Ah! Here's the report I was looking for yesterday. Long read...but well worth it... (I'm not sure how the tables will turn out, but regarless...the text is very informative)
Associate: Felix Narhi (604) 669-7122
One of the Most Promising Biotech Companies in Canada
HIGHLIGHTS
-Biotechnology companies have enjoyed an excellent year in 1999 after a prolonged period of flat growth. Long-term prospects for the industry appear very bright.
-The Company?s products address a number of significant commercial opportunities in the vast areas of cardiovascular, autoimmune disease and cancer.
-The Company is entering U.S. clinical trials in a 5th indication, Congestive Heart Failure (CHF). This condition represents a huge market of nearly 5 million Americans.
-We believe Vasogen is the only Canadian company of its size that will have 5 products in clinical trials by Q2?00 (3 clinical trials are now in progress and 2 more will commence in Q2).
-Vasogen continues to attract very high calibre industry professionals to both its Scientific Advisory Board and Board of Directors - further enhancing it?s credibility with the medical community.
We expect some very positive near-term milestones.
Company is increasing U.S. visibility for their new AMEX listing - Vasogen recently presented to the New York Society of Security Analysts to raise investor awareness and presence.
(Revenue figures in ?000s)
1999E 2000E 2001E 2002E
FY Rev- $6,750 $11,370 $24,237
FY EPS (0.25) (0.03) 0.03 0.15
Shares o/s (basic): 37.0 M
Market Cap.: $309.0 M
Biotechnology Sector has Turned the Corner
Returns for biotechnology companies have been left behind during most of the current great bull market - until recently. The AMEX Biotechnology Index had been relatively flat since 1992 and lagging the S&P 500 by a growing margin until the index exploded last year. Most industry observers expect continued robust growth for a prolonged period fueled by the numerous recent fundamental advances in the healthcare sciences and growing demand from an aging population.
-AMEX Biotechnology Index since inception vs. S&P500 (1992-2000), Source: BigCharts.com
One area in particular that has begun to capture investors? attention is the fast growing cardiovascular disease segment of the industry. It is now widely recognised that damaging inflammatory immune responses are associated with the development and progression of most cardiovascular diseases, including those resulting from atherosclerosis, such as heart attacks, strokes and peripheral vascular disease (PVD). In addition, inflammatory damage plays a significant role in congestive heart failure, which results in a progressive loss of ability of the heart to pump blood leading to increasing morbidity and death. Vasogen?s immune modulation therapies (IMT) have been shown to down-regulate the type of inflammatory processes that are involved in these clinical problems and are, therefore, particularly well-positioned to capture future market share.
Vasogen is Gaining Visibility in the U.S.
Since obtaining a U.S. listing in November 1999, the Company has commenced a program aimed at increasing their visibility south of the border. Despite the low initial share volumes traded on the AMEX, we feel there is a growing interest in the U.S. (We believe many US investors are currently purchasing shares through the TSE due to the increased liquidity offered by that exchange). A notable recent event was a company/investor presentation to about 40 members of the New York Society of Security Analysts on January 19. Interestingly, this Society only allows presentations from 20 companies per year. Clearly, getting such exposure was a major coup for a small-cap Canadian company like Vasogen. With the recent expansion of the Company?s clinical trials program in the United States, combined with a number of senior US-based appointments to its Board of Directors and Scientific Advisory Board, we expect that investor awareness will continue expand in the coming months.
New Therapy VAS991 - Congestive Heart Failure - A Large Potential Market
Nearly five million Americans now suffer from congestive heart failure (CHF), and as the population ages the incidence of congestive heart failure is rising dramatically. Estimated annual diagnosed cases rose from 250,000 people in 1970 to nearly 700,000 in 1992. CHF occurs when the pumping function of the heart is insufficient to meet the body?s demand for oxygen and other nutrients. Men are at higher risk than women, although the difference narrows with age. The cause of heart failure in men is more likely to be coronary artery disease; while in women heart failure is more apt to be the result of high blood pressure or unknown causes. About 250,000 people die of heart failure each year. Heart failure is the most common reason for hospitalization in the elderly. Clearly, as the population ages, coming up with new ways to keep Baby Boomers? hearts pumping efficiently and arteries from clogging will take on added significance.
