MTST: Zacks Small Cap Research Initiates Coverage of MTST at Buy
OTC:MTST We recently initiated coverage of MetaStat Inc. with a $0.75/share price target and Buy recommendation. See below for access to our full 28-page report on the company which includes our financial model and a comprehensive analysis of MTST's technology, products, markets, competition and commercial opportunity. SNAPSHOT MetaStat, Inc. (MTST), headquartered in Boston, MA, is a development-stage company engaged in the advancement of their proprietary molecular cancer diagnostics technology which stratifies risk of metastasis, information which is anticipated will be used to make more informed treatment decisions. Their platform technology, which is built on the principle of how metastatic cells are attracted to blood vessels and incorporates a unique and IP-protected biomarker, is in late-stage development for breast cancer with potential follow-on applications in other epithelial-based tumors including lung, prostate and colorectal. The heart of the technology relates to the Mena protein and isoforms its primary roll in enabling the spread (i.e. metastasis) of cancer through the body by enhancing cell motility and invasiveness. Two products are currently in late-stage development; MetaSiteTM Breast, for early stage breast cancer, and MenaCalcTM, which is also applicable to early stage breast cancer in addition to several epithelial-based cancers including cancers of the lung, prostate and colon. The company envisions that, upon eventual commercialization, their assays would be used with early stage cancer patients to help oncologists determine the most appropriate course of treatment based on the individual risk of metastasis. Their diagnostic products would directly address the aggressiveness of a patient's tumor. This information, which is central to personalized cancer therapy, has the potential to reduce the overtreatment and unnecessary use of chemotherapy in patients whose tumors are biologically incapable of metastasizing. The company cites that while, for example, only ~35% of breast cancers are capable of metastasis, the majority of these patients undergo inappropriately-aggressive therapy which is expensive and associated with extreme side effects. A breast cancer indication alone (with MetaSite Breast alone or in combination with MenaCalc) would target a patient population in the U.S. of almost 200k and represent an annual market worth close to $300M. Adding in lung, prostate and colorectal indications would increase the total annual U.S. addressable population to an estimated ~600k people and increase the value of the aggregate target market to over $600M. Clinical trials to-date, which have included almost 1,800 individuals over five separate studies have shown promising results in the ability of their tests to predict the risk of metastasis in early stage breast cancer patients. Study results have recently been published in major peer-reviewed medical journals and presented at large industry conferences. MenaCalc, in study results which were presented in April, has also shown to be a prognostic for outcomes in non-small cell lung cancer. Additional studies are planned in breast as well as other cancers, some of which are expected to report preliminary data later this year. If eventually commercialized, MTST’s assays will not be the first or only metastatic risk-based cancer diagnostics on the market. MTST’s tests will compete with Genomic Health’s (GHDX) Oncotype DX, the current market leader, as well as MammaPrint (Agendia), Prosigna (NanoString)(NSTG) and IHC4 (Genoptix/Novartis) (NVS). However, MTST's technology looks to be highly competitive to these already established products based on clinical data which has indicated superior performance, appropriateness for a larger portion of breast cancer sub-types and more “actionable information” to a larger proportion of the patient population. MetaStat intends to commercialize their products as laboratory developed tests (LDT) and is in-process of completing build-out of a CLIA certified lab at the site of their current laboratory operations in Boston where the tests will be manufactured and processed. They have chosen the LDT pathway instead of seeking FDA clearance as they believe it will allow for shorter and lower cost to market. The company will continue to conduct clinical trials to facilitate marketing efforts, expand labeling and for development of tests for other cancer types. MTST aims to have their breast cancer assays on the U.S. market sometime in 2016 and hopes to follow with tests for other cancer types at a rate of one every 12 - 18 months. Reimbursement is expected to be available under an existing CPT code specific to computer-assisting imaging as well as a miscellaneous procedure code, the latter which Oncotype DX (as well as the other gene panel tests) has been successfully reimbursed under. Pursuit of a dedicated CPT code may be a future endeavor. VALUATION / RECOMMENDATION: $0.75/share, Initiating Coverage w/ Buy Recommendation Ballparking initial launch in mid/late calendar 2016… MTST has indicated that they hope to have their initial breast assay(s) commercialized in the U.S. market sometime in calendar 2016 with the launch and roll-out supported by the existing positive clinical data as well as at least some of the preliminary data from the newly initiated studies. Prerequisite for the launch will be completing any necessary build-out and regulatory/accreditation requirements of their lab in order to meet CLIA compliance - this is expected to be wrapped up in calendar Q4 2015. They will also need to line up initial distribution/sales infrastructure. The company will also likely be looking to raise additional capital to fund ongoing operations including R&D/clinical trial activities as well as any pre-launch preparations. Given the list of boxes that need to be checked off prior to initiating launch, we are modeling