Prismaflex. Spectral’s pump is going to be filed as a 510K in the United States which is targeted for the first quarter of 2016. The advantage of using Spectral’s pump is that it is simpler to operate and has
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a disposal cartridge which can be used for each PMX treatment. Spectral initially intends on installing its pumps at the same 45 clinical sites from the EUPHRATES trial upon completion of the trial.
Figure 11: Spectral’s Pump
Source: Spectral Medical
Figure 12: Spectral’s Pump Used in Conjunction with PMX column
Source: Spectral Medical
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Figure 13: Spectral’s Disposable Blood Pump Cartridge used in Conjunction with PMX column
Source: Spectral Medical
Diagnostic Reagents
Spectral’s potential success is likely going to be tied to the development and commercialization of PMX, along with its complimentary revenue stream coming from their EAA diagnostic test. That being said, Spectral has tried to diversify their revenue base by developing, producing, and marketing recombinant cardiac proteins, antibodies, and calibrators. These products are sold for use in research and development, as well as in products manufactured by other diagnostic companies. Spectral has actively marketed its capability to develop and manufacture monoclonal and polyclonal antibodies and recombinant proteins. They’ve entered into license and supply agreements with diagnostic product manufacturers for the use of its proprietary Troponin I recombinant protein molecules for the calibration of commercial Troponin I assays. Customers include Beckman Coulter, Abbott Labratories and BioMerieux, where Spectral generates royalty revenues based on a percentage of end user sales of Troponin I.
FINANCIAL FORECASTS
We expect a PMX launch in third quarter of 2017, if approved. U.S. sales of PMX are estimated at C$27.3M, C$113.8M, C$172.9M, and C$227.5M, (peak sales) from FY17 to FY20, respectively. As mentioned in the Products section, Spectral sells the EAA diagnostic and proprietary reagents worldwide. The EAA diagnostic is the only approved kit by the FDA to measure circulating endotoxin levels in patients. We expect U.S. sales of the EAA diagnostic to increase after PMX is commercialized in 2017 because the kit will be sold in conjunction with PMX. We estimate EAA diagnostic and proprietary reagents sales to be C$3.1M, C$3.8M, C$5.8M, C$7.2M, and C$8.6M from FY16 to FY20, respectively. We estimate Spectral’s total sales revenue from FY16 to FY20 to be C$3.1M, C$31.1M, C$119.6M, C$180.1M, and C$236.1M, respectively.
In terms of operating expenses, we estimate R&D from FY16 to FY20 to be C$7.2M, C$9.8M, C$9.9M, C$10M, and C$10.1M, respectively. SG&A estimates are C$3.0M, C$6.2M, C$13.5M, C$18.7M, and C$23.5M from FY16 to FY20, respectively.
Net income (loss) from FY16 to FY20 are estimated at C($11.9M), C$0.3M, C$47.6M, C$72.7M, and C$100.5M, respectively. Basic and fully diluted EPS estimates are C($0.06M)/C($0.06M), C$0.00/C$0.00, C$0.23/ C$0.23, C$0.35/C$0.35, and C$0.49/C$0.48 from FY16 to FY20, respectively.
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Figure 14: Annual Estimates (FY2017-2020)
Source: Mackie Research
Figure 15: Quarterly Income Statement FY2014-2016 (Actual & Estimates)
Spectral manufactures the EAA at its Canadian facility in Toronto, Ontario. The facility complies with the requirements of Current Good Manufacturing Practices (CGMPs) and regulating authorities including the FDA and Health Canada’s Therapeutic Product Programme. Spectral’s manufacturing facilities were upgraded in 2007 and is self-sufficient for the manufacture of its EAA product and the manufacture of its proprietary biological reagents. Spectral’s patented recombinant single-chain Troponin I-C polypeptide has gained worldwide recognition as a superior reagent for calibration of cardiac Troponin I assays.
The PMX device is manufactured by Toray. Recent construction of Toray’s new plant facilities have been completed and the new plant complies with FDA regulatory requirements and is expected to be fully operational before the U.S. market launch of PMX.
