Vasogen: Compelling Story, Significant Upside

May. 4.07 | About: Vasogen Inc. (VSGN)

For investors of small biotechnology companies who are comfortable taking some risk, Vasogen (VSGND) offers compelling valuation with a story similar to that of Dendreon (NASDAQ:DNDN).

Vasogen is a biotech company that develops immune modulation therapies to target chronic inflammation in cardiovascular and neurological conditions. Vasogen recently completed a Phase III ACCLAIM Clinical trial for their Celacade treatment in relation to chronic heart failure. Celacade failed to meet the primary endpoint in the Acclaim trial of 2408 patients for significantly reducing the risk of death and cardiovascular hospitalization.

However, results from a major sub-group of the study excluding patients with no prior history of heart attack did meet the primary endpoint. Based on the sub-group results, Vasogen has requested a meeting with the FDA which is expected to take place in late May to early June of 07 to discuss the next step with respect to the development of Celacade in the US. In addition, Celecade has CE Mark approval in the EU and has very recently announced a collaboration with Grupo Ferrer Internacional, a leading European pharmaceutical and medical devices company, to commercialize the Celacade technology in the EU and certain Latin American countries. The current stock price of $3.25 (post 1-for-10 reverse split) is near an all time low and is not reflecting the near-term opportunity in Europe. Furthermore, the market appears to have overlooked the promising data from the sub-groups in the Celacade trial.

Celacade

Celacade is a therapeutic device technology designed to apply oxidative stress to autologous blood. Oxidative stress initiates apoptosis which in turn leads to a systemic reduction in inflammation. The treatment is easily administered during a brief 20-30 minute out-patient procedure on a monthly basis. Celacade is safe and well-tolerated. The Acclaim Trial showed that Celacade reduces the risk of death or cardiovascular hospitalization for early stages of chronic heart failure patients. Potentially, Celacade could signficantly reduce time in the hospital as the need for repeated hospitalizations remains a problem for heart failure patients.

ACCLAIM Trial

The Acclaim Trial was a 2408 patient study designed to assess the ability of Celacade to reduce the risk of death or first hospitalization. The placebo (n = 1204 patients) and Celacade (n = 1204 patients) groups were balanced for all important baseline characteristics, including demographics, left-ventricular ejection fraction, New York Heart Association classification, concomitant medical conditions, medications, and device therapies. The difference in time to death or first cardiovascular hospitalization for the study was not statistically significant (p = 0.22) although there was a significant improvement in the quality of life (p = 0.04). However, a pre-specified sub-group of patients with NYHA Class II chronic heart failure (n = 689 patients), the time to death or hospitalization was significantly reduced in the Celacade group (n = 359 patients) compared to the placebo group (n = 330 patients) by 39% (p = 0.0003). Furthermore, in another pre-defined subgroup of patients with NYHA Class II-IV with no history of prior heart attack (n = 919 patients), Celacade (n = 460 patients) was also shown to significantly reduce the risk of death or hospitalization by 26% (p = 0.02).

European Commercialization

In April 2007, Vasogen announced a partnership with Grupo Ferrer Internacional to commercialize Celacade in the EU and certain Latin American countries. Ferrer is a mid-sized privately held European research and commercial development company operating in 60 countries. The majority of Ferrer's products are in the cardiovascular and central nervous system area. Their familiarity of the cardiovascular market and their contacts in the EU will be key to a successful European launch of Celacade. Under the agreement, Ferrer will have exclusive rights to market Celacade in specified European and Latin American countries in addition to the right of first negotiation with respect to the remaining countries in the EU. Ferrer will begin an initial commercialization phase in Q3 of 07 in which Celacade will be made available to key leaders in the European market. The initial commercialization is expected to last about a year. During this time period, Ferrer will purchase the Celacade device and disposable cartridges at cost from Vasogen. Following the completion of the initial commercialization, Vasogen will receive 45% of Celacade revenues in the first 5 years and 42% thereafter in addition to certain milestones. Ferrer will be responsible for all costs associated with the launch and marketing of Celacade.

The company had been anticipating an agreement with a European partner for over a year now. With the unfavorable results from the Acclaim Trial in mid 2006, investors questioned whether Vasogen would be successful in partnering with a reputable European distributor. Even if an agreement was reached, it seemed unlikely Vasogen would be able to negotiate favorable terms. Surprisingly, Vasogen was able to partner with a reputable distributor and on very reasonable terms which is a reflection of new management's ability to deliver. The partnership with Ferrer is better than what most investors were expecting. To begin with, no one was expecting a marketing agreement for Latin American countries. More importantly, Ferrer has a focus in cardiovascular products and has relationships with key European physicians and hospital executives. Furthermore, Ferrer has experience in obtaining approvals for insurance reimbursements in each of the EU countries. A successful launch in Europe is key to Vasogen's success. The partnership with Ferrer is the first significant step in the company's ability to generate significant revenue.

