SPNC’s Stellarex: Fairy Tales, Nightmares and Fortuitous Flattening, Price Target $8

Highlights
  • SPNC has serious disclosure related issues including a) SPNC did not disclose 12 recent patient death allegations by medical professionals “against” SPNC devices
  • b) FDA alleges SPNC deliberately withheld adverse event reports from the FDA
  • c) Unacceptable surgeon injuries - SPNC laser device emits accidental radiation and causes “burns to the gown, glove and finger of physician”
  • d) SPNC did not disclose the largest recall in SPNC history in November 2016
  • Stellarex pivotal clinical data is “worst-in-class” for both primary efficacy and primary safety measures
  • Further analysis of primary efficacy measure shows competitors’ clinical data outclassing Stellarex by a factor of 16X and 9X, Stellarex really is “worst-in-class”
  • SPNC data-mined non-performance related demographic “differentiators” and successfully sold a flawed narrative to the street, our experts claim differentiators are trivial and highly unlikely to impress the FDA or cause hospitals to choose Stellarex
  • Medtronic, the DCB market leader, recently dropped its estimate of the worldwide DCB market by 23%, while SPNC’s industry forecasts became even more aggressive
  • Stellarex sales have failed in Europe, the only market it is approved in, supporting our view that projections of U.S. sales, if Stellarex is approved, are wildly inflated
  • A closer look at clinical data suggests “fortuitous flattening” or “manufactured data” was the difference between success and failure of the Stellarex Pivotal Trial
  • SPNC discloses its promotion of the AngioScore product included assumptions that were “materially inaccurate” and that these material inaccuracies may occur again – specifically mentioning Stellarex
  • Recent commentary by sell-side analysts highlights “modest deceleration in base business growth” and “flat to down performance”
  • SPNC likely requires $100M+ in new capital but is already highly levered with over $300M in debt - a dilutive equity raise would crush the stock, daily liquidity is just $9M
  • Short term price target: $8 (70% downside)

June 13, 2017

 

By: Jay Thompson, with significant support from various experts.

 

Our research included interviews and in-depth analysis of various issues included in this report by 6 experts in fields relevant to the content in this report. We advise all readers of this report to read the biographies provided in Exhibit 5 to this report.

 

I.              Stellarex – a fairy tale turned nightmare?

 

The Spectranetics Corporation (“SPNC), a medical devices manufacturer, is up 150%+ and about $750M in market capitalization on hype of its new product, Stellarex.

 

Before getting into Stellarex itself, we want to point out that SPNC management are currently accused of various securities frauds.  Furthermore, they appear to routinely overhype the prospects of their “new” products. AngioScore and the ISR indication for SPNC’s disposable lasers (“ISR”) are two clear examples of hype that was not only unfounded to begin with but was also aggressively pushed on investors when management was allegedly fully aware their words were untrue. During 2014 and 2015, management suggested AngioScore would not be impacted by the launch of drug-coated balloon (“DCBs”). After almost a year of strong denials, management finally admitted DCBs were stunting AngioScore’s growth. The management team followed the same game plan with ISR when the FDA approved it in July 2014. Management hyped this FDA approval, suggesting to investors that ISR would boost SPNC’s sales. Yet, they allegedly knew physicians were already using ISR “off-label.” Off-label use of the lasers was already generating revenue for SPNC and its sales personnel did not see further growth ahead so the FDA approval was essentially a non-event. These facts appear as though they were well-known internally at SPNC but investors were told a different narrative. As expected in any fraudulent scheme, the AngioScore and ISR hype eventually succumbed to reality in 2015 and SPNC’s stock price dropped 66% in response.

 

Management also routinely omits and does not inform investors of significant negative developments. How significant and negative? How about withholding the fact that the largest product recall in the company’s history happened one day before its third quarter 2016 earnings call; or the fact that SPNC has failed to disclose patient death allegations relating to several of its products by numerous physicians? Or the lack of a disclosure of the rate of thrombosis associated with Stellarex. Thrombosis is a key safety measure every other DCB manufacturer has previously disclosed.

