Viatar CTC Solutions Inc.
(OTCQB: VRTT)

RESEARCH REPORT
December 1, 2015

Market Data

Fiscal Year December
Industry MedTech
Market Cap $18.9M
Price/Earning (ttm) N/A
Price/Book (mrq) N/A
Insider Ownership 15.1%
Shares Outstanding 18.3M
Equity Float 8.6M
Avg. Volume (3 mo.) 1,533
As of November 30, 2015

Income Statement Snapshot

Revenue $0.04M
Net Loss ($5.3M)

Balance Sheet Snapshot

Cash $1.4M
Debt $1.7M

Viatar CTC Solutions Inc. is a medical technology company focused on the treatment of patients with metastatic cancer. The Company's lead product, the Viatar™ Therapeutic Oncopheresis System, removes circulating tumor cells (CTCs) from whole blood using label-free cross-flow filtration. It is designed to be used as a periodic therapy to improve overall survival for a wide range of solid tumor cancer types, such as lung, breast, colon, prostate, and gastric cancers. This proprietary technology also powers the Company's liquid biopsy products, which are collection systems for use by genetic testing companies, researchers, and medical oncologists, that provide a greater quantity and purity of circulating tumor cells for molecular analysis and personalized medicine objectives. The Company’s liquid biopsy products are currently generating revenue, and sales are expected to increase in the coming quarters.

Valuation

We are valuing VRTT at $3.85, using a NPV analysis on the future projected cash flows of its Viatar Therapeutic Oncopheresis System and Viatar Collection System for Molecular Analysis.

  • Therapeutic oncopheresis system addresses the large and under-served metastatic cancer market
  • Compelling animal data shows that removing CTCs slows down metastasis
  • The Viatar Therapeutic Oncopheresis System is designed to filter a patient’s entire blood within four hours, mimicking on a larger scale the process seen in kidney dialysis
  • The Viatar Therapeutic Oncopheresis System is highly attractive from an economic perspective at an estimated cost of $15,000 per patient per year
  • VRTT expects to launch the Viatar Collection System for Molecular Analysis in 2016
  • Near term commercialization opportunity for both products in Europe and Canada after obtaining the CE Mark in late-2016
  • Highly experienced management team with significant previous success
  • Recently raised $1.3 million through convertible notes
  • Five patents pending with coverage until 2035

Therapeutic oncopheresis system addresses the large and under-served metastatic cancer market. The metastatic cancer market represents a significant opportunity, with therapies currently available for patients with metastatic cancer showing only a few months of extra survival time at most. According to the World Health Organization, there were 14 million new cases and 8.2 million cancer deaths in 2012, and the amount of new cases is expected to grow by 70% over the next 20 years. 90% of cancer deaths are caused by stage IV or metastatic cancer.

The market to address advanced metastatic cancers has improved over the past few years, but on the whole, the market is still lacking. The most promising therapies to treat metastatic cancers are cancer immunotherapies. The majority of initial FDA approvals in this area have been in a class of therapies known as checkpoint modulators which stimulate the immune system through T-cells. Approved cancer immunotherapy drugs are designed to prime white blood cells (WBC) to target and attack cell signal pathways that are developed as CTCs become more prevalent throughout the body. These improvements have improved patient survival by only a few months, while typically costing $100,000+ per patient. New targeted immunotherapies and immunotherapy/chemotherapy combinations are being tested in clinical trials, and while these therapies promise further survival improvements, it is likely that the median length of survival will only improve marginally. Additionally, as targeted therapies are only intended to work on a specific type of cancer, they are not available to all patients.

These issues provide a significant opportunity for Viatar and its lead product, the Viatar Therapeutic Oncopheresis System. This system has the potential to improve the survival rates of all major cancers and can likely be used in combination with other immunotherapy and chemotherapy treatments to further improve efficacy at a marginal cost of only $15,000 per year.

