FPMI FluoroPharma Medical Inc (CE)

FluoroPharma Medical, Inc. (OTC BB:FPMI) seeks to develop breakthrough molecular imaging agents for positron emission tomography (PET) to fulfill critical medical needs. The company’s products are designed to improve patient diagnosis and management by evaluating various forms of cardiac disease at the cellular and molecular level.  Each year, millions of patients undergo molecular imaging studies in the U.S.  The main reason for these studies is to detect and evaluate ischemic heart disease and myocardial infarction (MI) in patients with acute and chronic forms of coronary artery disease (CAD).  These images provide benefit in the initial evaluation of patients with suspected but unproven CAD, and in those patients in whom a diagnosis of CAD has been established and information on prognosis or risk is required.

FluoroPharma's current focus is on three separate cardiac molecular imaging pharmaceuticals, two of which are in clinical-stage (BFPET, CardioPET) and recently entered phase II clinical trials.  The third candidate, VasoPET, is still in early development stage with initial clinical testing still likely to be years away.  If all goes to plan, the first of the three products could be on the U.S. market within the next three to four years.  FluoroPharma's products are aimed at improving overall patient care via improved disease detection and are expected to; provide significantly greater diagnostic accuracy compared to currently employed nuclear imaging agents and modalities, increase the use of PET in cardiac imaging, and help reduce the number of unnecessary diagnostic and therapeutic procedures.

In the U.S., there are an estimated 12 million PET imaging procedures done per year - however, the vast majority of these scans are for the diagnosis of cancer.  While PET is becoming more established in the cardiac setting, this segment continues to be dominated by lower cost competing modalities.  By all accounts, this is quickly changing as several factors have led to a shift in favor of PET for the diagnosis of cardiac disease.  FluoroPharma expects to capitalize on this growth through the introduction of novel cardiac PET tracing agents, the market for which is expected to grow by at least 14% annually over the next four years to approximately $900 million (or more).  Aside from one currently marketed branded cardiac PET tracer (which suffers from certain issues), the market is largely is wide open.

Cardiac Imaging Modalities

Within cardiac imaging there are several different modalities including ultrasound, MRI, PET, computer tomography angiograph (CTA or CT) and single-photon emission computed tomography (SPECT).  PET and SPECT are nuclear (also called molecular) imaging modalities which provide the highest level of detail relative to organic anatomic changes (i.e. - function and metabolism) in the body while the others primarily only provide information about the anatomy and structure of the body.  CT and MRI, while sometimes used as an adjunct to PET and SPECT for cardiac imaging, have not gained widespread acceptance as a first-line diagnostic for this application and are generally viewed as complementary to molecular cardiac imaging.  This is especially the case for myocardial perfusion imaging (MPI) which is used to determine the volume of blood flow to the heart and the function of the heart muscle.  CT coronary angiography, which uses a high speed (64-slice) CT camera and drugs to slow the heart, is a relatively new procedure and provides more functional detail of the coronary arteries than conventional CT scans.  Although CT coronary angiography is gaining greater acceptance in the diagnosis of CAD, MPI via nuclear imaging remains the most definitive non-invasive technique for diagnosing CAD.  As PET and SPECT are considered the gold-standards for high accuracy cardiac imaging, we confine our discussion solely to these two imaging modalities.

PET Growing At SPECT's Expense…

Nuclear imaging uses radioactive materials called radiopharmaceuticals or radiotracers which are injected into the patient and accumulate in the area of the body to be imaged.  These tracers emit very minute levels of radioactivity which are detected by a camera (i.e. - PET, SPECT) which can then provide very detailed molecular images.

PET and SPECT are the two most widely used nuclear imaging modalities.  SPECT has some utility in a number of applications including neurology and oncology but is primarily used in cardiology.  In cardiac scans, PET has been shown to provide a better picture of blood flow compared to SPECT which allows it to better identify those patients that should undergo revascularization and reduce reliance on coronary angiography as a definitive diagnostic.  Another significant differentiator is that PET scans are quantifiable, while SPECT scans are not - the difference is important as approximately 20% of CAD patients have global ischemia as a result of multi-vessel CAD which can not be detected by SPECT but can be with PET due to its quantifiable functionality.  PET's superior sensitivity has been documented in clinical studies and was even more apparent with heavier and large-breasted patients.  PET uses different types of radiopharmaceuticals compared to SPECT, which contributes to the greater sensitivity of PET.