 

A traditional angioplasty, or percutaneous transluminal angioplasty (“PTA”), treats peripheral artery disease (“PAD”) by inserting a balloon into the artery, inflating it to break up the build-up of fatty substances or plaque, and is then removed. A DCB does essentially the same thing but also is designed to leave behind a drug to purportedly enhance the likelihood the blockage does not build up again. Stellarex is a DCB designed to treat patients with PAD.

 

 

SPNC is hopeful that the U.S. Food & Drug Administration (“FDA”) will approve Stellarex in the second half of the year and allow SPNC to commercially launch Stellarex in the U.S. by the end of 2017. SPNC has been hyping Stellarex “top-tier” clinical data since at least January 2016. Needless to say, the “top-tier” clinical data referenced in public statements the past two years was not primary or even secondary outcome “performance-related” data that the FDA and Medicare are interested in. The data SPNC points to and glorifies is demographic data, which by definition is not “performance-related.” The facts presented in this report lead us to believe that the FDA should proceed with extreme scrutiny and caution when considering the Stellarex clinical data. We are confident that Stellarex, even if approved, will be a huge disappointment, similar to the company’s previous overhyped products. Stellarex has already exhibited disappointing results in Europe and has weak clinical data as compared to its competitors. This report also details the heavily saturated U.S. DCB market and explains why a late market entry is so detrimental to the true prospects of Stellarex in the U.S. The bad news does not stop there however. SPNC investors are likely unaware that the current worldwide and U.S. market leader, Medtronic PLC (“MDT”) has dropped its worldwide DCB market forecast by 23%. The market segment Stellarex is seeking FDA approval for is now only projected to be worth $500M in 2020. Unsurprisingly, SPNC has refused to drop its own internal forecast of $100M in Stellarex sales by 2019-2020. The $100M figure is two years old and represents nothing more than “pie-in-the-sky” in our view. The market estimate topic creates an interesting dynamic. Who do you trust to make the estimates? Do you trust the more recent forecasting by MDT, the market leader who undoubtedly has a keen “inside” understanding of past, current and future market dynamics? Or do you trust SPNC management, who are currently accused of various securities frauds that involved over-hyped products including AngioScore and ISR? Consider also that SPNC’s two-year old “pie-in-the-sky” $100M figure was also developed by SPNC themselves, who have no “inside” understanding of the U.S. DCB market because they have no approved products in this space.

 

A few comments by analysts and management about Stellarex provide an overview of its importance to SPNC.

 

1.     “Our valuation ascribes…$19/share value to the Stellarex franchise1

2.     “Inarguably, nothing matters more to the stock through 2017, and the firm’s future growth profile, than the imminent Stellarex US launch. 1

3.      “Stellarex is now the single biggest growth driver for Spectranetics…we model 16% growth in 2018 and believe this level is sustainable through the end of the decade, based largely on Stellarex uptake.” 2

4.      “The most important launch in the history of our company3

 

1 April 27, 2017 Canaccord Genuity analyst report (the “CG Report”)

2 December 15, 2016 Raymond James analyst report (the “RJ Report”), referring to SPNC’s overall growth rate

3 SPNC Q1 2017 earnings call

 

This report also explains that SPNC’s other products are stalling and will not make up for the forthcoming failure of Stellarex.

 

II.            Stellarex seeks to enter the U.S. DCB market, which is saturated by large global medtech players

 

The Endovascular Expert, who estimated he completes approximately 300 surgeries to treat PAD patients each year, and uses a DCB in 25% of PAD surgeries, stated the following:

 

“If your business relies significantly on a DCB you better have scientific data that proves your DCB is by far the best. You need nothing less than compelling, irrefutable clinical data. Even still, if you do have the best DCB, you are the third competitor to market and are 3 years late to market.”