Financial Recap
We have tried to estimate the stage of Vasogen?s therapies and our expectation of revenue from each indication. As in the pharmaceutical industry, we believe examining a medical technology company?s ability to innovate, by looking at and tracking the progress of its product development pipeline, is a sound policy. The average success ratio for any given treatment may be different for new immune modulation therapies than pharmaceuticals. Unfortunately, there is no benchmark for an average IMT ?hit ratio? due to the emerging nature of this new field. As a result, we have attempted to classify each of Vasogen?s therapies into ?drug-equivalent? development stages. We have applied these probabilities to each potential therapy and discounted a conservative market penetration rate. While this approach may be limited, we feel it provides the closest proxy to discount the risks that all new biotechnology treatments face. Below is an updated outline of Vasogen?s therapies and our estimation of revenue contribution from each indication based on this approach.
Product
Market/ Indication
Expected Commercialization Timeframe**
Total Available Market (000s)
Target Market%
Serviceable Available Market (000s)
Vasogen's Expected Penetration (5 years post mkt intro)
Size of Vasogen's expected market
(# of patients)
5 Year Revenue Potential to be realized by Vasogen
Prob, of success*
5 year post mkt intro - Vasogen's Realizable Royalties Revenue
Product: VasoCare
Market/Indication: PVD
Expected Commercialization Timeframe: 2000
Total Available Market (000s): 5,600
Target Market (%): 50%
Serviceable Available Market (000s): 2,800
Expected Penetration (5yr post market): 22%
Size of Vasogen's Expected Market (# of patients): 616
5 Year Revenue Potential: $221,575
Probability of success: 45.00%
5 year Realizable Royalties: $99,709
Product: VAS971
Market/Indication: TAA
Expected Commercialization Timeframe: 2001E/2002NA
Total Available Market (000s): 10
Target Market (%): 100%
Serviceable Available Market (000s): 10
Expected Penetration (5yr post market): 60%
Size of Vasogen's Expected Market (# of patients): 6
5 Year Revenue Potential: $2,700
Probability of success: 37.5%
5 year Realizable Royalties: $1,013
Product: VAS971
Market/Indication: AAA
Expected Commercialization Timeframe: 2001E/2002NA
Total Available Market (000s): 90
Target Market (%): 100%
Serviceable Available Market (000s): 09
Expected Penetration (5yr post market): 60%
Size of Vasogen's Expected Market (# of patients): 54
5 Year Revenue Potential: $24,300
Probability of success: 37.5%
5 year Realizable Royalties: $9,113
Product: VAS981
Market/Indication: GVDHD/(allogenic BMTs)
Expected Commercialization Timeframe: 2000/2001E&NA
Total Available Market (000s): 11
Target Market (%): 236%
Serviceable Available Market (000s): 26
Expected Penetration (5yr post market): 85%
Size of Vasogen's Expected Market (# of patients): 489
5 Year Revenue Potential: $70,357
Probability of success: 30.00%
5 year Realizable Royalties: $21,107
Product: VAS972
Market/Indication: RA
Expected Commercialization Timeframe: 2003/2004NA
Total Available Market (000s): 5,400
Target Market (%): 10%
Serviceable Available Market (000s): 540
Expected Penetration (5yr post market): 40%
Size of Vasogen's Expected Market (# of patients): 216
5 Year Revenue Potential: $77,695
Probability of success: 15.00%
5 year Realizable Royalties: $11,654
Product: VasoCare
Market/Indication: PVD
Expected Commercialization Timeframe: 2000
Total Available Market (000s): 5,600
Target Market (%): 50%
Serviceable Available Market (000s): 2,800
Expected Penetration (5yr post market): 22%
Size of Vasogen's Expected Market (# of patients): 616
5 Year Revenue Potential: $221,575
Probability of success: 45.00%
5 year Realizable Royalties: $99,709
Product: VAS991
Market/Indication: CHF
Expected Commercialization Timeframe: 2003/2004NA
Total Available Market (000s): 4,900
Target Market (%): 40%
Serviceable Available Market (000s): 1,960
Expected Penetration (5yr post market): 20%
Size of Vasogen's Expected Market (# of patients): 392
5 Year Revenue Potential: $141,002
Probability of success: 30.00%
5 year Realizable Royalties: $42,301
TOTAL Revenue Potential: $770,785
TOTAL Realizeable Royalties: $254,843
all figures $CDN (000s)
As each therapy nears completion with no setbacks we have become increasingly optimistic on Vasogen?s ability to convert their science to clinical, and ultimately, commercial success.
