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Wednesday, January 21, 2015

Next Steps For Protalex With PRTX-100 Expected To Unlock Significant Value

By Jason Napodano, CFA & David Bautz, PhD

- Final analysis of the Phase 1b study continues. Management is in discussion with the FDA on the design of a Phase 2 study in RA.

- Beyond RA, we expect the company to finalize an agreement with the U.S. FDA to move into a Phase 1 study in ITP by the middle of the year.

- ITP is an Orphan Drug indication and would provide additional upside to the company on both pricing and exclusivity.

- Protalex balance sheet may look low on cash but the company is backed by management and insiders who collectively just made $5 million available to move PRTX-100 forward in development.

Please read the full article on Seeking-Alpha: LINK

InVivo Patient No.1 Shows ‘Unexpected’ Gains

By Jason Napodano, CFA

On January 21, 2015, InVivo Therapeutics (NVIV) provided an update on the status of the first patient enrolled in the company’s ongoing pilot study of its investigational Neuro-Spinal Scaffold (NSS) for the treatment of acute spinal cord injury. This is primarily a safety study (NCT02138110), with the main goal to evaluate whether the NSS is safe and feasible for the treatment of complete functional spinal cord injury. The primary endpoint is incidence of all adverse device effects of any kind/seriousness at six months post-surgery. Safety will be determined by no degradation in paralysis level or sensory motor neurological function beyond that typically seen in the AIS-A subject. The subject was enrolled at the Barrow Neurological Institute at St. Joseph’s Hospital and Medical Center in Phoenix, AZ. Dr. Nicholas Theodore, Chief of Spinal Surgery, Barrow Neurosurgical Institute and Medical Director of the Neurological Trauma Program performed the surgery.

However, to gather preliminary evidence of clinical effectiveness of the NSS, study investigators will assess functional improvement of ASIA Impairment Scale, sensory scores, motor scores, bladder and bowel function, neurological tests, and The Spinal Cord Independence Measure III. This is where it gets interesting, because the results from the first patient, 25-year old Jordan Fallis, are ‘unexpected’ according to Dr. Theodore.

The 90-Day Assessment 

On October 15, 2014, InVivo announced the first patient surgery and implantation of NSS took place. In the time between implantation and the 90 day post-injury assessment, there were no reported serious adverse events associated with the NSS. The primary safety endpoint will be assessed again at six months, but things look to have gone well with respect to the key gating-factor to moving forward with enrolling more patients in the study. However, what was unexpected so soon after the surgery was the functional recovery seen to date. According to InVivo’s press release, the subject has progressed from a complete AIS-A injury (pre-surgery) to an incomplete AIS-C injury with motor, sensory, bowel, and bladder function improvements. That’s huge!

As a reminder, Jordan was paralyzed from the belly-button down following his motorcycle accident. Motor improvement from the pre-surgery assessment to the 3-month visit involved the return of active movement of the hip flexors against gravity (allowing for leg to chest motions) and palpable contractions of the knee extensors. A recent video posted of him on YouTube shows he has regained significant ability. For example, InVivo’s press release notes, “Sensory improvement from the pre-surgery assessment to the 3-month visit involved the bilateral return of sensation to two dermatomes extending down the top of the subject’s legs and the S4-S5 dermatome. In addition, the International Standards for Neurological Classification of Spinal Cord Injury (ISNCSCI) exam, the Spinal Cord Independence Measure (SCIM III) exam, and additional assessments of bowel and bladder function demonstrated that between hospital discharge and the 3-month visit, the subject has regained bowel function and improved bladder function.” Huge!

...More Data Needed...