Compelling animal data shows that removing CTCs slows down metastasis. A number of compelling animal studies have indicated that the removal/reduction of CTCs from the bloodstream has a significant impact and is a strong marker of improved survival and reduction in tumor size. Below, we detail some of the most important studies in this area:

In a 2011 study using magnetic filtration of the ascites (fluid) of mice that were infected with human ovarian carcinoma, researchers removed CTCs and increased the median time to death by 32.4% with only one filtration session (this is shown in the chart below). Further, the control group showed tumor progression that was 10.77 times faster than the filtrated group (as indicated by the hazard ratio).

Scarberry, et al, Targeted removal of migratory tumor cells by functionalized magnetic nanoparticles mipedes metastasis and tumor progression.

Scarberry, et al, Targeted removal of migratory tumor cells by functionalized magnetic nanoparticles mipedes metastasis and tumor progression. Nanomedicine (2011) 6(1), 69-79

A 2014 MIT study showed that interfering with CTCs, platelets, or WBCs stops the metastatic process. This provides strong evidence for using CTC removal for an increase in survival.

A 2015 University of Michigan study which collected CTCs for 28 days from mice with breast cancer showed an 88% reduction of tumor cells in the lungs (indicated in the chart below), 30% fewer metastatic lesions in the lungs, and only two out of eight mice had tumor cells in the liver, versus all of the mice in the control group, thus providing further evidence that eliminating CTCs either slows down or prevents cancer from metastasizing elsewhere.

Azarin SM, et al, In vivo capture and label-free detection of early metastatic cells, Nature Communications, (2015) 6:8094, DOI: 10.1038/ncomms9094

Azarin SM, et al, In vivo capture and label-free detection of early metastatic cells, Nature Communications, (2015) 6:8094, DOI: 10.1038/ncomms9094

The evidence from this study could be critical, and indicates that the removal of CTCs in earlier stage cancer could slow down or prevent metastasis and provides an argument for also using VRTT’s technology for cancer in stages prior to stage IV.

Finally, a 2006 retrospective analysis of metastatic breast cancer patients showed a clear improvement in median survival that was correlated with either low levels of CTCs or a significant reduction in CTCs from the “danger zone” (greater than five CTCs) to the “safe zone” (less than five CTCs).

Hayes DF, et al. Circulating Tumor Cells at Each Follow-up Time Point During Therapy of Metastatic Breast Cancer Patients Predict Progression-Free and Overall Survival Clin Cancer Res 2006;12(14): 4218-4224.

Hayes DF, et al. Circulating Tumor Cells at Each Follow-up Time Point During Therapy of Metastatic Breast Cancer Patients Predict Progression-Free and Overall Survival Clin Cancer Res 2006;12(14): 4218-4224.

In the above chart, patients with less than five CTC’s showed the longest median survival rate of 22.6 months, while patients that had a reduction to the “safe zone” had a median survival of 19.8 months. Patients that saw CTCs move from the “safe zone” to the “danger zone” had a significantly lowered survival rate of 10.6 months, and patients whose CTCs remained elevated throughout had a median survival of only 4.1 months, and a probability of survival of zero.

These studies provide significant evidence that a reduction in CTCs will have a positive impact on median overall survival and the number of patients that manage to live with cancer. The survival curve for cancer immunotherapy patients has tended to “level off” after 2+ years of treatment, meaning that survival rates stop declining and the cancer tends to stabilize. Effective CTC removal could show this same type of effect, particularly when considering the long-term survival rates shown in the above graph of patients whose CTCs remained in the “safe zone” throughout the study. To date, the issue with CTC removal has been an engineering problem. The issue is, can you safely remove enough CTCs from the bloodstream to have a therapeutic effect. It is this problem that the Viatar Therapeutic Oncopheresis System will attempt to answer.

