When examining Venaxis' (APPY) chart over the past few years, it's hard to say the company hasn't had a rough time. A major reason the company has been recently trading at a depressed price was because of the recent cash raise of approximately $14.4 million (before deducting fees and expenses), in which the company issued 11.5 million shares and warrants at a combined price of $1.25. However, the weakness following the financing could offer an entrance opportunity ahead of the upcoming pivotal study results for APPY1, the company's blood-based appendicitis test, which are due by the end of the year. The current focus of the company is to develop the APPY1 Test to assist physicians in identifying children and adolescent patients at low risk for appendicitis as this population is at the highest risk of long term health effects associated with CT imaging.
This week, I had the pleasure of interviewing one of the leading senior analysts for medical diagnostic devices and life science tools, Mr. Jeffrey Frelick, a senior research analyst and a managing director at Canaccord Genuity, which has been covering Venaxis for several years. Prior to joining Canaccord, Mr. Frelick was a senior analyst at ThinkEquity and Lazard Capital Markets, where he was covering the diagnostic industry. Prior to Lazard, he was a medical device associate analyst at Susquehanna Financial Group, Leerink Swann & Company, and ABN Amro. Prior to Wall Street, Mr. Frelick was a consultant at Boston Biomedical Consultants, from 1997-1999, where he provided strategic planning assistance, market research data and due diligence for diagnostic companies on a global basis. He earned a B.S. in Biology from the University of Pittsburgh and an M.B.A. from Suffolk University Business School.
Ben Yoffe: Mr. Frelick, what can you tell us about the history of Venaxis' APPY1, and what has changed in the last three years?
Frelick: I have been following APPY since 2008 because in our opinion, Venaxis could commercialize the first blood test aiding in identifying patients at low risk of appendicitis.
Venaxis has recently commenced its third pivotal study using a panel approach, as the prior two clinical trials have produced some mixed results.
The 2008 clinical study which produced sensitivity of 90% and negative predictive value (NPV) of 87%, across 4 test sites, didn't seem quite robust enough, so APPY decided not to file its 510k application with FDA.
In 2010, Venaxis decided to expand the second clinical trial to 800 patients across 13 sites. However, following post-hoc analysis, given its low specificity due to improper sample collection, sample transport conditions and timing, the 1st generation, 1-hour ELISA-based test was not formally submitted to FDA. In late 2010, Venaxis decided to move forward with its 2nd generation 20-minute rapid test.
In 2011, APPY decided to enhance the performance of the test with a multi-marker panel approach and conducted several pilot studies. The APPY1 test includes its MRP 8/14 markers along with a C-reactive protein and white blood cell count for broader coverage of the body's appendicitis response.
Yoffe: So All eyes are focused on APPY1 pivotal study results, which are due by the end of the year. What are your expectations?
Frelick: Our expectations for the pivotal trial of the APPY1 test are for sensitivity and NPV to be in the mid-90% range given the recent pilot studies. The 2011 pilot demonstrated NPV of 97%, sensitivity of 97%, and specificity of 43%. The strong NPV result implies that physicians are 97% confident that a patient who tests negatively for appendicitis does not have appendicitis. Since Venaxis intends to market the APPY1 test as a "rule out" test for appendicitis, we believe there is a likelihood of producing similar results and thus FDA approval is compelling.
Yoffe: Does it have any significant competitive advantages?
Frelick: While there is not a competing test for aiding in diagnosing appendicitis, we see advantages in improving clinical outcomes by allowing for more timely diagnosis, and reducing unnecessary CT scans in children. The APPY1 test does not change typical emergency room work flow for abdominal pain and can be performed from the same blood draw for complete blood count, which is standard practice.