Despite the greater accuracy afforded by PET, nuclear imaging is currently dominated by SPECT, accounting for approximately 90% of all nuclear scans.  In aggregate, molecular imaging is used in approximately 10 million MPI scans every year in the U.S.  Estimates put the number of SPECT cameras currently in use at about 14k, compared to just 140 dedicated PET systems being used for cardiac applications.  The dominance of SPECT up to now has to do with its lower cost and, until recently, more favorable insurance reimbursement.  In addition, PET has historically been limited to only a few PET centers and used primarily for oncology.

The tides are turning however, with rapid growth in the number of dedicated PET centers and technological advancements making PET scanners even more sensitive and providing greater image uniformity (especially as compared to SPECT).  The increased adoption of PET over SPECT in cardiology has also been facilitated by the introduction of lower cost PET scanners, coupled with significantly higher reimbursement compared to SPECT - which makes the economics of owning a PET scanner much more palatable for imaging facilities than they might have been previously.  An opportunity to increase PET scanner utilization beyond oncology into applications such as cardiology is viewed highly attractive to health care providers which are looking to cover the relatively high fixed cost of their nuclear scanners (compared to a relatively low per-scan, variable cost).  This, along with a global shortage of molybdenum-99 (used for SPECT imaging), has helped to significantly increase the use of PET, especially as a first-line diagnostic for cardiac procedures.  In fact, The American College of Cardiology Environmental Scanning Report 2011 notes, "A greater use of PET can be expected for both assessing blood flow quantitatively and molecular imaging of atherosclerotic plaques and myocardial disease states."  The expected transition away from SPECT to PET for cardiac imaging is echoed by a May 2011 molecular cardiac imaging industry report by TriMark Publications titled Nuclear CardiologyMarkets;Trends, Industry Participants, Product Overviews and Market Drivers which notes, "A continued movement towards PET from SPECT will result in a nearly 50% of the entire cardiac SPECT market transitioning to PET within the next decade, resulting in a total SPECT decline from over 90% of the nuclear medicine studies to 68%."

BFPET

BFPET  is a novel blood flow imaging agent being developed for use in conjunction with stress-testing for the detection of ischemic (reversibly damaged) and infarcted (irreversibly damaged) tissue within the myocardium in patients with suspected or proven chronic CAD.  BFPET, a Flourine-18 labeled tracer, has been designed to enter the myocardial cells of the heart muscle in direct proportion to blood flow and membrane potential - which are the two most important physiological indicators of adequate blood supply to the heart.  BFPET has been designed to effectively differentiate among those cells of the myocardium that are ischemic, infarcted and those that are healthy.  Because ischemic and infarcted cells take up significantly less BFPET than normal healthy myocardial cells, the signal emitted by BFPET is inversely proportional to the extent of myocardial injury.  Therefore, as a result of BFPET’s use, FluoroPharma believes ischemic heart tissue can be more reliably detected using BFPET.  BFPET is expected to primarily be used in conjunction with stress-testing for patients with suspected or proven chronic CAD.  If approved, BFPET will represent the first molecular imaging blood flow agent commercialized for use in the cardiovascular segment of the PET imaging market.

BFPET has completed phase I trials and recently entered phase II trials to assess its efficacy in CAD subjects.  Phase II trials will compare BFPET to Rb-82 and/or traditional SPECT agents.  Based on current expected timelines, we believe phase II trials might be completed by sometime in 2013.  If all goes to plan, phase III trials could wrap up and an NDA filed by the end of 2015.  This potentially puts BFPET on the U.S. market by 2016.

Phase I trials (used to assess safety / tolerability, distribution and dosimetry) consisted of 12 healthy individuals which were injected with one dose of BFPET while at rest (i.e. - not stressed-tested).  Results, announced in July 2008, showed a favorable profile on all categories (safety, distribution, dosimetry) and no adverse events were experienced.