 

III.         Stellarex clinical data is “worst-in-class”

 

1.     Stellarex pivotal data

 

As seen in the chart below, the Stellarex clinical data announced on November 2, 2016 was “worst-in-class” for each of the two (2) primary outcome measures SPNC identified prior to conducting its U.S. randomized pivotal trial (the “Pivotal Trial”). Although Stellarex has been tested in five (5) clinical trials to date, only two (2) of the trials were randomized and purportedly conducted in accordance with FDA clinical trial design best practices. We don’t consider any of SPNC’s non-randomized studies in this report and discount the value of the clinical trial conducted in Europe (the “European Trial”) in Exhibit 4. As a result, we believe the key to FDA approval is the Pivotal Trial.

 

MDT and C.R. Bard, Inc. (“BCR”) are the only companies that currently have FDA approved DCBs that are commercially available in the U.S. For simplicity’s sake we do not refer to the specific name of MDT or BCR’s products or the name of the clinical trial associated with those products in this report. We simply refer to each product or clinical trial data belonging to MDT or BCR. We refer to the MDT, BCR and Stellarex DCB products as one “class” in this report given that they are the only 3 DCBs to have completed U.S. pivotal trials. We focus our attention in this report on 12 month clinical data as opposed to later, more complete, data sets as Stellarex and BCR 24 month data has not been published as of the date of this report.

 

 

* As reported by SPNC prior to the trial being conducted. Only measures at 12 months considered in order to ensure comparability with MDT and BCR clinical data. MDT data is as of 360 days. BCR and Stellarex data as of 365 days. Measures identified as "data mining" are measures that were not listed as primary or secondary outcome measures in SPNC’s filings at clinicaltrials.gov.

 

** If data was not published by SPNC we assume it was not "best-in-class." If data was not published by at least 2 of the 3 companies we have excluded the measure in this comparison. Several secondary outcome measures were not included in this chart as a result of differences in measures between the 3 trials. If data was only published by 2 of the 3 companies we considered the two companies that reported data to be “best” and “worst” in class depending on their respective data. We did not consider the company that did not publish its data. If 2 companies had equivalent performance data we ranked the company that had the larger trial population higher than the one with a smaller population.

 

*** We do not view mortality rate as a substantial comparable measure between these three products. We are not aware of any deaths in either of the three trials being identified as device or procedure related.

 

Table 1

 

Source: Various sources and calculations are provided in Exhibit 1

 

2.     Data mining, “top-tier in the most complex patient group”

 

SPNC’s stock closed up on November 2, 2016 at $22.10 and briefly traded above $30 last month. The continued hype of Stellarex is likely the result of this uptrend. Although the data presented in Table 1 clearly is not positive, SPNC appears to have done some data mining to find perhaps the only incremental yet trivial positive that existed in the clinical data. In press releases and on earnings calls since November, SPNC has hyped the Stellarex data. We noted all comments of a positive nature by physicians we have witnessed thus far came from key opinion leaders (“KOL”) who are being compensated by SPNC. Of course, SPNC could probably find a physician or two who they are not compensating, directly or indirectly, that may be willing to say something positive by Stellarex, but we don’t believe the physician community is genuinely excited about Stellarex. The European physicians surely are not excited and are not choosing Stellarex. This is telling because this is the most mature market in the world for DCBs. DCBs have been available in Europe since 2009.

 

November 2, 2016 press release: “Results are top tier in the most complex patient group studied in DCB IDE trials.”

 

January 24, 2017 press release: “In a real-world setting, ILLUMENATE Global validates the earlier ILLUMENATE US Pivotal results, achieving best-in-class 12-month primary patency rates in a patient cohort with the highest rate of severe calcium yet studied. These results are significant because severe calcium has been one of the greatest challenges in our DCB practice”

 

Q4 2016 earnings call: “Physicians have expressed their view that our low drug dose, combined with top tier efficacy across the spectrum of patient complexity, embodies a no compromise solution, when selecting a DCB.”