Spectral’s stand alone blood pump is manufactured by a private dialysis equipment company in Switzerland.
MARKET OVERVIEW
The market for sepsis treatment is largely an unmet medical need. In the United States, approximately 750,000 cases of sepsis occur each year, of which at least 225,000 are fatal (Journal of Clinical Medicine
Research 7, No.1 (2015) p.18-20). Approximately 40% of all intensive care unit patients have sepsis on admission to the intensive care unit or experience sepsis during their stay in the intensive care unit. CDC’s (Centers for Disease Control and Prevention) National Center for Health Statistic, based upon information collected for billing purposes, estimates that the amount of hospital visits of patients with sepsis or septicemia (another word for sepsis) increased from 621,000 in the year 2000 to 1,141,000 in 2008. As noted in Figure 18, hospitalization rates for sepsis (in contrast from the previous statistic, this focuses on patients admitted to the hospital for sepsis) more than doubled from 2000 through 2008.
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Figure 18: Hospitalizations for and with Septicemia and Sepsis
Source: CDC/NCHS, National Hospital Discharge, 2008 - from NCHSH Data Brief No.62 June 2011
Organ failure occurs in about one-third of patients with sepsis, and severe sepsis is associated with an estimated mortality rate of 30-50% (Journal of Clinical Medicine Research 7, No.1 (2015) p.18-20). There is wide variation in the incidence of sepsis and severe sepsis in the general ICU setting, with reported rates ranging from 20% to 80%, and reported mortality of 20% to 50% (Journal of Clinical Medicine Research 7, No.1 (2015) p.18-20).
Approximately two-thirds of sepsis occurs in patients over the age of 65 years (CDC/NCHS, National Hospital Discharge, 2008 - from NCHSH Data Brief No.62 (June 2011)). Patients over 85 years old are 30 times more likely to be hospitalized for sepsis. The length of stay is prolonged by 75% and mortality is 8 times higher in septic patients for all who end up in the ICU (National Vital Statistics Reports No.58 (2010) p. 1-135). According to the CDC, severe sepsis accounts for approximately 40% of ICU expenditures. The United States healthcare cost is six times greater in patients with sepsis, resulting in an estimated US$14.6 billion, as reported by the CDC.
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Figure 19: Rates of hospitalization for Sepsis, by sex and age for 2008
Source: CDC/NCHS, National Hospital Discharge, 2008 - from NCHSH Data Brief No.62 June 2011
Figure 20 further illustrates the fact that sepsis treatment is an unmet medical need, as patients hospitalized for sepsis were more severely ill than patients hospitalized for another diagnosis.
Figure 20: Percentage of hospital stays where the patient had seven or more diagnosis, 2008
Source: CDC/NCHS, National Hospital Discharge, 2008 - from NCHSH Data Brief No.62 June 2011
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We estimate PMX’s target population to be around 175,000 patients per year, which represents a consumption of around 350,000 PMX cartridges and 875,000 EAA diagnostic tests.
Conventional Sepsis Treatments:
Common conventional sepsis treatments include antibiotics to treat the infection, fluids, and medication through intravenous (IV) to maintain the blood pressure, correct any clotting problems, and stabilize blood circulation, oxygen, and plasma (or other blood products). However, clinical reports suggest controversial results with these treatments. Currently, there are no approved drugs available in both U.S. and EU markets.
Eli Lilly’s Xigris was the only approved drug for patients with severe sepsis, who had a high risk of death. This human activated protein C recombinant was originally approved by the FDA in November 2001, however, the manufacturer’s aggressive strategies in marketing its use in severe sepsis were criticized, and on October 25, 2011, Eli Lilly withdrew Xigris from global markets after a major study showed no efficacy for the treatment of sepsis. The study, called PROWESS-SHOCK, reported a 28-day all-cause mortality rate of 26.4% in patients treated with Xigris compared with 24.2% in the placebo group, and did not deem the difference statistically significant. There were also claims following a 2009 study that the drug led to an increased risk of serious bleeding and death, but were later refuted with an additional study. Due to the lack of current efficacious treatments for severe sepsis to control mortality, we believe there’s an extraordinary market opportunity for Spectral.