Management

In March 2006, Terry Gregg succeeded co-founder William Grant as Chairman. In March 2007, Gregg was appointed President and CEO of Vasogen. Gregg was formerly President and Chief Operating Officer of MiniMed Inc. He transitioned MiniMed from a development-stage therapeutic device company into a leader in diabetes management systems. He was instrumental in Medtronic's $3.4 billion acquisition of MiniMed in 2001. As President and CEO, his leadership and experience bring instant credibility to Vasogen. His operational expertise is already evident in the favorable partnership with Ferrer. He will be the key figure in bringing Celacade to commercialization. In addition, Board member, Ronald Cresswell is a former Senior VP and Chief Scientific Officer of Warner-Lambert. Dr. Cresswell has over 30 years of research and commercial development in the cardiovascular area and was instrumental in the success of Lipitor. His reputation and contacts in the cardiovascular field will also be valuable to the success of Vasogen.

FDA Meeting

In April 2007, the company submitted a pre-read package to the FDA regarding the data from the pre-specified sub-groups of the Acclaim trial and has requested a meeting to discuss the further development of Celacade in the US. The company has indicated that they expect the meeting to take place in late May to early June. Specifics of the meeting will be released in mid June. There are 3 possible outcomes from this meeting.

1) The FDA could outright reject Celacade based on the overall data from the Acclaim trial, but this is unlikely given the data from the sub-groups and the need for safe treatments for chronic heart failure patients.

2) The FDA could ask Vasogen to conduct an additional trial with specific criteria that would replicate the results from the sub-groups.

3) The FDA could determine the data from the sub-groups is sufficient for consideration and would ask Vasogen to submit the sub-group data with an amended application.
With an outright rejection of Celacade unlikely, Vasogen is in a win-win situation. Given the FDA's conservative nature, one might conclude that the FDA will require Vasogen to conduct an additional trial focusing on Class II and III patients without a history myocardial ischemia. Celacade was found to improve the quality of life and was well tolerated by patients in the Acclaim trial. Therefore, enrollment for an additional study would not be an issue. From the analysis of the sub-group data, it's likely that such an additional trial would be successful and pave the way for FDA approval. However, recent statements made by FDA officials suggest the FDA has put a priority on making treatments available to patients who need them. An example of this shift in policy is Dendreon.

Dendreon's cancer treatment, Provenge, failed to meet its primary endpoint. After further analysis, Provenge showed that the treatment prolonged overall survival. An FDA Advisory Committee overwhelmingly recommended the treatment with a 17-0 vote on safety and 13-4 vote on efficacy. In fact, the efficacy question was re-worded by the FDA and given a more lenient inpretation. DNDN is currently waiting on a decision by the FDA for approval of Provenge. In Vasogen's situation, the analysis from the pre-defined sub-groups is even more compelling. The sub-groups are a decent size, and the results are quite definitive. Given the lack of safe treatments and the cost of repeated hospitalizations for chronic heart failure patients, it's not inconceivable that the FDA would consider approving Celacade without further trials based on the decent sized sub-group data. If Celacade is approved by the FDA in Q4 of 07, the approved market for Celacade would double with the addition of US patients. Vasogen would be able to begin initial commercialization in the US by 2nd half of 08 and begin full commercialization in 09. In addition, market acceptance of Celacade in the US would benefit from a favorable roll out in Europe in 08.

Valuation

In Q4 2006, investors eagerly anticipated the announcement of the European partnership. The stock price at the time was around $0.75 (pre-split). As Q1 2007 came to an end without the announcement of a partnership, investor anticipation had faded. In addition, with the stock price around $0.35 - $0.45 (pre-split), Vasogen was facing a Nasdaq delisting. To rectify the delisting issue, the company announced a 1-for-10 reverse split effective on April 17, 2007. On the day before the split, VSGN was trading at $0.43. The day after the split, the stock was trading at $3.60. It's difficult to understand the rationale behind the sell off. On April 18, 2007, the company finally announced the partnership with Ferro. The stock price traded up to $4.50 on the news, but quickly retraced back down to $3.50. The partnership with Ferro marked the beginning of the commercialization of Celacade. This news should have been received much more positively by the market. However, with the delays in announcing the partnership and the confusion from the 1-for-10 reverse split the day before, investors did not focus on the favorable news. Had the partnership with Ferro occurred in Q4 2006 when anticipation of the announcement was high, the stock price probably would have traded from $7.50 (post-split) to $10.

There are an estimated 6.6mm chronic heart failure patients in Europe alone including 3mm patients with no history of myocardial ischemia. In the US, there are an estimated 5.2mm patients including about 2.8mm patients with no history of MI. These numbers are projected to increase substantially over the next 10 years. At a current stock price of $3.25, the market is underestimating the potential revenue for Celacade. In addition, the recent appointment of Terry Gregg as President and CEO is significant and should be viewed positively by investors. Most importantly, the partnership with Ferro has given visibility to the commercialization of Celacade. With a mid-June FDA update around the corner, investors should also be accounting for the probability that Vasogen will not have to conduct an additional trial. Vasogen currently has a market capitalization of about $56.5mm with $27mm in cash (enterprise value = $29.5mm). At $3.25, with $1.55 per share in cash, Vasogen warrants a much higher EV than the $1.70 per share just based on the European market alone. The risk/reward scenario is very favorable to investors at current levels. For the reasons stated above, Vasogen should be trading around $6-$7 with an upside to $10-$12 if the FDA recommends the company submit Celacade for approval at the June meeting. There is minimal to no risk on the downside if the FDA requests an additional trial. Finally, with the initial European commercialization beginning in Q3, expect the stock price to start reflecting the potential revenue from Celacade.

Disclosure: Author has a long position in VSGND

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