I see BioSig as a clear-cut acquisition target by any of the "Big-3" market leaders in the electrophysiology space, GE Healthcare, Abbott Labs, or Boston Scientific. That's because existing EPS recording systems are hampered by high signal-to-noise ratio outputs, limited dynamic range, and low sampling rates. The limitations of these existing systems make it difficult for the electrophysiologist to find and treat arrhythmias such as atrial fibrillation (AF) and ventricular tachycardia (VT). It also leads to long surgery times and low rates of success for cardiac ablation procedures, two things that add significant cost to the healthcare system.
BioSig is working towards approval of PURE EP in 2017. The company is engaging with leading hospitals and research institutions to conduct preclinical data on PURE EP. Several manuscripts have already been presented and more are planned for 2017. I expect the company to have abstracts and presentations at the AF Symposium and the Heart Rythm Scientific Session in 2017. Guidance is to file the U.S. 510(k) application during the first half of 2017 and launch the product in the fourth quarter of 2017.
The Problem With Current Systems
A cardiac mapping system with low fidelity or high signal-to-noise ratio can result in incomplete ablation of the target area that results in recurring arrhythmia and the potential for a repeat procedure at some point in the future. A poor signal quality might also lead to longer procedure time, adding cost to the hospital and potential detrimental adverse effects on the patient.
For example, recent data published in JAMA found that radiofrequency catheter ablation procedures had a success rate of only 46% on the first try. In fact, roughly half of the study population had symptomatic recurrences of atrial tachyarrhythmia and declining quality of life measures within two years of the procedure. The website www.stopafib.org reports success rates for catheter ablation procedures, usually in concert with anti-arrhythmia medications, ranges between 30 and 60% after a single procedure.
An analysis of patient outcomes following catheter ablation procedures for the treatment of AF published in Arrhythmia and Electrophysiology found that the average patients undergoes 1.3 procedures before the success rate, defined as no required further anti-arrhythmic medication, eclipsed 80%. The report cited "ineffective technique" as the primary cause of recurrent arrhythmia necessitating a follow-up procedure. The study looked at 16,309 patients from 521 centers in 24 countries around the globe. To further this point, Dr. John Mandrola MD, a cardiac electrophysiologist in private practice and columnist at theHeart.org / Medscape stated in November 2012:
"One of the greatest drawbacks of AF ablation is the need to redo the procedure. Recurrent AF occurs in too many ablation patients—up to 30% to 40% in honest reports. In nearly all redo procedures, the problem is gaps in conduction block between the pulmonary vein and left atrium. Again, it's not exactly clear why these gaps occur, though lack of transmural burns is the leading hypothesis. Good AF ablationists understand the importance of making each burn effective and continuous, but the technology is not quite there yet. It's hard to make continuous lines with dots."
PURE EP Has Several Advantages
PURE EP stands for Precise Uninterrupted Real-time evaluation of Electrograms (PURE) EP Systems. BioSig's proprietary system is similar to traditional EP recording systems produced by GE Healthcare or St. Jude Medical, which have two computer screens and allow for independent, real-time review capabilities. However, where PURE EP is superior is in the systems very low noise (1 11V RMS), coupled with a minimum gain and maximum bandwidth (1 KHz). PURE EP delivers unique proprietary topology features, including high input impedance, high common mode rejection ratio (110dB@60Hz), and rejection of noise generated by an RF ablation generator.
This is all rather technical, but what investors need to understand is that as clinical decisions are made in real-time during ablation procedures, PURE EP's ability to display both small and large signals with similar resolution is a significant leap forward in the treatment of arrhythmias, including atrial fibrillation (AF) and ventricular tachycardia (VT).
And importantly, PURE EP System is designed to be used in conjunction with existing EP recording devices, essentially creating a new category within the market where EP labs can add on the platform without the significant cost of replacing or upgrading the expense technology already in place. It is designed to improve the signal and recording so that analysis at previously undetectable levels can be conducted with high accuracy. This is the key to the BioSig investment thesis, as the company is not competing with industry behemoths Boston Scientific, St. Jude Medical, and GE Healthcare, but instead bringing a new product to the market - an EP Information System - that makes interpretation and visualization of challenging signals possible.
Pre-Submission Data Looks Impressive
Throughout 2016, BioSig and its research partners have been active in presented in vivo data on BioSig showing the significant advantages of the system outlined above. For example, in March 2016, at the 13th Annual IDSS meeting, researchers from the Mayo Clinic presented pre-clinical data from three canine studies comparing BioSig's PURE EP System to a traditional FDA cleared recording system, System-A, which was later revealed to be CardioLab by GE Healthcare, the market leader in this area with 50% share. Analysis of the two systems was done head-to-head, simultaneously, in real-time.