Available clinical data could strengthen doctors’ confidence in PMX usage:
Polymyxin B-immobilized fiber hemoperfusion column (PMX) has been used in Japan and covered by the Japanese Ministry of Health since 1994. The efficacy and safety data has been reported in peer-reviewed articles. Over a span of 22 years to date, published articles on the use of PMX have reported on over 140 individual studies that included approximately 4,400 patients, who have received approximately 7,600 PMX perfusions. Discussing the wealth of clinical data available on PMX, Spectral has stated that the safety profile continues to be excellent, with the number of treatment-related, serious events, being very low. The majority of the product use has been in Japan, but utilization of PMX in Europe and other regions is now increasing.
Systematic review of available data from randomized controlled trials (RCT) indicated that the use of PMX was associated with a significant 26% increase in MAP (mean arterial pressure) when compared to a conventional treatment paradigm. Patients with a worse MAP profile before treatment benefited after the column treatment. Overall mortality rates (14 days, 28 days, 30 days, and 60 days) were 61.5% in the conventional therapy group and 33.5% in the PMX group – a very statistically significant result. It is important to note that when the analysis was limited to a 28-to-30-day mortality, the results were also statistically significant. Endotoxin levels were decreased by 33-80% after the column treatment. We believe that the current wealth of available clinical data could increase U.S. doctors’ confidence and use of PMX.
The ease of use provides another marketing advantage:
The PMX cartridge is ordered by the physician and attached to Spectral’s new pump system. The new pump requires less expertise than needed for dialysis and can be administered by nurses in the ICU. Generally patients are in the ICU with a 1:1 or 1:2 patient-to-nurse ratio, therefore, no additional manpower is required to administer PMX. PMX is currently designed to be used in the ICU, but given its ease of use we can see it being used in other areas, such as in emergency, etc.
Cost-effective characteristics of both PMX and EAA represent an opportunity:
Sepsis is highly prevalent within ICUs and is associated with high costs – the cost of caring for sepsis patients has been shown to be 6 times higher than caring for ICU patients without sepsis. U.S. data has shown that each adult sepsis patient consumes between US$21,000 and US$25,000 (direct costs) during hospitalization (Chalfin D, et al., The economics of critical care medicine: Critical care clinics). Given around 750,000 sepsis hospitalization cases each year, the total direct economic burden from sepsis is around $15 billion. This figure may increase when patients progress to severe sepsis, septic shock, and multiple organ dysfunctions, ultimately leading to longer hospital stays. For these reasons, healthcare providers, drug/medical device manufacturers, government authorities, and payors have focused their attention on
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strategies that could reduce the economic burden of sepsis. However, studies have shown that current treatment of sepsis has not been cost efficient. An analysis of more than 166,000 sepsis patients at 309 hospitals found wide variation in mortality and cost (Chalfin D, et al., The economics of critical care medicine: Critical care clinics). One third of hospitals exceeded expected costs of care by at least 10% and there was no significant association found between hospital spending and mortality. The study found that more hospitals had higher-than-expected costs and higher-than-expected mortality rates (10% of hospitals) than hospitals that had lower-than-expected costs and mortality rates (7% of hospitals). These findings serve to highlight the opportunity of finding a more cost effective treatment program.
PMX’s cost of treatment is expected to be priced near US$20,000 and that should include all tubes and accessories needed; there should not be any additional cost. One 2011 study based on PMX use in Italy showed that, compared to conventional sepsis therapy, PMX plus conventional therapy provided a better profile in terms of number of life years gained at additional cost. This pharmacoeconomic study suggested that PMX was a cost-effective intervention for the treatment of severe sepsis/septic shock of abdominal origin (Berto P, et al., Blood Purif (2001)).
We expect PMX to achieve maximum cost efficiency in selected patients with high endotoxin measured by the EAA diagnostic and would likely be preferred by U.S. payors.