BFPET Pre-Phase II Study Results Very Encouraging…

In late July 2012 FlouroPharma announced that quality of the initial images using BFPET in a 20-patient (with coronary artery disease) investigator-led stress perfusion imaging study conducted at a hospital in Beijing China were "spectacular" and "superb".  This study is similar in the design of the phase II study where BFPET will be compared to Rb-82 and/or traditional SPECT agents such as sestamibi which suffer from certain drawbacks such as high cost or comparably (relative to BFPET) lower image quality.

Alan Fishman, principal investigator of the BFPET phase I trial, notes in the press release relative to the current study that "initial results are impressive.  Image quality obtained using PET is superb. BFPET shows clear diagnostic qualities as well as increased resolution, inherent in PET.  The initial images look spectacular and we are confident that when all the patients are imaged, the data will further support clinical development of the agent."  His confidence was further bolstered when additional data was available in November 2012, noting "We saw a high level of agreement between the angiography, the SPECT and the BFPET images. These additional images demonstrate that BFPET shows clear diagnostic qualities as well as the increased resolution, inherent in PET."

In early January 2013 FPMI announced that phase II trials of BFPET are being conducted at Massachusetts General Hospital.  The specific trial design will be announced prior to the commencement -  until then we estimate BFPET enrollment will also be approximately 50 patients.

BFPET market is huge…

BFPET will be used to measure cardiovascular blood flow in MPI exams.  Approximately 10 million perfusion imaging exams are performed in the U.S. every year.  SPECT currently dominates this market although, as noted, SPECT suffers in image quality compared to PET.  PET MPI exams use the tracer Rb-82 which, as noted, is relatively expensive which has limited its use.  FluoroPharma expects to capitalize on the deficiencies of SPECT and Rb-82 by positioning their Flourine-18 labeled BFPET tracer as a high accuracy, relatively safe agent for MPI. 

BFPET will be used with PET in combination with stress testing for the identification of ischemic and infarcted tissue in patients with chronic CAD (approximately 85% of CAD is considered chronic as opposed to acute) as well as in combination with FDG (or CardioPET) in patients with acute CAD that are undergoing CVA. 

The potential market for BFPET is huge - essentially encompassing the entire MPI procedural population.  However, as the vast majority of MPI procedures are done using a modality other than PET, the proportion of this market that BFPET would realistically be able to initially attain would likely be relatively low.  But, due to the rapidly growing acceptance of PET in cardiac diagnostics along with the advantages of BFPET compared to Rb-82, deeper penetration within MPI could come fairly swiftly.  FluoroPharma estimates that PET will account for approximately 5% of the U.S. molecular imaging market by 2015 and 25% share within five years after BFPET makes its commercial launch (both of which are very conservative relative to the estimates cited in the aforementioned market study).  They also believe BFPET could eventually capture approximately 65% share of the evaluable cardiovascular PET market.

Based on these assumptions, FluoroPharma estimates that BFPET could capture about 1% - 3% of the total market for MPI radiopharmaceuticals in the first full year after launch (i.e. - possibly ~2016/2017) and will account for about  20% - 30% of the market five years following launch (i.e. - possibly ~ 2021/2022) - which, depending on the selling price that the company is able to achieve, could mean revenue to FluoroPharma from sales of BFPET as high as $50 million in the first full year after launch and ~ $700 million five years after launch. 

CardioPET 

CardioPET is a novel molecular imaging agent (also labeled with Flourine-18) in development for the assessment of myocardial metabolism.  FluoroPharma intends to develop CardioPET for use in the following areas: (a) detection of ischemic and infarcted tissue in patients with suspected or proven forms of acute and chronic CAD, including those that cannot undergo stress-testing; and (b) Cardiac Viability Assessment (CVA), for the prediction of functional improvement prior to, or following revascularization in patients with acute CAD, including myocardial infarction.