 

First, the demographics of the patient population and “complex” patients such as those with severe calcification, were not included in the primary or secondary outcome measures reported prior to the Pivotal Trial. It is a tell-tale sign that the sponsor of a clinical trial is stretching poor results of a clinical trial when they choose not to promote the primary or secondary outcome measures and choose instead to focus on non-performance indicators such as the complexity of the patient group. Second, the foundation of this claim would be arguable perhaps if there was some analysis in each of the MDT, BCR and Stellarex trials that specifically identified how patients with “severe calcification” reacted to each DCB. However, this analysis does not appear to exist, or does not exist in a public forum. Third, it appears SPNC is basing its statement solely on the fact that there were more patients with severe calcification that were treated with Stellarex in the Pivotal Trial, 43.9%, then MDT had in its pivotal trial, 8.1%. See Exhibit 1 for this data. Lastly, SPNC’s own data demonstrates that Patency is not necessarily tied to severe calcification rates. The Pivotal Trial and European Trial both showed comparable Patency results, 82.3% vs 89%, respectively, but the Pivotal Trial had (i.e. 43.9%/15.6%) had 2.8X more patients with severe calcification.

 

The Vascular Device Expert stated:

 

“One could easily interpret the data presented to suggest that the Stellarex pivotal trial had a healthier patient group rather than the most complex patient group. The Stellarex pivotal trial had a lower proportion of the worst patients classified on the Rutherford scale (Class 4); 20% less than the MDT study and only half the proportion in the BCR study.  Similarly, Stellarex was used to treat significantly shorter lesions.  Both parameters are likely to be more closely linked to outcomes than degree of calcification.  Either way, this type of data mining and selective reporting raises deep concerns over the quality of the data. It is unlikely to be appreciated by FDA reviewers, or Medicare for that matter, and is unlikely to sway end users to adopt a new platform.”

 

3.     Low dose

 

SPNC seems to suggest that low dosage is a key concern for surgeons. We believe the following statements prove the opposite is true.

 

The Endovascular Expert stated:

 

“Dosage is not a consideration for me. I have to trust that FDA approved devices have been designed with an appropriate dose.”

 

The European Trial stated the following:

 

 “The clinical implications of the higher drug dose coating formulation are unclear; however, low-dose DCBs carry the potential to reduce distal drug embolization.”

 

In our view the “low dose” differentiator promoted by SPNC is nothing more than a hypothetical theory. A negative side effect of a higher dose, such as the dose MDT uses, has not been proven to be of any danger to the patient. It is a trivial discussion at this time.

 

The FDA Expert stated:

 

“In January 2017 MDT stated 200,000 patients had been treated with its DCB. By my estimate, SPNC has sold under 4,000 (i.e. $5.8M/$1,500 average selling price) DCBs through the same time period. According to the RJ Report, MDT leads the market with 48% market share and BCR’s DCB, which uses the same dose as Stellarex, has not differentiated itself in the marketplace as a result of dosage or any other measure. I see no reason why management should believe Stellarex has a chance to differentiate itself on this attribute.”

 

4.     Claims that Stellarex may represent a next generation DCB

 

SPNC has promoted another theory about Stellarex. The story is that Stellarex is a “next generation DCB” that provides a unique and improved combination of both effectiveness and safety for patients. MDT and BCR’s products have done quite well in the market thus far, representing an annual U.S. market of approximately $221M according to the RJ Report. By our math, Stellarex has thus far generated no more than $5.8M in revenues EVER. If SPNC has this magical new product the management team speaks of then physicians would be talking openly about it and sales in Europe, where it is already available, would not be so lackluster. We don’t believe the hype.

 

The results in Table 1 also display that Stellarex was “worst-in-class” in the primary safety outcome measure. Furthermore, as of the date of this report, to our knowledge, SPNC has not publicly-disclosed the “rate of occurrence of arterial thrombosis of the treated segment,” (“Thrombosis”) or the “rate of target vessel revascularization” (“TVR”). Both Thrombosis and TVR were listed as secondary outcome measures prior to the Pivotal Trial commencement. We understand the FDA has approved Phase I and Phase II safety data for Stellarex and presume any data involving Thrombosis was submitted to the FDA. The question remains however, why was this data not disclosed publicly?