COMPETITION/NEW ENTRANTS
Aethlon Medical (NASDAQ: AEMD) – Early clinical stage in U.S.
On September 30, 2011, Aethlon signed a $6.8 million contract with the Defense Advanced Research Projects Agency (DARPA) to develop a medical device that would reduce the incidence of sepsis in combat-injured soldiers and civilians. No detailed information is available.
Cytosorbents (NASDAQ: CTSO) – Early clinical stage in EU and IDE in U.S.
Cytosorbents’ CytoSorb is a first-in-class extracorporeal cytokine absorber, now approved in EU, and broadly indicated for use in any clinical situation where cytokines are elevated (ie. different from Spectral’s PMX used for elevated endotoxin levels). CytoSorbents has conducted a small-scale clinical trial in sepsis patients within Europe (European Sepsis Trial). In the randomized, controlled, multi-center study in Germany, CytoSorb significantly reduced 28-day all-cause mortality (0.0% vs. 62.5% in control, p = 0.03, n=14) in 43 patients with septic shock and respiratory failure – 60-day mortality and ICU stay was non-significantly improved by CytoSorb treatment. Other independent trials also showed that CytoSorb was safe and well tolerated in more than 300 treatments in very sick patients with the worst forms of sepsis and lung injury. Cytosorbents also has an FDA-approved IDE application to run a small sepsis trial in the U.S. The company is currently collaborating with Dr. John Kellum at the University of Pittsburgh Medical Center to target severe sepsis and septic shock. Investors should note that CytoSorb is designed to treat sepsis patients with high cytokine level, which serves to differentiate their product from PMX (designed to treat sepsis patients with high endotoxin levels). The causes of sepsis are still relatively unknown, so assuming both of these products make it to market, both treatments could potentially be used to treat sepsis depending on the symptoms (elevated cytokines vs. endotoxins).
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Figure 21: Cytosorbents CytoSorb
Source: Cytosorbents’ corporate presentation
Alteco Medical – Approved in EU for endotoxin removal in 2007
Alteco’s LPS Adsorber is a Class IIa medical device (column) approved for endotoxin removal in an ICU setting. The column does not contain any pharmaceutical or toxic components. Its high affinity to the Lipid A moiety of the endotoxin molecule by hydrophobic and ionic interactions ensures efficient reduction of endotoxins from different bacteria species, as this component of the endotoxin molecule is constant. The capturing component is a specially designed synthetic peptide. More than 2,000 treatments have been carried out worldwide using LPS Adsorber. The clinical reports and published data indicate the efficacy of LPS Adsorber to remove endotoxin and to improve organ function in patients suffering from severe Gram negative sepsis and septic shock. However, LPS Adsorber did not achieve significant mortality and ICU-stay reduction. Alteco has not disclosed its U.S. commercialization plan. We believe Alteco would likely need to conduct a U.S. pivotal trial that achieves statistical significance to obtain FDA approval.
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Figure 22: Alteco LPS Adsorber
Source: Alteco’s corporate presentation
All in all, there has not been any other major direct therapeutic competitor identified in this particular market segment, although there are a number of companies that either are, or were, engaged in clinical research and development related to other sepsis therapies.
VALUATION
Our $2.50 valuation is based on applying a 25x P/E multiple (in line with fast growing specialty pharma valuations) to our 2018 diluted EPS estimate of $0.23 at a 50% discount rate. We are using a relatively high discount factor of 50% due to the difficulty (risks) involved with bringing a sepsis treatment to the North American market (represented by the fact that there are no current FDA approved treatments for sepsis in North America). That being said, with the wealth of treatment evidence available (many clinical trials and documented success globally) supporting its safety and efficacy, along with positive updates from the interim EUPHRATES trials, we are confident in FDA approval. We feel that a 50% discount factor is conservative for the above reasons. Our valuation is based on using 2018 estimates because that is expected to be the first full year of Toraymyxin (PMX) sales.