FluoroPharma believes that CardioPET may be ideal for CVA through its ability to specifically identify jeopardized but viable myocardium - that is, heart tissue that has suffered an acute episode of ischemia, but is still viable. Identifying viable myocardium, also referred to as hibernating or stunned myocardium, from non-viable scar tissue is crucial because it is well documented that revascularization in patients with substantial viable myocardium results in improved left ventricular dysfunction and survival.  The company believes that CardioPET, if approved, may have several significant advantages for assessing cardiac viability using PET, and would represent the first imaging agent available in the U.S. for use in patients with acute and chronic CAD that cannot undergo stress-testing. CardioPET is designed to provide the metabolic component for CVA.  Accordingly, it may be used with either BFPET or other blood flow agents in performing CVA.

In the acute setting, CardioPET could potentially play a critically important role in emergency rooms, helping to better assess the risk of patients presenting with signs of acute coronary syndrome.  Patients coming into emergency departments that show signs of ACS are initially triaged based on a review of their medical history and through some gate-keeper type of tests such as a chest x-ray, EKG and certain biomarker tests such as Troponin.  While these tests are generally good for providing information relative to whether someone has recently suffered a cardiac event such as a heart attack, they have certain shortcomings.  EKG's have shown to be highly accurate in the confirmation of ACS but suffer from high false positives - which means many low-risk patients may be inaccurately diagnosed as high-risk.  Troponin and other biomarker tests, used to detect elevated levels of certain proteins released following a heart attack, are accurate in determining whether a cardiac event occurred but the accuracy of the tests is highly dependent on when they are administered as these biomarkers peak in the body ~8 to 24 hours after the onset of a heart attack.  This means triage decisions may be delayed, potentially putting a patient at greater risk.

While these gate-keeper tests are generally valuable for triaging patients to a high-risk group (which should be admitted to the hospital immediately), they provide less guidance for intermediate and low risk groups.  This often results in either over- or under-diagnosis and inappropriate follow-on testing and treatment for intermediate and lower risk patients.  CardioPET could be ideal adjunctive test for this patient population, which accounts for ~85% of the patients emergency departments see every year with signs of ACS.  CardioPET could allow emergency room physicians to better diagnose these patients determine the next course of action - whether it be release and outpatient follow-up or admit to the hospital and treatment.

CardioPET completed phase I trials and in March 2012 FluoroPharma announced the initiation of the phase II trial design.  The company signed a letter of intent with SGS Life Sciences to provide clinical research services for phase II trials of CardioPET - this agreement was consummated in September 2012 when the companies signed a Clinical Research Agreement.  The Belgian-based trial will be open label and designed to assess safety and performance of compared to stress echocardiography, myocardial perfusion imaging (MPI) and angiography.  The trial will be conducted at two sites in Belgium.  Enrollment is expected to consist of between 30 and 100 patients with known stable chronic coronary artery disease that can not undergo stress testing.

Phase I trials (used to assess safety / tolerability) consisted of 6 patients with diagnosed CAD and 15 normal healthy volunteers (i.e. - control group).  Phase I testing completed in April 2007 and demonstrated CardioPET was safe with no patients experiencing any adverse events.

On 2/28/2013 FPMI announced that the initial images from phase II trials "show high resolution in the heart and provides extremely clear image quality".  In the press release announcing the results of the most recent images, Dr. Roland Hustinx, one of the investigators in the study, notes, "The (phase II) images obtained from CardioPET are high quality and agree with previous findings."

We view this news as an obvious and significant positive for FPMI and their CardioPET candidate and our outlook remains highly positive on FPMI.  If all goes to plan phase II will wrap up in 2013 and phase III completed and an NDA filing potentially happening by the end of 2015.  U.S. launch could potentially happen by 2016.