Positive Near-Term Milestones
We feel that there are a number of potential explosive developments on the horizon for Vasogen that could add significant market value to the company. Some milestones that may occur within the next few quarters include the following:
Announcement of an initial commercial licensing agreement.
Successful conclusion of the clinical trial of Vasogen?s lead therapy ? Vasocare
the deadly severity of the condition.
Publish initial preclinical results regarding the connection between Vasocare and the stabilization and regression of atherosclerosis. Given the recently established link between inflammation, unstable plaque, and heart attacks and strokes, these areas are considered the ?Holy Grail? of atherosclerosis treatment.
Summary
Historically, in the medical devices market, fast growth rates ultimately mature into steady business areas dominated by a few large oligopolists. First-mover status, patent protection, and ?franchise? brand names with healthcare practitioners play an important part in determining future oligopolist members. These successful companies have enjoyed both long-lived and substantial cash flows.
As a pioneer of immune modulation therapies, we feel Vasogen certainly enjoys early-mover advantages in this emerging field. Vasogen has spent over $21M on immune modulation therapy R&D since inception in 1992. Furthermore, the Company now boasts 5 issued patents and an additional 15 pending patents that protect this intellectual property. These patents cover all aspects of the Company?s therapies including the delivery technology, immune cell modification processes, bone marrow treatment technology and the application of these to a broad range of related diseases. Ultimately, large healthcare companies will supply extensive ?branding? and marketing for Vasogen?s therapies.
The Company has steadily progressed from ?raising eyebrows? in the scientific community to attracting top medical doctors and researchers to their innovative IMTs. Indeed, that is not surprising ? most new platform technologies typically receive a cool reception initially from a skeptical scientific community. Vasogen?s therapies have survived the intense scrutiny of their peers and has begun winning support. We have grown increasingly impressed by the credentials of the personnel Vasogen has attracted to their Scientific Advisory Board and Board of Directors. Equally impressive are the resumes of the senior clinical investigators of leading medical colleges conducting IMT clinical trials for Vasogen. For example, Vasogen just attracted Dr. James Young, Medical Director from the Kaufman Center of Heart Failure (The Cleveland Clinic Foundation) to direct a clinical trial for Congestive Heart Failure using the Company?s VAS991 therapy. Dr. Young is considered one of the world?s foremost experts in the study of heart failure. The due diligence people of this calibre would perform prior to lending their names and reputations speaks volumes about Vasogen?s underlying therapies. Obviously a growing number of industry professionals would like to associate themselves with, what we consider to be, one of the most exciting therapeutic breakthroughs in healthcare for years, if not decades. We expect that Vasogen should continue to attract additional endorsements from additional healthcare heavyweights going forward.
The average market capitalization of the 10 comparable companies (as outlined in our June 1999 research report) which are at like stages of development and targeting similar therapeutic categories is $US 470 million or approximately $CDN 680 million compared to Vasogen?s $309 million. Most of these companies have no more than three clinical trials underway. In contrast, Vasogen will have 5 underway by Q2?00 (3 currently underway and 2 more in Q2). Furthermore, very few companies in that biotech comparison group can boast the clout enjoyed by members of Vasogen?s Scientific Advisory Board and Board of Directors. As a result, we feel Vasogen?s current market cap offers a very attractive valuation. Vasogen?s immune modulation therapies appear to be on the verge of breakthrough success in the coming quarters.
We are raising our 12-month target price to $15.00 to reflect the highly positive events we expect may occur in the coming quarters.
The information contained in this report has been drawn from sources believed to be reliable but its accuracy or completeness is not guaranteed, nor in providing it does Research Capital Corporation assume any responsibility or liability. Research Capital Corporation, its directors, officers and other employees may, from time to time, have positions in the securities mentioned herein. A copy of the firm?s statement of financial condition, along with a list of partners, directors and senior officers is available on request. Contents of this report cannot be reproduced in whole or in part without the expressed permission of Research Capital Corporation. (U.S. Institutional Clients - Research Capital U.S.A. Inc. (a wholly owned subsidiary of Research Capital Corporation) accepts responsibility for the contents of this report subject to the terms & limitations set out above. Firms or institutions receiving this report should effect transactions in securities discussed in the report through Research Capital U.S.A. Inc., a Broker-Dealer Registered with the United State Securities and Exchange Commission).
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