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Figure 23: Valuation Grid – Stock Prices at Different Combinations of Discount Rates and P/E values
Source: Mackie Research
P/E values 35% 40% 45% 50% 55% 60%
20x $2.51 $2.34 $2.18 $2.04 $1.91 $1.79
25x $3.14 $2.92 $2.72 $2.55 $2.38 $2.24
30x $3.77 $3.51 $3.27 $3.06 $2.86 $2.69
35x $4.40 $4.09 $3.81 $3.56 $3.34 $3.13
40x $5.03 $4.68 $4.36 $4.07 $3.81 $3.58
45x $5.66 $5.26 $4.90 $4.58 $4.29 $4.03
50x $6.29 $5.85 $5.45 $5.09 $4.77 $4.48
55x $6.91 $6.43 $5.99 $5.60 $5.25 $4.92
60x $7.54 $7.01 $6.54 $6.11 $5.72 $5.37
Discount Factors
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MANAGEMENT TEAM
The management team at Spectral Medical Inc. boasts a wealth of experience in the industry, as well as
considerable familiarity with the treatment of sepsis. CEO Paul Walker, in particular, is a pioneer in the
field and has made large contributions. The team has also collected an abundance of valuable business
and executive management experience, including mergers and acquisitions, corporate reorganizations,
business partnerships, tax planning, as well as international marketing, specifically in Europe. Forty-five
percent of ownership is occupied by the board and management. Of note, two board members, Koichiro
Takeshita from Toray and William Stevens, own twenty-two and seventeen percent, respectively.
Management Team
Paul Walker, M.D., Ph.D., F.R.C.S.C, Director, President, & Chief Executive Officer, has been the
president and CEO of Spectral since April 2001. Prior to Spectral, he held the position of COO of the
Toronto General Hospital, and was Surgeon in Chief and Vice President of the Surgical Directorate of the
University Hospital Network. Dr. Walker has also been a Professor of Medicine and Laboratory Medicine
at the University of Toronto, an active Vascular Surgeon and the Director of an Intensive Care Program.
Dr. Walker has been a leader in the area of endotoxin and its role in sepsis. He’s the co-inventor of the
Endotoxin Activity Assay (EAA) and is a frequent participant at leading sepsis and critical care
conferences. He has also authored over 100 scientific publications. He obtained his M.D. from the
University of Western Ontario, while his Ph.D. is from the Salgrenska University of Goteborg, Sweden,
and is a graduate of the Advanced Management Program from Harvard School of Business.
Tony Businskas, B.A., C.A., Executive Vice President & Chief Financial Officer, joined Spectral in
February 2005 as CFO, coming over from MDS Pharma Services. Mr. Businskas, a Chartered Accountant,
has over 30 years of business experience, and has held senior financial positions in both public and private
companies. He brings significant experience in mergers and acquisitions, corporate reorganizations,
business partnerships and alliances, tax planning and finance.
Mr. Businskas received his B.A. degree from the University of Toronto in 1971 and became a chartered
accountant in 1975. He went on to continue his studies in general management at the Richard Ivey School
of Business, University of Western Ontario, Canada and at the Darden School of Business, University of
Virginia.
Debra M. Foster, RN, B.Sc., Vice President, Clinical Development, brings more than 20 years of
experience to the Spectral team. Ms. Foster started her career as a registered nurse specializing in the adult
critical care setting. She then worked in the Medical Surgical Intensive Care Unit of Toronto General
Hospital as a clinical research coordinator, where she developed expertise in clinical trial design, operation
and execution, as an active member of the Canadian Critical Care Trials group. As research coordinator
she has lectured to medical professionals on the topics of sepsis and clinical trials for sepsis internationally.
She holds a Bachelor of Sciences degree in Human Biology from the University of Toronto.
Dr. Gualtiero Guadagni, Ph.D., Vice President, Sales and Marketing, has extensive experience in market
development and sales of Spectral’s Endotoxin Activity Assay (EAA) and Toraymyxin theranostic
approach to the management of septic shock in regions outside of North America. Dr. Guadagni is
responsible for the development and expansion of commercial opportunities for Toraymyxin and EAA in
Canada, the United States and Europe.
Before joining Spectral, he spent 10 years at ESTOR S.P.A. as the sales and marketing director, as well as
scientific consultant for Toraymyxin. ESTOR is a Milano-based company with a focus on the production,
promotion and sale of advanced biomedical devices in the areas of dialysis, intensive care, and
hemodynamics. A few countries of focus to the Dr. Guadagni-led sales team included Italy, Switzerland
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and Austria, where the sales of EAA and Toraymyxin have grown annually. As a scientific consultant at
ESTOR, he coordinated a number of post-marketing clinical trials such as the “Euphas” trial (Early Use of
Polymyxin B Hemoperfusion in Abdominal septic Shock). He also coordinated “Euphas2”in 2010, an
international data registry for Toraymyxin and EAA use in critically ill patients with septic shock, in
multiple countries worldwide.
Dr. Guadagni received both his PhD in bioengineering and his Master’s degree in mechanical engineering
from Politecnico di Milano University in Italy.
Board of Directors
Anthony Bihl, Chairman of the Board, has served on the Board since March 2008. With over 30 years in
leadership of global healthcare businesses Mr. Bihl is an experienced executive, which includes
operational, financial, and senior executive positions. He currently serves as the CEO Bioventus LLC, a
global provider of ortho biologic products, and as director on the board of Greatbatch Inc. From 2011 to
2012, Mr. Bihl was Group President of American Medical Systems (“AMS”), a subsidiary of Endo
Pharmaceuticals, in Minneapolis, Minnesota, while he served as CEO of AMS from 2008 to 2011. Prior to
that Mr. Bihl served in a variety of senior leadership positions at Bayer Healthcare Diagnostics Division
from 2000 to 2007, including Vice President of Finance, Senior Vice President of Business Planning and
Administration, and President. He was also CEO of Siemens DX upon the acquisition of Bayer’s
Diagnostics Division by Siemens AG.
Paul Walker, Director (see Management Team write-up)
Kevin Giese, Director, has a B.A. degree in economics, a law degree, and an M.B.A. He has practiced law
in Vancouver and has held a variety of senior management positions including President of Mr. Lube U.S.
(acquired by Pennzoil), director and CFO of TSX-listed NQL Drilling Tools (acquired by National Oilwell
Varco), as well as various management roles and board memberships to other private and TSX listed
companies. He currently serves on the Board of Directors of BioAlberta and was a past advisory board
member of the Institute of Corporate Directors (Canada). Mr. Giese is the founding President, CEO, and
Director of Medwell Capital Corp. (formerly BioMS Medical Corp.), a biotechnology company dedicated to
the development and commercialization of innovative therapies, with a focus on the treatment of Multiple
Sclerosis. He received the BioAlberta Award for Entrepreneurship in 2005.
Guillermo Herrera, Director, has over 30 years of global healthcare experience. He is the Chairman and
founder of Pinnacle Biologics Inc. Prior to that Mr. Herrera spent 24 years at Abbot Laboratories, serving
as both Senior Vice President, International Operations and President of Abbott International. While at
Abbott, he was responsible for international commercial operations including sales and marketing of
pharmaceutical, nutritional and hospital products in markets outside the U.S. Mr. Herrera received his
B.A. degree in industrial economics from the Universidad del Valle, Columbia, and his M.B.A. from the
Kellogg Graduate School of Management at Northwestern University.
Koichiro Takeshita, Director, has been Director, Medical Device Division of Toray Industries, Inc. since
2010. He joined Toray in 1983 and has over 20 years of experience in the clinical development of
pharmaceutical products and medical devices. From 1991 to 1996 he was the Technical Representative of
Toray in its European Headquarters. Mr. Takeshita received a bachelor’s degree in pharmaceutical science
from the University of Tokyo.