The Viatar Therapeutic Oncopheresis System is designed to filter a patient’s entire blood within four hours, mimicking on a larger scale the process seen in kidney dialysis.The Viatar Therapeutic Oncopheresis System removes circulating tumor cells from whole blood using label-free (refers to separating different cell types based on size and deformity) cross-flow filtration. The cross-flow filtration identifies the difference between CTCs and other, normal blood components (red blood cells (RBC), platelets, and WBC). This is depicted in the following picture:

Source: Company filings

Source: Company filings

As seen in the above picture, CTCs are captured from the patient’s blood, while RBCs, platelets, and WBCs are filtered through the Company’s filter membrane and returned back to the patient. This process ultimately extracts CTCs and a nonharmful amount of WBCs. The ability to filter out CTCs from other blood components is due to a micro-machined polymer that sorts out smaller RBCs, WBCs, and platelets from CTCs. Other companies have thicker filters in which blood components get trapped; this prevents other devices from filtering a large amount of blood in an appropriate time frame.

The Company’s micro-machined polymer can filter out the different blood components effectively because of the size and deformity of the various blood components. CTCs are larger (15-20 microns in diameter) and less deformable as compared to other blood components, which is why they do not pass through the filter membrane. WBCs (10 microns in diameter) are smaller than CTCs and are more deformable than CTCs (they are less deformable when compared to RBCs). Platelets and RBCs are the smallest in diameter, and RBCs are the most deformable. Some WBCs may get filtered out from the patient through this process, although this is not expected to cause any safety issues. Evidence of this exists in the process called leukapheresis before the use of chemotherapy. In this process, WBCs are removed from the bloodstream to protect them from chemotherapy and then transfused back into the patient a few hours later.

VRTT also currently earns revenue from the sale of filters for ScreenCell’s diagnostic CTC platform. We believe that this helps validate the quality of the Company’s polymer technology prior to human trials.

The Viatar Therapeutic Oncopheresis System is highly attractive from an economic perspective at an estimated cost of $15,000 per patient per year. Currently, the Company is planning to sell its base unit for $4,000, and this has an estimated five year life. The replacement filter fluid circuit costs $150 per treatment. Each base unit is expected to handle three patients per day (four hours per patient). The replacement filters are affordable and will create a recurring revenue stream for the Company once a base unit is installed in a chemotherapy, dialysis, or apheresis clinic. The Company estimates that its therapy would cost the patient $15,000 per year, a significant reduction from other new cancer drugs entering the market. If the Company’s system shows statistically significant efficacy and safety, we believe it has an opportunity to gain traction due to its strong projected economics. Even at only $15,000 per year, VRTT projects 70% gross margins and 30% operating margins.

VRTT expects to launch the Viatar Collection System for Molecular Analysis in 2016. The market for CTCs used for research in laboratories and hospitals is expected to grow rapidly over the next few years. A research report by Kalorma Information states that CTC technology platforms for the research market are projected at $960 million in 2013 and expected to grow to $3.5 billion by 2017. This is expected to be driven by the increasing prevalence of CTC usage in genomic cancer testing and the rapid declines in DNA sequencing costs, which have dropped much faster than what would be projected by Moore’s Law. Most testing is currently performed through tissue biopsies, and these hypothetically have some limitations in understanding cancers that have metastasized, as the cancer is no longer localized and has spread to different areas of the body.

The main competitive advantage that the Viatar Collection System is projected to have is its ability to process a much larger volume of blood (50 mL vs. 10 mL), an advantage which is shared by the Company’s Therapeutic Oncopheresis System. VRTT does not intend to compete directly with other CTC platforms in research and instead intends to be used as a “front-end” solution that provides CTCs to various platforms to use for research insights. VRTT intends to price its system at 25% of the total cost of this research. While we do not expect this to be a huge revenue driver for VRTT, this can help fund the trials for the Therapeutic Oncophersis System, while providing marketing of their technology platform to thought leaders in CTC research and treatment.

Near term commercialization opportunity for both products in Europe and Canada after obtaining the CE Mark in late-2016. VRTT intends to obtain the CE Mark and commercialize both of its systems in 2016. This provides the possibility of near-term commercialization in Europe and Canada, while providing data that will be crucial in supporting larger PMA trials in the U.S. In 1H16, VRTT intends to complete engineering, manufacturing, and animal testing, and subsequently following this up with an application for CE Mark regulatory approval.

In 2H16, VRTT plans to conduct a pilot human clinical trial, obtain CE Mark regulatory approval, and begin commercializing its technology in Europe and Canada through both a direct sales force and distributors.

