PLCSF: Initiating Coverage of PLC Systems Inc.
By Brian Marckx, CFA
We have initiated coverage of PLC Systems, Inc. (PLCSF). See below for free access to our full 16-page report on the company which includes our financial model, valuation methodology, risk factors and provides further discussion about the company, their flagship RenalGuard product and competitive advantages, clinical trial data, and targeted applications.
BACKGROUND
PLC Systems Inc. (OTC: PLCSF) is a medical device company focused on commercialization of its RenalGuard product which is designed to reduce the risk of adverse exposure to toxic contrast media which can accumulate in the kidneys of patients undergoing angiographic medical imaging procedures. PLC went public through an IPO in 1992 and until recently was also involved in the manufacture and sale of a carbon dioxide laser used in transmyocardial revascularization procedures, called CO2 Heart Laser System. In February 2011 PLC sold its heart laser to Novadaq Technologies for $1 million in cash in order to focus all of their resources and efforts on RenalGuard. PLC's scientific advisory board and trial investigators are counted among the world-renowned experts in the field of contrast induced nephropathy and have helped guide the science and clinical development of RenalGuard.
Angiographic imaging is used to view blood vessels and organs of the body and incorporates the use of a contrast agent injected into the blood stream to enhance the visibility of these structures in an X-ray. Data from completed and ongoing clinical trials indicate a strong safety profile and effectiveness of RenalGuard in reducing the risk of dangerous acute kidney injury, specifically contrast induced nephropathy (CIN), in at-risk patients undergoing image-guided cardiology and radiology procedures. Current standard of care to address the risk of CIN, a worldwide market PLC estimates at approximately 1 million patients and worth $500 million/year, are relatively unsophisticated, antiquated and (based on clinical data to-date) less effective than RenalGuard.
PLC obtained CE Mark in late 2007 allowing them to sell RenalGuard in Europe and also allowed them to initiate clinical studies of RenalGuard in Europe, which commenced shortly after CE Mark was granted. The company initiated commercialization in Italy in 2008 but only recently began ramping up their international sales efforts after their compelling clinical trial data from European studies was published in prestigious peer-reviewed journals and presented at the American College of Cardiology conference. PLC expects this to support their recently commenced roll-out into larger territories including France, Germany, Brazil, Israel and other regions where they just signed distribution agreements. This includes a deal signed in October 2011 with a subsidiary of the Bracco Group, a worldwide leader in diagnostic imaging equipment and agents, to be the exclusive distributor of RenalGuard in France and Germany. International expansion plans also include selling into China, other parts of Europe and, eventually into Japan.
RenalGuard is currently in a large (300 – 600 patient), multi-site (~30) pivotal U.S. clinical trial comparing it to standard of care in reducing the rates of CIN. Patient enrollment and clinical site recruitment is ongoing. Results of the study, which we think could wrap up in 2014, will be used (assuming positive) to support a PMA filing for FDA approval. If all goes to plan, we think RenalGuard could launch in the U.S. market sometime in mid-to-late 2015.
PLC's near-to-mid term strategy includes completing the U.S. study, additional investigator-led studies in international markets, presentation of clinical data to bolster commercialization efforts, additional OUS distribution agreements, initiation of a full clinical trial in Japan to support an eventual regulatory filing in that country, and raising additional capital to help fund these programs and general operations.
Pro forma for the July 2012 sale of $1 million in convertible debt, PLC had just under $2 million of cash on the balance sheet at the most recent quarter end (6/30/2012). Another $1 million remains available under a $6 million senior secured convertible debt purchase agreement with an institutional investor (GCP IV LLC). Revenue and related cash generation will likely be modest (unless and) until RenalGuard launches in the U.S. and, coupled with the expectation that the aforementioned activities will materially increase the rate cash burn (which was $515k in the most recent quarter), PLC will likely need to secure a significant amount of additional capital to sustain them until they can reach the point of self-sustainable cash flow generation.
Despite certain material risks which we outline throughout our report, we believe the shares trade cheaper than fair value and are initiating coverage of PLCSF with an Outperform rating and $0.50/share price target.