CardioPET for cardiac viability…

CardioPET's chief clinical uses are expected to be to identify patients with jeopardized but viable myocardium that will benefit from PCI and in the evaluation of CAD in patients that can not exercise.  PET imaging using CardioPET will be positioned as an alternative to exercise stress-testing.  CardioPET's target markets will be the approximately 4 million patients with chronic CAD that can not undergo exercise stress testing, the 1.6 million people that could benefit from cardiac viable assessment, and a portion of the 12 million MPI procedures.  As there are no directly competing tracer products in the non-stress testing indication, FluoroPharma expects to be able to capture a significant portion of this segment shortly after launch.  Within five years of launch FPMI believes that they can attain as much as 80% share for the myocardium viability indication, 30% of the CAD diagnosis at rest indication, and 7% of the MPI indication.  Based on these assumptions, the company believes that within the third year of launch, CardioPET could be used in approximately 700k procedures, growing to 1 million+ procedures in year five post-launch.  This could equal a potential revenue opportunity to FluoroPharma of approximately $400 million in the third year (i.e. - ~2019/2020) and $600+ million in the fifth year (i.e. - ~2021/2022) after launch.

VasoPET

FluoroPharma is developing VasoPET as a novel molecular imaging agent for the detection of vulnerable coronary artery plaque in patients with CAD.  VasoPET, if approved, would represent the first PET cardiac product to reliably image inflamed plaque and therefore may differentiate between vulnerable and stable coronary artery plaque.

The rupture of atherosclerotic plaques and the subsequent formation of thrombi are currently recognized as the primary mechanisms of myocardial and cerebral infarctions.  Therefore, the detection of vulnerable plaque in atherosclerotic lesions is a desirable goal—and to date remains both a significant unmet clinical objective and a large unaddressed market opportunity.

Coronary artery plaques grow over time and progressively narrow the lumen (i.e. - opening) of the coronary artery until blood flow to the heart diminishes to a critical level.  The decrease in blood flow causes symptoms of chest pain (angina), at first during exercise and then progressively during rest.  Rupture of the plaque and/or clot formation overlying the plaque may then result in myocardial ischemia and/or myocardial infarction.  Coronary artery plaque that is vulnerable is differentiated from its stable form by a large lipid-rich atheromatous core, a thin fibrous cap, and infiltration by inflammatory cells such as macrophages. The risk factor for rupture (and subsequent heart attack) is currently thought to be independent of plaque size and arterial narrowing, but rather is thought to correlate more with the presence of inflammation.

VasoPET has completed preclinical testing and preparation for an investigational new drug (IND) application is currently ongoing.  Based on current expected timelines, an IND could be filed and phase I trials started towards the back half of 2014.  Eventual FDA approval and subsequent launch is likely to be at least four years away (~ 2017+). 

VasoPET for identification of vulnerable plaques…

VasoPET is expected to be able to identify the presence of inflammation and vulnerable plaques, the rupture of which could increase the risk of heart attack or stroke.  The target market for VasoPET is expected to be those patients that have been diagnosed with ischemia through conventional exercise stress testing and specifically those that have already experienced an acute cardiac event such as a heart attack or stroke.  VasoPET could be ideal in helping determine effective treatment to this patient population including appropriate medication and dosage.  This target market represents approximately 30% of the total CAD patient population, or about 4 million people.  VasoPET could also have utility as a first line diagnostic for atherosclerosis, which would expand its potential target market to an additional ~ 50 million people.  Another potential use is for determining a patient's response to statins (such as simvastatin, Lipitor, and Crestor), commonly used drugs to combat high cholesterol - FPMI pegs this indication at a potential market size of about 4 million.  Based on estimated penetration rates of these target markets (0.6% of the atherosclerosis market and 10% of all the other potential indications,fiive years after launch), FluoroPharma believes that VasoPET could be used in approximately 30k PET scans in the first full year of launch, growing to 450k and 700k scans in the third and fifth year (post-launch), respectively.  Assuming a ~$600 cost per dose,   This implies a potential revenue opportunity of ~$18 million in year 1 (2017/2018), $270 million in year 3, and $420 million in year 5 (2022/2023).

Q1 2013 10-Q Filed

FluoroPharma filed their 10-Q for the first quarter ending March 31, 2013 on May 15th.  Results continue to be in-line with our estimates both in terms of expenses and cash burn.  In addition development progress remains closely tracking our expectations.