In 2017, VRTT plans to begin the FDA regulatory process through PMA trials and will also begin conducting more thorough clinical studies. Ultimately, entering the U.S. market will likely be the largest revenue driver for the Company.

Highly experienced management team with significant previous success. VRTT CEO Ilan Reich has had substantial success in growing and operating medical device companies in the past; as Executive Vice President, President, and co-CEO of Inamed Corporation, he helped significantly improve the company’s performance and operations. Mr. Reich was at Inamed from 1998-2001, and the market cap of the company grew from $25 million to $500 million during his tenure. Inamed was eventually acquired by Allergan for $3.5 billion in 2005.

Mr. Reich’s proven ability to significantly grow a medical device company should prove valuable at Viatar.

Recently raised $1.3 million through convertible notes. In October 2015, the Company raised $1.3 million through the sale of two convertible notes with July 2018 maturities. These notes bear interest at 4% per annum, and the note is convertible at $2.50 per share. We believe that this will provide the funds to allow the Company to complete its initial pilot study and obtain the CE mark. Further funds will need to be raised to fund commercialization efforts and PMA trials in the U.S.

Five patents pending with coverage until 2035. Having patent coverage until 2035 ensures that the Company will be able to earn profits on its technology, if approved, for a significant period of time.

We are valuing VRTT at $3.85 per share, based on an NPV analysis of its Viatar Therapeutic Oncopheresis System and its Viatar Collection System for Molecular Analysis. We are valuing the Therapeutic Oncopheresis System at an NPV of $163.3 million and the Collection System for Molecular Analysis at $21.7 million. Clinical applications have the potential to generate significant, multi-billion dollar per year revenue streams for the Company. There are a considerable amount of cancer drugs (both immunotherapy and chemotherapy drugs) that generate multiple billions of dollars each year in revenue. VRTT’s Therapeutic Oncopheresis System, if successful, is likely to be applicable across all major metastatic cancers and should not be confined to just one or a few major types. This gives the Company an extremely significant and deep market opportunity. Another advantage is that VRTT will be testing its technology through PMA trials, which should save the Company significant time and money as compared to biotech companies that need to perform multiple expensive, multi-year clinical trials to get their therapy into the market. As is seen in our peer chart, VRTT, on the basis of market cap, has a much lower valuation than other biotech companies that are developing therapies to treat various types of metastatic cancer.

If the Company successfully completes its commercialization strategy (CE Mark, initial product sales, PMA trials, U.S. sales and full scale commercialization), we expect VRTT’s valuation to increase significantly. Companies that obtain the CE Mark typically see their market cap increase to approximately $150-$250 million (companies who fall below this range typically are either operating in small markets or have failed to effectively commercialize their technology in the subsequent years following CE Mark approval). With regards to our current valuation model, this can be observed by adjusting our probability of commercialization. Adjusting the probability of commercialization of the Therapeutic Oncopheresis System from 15% to 35% would more than double our value per share to $8.40, and assuming a 50% probability of commercialization would give a value per share of $11.80. The probability of successful commercialization will rise as positive studies are released. This also does not take into account the time value of money. As the Company gets closer to significant sales, the value per share would continue to increase. We are currently projecting VRTT’s first significant revenues to occur in 2020.

Two companies that can provide a potential longer-term analog of VRTT’s future value include CytoSorbents Corporation (Nasdaq: CTSO) and Novocure Limited (Nasdaq: NVCR). These two companies are currently near the beginning of their commercialization efforts. CTSO currently trades at a $184.4 million market cap, has earned the CE Mark, as is currently advancing its commercialization efforts. CytoSorbents’s technology removes cytokines and other inflammatory mediators from a patient’s bloodstream. CTSO provides an analog to VRTT as a company that also removes a significant amount of toxic substances from a patient’s blood. NVCR is further along, and currently trades at a $2.0 billion market cap. Novocure has obtained the CE Mark and completed multiple successful PMA trials. Novocure’s technology delivers low intensity TTFields to cancer tumors to interrupt cell structures during division, thus causing cancer death. NVCR also provides an analog of the potential valuation that can be prescribed to a medical device technology that treats cancer.