OUTLOOK
International Status…
On the heels of the publication and presentation of the compelling data from the Italian clinical trials (MYTHOS and REMEDIAL II), in October 2011 PLC brought on ACIST Medical Systems as its exclusive distributor of RenalGuard in France and Germany, the two largest countries in the E.U. A subsidiary of worldwide leader in diagnostic imaging and contrast agents the Bracco Group, ACIST brings wide distribution reach and along with RenalGuard's strong trial data, offers a potentially potent combination to grow sales in Europe. PLC also sells RenalGuard in Italy through their distributor, Artech, which in 2011 accounted for over 50% of RenalGuard sales. With the recent addition of other distributors in larger markets, the customer base will be much more diversified and reduce any customer concentration risk.
In March 2012 PLC announced they received approval to sell RenalGuard in Brazil and, through their Brazilian distributor, DISCOMED, is in the midst of the initial roll-out in that country. Also in March PLC received approval for sale of RenalGuard in Israel and announced A.M.I. Technologies will distribute the product in the Middle East. The Latin America market is serviced by RenalGuard's distributor, Girlow USA, which exhibited RenalGuard in August at SOLACI 2012, the annual meeting of the Latin America Society of Interventional Cardiology which is attended by over 2,000 clinicians and other industry professionals.
A key near-term focus for PLC is to continue to increase the number of distributors selling RenalGuard and to expand their international reach. This could include other countries in Europe, South and Latin America, the Middle East and Asia.
Japan could be the next major international market launch but will likely not happen until at least late 2013 or sometime in 2014, following completion of the proposed 60-patient study and regulatory approval in that country.
U.S. Status…
As noted above, in order to move the U.S. clinical study along PLC will need to raise additional capital. We assume they're able to successfully do so on an ongoing basis. Our model assumes financing comes in the form of convertible debt / warrants, although beyond the GCP IV LLC securities purchase agreement we have no particular insight into the source or type of potential future financing.
The U.S. strategy includes completing the U.S. clinical trial and, assuming positive results, an eventual PMA filing and U.S. launch. As a placeholder and until the 163-patient re-estimation total enrollment decision-point (i.e. – either 326 or 652 patients) is attained, we assume total enrollment will be 326. Our current modeled timelines relative to the U.S. trial and commercialization include completing trial enrollment in late 2013 followed by finalized data analysis, a peer-reviewed publication and PMA filing by mid-to-late 2014, and U.S launch in mid–to-late 2015. We note, that if PLC/trial investigators decide enrollment needs to be 652 (in order to increase the chance of hitting efficacy endpoints), our projected timelines would be pushed back and our modeled expenses and assumed financing needs would materially increase.
Our model assumes U.S. distribution is also handled by a third party – it's still early and management hasn't discussed their selling/marketing plans for the U.S market so this assumption is also a placeholder for now (3rd party distribution is reflected in our gross margins and SG&A expenses).
Revenue…
We expect to see revenue climb from here on out (although there will likely be some quarterly gyrations), initially benefitting from the addition of new international distribution agreements in new geographic territories, including the several penned since early 2012 covering large markets in Europe, South America and the Middle East. Revenue has been, and will likely continue to be over the near-term, somewhat lumpy as a result of initial stocking orders from new distributors. We expect to see this smooth over the longer term. PLC's "razor/razor blade" business model affords the potential for revenue, cash flow and earnings to ramp relatively quickly assuming they can continue to grow the consoles ("razor") installed base and there's sufficient pull-through demand for the single-use consumables ("razor blade").
Our modeled revenue through 2014 includes only sales outside of the U.S. We project revenue from consoles to be roughly equal to that from consumables through the end of 2013 but then sales from consumables, which should be feeding an ever larger installed base, to begin to outpace that of consoles beginning in 2014. We look for total revenue of $1.6 million in 2013 and $3.0 million in 2014. We think RenalGuard could enter the U.S. market in mid-to-late 2015, a small contribution from which is reflected in our $6.5 million revenue figure for that year.
Relative to domestic sales, we currently model somewhat of a measured ramp in revenue at the outset of entrance into the U.S. (2015) and over the following (approximately) five years as third-party reimbursement specific to RenalGuard or for the prevention of CIN may yet to be in existence. We think that while lack of specific reimbursement could temper the ramp at outset of commercialization in the U.S., meaningful long-term demand could be cultivated from economic incentives being borne from recent and ongoing domestic healthcare reform measures aimed at reducing unnecessary costs. For instance, the move away from a "fee-for-service" to a "pay-for-performance" model should increase demand for lower-cost and more efficacious treatments and products – such as RenalGuard. And while there may not be reimbursement specific to RenalGuard/CIN-prevention at the outset, PLC could (and likely would) initiate or support the process of applying for Medicare reimbursement shortly following FDA approval.
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