Importantly, we see FPMI's fundamentals improving as time passes, not necessarily because of positive divergence from our expectations relative to product development but more to do with how the overall market for PET is developing and ever-improving expectations for growth of PET and, in particular growth of PET for cardiac diagnosis.  While it's been no secret that PET has, and was expected to, make significant gains in terms of growth of installed systems and in the number of cardiac scans performed, largely at the expense of SPECT, as new estimates (several sources offer estimates) are published relative to these expectations, the general theme is that cardiac PET may accelerate even faster than was thought just a few years ago.  This trend, along with an aging and fattening population (i.e. - more heart disease), offers a very attractive opportunity for FPMI.  See our full report which includes a discussion on fundamental trends that we see favoring FPMI. 

Q1 operating expenses were $1.1 million, down from $1.4 million in Q4 and below our $1.5 million estimate.  We reiterate that management has done an impressive job keeping expenses down and cash burn to a minimum despite meaningful progress with development of the pipeline (including recently moving both CardioPET and BFPET into phase II trials, with initial images already coming from these studies) as well as with awareness-building and capital raising efforts.

Q1 net loss and EPS were $1.0MM and $0.04, better than our $1.6MM and $0.07 estimates.  Cash used in operating activities was $672k, which was below the ~$825k average quarterly burn in 2012.  FPMI exited Q1 with $631k in cash and equivalents, compared to $1.3MM at the end of 2012. 

Recent highlights in product development include two separate rounds of high quality images from a BFPET study being conducted in China and high quality initial images from the CardioPET phase II trial.  Relative to increasing visibility and awareness to industry leaders, FPMI's products were highlighted at two major scientific forums during Q3 2012; the high quality BFPET images were presented in Baltimore at the Annual Scientific Session of the American Society of Nuclear Cardiology in a lecture titled, "Nuclear Cardiology in 2012 and Beyond: Can We Meet the Challenges" and earlier that week in Dublin, Ireland two abstracts describing FPMI's products were presented as posters at the World Molecular Imaging Congress.

FPMI also presented at Taglich Brothers Small Cap Conference earlier this month.

We have made no material changes to our financial projections following the close of Q1.  We think 2016 or 2017 could potentially be initial launch year of FPMI's first commercialized product.  We are maintaining our $2.35/share price target (validated with our DCF valuation) and Outperform rating.

FPMI Attractive Valuation

Assigning valuation of FluoroPharma is somewhat tricky given that the first commercial product launch is still at least several years away.  There are also no publicly available acquisition transactions in the radiopharmaceutical space involving a target company similar to FluoroPharma that could be used to value the company.

As a result, we believe an appropriate valuation methodology is to use price/sales ratio based on an estimate of revenue two to three years after when the first product may launch.  Based on management's assumptions relative to demand for their products and growth of the respective markets, estimated revenue in 2019 could be as much as $1.7 billion.  We have significantly haircut these estimates as we think these may be more of a best-case scenario.  We use a 2.5x price/sales multiple to our estimated (i.e. - ballparked) 2019 revenue of $155 million and discount this back to the present at a fairly lofty 25%/year.  We feel this discount rate is appropriate given that product development is still at an early enough stage where there is not insignificant risk of failure to hit expected milestones, including eventual FDA approval and commercialization.  These inputs result in a current valuation of approximately $52 million, or about $2.35 / share.

We have also built a DCF model through 2022 which also supports a valuation of approximately $2.35.  Key inputs to our DCF model are meaningful revenue commencing in 2017 and growing to around $340 million in 2022 and a ~19% cash flow discount rate (which again, reflects inherent risks of a FPMI's development-stage status).  Our DCF model calculates a valuation of $2.43.

Depending on the progression, success and timeliness of product development and related likelihood of ultimate FDA approval / commercialization, it may be appropriate to adjust the discount rates used in both valuation methodologies.  Similarly, depending on how certain other factors evolve over the next few years such as the reimbursement environment for radiopharmaceuticals, growth of PET for cardiac applications, and the competitive landscape for novel PET cardiac tracers, it may prompt modifications (up or down) to our forecasted revenue and cash flow estimates.  As it is now we value FPMI at $2.35/share.  Based on the current share price of $0.80, we feel the stock remains undervalued and are maintaining our Outperform rating.

See below for a link to our full 22-page report on FPMI. 

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