Obvious risks still remain, including the fact that the Company’s technology has not yet been tested in humans, although CTC data from other studies presents an extremely compelling case for the removal of CTCs extending patient lifespans. We also believe that a small percentage of the patient population will not want to use the Company’s technology. Many patients with metastatic cancer typically obtain medication that can be taken in their own home, and some patients choose to forgo chemotherapy due to harsh side effects. This behavior tends to become more common as patients enter the later stages of cancer. Therefore, there may be a small portion of patients who find obtaining treatment for four hours on multiple occasions at a clinic to not be worthwhile. Ultimately, we think this will be only be a small portion of patients at max and do not think this will affect company results in any meaningful way.

There are other technologies being developed in research labs that are exploring ways to remove/isolate CTCs from patients. However, these technologies still are not being developed to a scale beyond what can be used in research labs. While competing technologies may eventually become available, it appears that VRTT, if successful, will have a first mover advantage in this area.

Some other notes on our model:

  • We are discounting future revenue streams at 10%. On top of this, we are assuming a probability of success of 15% for the use of VRTT’s technology in the clinic, and 75% for the use of VRTT’s technology in research
  • We assume that VRTT earns the CE Mark in 2016. We project small cash flows from 2017-2019. We assume FDA approval in 2019, and a significant increase in revenue and cash flows beginning in 2020 on the back of FDA approval and much more robust data pertaining to VRTT’s technology
  • We assume 30% operating margins, once VRTT reaches scale in production. We project this in 2021 for clinical cash flows and 2020 for research cash flows
  • We assume VRTT to reach a peak penetration rate, considering the worldwide population, of 1.0% in 2024. The majority of revenues should come from developed nations, including the U.S., developed EU, Canada, and Japan
  • We project fully diluted shares outstanding of 48.1 million, as compared to fully diluted shares outstanding of 19.5 million currently. We are assuming that the Company will raise an additional $30 million to fund PMA trials and commercialization efforts. We are assuming this money will be raised at the current share price of $1.05, which is conservative, considering that positive news and a move of the stock towards fair value could move this price higher.
Source: ThomsonReuters, as of November 30, 2015

Source: ThomsonReuters, as of November 30, 2015

There is no guarantee that the Company’s clinical studies for the Therapeutic Oncopheresis System will show statistically significant efficacy. There is no guarantee that the Company will achieve its primary endpoint(s) in its clinical studies. However, the data related to the correlation between CTC removal and survival rates is very promising.

The Company’s technology has not yet officially been proven to be safe for use in humans. The Company’s 2016 pilot study should provide data regarding the safety of the Therapeutic Oncopheresis System in humans.

VRTT’s future capital needs are uncertain.VRTT will need additional funds to perform PMA trials and to commercialize its technology. These needs are uncertain, and will likely lead to significant dilution of current shareholders.

There are other technologies being developed for CTC removal/isolation in research. Some of these technologies may eventually become commercially viable, and represent a significant competitor to VRTT. However, we believe that VRTT’s technology will have a first mover advantage over current competitors.

Revenues will ultimately depend heavily on reimbursements from Medicare and other third-party insurance companies. Reliance on third-party reimbursement creates uncertainty. However, reimbursement momentum should be helped by the need for therapies to treat metastatic cancer, along with the low projected price point of VRTT’s technology as compared to much more expensive therapies for metastatic/stage IV cancer.

Source: ThomsonReuters, as of November 30, 2015

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Auditor: Rosenberg Rich Baker Berman & Company
Legal: Sichenzia Ross Friedman Ference LLP
Transfer Agent: Island Stock Transfer

Company Information

Company Website

Company Contact Info:
Viatar CTC Solutions Inc.
116 John Street
Suite 10
Lowell, MA 01852
(617) 299-6590
info@viatarctcsolutions.com
Investor Contact Info:
RedChip Companies, Inc.
1017 Maitland Center Commons Blvd.
Maitland, FL 32751
(407) 644-4256
www.redchip.com

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