Vasogen (VSGN), a biotechnology company engaged in the research and commercial development of therapies designed to target the destructive inflammatory process associated with the development and progression of cardiovascular and neurodegenerative disorders, remains largely misunderstood on Wall Street.
Its lead product is Celacade, a medical device with an indication for CHF. With a market cap of just $50M and cash on hand of $32M, and an enterprise value fluctuating around $20M, the street continues to undervalue both Vasogens near term, and long term potential, and current valuations represent a compelling investment.
I believe there were two recent bearish developments that overshadowed what should have been two other extremely positive developments, and continue to drive share attrition to near all time lows in the share price. The first came in the form of a 1:10 reverse stock split on April 17th that was designed to help attract institutional investors and coverage, and to meet Nasdaq continued listing requirements. News of the reverse split was followed on April 18th with a potentially lucrative European Collaboration with Grupo Ferrer to commercialize Vasogens lead product Celacade in select countries of the European Union.
What should have been very well received was completely overshadowed by the reverse split just one day prior. Grupo Ferrer is a multi-billion private, yet relatively unknown to wall street, pharma company with an impressive list of bringing successful therapies to market. Vasogen was able to obtain a potentially lucrative back-ended deal in which they will receive 45% of revenue from Grupo Ferrer for a period of 5 years, and 42% thereafter, as well as, (undisclosed) milestone payments contingent on a country by country first patient treated basis, and pre-established sales thresholds. The two companies plan to commence an initial commercialization period in the September 07' timeframe, with the first patients treated in Germany and Spain.
Currently the market is placing little, if any, value in this potentially multi-million dollar deal, estimated to reach $182MM in sales by 2012 by Rodman and Renshaw analyst Navdeep Jaikaria. Who has also issued a $13 price target(30X2011 P/E discounted annually at a rate of 40%). With the stock currently trading at $2.30, with approximately $1.44 in cash, one can make the case for limited downside risk. The second bearish development came on May 18th in the form of an untimely Equity offering, raising $16M at $3.25 per share (a premium to the previous days closing price). This was the second equity offering in a matter of 6 months and it is clear that frustration is at an all time high regarding dilution.
On the other hand, the latest offering gives the company enough cash ($32M total) to operate until early 2009 at burn rate of $1.5M per month, limiting or possibly eliminating the amount of money that will need to be raised going forward. The positive development that followed, and was again overshadowed, was a decision from the FDA in late June to allow the company to conduct a confirmatory trial for Celacade utilizing the Bayesian approach which should significantly lower the number of patients needed, and therefore cost and duration of the trial. While also improving the chances for success, given that Vasogen may now borrow strength from the previous ACCLAIM trial. Note in ACCLAIM they saw a 39% reduction in death or first hospitalization in a subgroup of NYHA class II patients with a p-value of .0003, on top of the best 'standard of care' available. A truly remarkable result, meaning there is only a 3 in 10,000 chance that these results will not be replicated, an indicator of the high probability of success in a new trial.
Perhaps the most positive point of the FDA decision is the strong position the company is now in with respect to partnering negotiations in the U.S., which are now underway with multiple potential partners and ramping up with the feedback in hand. As previously stated by the company, the biggest hurdle in negotiations was due to the uncertainty surrounding the confirmatory trial size and cost. As mentioned the recent FDA decision considerably cuts down on the expected size and cost of the next trial.
I am hearing that the confirmatory trial will now potentially only need to enroll 200-300 patients, a number which should be confirmed by Vasogen towards the end of the summer. At an average cost of $20K per patient, a trial of 200-300 patients would cost approximately $4-6M, much lower than expected and only a fraction of the first ACCLAIM trial cost. I am also hearing that early feedback from potential partners is very encouraging, and I expect positive developments on this front in the near future.
I also expect there is potential for an upfront payment, and milestone payments, which would go a long way towards alleviating fears of the need to raise additional money via equity financings, which continue to persist in the marketplace. Moving forward, there are a number of developments in the pipeline that could potentially affect the stock price.
In the coming weeks or months Vasogen should begin to submit the ACCLAIM data to leading medical journals for publication. I am also hearing that there have been a number of analysts who have recently expressed interest in picking up coverage on the name, and would expect the first of the new coverage in the near future. Also, Vasogen has plans to initiate a phase II trial for its leading drug candidate VPO25 this fall in the area of Diabetic Retinopathy, which effects over 4 million Americans. This is a trial that should only cost the company $1M over a 12 month period, after which, if successful, the company will license out VPO25 to a number of leading pharma/biotech companies to development for other indications, namely ALS, Parkinsons, Alzheimers, etc.
Other developments will come in the form of final analysis regarding trial specifics expected towards the end of the summer, and concluding a U.S. partnership to help carve out, and clear the pathway forward in the U.S. As well as the initial commercial launch of Celacade in Europe, and details pertaining to the finalized marketing plan expected to commence in September of this year, and eventual milestone payments and revenues coming in from commercial sales thereafter.
New developments we have recently learned of is possible approval in Canada, as they have recently adopted practices similar to the European Union. The company is currently addressing this issue, and I expect to hear more on that front in the coming months. As you can see, there are plenty of reasons to get excited about Vasogen’s prospects moving forward, with seemingly all the negative restructuring moves behind us, and trading just $20M above cash levels, there is little reason to worry about downside risk.
I will now briefly address George Gutowski's article published on Friday, July 13 entitled, “Does Vasogen's Verbiage Inspire Your Confidence?” It has been a shareholder concern for some time that Vasogen management has not been clear enough regarding statements to shareholders. In the past they have had good reason, as delicate meetings with potential European partners, the FDA, and now U.S. partners dictate that they be very wise in what they say publicly.
I believe this is beginning to change with the conference call given on July 10th. If the author would have listened to the CC, instead of just posting lines from the earnings release, he would have answered many of his own questions. One who has followed Vasogen for some time would know that they have never given much, if any, new information in their earnings releases. For forward looking statements one must tune into the conference call. I for one am looking forward to future calls, and I continue to strongly believe in the story here. It’s simply a matter of time until the rest of the street figures it out.
Disclosure: The author has a long position in VSGN.
VSGN 1-yr chart: