Description

Overview

We believe that VTL offers the chance to short a Phase 3 trial that has shown no evidence of efficacy in prior studies.  This is a device that has been in development for almost 2 decades, undergone bankruptcy due to repeated lack of efficacy in clinical trials, and now resurrected in a Hail Mary attempt for a Phase 3 in a very difficult to treat patient population.  Their SEC filings specifically warn that the FDA specifically noted that there was no evidence of efficacy in Phase 2 to warrant being taken into Phase 3.  With the stock trading at $20 and under $4/share in cash there is 50-75% downside to the stock when the Phase 3 trial fails in the 3Q15.

History

Vital Therapies, Inc. was formed in May 2003 to acquire the assets of VitaGen (formerly Hepatix) in a bankruptcy proceeding. The predecessor companies developed the ELAD System, completing two pilot trials in acute liver failure and two randomized, controlled Phase 1 and Phase 2 trials in FHF, but failed to attract funds sufficient to continue development of the system. Beginning in June 2003, VTL refocused the company to pursue regulatory approval and commercialize the ELAD System in China. In 2007, VTL completed a pivotal trial in acute liver failure in subjects with viral hepatitis in China, and we submitted an application for marketing in China. However, the application is still under review in China and approval is dependent on garnering US approval for the ELAD system.

In April 2014, VTL sold 5.175M shares at $12 a share and raised $62.1M in its IPO ($51.9M net).  Bank of America and Credit Suisse acted as joint book-running managers for the offering.  VTL sold another 2.05M shares at $17.50 per share for net proceeds of $32.8.

ELAD System

VTL's main and only value driver is the ELAD System, an extracorporeal  artificial liver  which is meant to help bridge the gap to transplant.  The ELAD system draws blood from the patient via a central venous line.  That line is then passed into a bedside unit where plasma ultrafiltrate is isolated by a generator.  The plasma passes through 4 cartridges of the C3A cells to allow for transfers of toxins from the plasma and metabolites into the plasma - this is the part meant to mimic the liver function.  This plasma is then filtered and recombined with the blood cells and then returned to the patient.  This is a continuous treatment for 5 days.

Here is a picture of the ELAD system

The ELAD system uses a C3A cell lines for the therapy.  The C3A cell line is derived from human liver cells.  We do note that C3A cell lines are commercially available for research purposes, however VTL does have a proprietary version of this cell line that they use for the ELAD system.

While it is beneficial to have certain human liver cell lines provide some of the functions of the liver, these cell lines naturally are not able to replicate the liver fully.  For example, the urea cycle is non-functional in C3A cells,  cannot provide ammonia detoxification in a bioartificial liver system.  (http://www.ncbi.nlm.nih.gov/pubmed/17680661)

Liver Failure

The liver performs a wide range of necessary functions including detoxification of metabolites, protein synthesis and other bio-chemicals necessary for digestion.  In the case of a liver failure, the only treatment shown to improve survival is a liver transplant.  Due to the various functions performed by the liver, it is very difficult to fully replicate all of them through an artificial treatment or system.

Alochol-Induced Liver Decompensation (AILD) is a form of liver failure whose immediate preceding event was ingestion of alcohol.  AILD can occur in patients with or without underlying liver disease.  For patients severe toxic liver damage caused by binge drinking it is known as Acute Alcoholic Hepatitis (AAH).  For patients with chronic disease due to another form of liver disease such as viral hepatitis, and then precipitated by alcohol intake, it is referred to as non-AAH.  There is currently no effective treatment for liver failure except for liver transplant.

ELAD Clinical Development

There are 3 ongoing clinical trials involving the ELAD system.  VIT-208 is the pivotal Phase 3 trial that will read out in the 3Q this year.

Here is a table of the clinical trials for the ELAD system.

Source: SEC Filings & www.clinicaltrials.gov

The current Phase 3 development program is based on the results of the VTI-206 Phase 2 study.

In this P2, 62 patients were randomized with 29 assigned to ELAD and 33 to control.  The overall results were negative with 11 (37.9%) patients alive in the ELAD group vs. 13 (39.4%) in the control arm according to analysis that considers all patients randomized.

In January 2011, the Data Safety and Monitoring Board asked that the company discontinue the non-AAH cohort since there was no possibility of any treatment benefit in this subset.  Thus VTL focused on the AAH subset.  There were 37 patients enrolled in the AAH subset.  However, VTL excluded 8 of them to examine a PP analysis.  This while a pre-defined analysis is not the standard way that data would be presented (it would be either all patients randomized, ITT, or modified ITT, mITT).   As you can see below the dropping of 2 patients from the denominator in the ELAD group allowed the OS survival to look better.

Source: http://vitaltherapies.com/wp-content/uploads/2013/08/Teperman-ATC-2013.pdf

Based on this heavily mined analysis, they were able to show a marginal trend towards benefit with a p-value of 0.27.  (Note the modified Y-axis in the chart below to highlight the slight trend in survival improvement).

Source: VTL 10K Filing

There is no explanation given for why the ELAD system works in this subset but not in the other subset.  Given the small size of the study it is very likely due to chance.  Confounding variables include the open-label nature of the study, and unclear (potentially unbalanced) standard of care treatments between the arms.

The company is quick to point out that this slight survival trend correlated with an reduction in bilirubin, which is a biomarker indicative of improved patient health.  However, we find it odd that this also was reduced in the non-AAH subset, leading to the question as to how prognostic this biomarker is for this treatment as it was reduced in both AAH and non-AAH subsets, but in one the ELAD group performed better than control while in the other it performed worse than control.  This is especially true since as an extracorporeal bio-artificial liver, its benefit should not be dependent on etiology of the disease.

Nevertheless, there is reason to be believe this improvement in bilirubin is a real effect, though its benefit on overall survival is very tenuous.  Other extracorporeal systems, such as the Molecular Adsorbents Recirculation System (MARS),  have shown some benefit in bilirubin but this has not translated into a survival benefit.

Phase 3 Clinical Trials

We believe that given the lack of evidence in Phase 2, there is no reason this treatment should be taken into Phase 3.  The small sample size of the overall study makes it impossible to interpret the results in a small subset.  The open-label study of the trial likely also introduced bias.  We believe that the VTI-208 Phase 3 study which will report out in 3Q of this year is highly likely to fail.

The VTI-208 Phase 3 study will randomize 203 patients with a 1:1 randomization to either ELAD + standard of care or standard of care.  The primary endpoint will be survival at 90 days.  Their powering assumptions for the Phase 3 assume that the control arm will have 50% survival and that the experimental arm will have 70% survival. We would note that a 20% absolute increase in survival and a 40% relative increase in survival is highly unlikely for any treatment in such a sick population and completely unjustified given the results of the Phase 2 study.  The appendix has a link to the baseline characteristics of the VTI-208 study.

The VTI-210 study is in a slightly different population.  This study will be focused on patients in the acute alcoholic hepatitis population, which is a subset of the AILD population in VTI-208.  Enrollment for this study still ongoing.  The company expects the results of VTI-210 to read out in early 2017.

Though the FDA has allowed them to move into Phase 3, it has done so with a number of reservations.  In their regulatory filings VTL notes the FDA does not view their Phase 2 study as indicative of any benefit.

For example, the FDA has noted its view that preliminary clinical evidence, at this time, does not indicate that the ELAD System may demonstrate a substantial improvement over standard-of-care.

The FDA was also concerned with their analysis plan for VTI-208 as they did not follow normal protocol.  It appears the FDA had to take the unusual step of reprimanding them to remind them of how to properly conduct a Phase 3 clinical trial.  This speaks to

In March 2013, we initiated VTI-208, a Phase 3 randomized, controlled, open-label clinical trial with a targeted enrollment of 200 subjects with alcohol-induced liver decompensation. The primary endpoint of VTI-208 is overall survival up to at least study day ninety-one. The VTI-208 clinical trial completed enrollment in January 2015 with 203 subjects having been enrolled at 40 clinical sites in U.S., United Kingdom, or U.K., and Australia. We expect to report topline results from the VTI-208 clinical trial in the third quarter of 2015. This is a quarter later than we had previously projected due to our decision to wait until the database is locked before any analysis of the results, rather than starting the analysis after the last patient enrolled has completed up to at least the study day ninety-one survival period. After dialogue with regulatory authorities, we decided that an earlier analysis carries a risk of compromising the data and, therefore, decided to wait for database lock to be safe. If the study is statistically and clinically successful, we expect to submit a Biologics License Application, or BLA, to the U.S. Food and Drug Administration, or FDA, in the first half of 2016.

In addition, VTL notes that the FDA has said that VTI-208 may not be enough for approval given the limitations of an open-label study and potential confounding issues that may not be well controlled for.

For example, the FDA has expressed concern about the open-label design of study VTI-208, our pivotal study in AILD, and the need to apply a consistent standard-of-care and to standardize post-discharge care, both being issues that could significantly confound the study results, impact morbidity and mortality and cause the FDA or other regulatory authorities to require that we repeat clinical trials with different trial designs.

[T]he FDA has commented that even if one of our Phase 3 clinical trials, including VTI-208, is a statistical and clinical success, a second confirmatory trial that substantiates positive results may be necessary to support a BLA

It totality, the number of comments VTL makes about the FDA reservations with their clinical development program, is striking for us, and very uncommon.  It seems likely to us that unless there is a striking evidence of efficacy in the VTI-208 program the FDA would not let them file on this program alone.  In particular given the concerns the FDA seems to have with their overall trial conduct, it would not be surprising to us if the FDA analysis differed significantly from VTL's analysis.

Valuation

VTL ended the 1Q15 with $90M in cash.  They have 24M shares outstanding and thus had $3.75 cash/share.  Their monthly cash burn rate in the 1Q 2015 was $4.7M and their current projection is that they expect to have cash until 3Q16.  If VTI-208 fails, they would attempt to extend their cash runway to allow for the readout of VTI-210 in 2017.

We believe that when VTI-208 fails the stock will trade to near cash levels.  Likely in the $3-$5 range.  Though they have stated that in the event of failure with VTI-208 they would hope to be able to extend the cash to allow for VTI-210 readout, since the populations are overlapping this means that VTI-210 may be stopped early for futility.

We believe simply shorting the stock is the best way to get involved.  Borrow is available, and relatively reasonable at 10-15% given that the data readout will be in the next 1-2 months.  Another option is to sell the September $22.50 calls to buy the September $20 puts, at the midpoint would cost approximately $3 to put on.

Appendix

Glossary

Clinical Publications

http://vitaltherapies.com/news-and-links/upcoming-events/

Phase 3 Study Baseline Characteristics

http://vitaltherapies.com/wp-content/uploads/2015/04/EASL-2015-VTL-ePoster-A-Randomized-Open-label-Multicenter-Controlled-Study-to-Assess-Safety-and-Efficacy-of-ELAD-a-Human-Cell-Based-Bio-Artificial-Liver-Support-System-ELAD-in-Subjects-with-Alcohol-Induced-Liver-Decompensation-AILD.pdf

Catalyst

We believe that VTL offers the chance to short a Phase 3 trial that has shown no evidence of efficacy in prior studies.  This is a device that has been in development for almost 2 decades, undergone bankruptcy due to repeated lack of efficacy in clinical trials, and now resurrected in a Hail Mary attempt for a Phase 3 in a very difficult to treat patient population.  Their SEC filings specifically warn that the FDA specifically noted that there was no evidence of efficacy in Phase 2 to warrant being taken into Phase 3.  With the stock trading at $20 and under $4/share in cash there is 50-75% downside to the stock when the Phase 3 trial fails in the 3Q15.