 

The Vascular Device Expert stated:

 

“Arguably, short-term thrombosis is the most important safety endpoint.  Not only is this an important indicator of the ease of use of the device, but thrombosis can have critical sequalae in addition to vessel occlusion. “

 

TVR is also considered to be a meaningful measure. We don’t understand how SPNC can honestly make claims suggesting Stellarex provides superior safety for patients when Stellarex was “worst-in-class” in the primary safety outcome measure and these two key safety measures have not been publicly disclosed.

 

5.     A deeper dive into the primary outcome measure

 

The FDA Expert stated the following:

 

“The goal of any surgery is long term health - not health as of a certain arbitrary date. The data promoted by these companies does not tell a complete story.”

 

The chart below tracks the continuous % improvement in patient outcome by measuring and plotting the divergence between the DCB and PTA outcomes. All data is derived directly from previously published graphs provided by each company as presented in Exhibit 2. The divergence calculations are further described in Exhibit 3.

 

 

Table 2

 

 

 

IV.          The U.S. market for Stellarex is slowing, yet SPNC forecasts “hockey stick-like growth” for Stellarex

 

1.     DCBs are an “emerging therapy,” they are not “the standard therapy” for PAD

 

A successful DCB surgery is one where blockage in the artery is removed as a result of the surgery and does not return. Once the drug is delivered by the DCB it will begin to dissipate and eventually, around 180 days from surgery, the drug will no longer be detectable within the body. The hope is that the drug will help dissuade the blockage from reforming before the drug loses its effect. As a result of this, the primary measure of effectiveness of all DCBs, Patency, will show a downward trending curve (and will be more pronounced after 180 days) that is a direct result of the drug losing its effectiveness. A DCB will likely be considered effective if it reduces the overall number of interventions (i.e. follow-up surgeries to treat the same issue) and/or Patency does not drop too far below 80% and never drops below 55% (See “Market Dynamics” below for an explanation of these percentages).

 

SPNC and the sell-side will have you believe that DCBs are dominating and will be the dominant PAD therapy in the future. This report, MDT’s DCB market forecast (discussed below), and Millennium Research Group, a well-respected and frequent reference used by the sell-side, support the opposite view. DCB therapies currently represent about 6% of the worldwide PAD market. DCBs are not currently and will not be the dominant PAD therapy by 2020. The following information was included in the RJ Report and was referenced as data provided Millennium Research Group, National Heart, Lung and Blood Institute, and Raymond James research.

 

 

* Per RJ Report

 

Table 3

 

2.     MDT cuts DCB forecast by 23%, Stellarex target market is only $500M in 2020

 

According to the RJ Report, MDT decreased their 2020 estimate for the worldwide DCB market to $770M from their October 2015 estimate of $1.0B – a 23% decrease. It is important to note that these market estimates include three (3) different indications for DCBs. The indication SPNC is seeking FDA approval for is the Superficial Femoral Artery (“SFA”). MDT projects the worldwide market for this indication will be just $500M by 2020. SPNC and its sell-side analysts have included other indications for Stellarex in their estimates of the 2019 and 2020 DCB market. These are indications that Stellarex has almost zero visibility into at this time - in our view. We are not considering them in this report.

 

3.     SPNC’s own market estimates suggest slowing SFA U.S. market growth

 

The SFA U.S. market is the market that Stellarex is currently seeking FDA approval for. We reviewed the 2015 and 2016 historical market figures provided in the RJ Report and broke SPNC’s annualized forecast for the U.S. SFA market into quarterly figures in order to present the chart below. SPNC is forecasting SFA U.S. market growth of 31% for 2017, 11% for 2018, 9% for 2019 and 14% for 2020. This is “slowing growth” no matter how you present it. Furthermore, we have yet to see any explanation as to why 2020 growth jumps back up to 14% when the downtrend was in place for each of the three years before 2020.

 

 

* Figures provided in RJ Report. We estimated the December 31, 2016 by subtracting all other quarters in 2016 from the $221M U.S. SFA market estimate provided in the RJ Report. The quarterly “breakout” for 2017-2020 was estimated by SkyTides for presentation purposes. All 2017-2010 quarterly figures totaled the annual figures in the RJ Report.

