QT VASCULAR LTD
510.SI
QT Vascular (QTVC SP)
- QT Vascular (QTVC) is engaged in the the design, assembly and distribution of balloon catheters used in angioplasty.
- The company has been loss-making for at least the past 6 years due to a combination of high expenses (R&D, marketing, litigation) and sales volumes below break-even levels; it is now considering a sale of key assets.
- At 4.1x Price/Sales, the group trades at a c.27% premium to regional and global medical device makers.
Background
- QT Vascular is engaged in the design, assembly and distribution of balloon catheters for the treatment of Peripheral Artery Disease (PAD) and Coronary Artery Disease (CAD), which result from of the obstruction of blood flow in the lower limb arteries and coronary arteries respectively due to the accumulation of plaque over time. These diseases are more prevalent in the elderly.
- QT Vascular was listed on the Catalist in April 2014 but traces its history back to 2005 when co-founder and CEO Dr. Eitan Konstantino started TriReme US, which was later merged with TriReme SG and Quattro Vascular – all related companies – to form QT Vascular.
Profits have been elusive.
- The company has yet to ramp-up its sales to breakeven levels, with R&D, marketing and litigation expenses (fully provided for) far outstripping revenues.
- About 0% of FY15’s US$12.4m in revenues were derived from the US, where the company sells its Chocolate PTA and Chocolate PTCA balloon catheters – used for treatment of PAD and CAD respectively – with the bulk of sales coming from the Chocolate PTA product. Thus, QT Vascular’s historical sales have been a derivative of the US PAD market, and the acceptance of its product there.
Strong headwinds prevail over the positive trend of ageing populations.
- By 2050, the proportion of the global population over 65 years of age will double to 16%, from 8% as of 2015. In the US, that number will be 22% in 2050, versus 15% as of 2015; this should theoretically drive sales of QT Vascular’s products.
- However, as we will elaborate, QT Vascular faces headwinds on multiple fronts that subtract from this trend:
- First, its traditional products (including the Chocolate PTA and Chocolate PTCA) are increasingly being replaced by drug-coated balloons.
- Second, its drug-coated balloons (DCBs) under development face strong competition from the incumbent powerhouses and are behind the curve in entering the more lucrative market (the US).
- Third, cash-flow issues could force the company to sell its drug-coated technology, thus undermining potential growth.
On the first point: traditional balloon catheters are being upended by drug-coated balloons.
- The bulk of QT Vascular’s current sales come from traditional balloon catheters, but these are gradually being superceded by DCBs which – via the QT delivery of drugs such as paclitaxel into the artery vessel wall – provide the important advantage of lowering restenosis rates amongst patients.
- Studies have shown that DCBs lower the proportion of patients undergoing repeat procedures (known as Total Lesion Vasculatization, or TLR) by 2-3x versus a non- drug coated balloon, thus lowering the medium-term (1-2 year) cost of treatment by 10-15%. In addition, DCBs present certain advantages over Drug-Eluting Stents (DES) – an alternative – because DES have not been particularly effective in treatment of peripheral artery disease (despite being relatively successful in usage on coronary arteries), and essentially leave a foreign body behind in the arteries.
On the second point: QT Vascular’s competitors have the first-mover advantage.
- We view the US PAD market as being much more attractive than the EU market for one key reason: reimbursement policy for DCBs remains non-existent or incomplete in most of Europe, but reimbursement policy is highly favorable to DCBs in the US, with the Centre for Medicare and Medicaid Services (CMS) approving DCB use in outpatient settings since June 2015, and also allows add-on payments for DCBs in inpatient settings.
- However, QT Vascular’s Chocolate Touch DCB for peripheral use, while having received CE Mark approval for sale in the EU since July 2015, is still an estimated 2 years away from potential FDA approval in the US, while front-runners Medtronic and C.R. Bard – the first two to clinch FDA approval in the US – are already aggresively jostling for market share; QT Vascular will have to play a difficult game of catch-up.
- Meanwhile, QT Vascular’s Chocolate Heart, a DCB for use in the coronary arteries, is still ~5 years from commerciality, and the use of DCBs for coronary angioplasty in general remains in its infant stage of testing and acceptance.
On the third point: the company could be forced to sell its key assets.
- QT Vascular announced on 2 May 2016 that it had received “preliminary non-binding proposals from third parties” expressing interest in purchasing certain assets of the company. Given the positive outlook for DCBs as an angioplasty device, we speculate that a sale could involve the company’s Chocolate Touch platform. Of course, since the Chocolate Touch is based on the Chocolate PTA platform, this could be packaged and sold together as well.
- Due to a ‘Qualifying Exit Event’ covenant under the company’s convertible bonds, specifying that any sale of assets with a transaction size greater than S$75m would trigger a doubling of the principal amount owed to investors, we think there is an implicit ceiling set for a transaction price; in addition QT Vascular’s market capitalization is S$87m at the time of writing, which leaves little upside.
- The real issue though is that a (potential) sale of the Chocolate Touch/Chocolate PTA would be tantamount to selling the golden goose to pay off the rent; the remaining portfolio would either be sunset devices (non-drug coated balloons: Glider products, Chocolate PTA/PTCA) or years from commerciality (Chocolate Heart).
We think more capital injections would be preferable.
- In our opinion a best-case scenario for QT Vascular would be additional capital injection(s) from VCs, PE funds, or angel investors, which would enable the company to complete clinical testing on the Chocolate Touch DCB.
- After investing over US$150m in its development, and only ~US$20m in incremental investment needed to complete clinical trials, we think bringing it to market could unlock more value for shareholders, despite strong competition from global powerhouses such as Medtronic and C.R. Bard.
QT Vascular trading at a premium to competitors.
- Valuation-wise, using a price-to-sales ratio as comparison, QT Vascular is trading at a 4.1x P/S ratio – above the median of 3.2x for regional peers and 3.7x for global peers. Thus, even at these levels, the stock looks a bit expensive.
Rachel Lih Rui Tan
DBS Vickers
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http://www.dbsvickers.com/
2016-07-04
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