TAEUS Commercialization Is Within Sight; Reiterate Buy and $6 PT
European commercialization looks possible by year-end 2020.
Recall that in March 2020, ENDRA Life Sciences received CE Mark
approval for ENDRA’s fatty liver imaging probe (FLIP) as a non-invasive
liver assessment tool for NAFLD and non-alcoholic steatohepatitis
(NASH). Recall also that ENDRA’s collaboration agreement with the
GE Healthcare unit of General Electric (GE; not rated) extends through
January 2021, and under the terms of the partnership, GE Healthcare
is to provide support for ENDRA’s TAEUS commercialization activities
in a fatty liver disease (FLD) application. In return, ENDRA is providing
GE Healthcare certain rights of first offer with respect to manufacturing
and licensing rights for TAEUS in FLD. We expect the GE Healthcare
partnership to lower the hurdles of ramping up commercial activities in
Europe, and potentially later in the U.S. More specifically, we expect
the launch of TAEUS to leverage GE Healthcare’s strong position in
the ultrasound market. ENDRA’s sales team is already working closely
with the GE team in the initial target markets, which include Germany,
France, Switzerland, and the UK, to introduce its TAEUS technology to
existing and new GE ultrasound clients in radiology. While the strategic
partnership is extended for only one year, we think extension of the
agreement is highly likely, as the uniqueness of TAEUS provides a
first-mover advantage in the marketplace, where there is a significant
clinical need and technology gap for a safe, non-invasive, cost-effective
diagnostic tool to evaluate liver fat in patients with chronic liver disease.
We look for potential announcement of the TAEUS launch as a positive
catalyst by year-end 2020 or early 2021, and therefore, reiterate our Buy
rating and $6 PT.
An extensive pre-commercialization strategy was executed over
the last several years. Current options used to diagnose and monitor
liver fat in NAFLD patients, namely MRI and liver biopsy, are difficult
to integrate into clinical practice. On the back of its robust clinical
utility, affordability, and the availability in a point-of-care setting, we
believe ENDRA’s TAEUS liver device is well-positioned to fill the void
in clinical treatment options. Furthermore, we think the device’s ability
to accurately quantify fat in the liver at the point-of-care at a fraction
of the cost of MRI and biopsy should provide a distinct competitive
edge in the commercialization of the product. With commercialization
activities already in motion, we look for the company to capitalize on
its extensive pre-commercial activities, which was established in the
background by ENDRA during the last several years, and thus, be
able to leverage its CRM network of over 3,500 global clinicians. As
a part of its EU commercialization strategy, ENDRA plans to initially
focus on establishing clinical evaluation reference sites that have used
TAEUS to measure and monitor liver fat, and execute product marketing
communication and education campaigns in the target markets. ENDRA
has devised a hybrid commercial strategy, where it leverages both its
own direct sales team as well as GE Healthcare sales channels to
drive sales. While GE Healthcare would facilitate the sales uptake in its
core market, radiology, ENDRA’s sales team would drive awareness,
interest, and trial outside of GE Healthcare’s ambit, specifically targeting
clinicians in hepatology, endocrinology, and primary care.
ENDRA is strategically using pre-approval time to generate additional data in the U.S. We think it notable that to further
strengthened its 510(k) application, ENDRA is conducting additional verification testing. If everything goes as planned, the
company expects to begin commercial activities in 2021. Recall that on June 8, the company announced that it partnered with
the Medical College of Wisconsin for a clinical study to evaluate TAEUS in non-alcoholic FLD (NAFLD). The proposed study
is expected to enroll 75 subjects with NAFLD to compare TAEUS against a baseline measure of liver fat as determined by the
current standard of care, MRI-PDFF, a specialized method of magnetic resonance imaging (MRI). Along with data expected
to be generated at ongoing or planned studies, we expect data points from this study to further support the body of clinical
evidence already generated with TAEUS. Notably, along with the GE Healthcare partnership and the feasibility study conducted
by the Robarts Research Institute, which used healthy volunteers to establish the safety and efficacy of TAEUS technology,
we note that this marks the third clinical research partnership for the company in the U.S. In our view, by generating important
additional clinical data ahead of U.S. approval, we look for a strong launch in the U.S., a potentially positive year-end 2020
but more likely early 2021 catalyst.
ENDRA expects its TAEUS FLIP device to be classified by the FDA as a Class II device. This type of classification
is typically "cleared to market" by the FDA through the 510(k) submission process. As expected, in June 2020, ENDRA
submitted a marketing application for its TAEUS FLIP device via a 510(k) application. The company is eyeing FDA clearance
and commercialization of its product by the end of this year. However, we believe with reports we’ve reviewed that the FDA’s
docket of applications for review being rather full through year-end, we think an early 2021 timeline is more likely. Similar to its
European commercialization plan, which includes establishing clinical evaluation reference sites, ENDRA has secured three
evaluation sites spread out throughout the U.S., including one at the University of Pittsburgh Medical Center for the Mid-Atlantic
region, Medical College of Wisconsin in the Midwest, and Rocky Vista University in Utah in the Southwest. Again, while clinical
data from these three evaluation sites is not currently required for FDA clearance, the company plans to utilize these centers
as reference sites and exploit data to support the anticipated U.S. commercial launch.
Intellectual property strengthened ahead of the TAEUS launch. Recall that on October 13, ENDRA announced that the
World Intellectual Property Organization (WIPO) issued international registration certificates (the equivalent of U.S. patents) to
the company. The issued patents cover proprietary designs for ENDRA’s TAEUS FLIP, its thermoacoustic imaging probe, and
its thermoacoustic imaging probe with outdents. Of note, while one certificate protects the basic appearance of the FLIP device,
including relevant combinations of shapes and surface indicia, the second certificate protects a user-friendly embodiment of
the first certificate. The company now has 73 patents either licensed, issued, filed or in preparation, which in our opinion, should
provide robust intellectual property protection as ENDRA begins to commercialize its TAEUS technology in Europe.
Financial challenges remain but we think partnership with GE has already paved a smooth launch ramp. On August 17,
ENDRA reported its financial results for 2Q20, which included operating expenses of $2.9M, a 24% jump from the same period
in 2019 that was driven by increased product development and pre-commercialization costs. Net loss came at $2.9 million in
2Q20, or ($0.20) per share, and cash and cash equivalents of $0.7M as of June 30, 2020. Driven by voluntary early warrant
conversions, pro forma cash totaled approximately $2.4M as of August 14, 2020. We believe ENDRA has adequate funds for
operations ahead of the first sale of TAEUS systems in 4Q20, but look for the company to raise $2M to $5M in additional funds
to secure a smooth runway for the TAEUS launch going into 2H21.
Valuation and risks. Our $6 PT was derived by using a 20% weighted-average cost of capital for ENDRA shares to discount
free cash flows from annual sales of TAEUS, the company’s next-generation imaging technology platform, dividing them by
our projected number of shares for each year to account for the effects of share dilution, and then factoring in a 0% terminal
growth rate and 78% clinical program probability of success observed, 2013-2016, for Class II devices prior to 510(k) regulatory
submission. Risks to our investment thesis include failure of clinical trials, regulatory requirements for additional clinical studies,
unproven commercialization strategy, failure of products to show sufficient differentiation in targeted therapeutic indications,
patent expiry or invalidation, and potential to raise additional funds under poor market conditions.
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