Results at IDSS show enhanced recording and improved signal acquisition and differentiation compared to GE's market leading system. For example, the output from PURE EP shows significantly less noise and improved signal clarity of the pulmonary vein, the papillary muscle, and left ventricle. Dr. Ammar M. Killu, M.D of Mayo Clinic concluded that PURE EP provided improved cardiac signal recording (signal-to-noise ratio and visualization of juxtaposed signals) versus GE's CardioLab, and is likely of value to electrophysiologists during EP procedures.
In June 2016, Dr. Killu published a paper in JACC: Clinical Electrophysiology entitled, "Novel Electrophysiology Signal Recording System Enables Specific Visualization of the Purkinje Network and Other High-Frequency Signals." The paper highlights the ability of PURE EP to "Consistently demonstrate superior Purkinje potentials and other high-frequency signal visualization compared with the standard recorder in all sites of the cardiac conduction system."
In September 2016, more data from Mayo Clinic became available at the IEEE Engineering in Medicine and Biology Society (EMBC2016). New data presented at IEEE-EMBC2016 further builds upon the advantage of the high sampling rate (2000 samples/second) coupled with a high-resolution AID converter (24 bits) and an input voltage range of (±250mV) of PURE EP compared to existing EP recording systems. The figure below highlights the key findings presented by Killu et al last week at IEEE-EMBC.
Expedited Path To Commercialization
PURE EP has been designated as a Class II medical device by the U.S. FDA. As such, human clinical data is not usually necessary as part of the 510(k) application. BioSig simply needs to include preclinical in vivo data supporting the safety and utility of the device as an enhancement to the existing market. Numerous preclinical programs are ongoing, including additional work with Mayo Clinic. The company has also worked with other prestigious institutions such as UCLA, Case Medical Center, and Mt. Sinai to help them collect all the necessary data prior to the 510(k) submission.
As noted above, additional data presentations are expected in 2017. The two most likely venues include the AF Symposium and the HRS Meeting around the middle of the year. The 510(k) filing is expected to take place in the first half of the year, with the FDA making a decision likely in the fourth quarter of 2017. If all goes well, BioSig should be in a position to launch PURE EP before the end of 2017.
A Large Market Opportunity
According to Global Industry Analysis, the electrophysiology device market will grow at a 12.1% compound annual growth rate, from $2.5 billion in 2012 to $5.5 billion by 2019, making it one of the fastest growing medical device segments. Accordingly, the number of catheter ablation procedures done in the U.S. is also expected to see accelerating growth. Health Research International sees the number of catheter ablation procedures on a global basis reaching 160,000 in 2017.
As noted above, PURE EP is designed to deliver improved signals and information over the existing already installed equipment, making the product a nice add-on to the expensive systems in place at EP labs across the world. PURE EP might cost $175,000 per install, and 25-30% penetration of the estimated 5,500 EP labs in the developed world is a feasible target. However, I also expect that BioSig will offer both software and hardware upgrades to the installed system, with a useful life of roughly ten years, along with yearly service revenue that sums to total revenue of around $405,000 per system installed over a ten year period.
From a valuation standpoint, BioSig is an estimated 12 months away from revenue generation, with peak sales likely five years later based on PURE EP system installs. This brings the cumulative revenue opportunity over the next 10-15 years to $615 million, with estimates peak revenues of around $175 million. Large medical device players like Medtronic, Boston Scientific, J&J, and Abbott Labs trade at approximately 3.9x projected revenues and 16.3x projected EBITDA (see below).
If we apply the industry average EV/Rev multiple noted above to our projected peak sales estimate of $150 million in 2022, and then discount back to present day at 15%, we arrive at a fair market value for BioSig of $225 million. If we assume the industry average EBITDA margin of 24% and apply a similar valuation methodology, only this time using the industry average EV/EBITDA multiple from above, we arrive at a fair market value for BioSig of $224 million. The blended average of these two methods yields a target market value of $225 million. This equates to $10 per share on a basic count.
The market is applying an overly pessimistic probability adjustment to this figure. Additionally, my target is calculated by applying multiples derived from the industry’s largest players with mature businesses and significantly lower growth rates. It is highly plausible that a company like Abbott, GE, J&J, or Boston Scientific would pay significantly higher than 4x peak sales or 16x peak EBITDA. After all, PURE EP would be plugged into the existing business at these companies, likely resulting in significantly higher profitability than what a small, standalone company like BioSig could achieve.
This is also a fiercely competitive space where 1% market share within the cath lab is worth $30 million. A complementary “bolt-on” type product like Pure EP would be highly coveted and too important to allow falling into a competitor’s hands.
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