We caution investors into reading too much into the results of one patient. Even Dr. Theodore states, “This is only one patient and we do not want to over-interpret the data.” And that’s understandable. But we cannot discount the significant improvement in function that Jordan has regained. Again, Jordan was complete AIS-A prior to the surgery. That means he had no sensory or motor function below the injury. Today, neurological assessments categorize Jordan as incomplete AIS-C, which means he has regained some motor function below the injury and has voluntary anal sphincter contraction. We suspect in time, as muscle strength returns with physical therapy, Jordan will progress to AIS-D. This is an enormous improvement in such a short timeframe. To put things into perspective, a 1999 analysis by Mario et al found that 10 to 15% of those with initial complete AIS-A injuries converted to incomplete injuries at 12 month follow-up. Only 2% will regain strength below the injury level. Based on the 3 month data from InVivo’s study, they either got really lucky or this thing works!

What We Think Is Going On

Investors familiar with the InVivo story are aware that the NSS is a porous bioresorbable polymer scaffold comprised of poly ((lactic-co-glycolic acid)-co-poly-(L-lysine)), or PLGA-PLL. The device provides structural support to injured spinal tissue, as well as a supportive matrix for allowing the endogenous healing/repair processes to proceed without risk of bleeding and inflammation creating scar tissue around the injury that might inhibit spinal transmission along the cord. InVivo management believes its device preserves healthy spinal tissue, increasing the chance for functional recovery. NSS is InVivo’s proprietary technology and was co-invented by Robert S. Langer, ScD, the David H. Koch Professor at Massachusetts Institute of Technology, and Joseph P. Vacanti, MD, affiliated with Massachusetts General Hospital. The patent rights that are the basis for InVivo’s products are under an exclusive, worldwide license from Children’s Medical Center Corporation and Massachusetts Institute of Technology.

The NSS is designed to facilitate the improvement of: 1) Motor control, including the recovery of muscle control, movement, and strength; 2) Sensory function, including reducing neuropathic pain and avoid bed sores, and 3) Autonomic control, including recovery of bowel/bladder control and sexual function. However, there may be secondary benefits not yet fully explored. These include the elimination of cysts, white matter sparing, and pressure reduction. For example, InVivo preclinical data from a rat contusion model shows significant cyst formation inside the spinal cord following an acute hemorrhage representative of a traumatic injury (see below).

Implantation of InVivo’s NSS is designed to prevent cyst formation by providing existing healthy spinal tissue a scaffolding/life preserver. Remodeled tissue forms around the scaffold and then fills the cavity as the device degrades. Preclinical data shows significant spared white matter (see below).

Beyond the reduction in cyst formation and ability to spare healthy white matter, the implantation procedure of the NSS allows for significant pressure reduction. Following a traumatic injury, increased spinal cord tissue pressure leads to secondary damage including ischemia. Decreasing spinal cord tissue pressure may enhance spinal cord blood flow (Werndle et al, 2014), which leads to tissue oxygenation. It is believed that this leads to neurological recovery. For instance, we had a chance to see a video the implantation of NSS in a porcine acute spinal cord contusion injury model earlier in the month when we sat down for a face-to-face meeting with InVivo management. The pressure reduction inside the spinal cord, as evidenced by substantial leakage of damaged cerebrospinal fluid during the implantation procedure, was profound. InVivo preclinical data shows a significant rise in spinal cord pressure following an acute injury and the reduction of pressure following myelotomy.

What’s Next For InVivo

InVivo will continue to follow Jordan for the rest of his life. The next update to investors should come at the six and twelve month marks. However, the pilot study is already seeking patient No. 2 as of early January 2015. We expect patient No. 2 will enroll in the next month. Following a cleared 30-day safety assessment of that patient, the trial will then be opened to enroll patients 3, 4, and 5. As a result of this new accelerated timeline, we are now expecting all five patients to be enrolled in the study by the middle of the year. That means investors will be getting another update on Jordan in three months, and an update on patient No. 2 at the 30-day and 90-day post-surgery time frame. Once patients 3, 4, and 5 enroll, the updates will come almost continuously throughout the second and third quarters. We expect the pilot study to wrap up by the end of the year, with 12-month safety assessments of all five patients likely to be completed by the middle of 2016.