William Stevens, Director, has served on the Board since September 2014 and holds over 20 years of
experience in capital markets and the investment industry. Currently he is the President of GS Investment
Corp, and was the Managing Director of Westerkirk Capital Corp., both private investment management
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companies. He has a successful track record of value creation for shareholders while holding senior roles
in investment banking and private equity. His educational background includes an M.B.A. from the
Harvard University Graduate School of Business Administration.
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INTELLECTUAL PROPERTY
Spectral has filed many patent applications in North America and other countries around the world with
respect to recombinant proteins, genetically engineered molecules, purified proteins, and specific
antibodies, or combinations of antibodies, employed in EAA and PMX. Several of these applications have
resulted in the issue of patents in various jurisdictions with the earliest expiry date in 2029. Other pending
patents relate to the devices on which the reactions take place.
RISKS
Spectral Medical Inc. and our estimates for the company are subject to a number of risks, including:
• FDA Approval (Regulatory) Risk: Our estimates and expectations surround an FDA approval for
Toraymyxin (PMX) to be distributed and used to treat sepsis in North America. Delays in drug
approvals or failing to obtain regulatory approval would have a material and negative impact on
our estimates.
• Clinical, Development Risk: Clinical device treatment development is not without risks. Clinical
trials may fail to meet endpoints for a number of reasons, which may include: not having enough
patients in a trial (study is underpowered), the trial is not properly designed, trial costs, time to
trial completion, quality of clinical data, regulatory issues, efficacy and safety concerns.
• Financing Risk: Spectral may be required, from time to time, to raise additional funds for its
clinical development activities and operations. The inability to raise capital on a timely basis, or
under appropriate terms, could have a material adverse impact on the operations of Spectral.
• Licensing Technology: Certain aspects of Spectral’s business uses licenced technology and
intellectual property (eg. technology/intellectual property rights licensed from Toray), which
subjects Spectral to certain risks that would not be present if these things were developed
internally. This also applies to meeting certain milestone obligations by licensor, which these
licensing rights are dependent on.
• Patent Protection and Infringement: The biotech/medical device industry is heavily reliant on
patented technology. The extent to which discoveries and related products and processes can be
effectively protected by patents and be enforceable is uncertain and subject to interpretation of the
courts. Likewise, the processes, products, and technologies of Spectral may be subject to claims of
infringement upon the patents of others, which could materially affect their business.
• Inflation/Foreign Exchange Rates: A significant portion of the Spectral’s revenues are
denominated in U.S. and European currency and are therefore subject to fluctuations in exchange
rates. These fluctuations could materially impact operating margins and the results of operations.
• Manufacturing Risk: Spectral must meet FDA standards in manufacturing processes, else plans
for commercialization could be materially adversely affected.
• Share Price Volatility: The specialty pharma sector can experience large share price moves, particularly if clinical trials fail, regulatory issues occur, and/or litigation happens.
• Competition: Spectral competes with other entities that develop and produce products aimed at diagnosing similar conditions to those addressed by Spectral’s products, including early-stage companies, established pharmaceutical companies, universities, research institutions, governmental agencies, and health care providers.
www.mackieresearch.com Initiating Coverage – SPECTRAL MEDICAL INC. Page 31
• Ownership Concentration: If certain shareholders act together, they may be able to exert a
significant degree of influence over Spectral’s management and affairs and over matters requiring
shareholder approval, including the election of directors and approval of significant corporate
transactions. The concentration of ownership may facilitate, delay, or prevent a change in control
of Spectral and might affect the market price of shares.
• Litigation Risk: As a therapeutic development entity, Spectral may become, in the ordinary
course of business, a party to litigation, for a myriad of potential reasons.
• History of Operating Losses: Spectral has incurred losses each year since its inception (an
accumulated deficit of approximately C$49 million. Unless Spectral is able to generate sufficient
revenue, it could continue to incur losses from operations.
www.mackieresearch.com Initiating Coverage – SPECTRAL MEDICAL INC. Page 32
RISKS TO TARGET
Please refer to section titled “Risks”.
RELEVANT DISCLOSURES APPLICABLE TO COMPANIES UNDER COVERAGE
1. Yue Ma, M.Sc. an Intern Associate of Mackie Research Capital Corporation, was also involved in the preparation of this research report.