Under the current protocol, physicians typically perform CT imaging on those suspected of appendicitis. CDC data indicates that 9.6M+ patients entered hospital ERs in the U.S. in 2009 complaining of abdominal pain. Of these patients, 3.1M patients received a CT scan, while only ~300K appendicitis cases were reported. Venaxis seeks to reduce the large number of unnecessary CT scans and meaningfully reduce the 3.1M costly and potentially hazardous CT scans performed. The New England Journal of Medicine published a study in 2007 that concluded that CT scans can lead to greater incidence of cancer, particularly in young patients.
If approved, APPY-1 would provide ER physicians with a result in 20 minutes to aid in the decision of ruling out possible appendicitis. The test is targeted for children, adolescents and young adults (ages 2-20), given the high prevalence rate in this population.
Yoffe: What is your sales projection for APPY1, if approved, in the U.S.?
Frelick: While 9.6M Americans entered the ER last year complaining of abdominal pain, our model initially assumes that 2.1M adolescent emergency room (ER) visits occur per year, then expands by 2017 to include 7.5M adults as well. Our model reflects a gradual uptick in penetration assuming FDA approval in 1H/2014. Given the 2.1M annual visits to the ER by children for abdominal pain, we peg the market opportunity at almost $200M. Upon FDA approval, Venaxis will pursue expanding the intended age group to include adults with abdominal pain. We estimate this will expand the U.S. market opportunity to approximately $700M based upon 6.6M ER visits for abdominal pain.
Yoffe: How strong is the patent protection?
Frelick: APPY has a solid IP portfolio including three key U.S. patents for "Methods and Devices for Diagnosis of Appendicitis, and several pending patent applications. In addition, patents have been issued in the following foreign countries: Australia, Hong Kong, Israel, Japan, New Zealand, Singapore, and South Africa. A patent was also granted by the European Patent Office and subsequently validated in the following European countries: Belgium, Switzerland, Germany, Spain, France, The United Kingdom, Ireland, Italy, the Netherlands, and Sweden.
Yoffe: In January, the company has obtained CE-Mark approval in Europe to market APPY1. What is the market opportunity for this product in Europe, and what is your opinion about the commercialization plans?
Frelick: APPY1 obtained CE marking on January 7 and Venaxis shipped its first product into Europe in early February. APPY looks to sell to 25-40 hospital sites across 5 European territories, garner support from key opinion leaders (KOLs), and seek publications, which will support its European roll-out. The company will identify and set up its European distribution in 1H13 and should begin to recognize revenues by 2H13, which we estimate at ~$1M. Venaxis is focusing on five regions in Europe (U.K., Italy, Germany, France, and Benelux area) which account for close to 70% of the 5,500 hospitals.
Yoffe: What is your impression of the management team as leaders?
Frelick: We believe Venaxis has assembled a solid management team and board of directors that are comprised of strong diagnostic industry veterans. CEO Steve Lundy has more than 25 years of Dx industry experience. Chief Commercial Officer Don Hurd has significant sales and marketing experience of 30years with both large [Siemens (SI), Bayer (OTCPK:BAYZF)] and small (BioBehaviorial Diagnostics, MicroPhage) diagnostic companies. Lyndal Hesterberg, Ph.D. leads the R&D initiative at APPY drawing on 30 years of experience in the development and launch of multi-marker diagnostic tests.
Yoffe: The company has recently completed an equity financing. Does it have sufficient liquidity to fund the operations through the upcoming targets?
Frelick: Venaxis' cash balance is approximately $20 million, which we think will get the company through its pivotal trial and early European commercialization given Venaxis burns ~$2-3M/quarter.
Yoffe: In closing, what is your rating and price target for APPY?
Frelick: We rate APPY shares a "buy" and have a $7 price target. While the point of care testing peer group trades approximately 3x sales, we have conservatively assigned a 2x multiple to APPY's 2018 revenue (to reflect product ramp and label expansion) estimate of $82M, discounted back 4 years at a 30% discount rate, yielding a price target of $7.
We believe Venaxis has an opportunity to commercialize a novel and unique diagnostic tool for aiding in the diagnosis of appendicitis that will result in meaningful revenues and growth.