Following successful completion of the pilot study, InVivo expects to conduct a pivotal study to obtain FDA approval to commence commercialization under a Humanitarian Device Exemption (HDE). We remind investors that InVivo received a Humanitarian Use Device (HUD) designation for the NSS in April 2013. We remind investors, there are no longer profit restrictions under HUD, only restrictions on the number of devices InVivo can sell per year – which is capped at 4,000 under the existing protocol.

Reasons To Be Bullish

Management believes the NSS- is a potential $500 million product in acute spinal cord injury. We concur. Even with the expanded inclusion criteria for the study we believe it still remains strict. We believe if the NSS works, then neurosurgeons will use the device in almost all non-penetrating spinal cord injuries, regardless of things like AIS-A impairment level and injury location. In three months Jordan Fallis went from complete AIS-A with no motor or sensory function below the belly-button to incomplete AIS-C and the ability to control his bowels/bladder. We suspect that with additional physical therapy and time, Jordan will progress to AIS-D by this six month or twelve month follow-up. That’s incredible!

Under HUD, InVivo can sell up to 4,000 devices per year. That’s approximately a third of the total number of acute AIS-A spinal cord injuries on average that occur in the U.S. Upside comes with the approval of NSS under a pre-market approval application, something we suspect that InVivo will do following the HUD pivotal study in 2016.

According to the NSCISC's February 2013 report "Spinal Cord Injury Facts and Figures at a Glance," (i) during the first year, average "cost of care" ranges from $340,787 to $1,044,197, depending on the severity of the injury, (ii) the net present value to maintain a quadriplegic injured at age 25 for life is $4,633,137, and (iii) the NPV to maintain a paraplegic injured at age 25 for life is $2,265,584. Because these costs place a tremendous financial burden on families, insurance providers, and government agencies, and because of the HUD designation, we believe a cost of $150,000 is fair (and actually quite conservative) for our financial modeling. This pegs the peak market under HUD at $600 million, and we think they can get there in only a few years after launch – assuming Jordan was not an outlier and the NSS continues to show similar results in future studies.

Financial Position

On November 5, 2014, InVivo Therapeutics (NVIV) reported financial results for the third quarter ended September 30, 2014. The company did not report revenues during the quarter. This was in-line with expectations. Net loss in the quarter totaled $1.2 million, driven by $2.4 million in R&D and $1.8 million in SG&A expense. From a cash burn standpoint, InVivo used $3.2 million in cash from operating and investing activities during the third quarter 2014. Operating burn for the previous four quarters came in at $4.1, $4.3, $4.2, and $3.6 million, so operating burn has been decreasing in the past couple of quarters. We see the company’s existing funds of $17.6 million as sufficient to support its planned activities through the end of 2015.

We suspect that InVivo will see new cash inflows over the next several quarters as investors exercise currently in-the-money warrants. There are approximately 9.8 million warrants currently in-the-money, 8.5 million exercisable at around $1.40 per share and 1.3 million at $1.00 per share. Exercise of all outstanding warrants currently in-the-money could generate $25+ million in new cash to the company with no “new” dilution.


I play golf, a lot. InVivo just stood on the first tee and ripped one 300 yards down the center of the fairway. Are they a professional or a 20 handicapper that just got lucky? We will have to wait for the next shot to get a definitive answer, but if we’re picking partners based on the drive – I’m with them.

InVivo’s basic market capitalization is $169 million. We think peak sales of the NSS, device alone under HUD, is $600 million. The market triples in size under a PMA to $1.8 billion. If the company can strike an alliance with a stem cell supplier and figure out how to seed the NSS with neural-spinal stem cells, then the market opens up from approximately 12,000 acute patients per year to some 300,000 chronic patients. That’s a 25-fold increase.

Odds of success at this stage, even under HUD, are still low, perhaps 20%. Odd under the PMA are even lower, perhaps 10%. We think NSS is likely three years from the market and around six years from peak sales under HUD and 10 years under the PMA. Using a 20% discount rate and a medical device industry average 5x price-to-sales ratio, InVivo should be trading at $3.25 per share. Accordingly, we recommend the stock for long-term investors. We anticipate raising our odds of success if patient No. 2 shows similar impressive gains to the ones made by patient No. 1, Jordan Fallis.

Tuesday, January 20, 2015

Initiating Coverage of Spectral Medical: Toraymyxin Column For Severe Sepsis

By Jason Napodano, CFA & David Bautz, PhD

Zacks Small-Cap Research is initiating coverage of Spectral Medical (TSX: EDT) (EDTXF) with a Neutral rating and a $0.75 price target.

Spectral is developing the Toraymyxin column for the treatment of severe sepsis. The Toraymyxin column is a polymyxin B loaded absorption column designed to reduce blood endotoxin levels in sepsis patients. Polymyxin B is an antibiotic with very high affinity for endotoxin, a component of the outer membrane of Gram-negative bacteria that is the most potent initiator of the septic response. The Toraymyxin column is approved in both Japan and Europe and has been used to safely treat over 100,000 patients.

Limited Treatment Options For Severe Sepsis

Sepsis is a potentially life-threatening condition caused by an overwhelming immune response to an infection. While the overall mortality rate for sepsis has been decreasing over the past 20 years, the condition is still responsible for the same number of deaths each year (~200,000) as from acute myocardial infarction making sepsis the 10th leading cause of death in the United States.

Part of the reason for the high mortality rate has to do with the limited number of treatment options, with no medications currently approved by the FDA for the treatment of sepsis. Early goal directed therapy, first introduced in 2001, is an effective means of stabilizing a septic patient through rigorous monitoring of heart rate, blood pressure, and urine output and subsequent titration of intravenous fluids as those parameters change. However, there is still a significant unmet medical need for better treatment options.

The only drug to be approved by the FDA for the treatment of sepsis was Eli Lilly’s Xigris® (drotrecopgin alfa). However, it was pulled from the market in 2011, 10 years after the initial approval, as follow up clinical trials were not able to show treatment with Xigris resulted in a reduction in 28-day all cause mortality. Thus, there are currently no FDA approved medications for the treatment of sepsis, with a number of high-profile clinical failures in the past few years.

Removing Endotoxin As A Strategy

Treatment with the Toraymyxin column is predicated on the idea that removing endotoxin from a patient’s bloodstream will decrease the inflammatory signal, thus harnessing in the immune response and decreasing the symptoms associated with that response, as well as the myocardial depressant effects that endotoxin produces. A number of small, open-label studies have supported the use of the Toraymyxin column in decreasing mortality in septic patients; however, the ongoing EUPHRATES trial being conducted by Spectral is the first to test the Toraymyxin in North America as well as the first blinded study of the device.

The Toraymyxin column is composed of polystyrene fibers coated with the antibiotic polymyxin B, an effective antibiotic with high affinity for endotoxin. However, the drug cannot be used systemically due to high incidences of nephrotoxicity and neurotoxicity associated with its use. The Toraymyxin column is quite effective at removing endotoxin, with greater than 90% of the available endotoxin removed from a patients bloodstream after two treatments. Spectral is utilizing the endotoxin activity assay (EAA) value as an inclusion criterion for the EUPHRATES trial, thus including only patients who have the highest endotoxin levels. An EAA value <0.4 is considered “normal”, a value of 0.4-0.6 is considered intermediate, and a value > 0.6 is “high”. Thus far, patients entering the EUPHRATES trial have had an average EAA value of approximately 0.75.

Potential Sepsis Market

There are an estimated 1,000,000 cases of sepsis in the United States each year (Martin, 2012). Approximately one-third of these patients will develop severe sepsis, with approximately one-half of those patients having both an elevated EAA and a MODS score > 9, which is the patient population that will be targeted by Spectral. Since each patient is treated with a total of five EAA tests and two Toraymyxin columns, we calculate a potential market of 875,000 EAA tests and 350,000 Toraymyxin columns used each year. We estimate that the EAA test and Toraymyxin column cost approximately $200 and $10,000, respectively, meaning that the U.S. sepsis market is a potential $3.5 billion opportunity.

