Predictive Technology Group Inc (PRED)

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PRED: Fertile Grounds for Genetic Testing - Zacks Research

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Predictive Technology Group, Inc. (OTC:PRED) is a cellular therapy and genetic diagnostic testing company currently commercializing its portfolio of four placental and Wharton’s Jelly umbilical cord-derived allografts and two gene-based diagnostics. The cellular therapy division provides products derived from amniotic tissue and Wharton’s Jelly that are used by physicians in a variety of healing applications. Genetic diagnostic testing is focused on the women’s health market and is expected to commercialize and seek approval for a test specifically for endometriosis.

The Predictive Biotech (PB) segment launched four products in 2017 and is currently generating quarterly revenues in excess of a $40 million annual run rate. Predictive Laboratories (PL) launched ARTguide™ in October 2018 for detecting genetic issues that may impact female fertility, including endometriosis and Fertility Dx in November, which adds a chromosomal microarray to the ARTguide diagnostic. In the future, PL will be responsible for advancing new candidates through the regulatory process. The third operating segment, CellSure (CS), is responsible for obtaining the source material for the cellular therapy segment. The fourth segment is Predictive Labs (PL) and was created with the acquisition of Taueret Laboratories in March 2019. PL will launch genetic tests for endometriosis and degenerative disc disease in the coming quarters.

Predictive’s revenues are generated exclusively in the self-pay market which allows for substantial flexibility in availability, pricing and distribution. The company is not required to conduct clinical trials for its cellular therapy products because they do not make efficacy claims. The products are considered minimally manipulated and fall under section 361 where physicians can use them based on their skills and experience. Predictive’s lab developed tests (LDTs) are not required to undergo the FDA’s premarket review as they can be performed in the company’s own facilities. This regulatory structure allows laboratories to provide tests in spaces where FDA-approved diagnostics do not exist. These are appropriate when serving a small market such as that in fertility. However, for larger markets, such as the ones that exist for endometriosis and degenerative disc disease, an FDA-approved test provides the flexibility for broader acceptance and we anticipate Predictive will pursue approval in these cases.

Predictive’s commercialization strategy in cellular therapy boasts over 20 sales team members and over 75 distributors that will target the naturopathic physicians, chiropractors, orthopedists, anti-aging, and cosmetic medicine and other specialties that seek to treat pain without surgery.

Predictive anticipates pursuing regulatory approval for specific indications in cellular therapy which will be guided by physicians’ treatment success with the current slate of products. The company is expected to pursue FDA clearance for diagnostic tests that are broadly used, such as the one intended for endometriosis.

Predictive is generating cash from operations which can be used for research and development. However, Predictive may seek to raise additional capital in order to accelerate the commercialization process and provide a buffer as investment in product development draws away funds.

While Predictive is currently generating its revenues from cellular therapy, the company will focus incremental efforts on obtaining FDA approval for its suite of diagnostic tests and allogenic cell products. The company may also be a supplier of cellular products to strategic partners that may pursue indications in areas including oncology and orthobiologics as well as provide inventory to tissue banks.

Predictive is expected to be successful as their products serve an unmet need for many conditions where pain medication is problematic or insufficient and surgery is excessive. The demand by patients for alternatives to strong analgesics and surgery has given rise to cellular therapy while the improvement in genetic testing to identify those at risk of suffering from specific diseases has provided an opportunity to apply preventative medicine. Predictive is fortunate in that they are able to commercialize their products immediately, which can provide capital and operating cash flow to support longer term work undertaking registrational studies for promising indications and broadly used tests. The availability of cash flow will provide a foundation that can support development and regulatory approval of additional services and products that can drive substantially faster revenue growth.

Investment Thesis

Predictive Technologies is growing in a number of underserved areas of the market including cellular therapy and women’s health, initially entering the market in the fertility health space. More specifically, the company emphasizes clinical categories of endometriosis, scoliosis, degenerative disc disease and regenerative human cell and tissue products. The common theme that connects currently commercialized products is their reliance on the self-pay market. This is an attractive space as products do not require time consuming approval by formularies or face restrictions by managed care or pharmacy benefit managers that create a barrier between product and patient and layer on substantial distribution costs. Success in cellular therapy and fertility health are expected to support efforts to advance many of the in-development medicines and services through the regulatory process.

In contrast to many development companies, Predictive is free cash flow positive, which provides funds for new launches, research and development efforts and sales initiatives. While we expect the company will consume the majority of operational cash generated to support growth in the sales force for both cellular therapy and genetic diagnostic tests, we see less reliance on capital markets for the company to achieve its objectives than a pure development company.

Both cellular therapy and genetic diagnostic tests are emerging areas in the health care space. For companies that can source, process and provide high quality medicines to the physicians who administer them, there is substantial opportunity. The same goes for genetic diagnostic tests that are developed and backed up by a genealogy database that can accelerate genetic discoveries. Predictive’s ownership of a proprietary genealogy database with over 30 million individuals and greater than 300,000 DNA samples provides a valuable resource that can isolate genes that are implicated in disease and generate tests that are highly accurate.

Predictive has identified a growth plan for each of its four segments. Predictive Biotech will continue to grow Section 361 product, which does not make any efficacy claims while Predictive Therapeutics will pursue Section 351 products that require review and approval from the FDA. CellSure will focus on procurement of tissue, optimizing cell yields and quality and offering storage services for new mothers. Predictive Laboratories, which was created and expanded through the acquisition of Taueret, will continue to develop and commercialize genetic diagnostic tests.

Key reasons to own PRED shares:

- Rapidly growing cellular therapy segment
-- Competency in cell and tissue processing
- Cash flow from Biotech supports development activities in Therapeutics
- Advance of cellular therapy candidates through regulatory approval process in Therapeutics
- Library of 300,000 DNA samples and 31 million-individual genealogy database
- Multiple new products launching in the Laboratory segment
-- ARTguide
-- Fertility Dx
-- ENDORisk
- Transform CellSure into dominant source of tissue product for both internal and exteral markets
- Development platform that can be applied to many genetic tests and cellular therapy applications

In the following sections we discuss Predictive’s four segments and the markets that each is pursuing. We provide a discussion of the regulatory environment that the company faces in each of its segments and highlight the portfolio of development projects that we anticipate taking place over the forecast period. We provide additional detail on the endometriosis test and market as we see this as a particularly large driver following a broad and successful launch and also a precursor of other broadly available diagnostic tests. We discuss company specific risk factors and provide a review of peer companies. Our valuation, which employs a DCF model, is described in detail with associated model assumptions in our full report. The product of our work generates a target price of $8.00 per share.