Heading To Phase III, This Pharma Stock Could Jump 30%

Summary

• Following solid 2Q17 and 3Q17 earning results, we see Vital Therapeutics reaching nearly $8/share within the next 12 months.
• Metabolic syndrome pharmaceuticals make for a very robust sub-sector, and we believe the Street is underestimating its potential.
• Despite our optimism, we encourage the reader to be cognizant of a few key risks.

By Sean Alyeshmerni, DO

We find Vital Therapeutics (VTL) to be a good buy at its current market price of about $6.00/share, with a target price of $7.87 for the 12-month time frame, following solid 2Q17 and 3Q17 earning results. The catalyst for this Buy rating is that the Phase III VTL-308 has promising signs of success for being considered a respectable candidate for severe AAH (Acute Alcoholic Hepatitis), a condition on the rise without a gold standard treatment to date.

(Photo credit: massdevice.com)

Most recently, the Phase II trial has shown distinct survivability benefits for AAH, from 10% to 20% effective within a couple months of initiating therapy, in a sub-sector with one of the highest percentages (80%) of FDA-passed drug sectors. Vital anticipates a successful Phase III trial to be released by March 2018, while the rest of the Street continues to wait in anticipation with ambivalent assumptions on the impending trial. The statistics reveal a strong majority of pharmaceutical agents that pass Phase III go on to be passed by the FDA and EMA. Hence, this company's pivotal Phase III VTL-308 is strongly likely, in our view, to be successful in possibly treating a vastly growing sector without a clear gold standard treatment.

This segment has been shown to be one of the "hotter areas" in pharmaceutical investing secondary to its high need and minimal competition. In previous press releases, there was seen to be an increase in monthly participants for the trial, as well as a high power of validity in the study that was successful in Phase I and II. This represents a strong sign that Vital is looking to enhance its statistical power after a good showing in Phase II, something not commonly done if a company is concerned about its ongoing Phase III results.

What the Street is not properly factoring in

As previously mentioned, Phase II of the trial showed very impressive results in improving marked survivability in patients who have not been accounted for in previous drug trials for AAH. Secondly, the metabolic syndrome pharmaceuticals make for a very robust sub-sector, according to several life science consultancies projected toward 2020. We believe the Street has not accounted for this projection within the sector. Thirdly, the statistic that nearly 80% of metabolic pharmaceutical agents are passed by the FDA does not seem to have been publicly accounted for in other projections either.

Puts and takes of our price target

Our twelve-month price target of $7.87 is derived from the five-year projected DCF model with $838 million EBIDTA and a 45% discount rate. There are sizable spikes in earnings to be expected at the press release for Phase III completion and on the passing of Phase III in March ’18 onward. Our projection remains that VTL will exceed consensus projections.

Concluding thoughts

With such strong historical and current scientific data heading towards a successful trial and assumed passing by the FDA, we believe our target valuation is fairly justified. All key points considered - low competition, growing industry, a healthy balance sheet, a very high sub-sector FDA pass rate, and strong clinical trials - VTL seems well positioned for a stronger showing than the Street expects.

A few important words on risks

Clinical Risk: Phase 3 of VTL-308 may not produce meaningful results, although preliminary reports suggest otherwise. The most likely risk is that the study fails to reach a statistically significant number of volunteers, casting doubt on the validity of the numbers. The trial may also not succeed on account of a failure to show improvements, as well as new evidence of harmful side effects. The failure to pass Phase III could have a very meaningful impact on the valuation of the stock.

Regulatory Risk: The FDA and EMA may not regulate the drug even if the trial does not fail. However, this would be unlikely given the need for and absence of a true market leader for this growing patient population. Such a failure to pass could be devastating for the company's value given it only has this one drug in the pipeline.

Competitive Risk: In the midst of the trial, or even shortly after, there is material risk that a competitor could launch a drug to treat acute alcoholic hepatitis with the intent to cast advantages over the discovered weakness upon completion of the trials. However, Vital Therapeutics does have a patent on this agent, so the chances are slim, in our view.

Financial Risk: Although $66 million in cash is likely to fund expenses for another few quarters, Vital has no other drug in the pipeline to diversify its risk. If one of the prior risks comes to fruition, the financial outlook could turn gloomy, given there aren’t other drugs to cushion the blow. A small company such as Vital Therapeutics might not have the armor to withstand a major setback. In addition, President Trump recently stated again that drug prices need to come down, and with political pressure, all pharmaceuticals could be targets for price cuts and decreasing margins.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Report authored by Sean Alyeshmerni, DO, edited by Daniel Martins.