EUPHRATES Trial Continues to Enroll Patients

Spectral initiated the EUPHRATES Phase 3 clinical trial in June 2010 and had 15 sites up and running by the end of 2012. There are currently 50 hospitals eligible to enroll patients in the study throughout Canada and the U.S. It could be argued that the trial is taking a very long time to fully enroll. That being said, investors should keep in mind that it is quite difficult to identify septic patients who fit all the inclusion/exclusion criteria. The EUPHRATES trial is screening approximately 125 patients per week, with most patients not qualifying due to not meeting the vasopressor requirements, not having a MODS score > 9, or not having an elevated EAA score. For comparison’s sake, the PROWESS-SHOCK trial that evaluated Xigris was performed from 2008-2011 in 208 hospitals and screened 27,816 patients in order to enroll 1,697 (6.1% enroll-to-screen rate).

The primary outcome of the EUPHRATES trial is now 28-day all cause mortality in patients that are in severe septic shock with EAA > 0.6 and a MODS score of > 9. Past research suggests that the expected mortality rate in this group of patients is close to 50%. Since the implementation of the new exclusion criteria (MODS score ≤ 9), the composite mortality rate of the enrolled patients has increased significantly, indicative of the fact that those patients most likely to benefit from treatment with the Toraymyxin column are being properly identified and randomized into the trial. Thus far, approximately 50 patients have been randomized into the trial according to the revised protocol.

Approximately six patients per month are being enrolled into the study and we estimate this could rise to seven or eight per month as the clinical trial sites fully adjust to the altered protocol. Thus, by the end of 2015, the study should have approximately 140 patients enrolled. Based on a power analysis (see ‘When will the EUPHRATES trial finish?’), we do not foresee the trial being properly powered at that time in order to show statistical significance, as it would take an enormous absolute risk reduction in order to show significance (> 20% difference in mortality between the Toraymyxin treated and control groups). Instead, we conservatively estimate that a maximum of approximately 230 patients will be necessary, with the study likely to have enrolled that many patients by the end of 2016.

Little Downside Risk, But Questions Still Remain

Spectral currently has a market cap of only approximately $57 million; thus, there is limited downside to an investment in the company at this stage. However, there are enough questions at this point to make us wait on recommending the shares. The company reported $11.7 million in cash and cash equivalents as of September 30, 2014, due in part to a two-stage financing undertaken in June 2014. The company will be able to sell an additional $5 million worth of stock in March 2015, which we estimate will extend the cash runway to the second half of 2016. Whether this will be enough to get the company through the end of the EUPHRATES trial is unknown as we are unsure of when exactly the trial will conclude. We remind investors that we are estimating the trial will not be fully powered until the end of 2016.

We see three potential outcomes to the EUPHRATES trial: 1) the mortality difference between patients treated with the Toraymyxin column and control patients is very large (>15% absolute risk reduction); 2) the mortality difference between patients treated with the Toraymyxin column and control patients is small, but enough to make it statistically significant (~10% absolute risk reduction), or 3) the mortality difference between patients treated with the Toraymyxin column and control patients is not statistically significant.

Clearly, the first two outcomes would be a positive for Spectral; however, we feel that the magnitude of a potential positive outcome is likely to go a long way toward determining the uptake of the Toraymyxin column in an intensive care setting and ultimately how much revenue the company is likely to derive from the device. However, there are a number of questions in regard to whether the trial will be successful, such as:

- Will the use of patients with MODS score > 9 lead to a successful outcome (i.e., could those patients be too sick to be able to save with the use of the Toraymyxin column?)

- Will the company allow the trial to go on long enough to be fully powered, as the company is currently guiding for approval of the Toraymyxin column as early as 2016, which would imply the EUPHRATES trial finishing at the end of 2015?

