Spectral Medical is undervalued, says Paradigm

Paradigm Capital analyst Scott McAuley likes what he sees in clinical stage medical device company Spectral Medical (Spectral Medical Stock Quote, Charts, News, Analysts, Financials TSX:EDT), saying in a Wednesday update that the stock is clearly undervalued at current levels.

Toronto-based Spectral Medical is trialling a treatment for septic shock and dialysis, with septic shock therapy PMX and sepsis diagnostic EAA. The company also has dialysis products SAMI and DIMI.

Spectral recently held Investigator Meetings which brought together representatives for existing new trial sites, the new clinical research organization and staff from US commercial partner Baxter. The program focused on enrolment and included educational sessions on best practices and inclusion criteria for Spectral’s Phase 3b trial on PMX, which currently has 60 patients enrolled. 

Spectral said the meetings were an overwhelming success.

“We now have significant recruitment efforts underway and are taking steps to accelerate enrolment, including the addition of multiple new sites, and a new CRO that many of these trial sites have worked with in the past. Given this progress, the investigator meeting was an important step, providing us the opportunity to reaffirm our unwavering commitment to the trial and advancing PMX to FDA submission and ultimate approval. Participants showed strong support, as well as shared in our eagerness to bring PMX to market,” said CEO Chris Seto in a press release.

McAuley said the meetings helped reinforce his conviction around the Tigris PMX trial as well as around the product itself and he said the sessions have already helped in speeding up enrolment. 

McAuley noted that the trial had been recruiting patients at a rate of 0.182 patients per site per month prior to the meetings, a rate which is far below the average of 0.83 from a review of past sepsis and acute respiratory distress syndrome (ARDS) trials. Management has said that if it reaches a rate of 0.25 per site per month it could reach a full 150 patients by September 2024.

McAuley is optimistic that full enrolment could come earlier.

“Given that it has recruited seven patients in the past six weeks across 16 active sites, that is already a rate of 0.29 patients per site per month. Also, management highlighted a recent review that found an average recruitment rate of 0.83 patients per site per month across 94 published studies from 2009 to 2019. Therefore, if it can keep up the momentum, there is an opportunity to finish the trial earlier,” he said.

“Management also highlighted that this strict enrolment is a function of the trial requirements and is not a reflection of the market for PMX. In fact, it is seeing an average of 1.2 patients per week that could be treated with PMX. Extrapolating across the ~6,000 hospitals in the U.S. would mean an annual addressable patient population of ~350,000. This is much higher than our current assumption of a 120,000 per year market and provides upside opportunity to our estimates,” he wrote.

With the update, McAuley reiterated a “Buy” rating on EDT and 12-month target of $1.60 per share, representing at press time a projected return of 385 per cent.

The analyst said the current $0.33 share price reflects that the market is only giving a 21 per cent probability of success to the Phase 3b Tigris trial, where published industry averages have the probability of success for an average Phase 3 trial at 63 per cent, or 77 per cent for trials that use a biomarker for patient selection. McAuley said the 77 per cent probability would represent a per-share value of $1.23, which is a significant upside to the current $0.33.

“Therefore, while financing remains an overhang, and we account for additional dilution in our rNPV, we believe the market is excessively discounting the potential for success in the Tigris trial,” he said.