Spectral Medical is “fundamentally undervalued”, Paradigm says

Paradigm Capital analyst Scott McAuley is maintaining a “Buy” rating and $2.30 target on Spectral Medical (Spectral Medical Stock Quote, Chart, News, Analysts, Financials TSX:EDT) following the company’s announcement of a non-dilutive US$10-million financing deal with commercial partner Vantive US Healthcare LLC.

McAuley said the deal removes a major financial overhang and provides runway through the expected PMX approval and commercialization. “This sets our sights on the upcoming data readout this August,” he said in a May 7 research note.

Spectral is a clinical-stage medical device company focused on developing therapies for critical care, particularly septic shock and dialysis.

“We view EDT as fundamentally undervalued with upcoming significant clinical catalysts,” McAuley said. “It has now finished recruitment of its Phase 3b study to show that PMX is effective at reducing mortality in endotoxemic septic shock, a condition with ~50% mortality, no FDA-approved treatments and a ~$2B market in the U.S. Market skepticism is driven by the history of failed septic shock treatments, the length of time it has taken to complete this trial and negative views on post-hoc analysis.

“Our conviction that the study will be successful is driven by a positive view on the post-hoc analysis of the prior Phase 3 trial, allowance from the FDA to include that prior data in the final analysis via Bayesian analysis, use of a companion diagnostic to select patients most likely to benefit from treatment and early results that exceeded expectations. Commercialization is significantly de-risked through its agreement with Vantive, the kidney care spin-off from Baxter International (BAX-US) that was recently acquired by Carlyle Group (CG-US). This acquisition gives Vantive the resources and incentive to grow and ensure PMX is a commercial success.”

MCauley said Paradigm still believes the market is underestimating the potential of PMX. The firm is assigning a 100% chance of success to the ongoing TIGRIS trial based on strong results from earlier analysis, FDA approval to include that earlier data in the final review, using a companion diagnostic to target the right patients, and encouraging past results.

“Using this as a base, the recent $0.81 share price and our updated $2.30 NPV reflect that the market is only giving a 35% probability of success to the Phase 3b TIGRIS trial,” he said. “Published industry averages have the probability of success for an average Phase 3 trial at 63%, or 77%, for trials that use a biomarker for patient selection. Using the 77% probability would represent a per-share value of $1.77, a 119% gain on the current share price.”

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