- Will there be another interim analysis of the EUPHRATES trial to examine how the results are changing with the altered exclusion criteria?

A rather important potential catalyst for the stock in the next 6-9 months would be the announcement of another interim analysis. While we are unsure of whether or when this will occur, we believe that since the DSMB has previously performed an interim analysis and made alterations to the study it is quite likely to happen again to ensure the proper patient population is now being targeted. The most likely outcomes from an interim analysis are:

1) The study is stopped due to a statistically significant improvement in 28-day all cause mortality in patients treated with the Toraymyxin column.

2) The DSMB recommends the study continue as planned with a recalculation of the sample size necessary to show statistical significance.

We can envision an interim analysis being performed in the fourth quarter of 2015, as this is when the company is targeting for completion of the study. Even if the study were not stopped by the end of 2015, we would view a recalculation of the sample size to <230 patients (which we have calculated to be the maximum that would likely be necessary) to be a positive as well as it would help to set a definite time point for completion of the trial.

Regardless of when it happens, a positive outcome to the EUPHRATES trial would cause a significant revaluation of Spectral’s shares, as there are no FDA approved treatment options for sepsis, and the sepsis market in the U.S. is a greater than $3 billion opportunity. We feel that there will be ample opportunity for investors to take a position in Spectral during the year as more information is gathered in regards to the EUPHRATES trial. We recommend that investors get familiar with Spectral’s story, and follow the updates as to when or if another interim analysis will be performed and when the company is likely to complete the trial.

Spectral’s Other Revenue Sources

For all intent and purposes, an investment in Spectral Medical, Inc. is predicated on successful commercialization of the Toraymaxin column. However, Spectral does derive some revenue from the sale of proprietary reagents (monoclonal antibodies, recombinant proteins, and calibrators). These materials are sold for use in research and development as well as in products manufactured by other diagnostic companies through non-exclusive license and supply agreements. In addition, the company earns royalty revenues from license arrangements based on a percentage of end user sales of Troponin I. In 2013, the company earned $1.3 million in royalty revenue and $1.1 million from the sale of reagents.

Valuing Spectral Medical

We are currently taking a conservative approach and modeling for the EUPHRATES trial to conclude in December of 2016. This timeframe is certainly subject to change; particularly if an interim analysis is performed that reveals more information about when the trial is likely to conclude. We understand our model is different from what Spectral management is currently guiding, as the current guidance is indicating that the Toraymyxin column could be approved as early as the first half of 2016. While Spectral will be utilizing a modular PMA application, we do not feel that this appreciably speeds up the approval process, and that the development timeline is completely dependent upon when the EUPHRATES trial ends. Instead, we model for the Toraymyxin column to be approved in 2017 and launched in 2018.

We forecast that each treatment will cost $21,000 ($10,000/column x 2 columns per patient + $200/EAA test x 5 EAA tests per patient). As of now, we are projecting peak market share of 25% in a target population of 175,000 septic patients per year to occur in 2024, with corresponding peak revenues of $1.2 billion. Given the limited treatment options available for sepsis patients and the lack of many viable sepsis treatments in late stage development, we feel that this is a fully realizable potential. However, based on our uncertainty surrounding whether the EUPHRATES results will be positive, coupled with the uncertainty regarding the timeline for the trial, we are utilizing a large discount rate and probability adjustment to derive a net present value for the company.

We assign a 30% discount rate to account for the uncertainties we have discussed, we forecast free cash flow to be 60% of gross revenues, and we assign a 50% probability of the EUPHRATES trial being successful. This gives us a net present value for the company of approximately $138 million. Spectral currently has a fully diluted share count of 184.5 million shares, which leads to a fair value of approximately $0.75 per share. Thus, valuation is attractive at today’s price. Risk and visibility keep us at a ‘Neutral’ rating, both of which are clearly “fixable” as the story progresses and more information is released in 2015.

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