2. On January 5, 2016, Andre Uddin visited the Spectral Medical EAA manufacturing facility in Toronto, Ontario. All expenses were paid in full by Mackie Research Capital Corporation.
ANALYST CERTIFICATION
I, Andre Uddin, certify the views expressed in this report were formed by my review of relevant company data and industry investigation, and accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not related to specific recommendations or views expressed in this report.
Mackie Research Capital Corporation publishes research and investment recommendations for the use of its clients. Information regarding our categories of recommendations, quarterly summaries of the percentage of our recommendations which fall into each category and our policies regarding the release of our research reports is available at www.mackieresearch.com or may be requested by contacting the analyst.
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The in fo rmat ion conta ined in th is report has been drawn f rom sources be l ieved to be re l iab le bu t i ts accuracy or comple teness is no t guaranteed, nor in p rovid ing i t does Mackie Research Capi ta l Corpora t ion assume any responsib i l i ty o r l iab i l i ty . Mackie Research Cap i ta l Corpora t ion , i ts d i rectors, o f f icers and o ther employees may, f rom t ime to t ime, have posi t ions in the secur i t ies ment ioned here in . Contents o f th is report cannot be reproduced in who le or in par t w i thout the express permission of Mackie Research Cap i ta l Corpora t ion . US Inst i tu t iona l C l ien ts - Mackie Research USA Inc. , a who l ly owned subsid ia ry o f Mackie Research Cap i ta l Corpora t ion , accepts responsib i l i ty fo r the contents o f th is report sub ject to the te rms and l imi ta t ions se t ou t above. US f i rms or inst i tu t ions rece iv ing th is report shou ld e f fect t ransact ions in securi t ies d iscussed in the report th rough Mackie Research USA Inc. , a Broker-Dea ler reg iste red wi th the F inancia l Industry Regu latory Author i ty (F INRA).
Member-Canad ian Investor Pro tect ion Fund / membre-fonds canad ien de pro tect ion des épargnants
Toronto 416.860.7600 - Montreal 514.399.1500 - Vancouver 604.662.1800 - Calgary 403.218.6375 - Regina 306.566.7550 - St. Albert 780.460.6460
www.mackieresearch.com Initiating Coverage – SPECTRAL MEDICAL INC. Page 33
INSTITUTIONAL EQUITY DEPARTMENT
RESEARCH
TORONTO
Barry Allan ......................................................... 416.860.7612 ................................................... Vice Chair, Mining Group & Director
Shireen Durfy ......................................................... 416.860.7652 ................................................ Senior Vice President, ECM Research
Ryan Hanley ......................................................... 416.860.8337 .................................................................................. Analyst, Mining
Russell Stanley ....................................................... 416.860.8636 ......................................... Vice President, Analyst, Special Situations
Andre Uddin... ........................................................ 416.860.8675 ............................................ Managing Director, Healthcare Research
Douglas Ibbitson .................................................... 416.860.7618 ................................................................. Analyst, Special Situations
Matthew Jennings ................................................... 416.860 7746 ........................................................ Research Associate, Technology
Mike Stevens ......................................................... 416.860 7614 ......................................................... Research Associate, Healthcare
CALGARY
Bill Newman, CFA ................................................... 403.260.2460 ............................................. Senior Analyst, Oil & Gas - International
David Ricciardi, CFA ............................................... 403.292.9483 .............................. Vice President and Analyst, Oil & Gas – Domestic
Valentino Pintea ..................................................... 403.260.2461 ........................................................... Research Associate, Oil & Gas
SALES AND TRADING
TORONTO
Pat McCarthy ................................................................ 416.860.7635
Tim Fisher ...................................................................... 416.860.7665
Terry Sugrue ................................................................. 416.860.7747
Matthew Ritzel ............................................................... 416.860.6849
Doug Van Peteghem .................................................... 416.860.7755
Mike Morrison ................................................................ 416.860.7751
