Spectral Medical has target trimmed by Paradigm Capital

The prospects are still good for clinical-stage medical device company Spectral Medical (Spectral Medical Stock Quote, Charts, News, Analysts, Financials TSX:EDT), but Paradigm Capital analyst Scott McAuley has lowered his target price from $2.10 to $1.90 per share on a change of plan for the company’s dialysis devices. In a Tuesday note to clients, McAuley reiterated a “Buy” rating on Spectral Medical, with his $1.90 target now representing a projected one-year return of 467 per cent.

Toronto-based Spectral Medical is creating next-generation products for treating critical care needs, including septic shock and dialysis. The company’s portfolio inccludes the sepsis diagnostic EAA, septic shock therapy PMX and dialysis products SAMI and DIMI.

Spectral Medical announced on Tuesday a new joint venture called I-Dialco between wholly owned subsidiary Dialco Medical and Infomed SA, a Swiss company developing and manufacturing blood purification devices. Dialco had previously licensed the SAMI and DIMI dialysis technology from Infomed for the North American market, and the JV will focus on the commercialization of SAMI and DIMI for the North American market, with Spectral and Infomed to own 30 per cent and 70 per cent of the JV, respectively.

“We have successfully worked with Infomed for many years and taking this next step with a leading medical device manufacturer illustrates our commitment to accelerating SAMI and DIMI’s growth within large, underserved markets, while maximizing value for our shareholders. Given Infomed’s extensive knowledge and experience in the dialysis space, we believe this new joint venture will allow SAMI and DIMI to reach their full commercial potential,” said Spectral CEO Chris Seto in a press release.

Commenting on the news, McAuley said that while the ownership dilution is significant, Spectral won’t need to contribute any capital to the JV, reducing Spectral’s corporate costs by about $3 million per year, and that comes at a critical time for the company’s Phase 3b septic shock study with PMX, the analyst said.

McAuley has positive conviction on the PMX trial, which is aimed at showing reduced mortality in endotoxemic septic shock, a condition with about a 50 per cent mortality and currently no FDA-approved treatments. McAuley said that combined with a distribution agreement with global medtech company Baxter International, PMX would be the only product in a $2-billion market.

“Our conviction that the study will be successful is driven by positive data from a post- hoc analysis of a prior trial, allowance from the FDA to include those prior positive data in the final analysis, use of a companion diagnostic to select patients most likely to benefit from treatment and results to date that are exceeding expectations,” he said.

McAuley said he previously valued Dialco at $0.30 per share but that given the lack of valuation information on the JV, ongoing challenging facing dialysis clinics overall and Infomed’s lack of a North American sales presence, he has removed the subsidiary, and now the JV, from his valuation.

“Our rNPV for PMX ($1.90/sh) assumes first sales in 2024, US$15,500 in total revenue per patient, a 50/50 revenue split between Baxter and EDT, and peak market share of 35 per cent by 2030 out of a market of 125,000 patients annually. Also, we assume ~$5.0 million in remaining trial costs, BAX shouldering all sales and marketing costs, 70 per cent gross margins on EDT’s revenue share, a 5x terminal multiple and a ten per cent discount rate,” he said.