initial introduction of the breast cancer assays around mid-to-late calendar 2016. MTST hopes to establish substantial distribution reach at the outset by partnering with well established sales organizations and through relationship-building at the hospital and cancer center levels. We model approximately $1.5 million of revenue in fiscal 2017 (ending Feb 28, 2017), which represents about 2% of the low-hanging fruit addressable breast cancer market (i.e. - Oncotype DX "intermediate risk" market) and less than 1% of the total addressable breast cancer market. Market share gains from low-hanging fruit, expanded label… The second and third years on the market (fiscal 2018 and 2019) we model revenue of approximately $5.9M and $21.5M, which assumes deeper penetration of the (previously defined) low-hanging fruit opportunity but represents less than 9% penetration of the total addressable market in 2019. This compares to the $4.8M and $27M Oncotype DX generated in its second and third full years after launch. We further assume MTST realizes average pricing of about $1.1k per test, a significant discount (i.e. again, applying conservative assumptions) to Oncotype DX's ~$3.5k). We think our somewhat more conservative approach is warranted given the relative dearth of competition to Oncotype DX following its launch in 2004 and the fact that Genomic Health had substantially more financial resources at the time (compared to MTST today) to support the roll-out. However, we also think MenaCalc/MetaSite Breast have the potential to be well received given the compelling clinical data to-date (which indicates potentially superior performance over Oncotype DX) as well as near-term data which could provide further insight into the utility of the technology and potentially demonstrate even greater benefit over Oncotype DX (possibly including in cancer subtypes which exclude competing tests). MTST has indicated that they will continue to build their clinical database beyond the already planned studies and look to further broaden the indicated uses for the breast cancer assays (similar to what GHDX did with Oncotype DX following initial commercialization). We think an expanded breast cancer label, which could include additional cancer subtypes, survival independent of therapy and predictive of chemotherapy response (among others) would provide meaningful additional competitive benefits and could result in an acceleration in market share gains. Follow-on launches in other cancers… Following launch in breast cancer MTST hopes to bring one new assay to market in other cancers at a rate of one every 12 to 18 months. And while we think the bulk of the revenue opportunity lies with breast cancer, expanding the portfolio to include additional cancers offers meaningful market-expansion and scalability opportunities. The positive clinical data presented in non-small cell lung cancer at AACR in April 2015 was the first major step towards commercialization of a lung cancer test, which is expected to be MTST's next product launch in the U.S. We currently model this to be a fiscal 2018 event. Importantly, while GHDX has Oncotype DX tests for cancers of the breast, prostate and colon, they do not for lung cancer. In addition, the Menacalc Lung data demonstrated significant predictive ability in squamous cell. The lack of significant competition and the presence of a low-hanging fruit opportunity in SCC may present ripe conditions for a particularly receptive market for MetaStat's lung cancer assay. Beyond lung cancer, visibility of the potential timing of introduction of tests in prostate and colorectal cancers is somewhat more cloudy, particularly given the lack of clinical data to be able to anchor to. However, as demonstrated in breast and lung cancer, patient samples have been readily available and these studies can be completed fairly swiftly and cost-effectively. In the span of just over 3 years GHDX was able to bring three new tests to market. As such, we think it is reasonable MTST could have lung, prostate and colorectal cancer tests commercialized within the next five years, and potentially earlier (MTST is aiming for closer to 3 - 4 years). We more conservatively model launch of a prostate and colorectal cancer test in fiscal 2020 and 2021, respectively. Value MTST at $0.75/share We value MTST using a combination of 10-year DCF and P/S comparables. We model incremental revenue contribution to begin for tests in; NSCLC in 2018, prostate cancer in 2020 and colorectal cancer in 2021. However, the breast cancer assays remain the majority driver of revenue throughout the term of 10-year DCF. We model revenue to grow from $21.5M in 2019 to approximately $111M in 2025 (the ninth year on the market). For reference, GHDX generated almost $260M in revenue from their Oncotype DX franchise (the majority of which comes from their breast cancer assays) 9 years post-launch - which arguably indicates our model is conservative. We assume gross margin grows from about 41% in the initial year of launch with relatively low production volumes to around 80% with improvement in reimbursement and laboratory/operating efficiencies. For reference, Oncotype DX gross margins are currently about 82%. Using these inputs along with a 10% discount rate and 2% terminal growth rate, our 10-year DCF calculates fair value at approximately $0.75/share. This valuation is supported with P/S comparables. Competitors NSTG and GHDX trade at 4.9x and 3.0x 2015 analysts' consensus revenue estimates. We apply the average (4.0x) to our estimated 2018 revenue of $5.9M and discount this back at 15%, which results in a per share value of approximately $0.73. The stock currently trades at just under $0.35/share which we think is below fair value. We are initiating coverage of MTST with a Buy recommendation and $0.75/share price target. See below for access to our full 28-page report on the company. 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