 

Table 4

 

4.     Slowing market yet Stellarex forecast shows “hockey stick-like growth”

 

SPNC is forecasting Stellarex dominance in the SFA U.S. market. Given “worst-in-class” clinical data and its failed European market penetration, among other issues discussed in this report, we don’t see how this growth can be justified. We believe management has been forced to stick with this ridiculous guidance because SPMC promised “$100M in sales in 2-3 years from US FDA approval” when they acquired Stellarex back in 2015. The forecast is not based on reality and current market conditions. It is based on a promise that was made two years ago when the market looked far more promising.

 

 

Table 5

 

5.     Market dynamics

 

The survival of the DCB market is dependent on DCBs being able to approximate Patency provided by metal stents, approximately 80%, which represents the most effective PAD therapy, while delivering on the promise of “leaving nothing behind” post-surgery. Stents are by definition left inside the body – and this is not desirable for many reasons when the extremities are involved. The “floor” for Patency is 55%. This is the Patency provided by traditional angioplasty balloons. As a result of the two “floors” created by this dynamic, we believe the DCB market can flourish if DCBs can maintain Patency at rates above or around 70% for the long-term. If that occurs then the Centers for Medicare and Medicaid Services (“CMS”) will likely continue to provide reimbursement for DCBs at higher rates than PTA.

 

Unfortunately, in June 2015, BCR’s device reported Patency at the 24-month interval of just 58.6%.  This means that BCR’s device is approaching inferiority and that a traditional angioplasty may be warranted over a surgery using BCR’s DCB since it can not maintain higher Patency rates over the long term. Not surprisingly, BCR did not formally publish the results of its clinical trial at the 24-month interval.

 

MDT is the clear leader in the DCB space as Table1 of this report displays. However, even MDT’s device may not have a long-term future. In September 2016, MDT published the results of its DCB clinical trial at the 36-month interval. Patency of 69.5% was reported. MDT is therefore also trending stronger towards the 55% floor that is traditional angioplasty, i.e. PTA, then it was in the first 24 months since surgery.

 

The MDT and BCR data was hardly positive news – in our view. We see these results as putting DCB reimbursement by Medicare at risk. We don’t envision Medicare will be as willing to continue reimbursement of DCBs at the same price level if these trends continue.

 

The Interventionalist stated:

 

“The real issue for CMS is not the overall Patency rate, but rather the reintervention rate… that is what drives cost effectiveness. Data is showing 50 percent fewer interventions across the board to maintain Patency… so if the Patency rates converge back to equivalence to PTA alone, the price will erode and any price premium to PTA will disappear… this is likely to reduce the overall market share of DCBs, which is perhaps why MDT revised the long-term outlook.”

 

V.            In Europe, the only market where it is approved, Stellarex has been a “dud”

 

SPNC management will suggest that Stellarex is behind MDT and BCR because MDT had a 6-year head start on Stellarex while BCR had a 29-month head start. There is no doubt this is a valid argument. However, real-world results generally tell the tale of the quality of a medical device better than anything else. SPNC’s CEO stated on the last earnings call “we don't break out specifically the growth rate of Stellarex in Europe.” We thought this was a tell-tale sign that Stellarex may be a “dud” in Europe. We searched every source we could find and eventually found the detailed European data in the RJ Report. Below is a chart showing quarterly top-line figures for Stellarex thus far.

 

 

Table 6

 

We noticed one quote we feel we have to share about Stellarex from back in the day. During SPNC’s Q4 2014 earnings call Scott Drake, SPNC’s CEO, made the following statement:

 

“We repeatedly hear that European physicians see Stellarex as the next generation drug coated balloon.”

 

When looking at the chart above that displays European sales we wonder why the excitement physicians had about the “the next generation” Stellarex was not converted into hockey-stick like growth.

 

In an analyst note from Piper Jaffray dated November 30, 2016, the analyst noted “regarding the slower than expected ramp of DCB adoption OUS, the company believes that strong clinical data presented this year should be accretive to market development.” We considered the results of the European Trial were available in August 2016 and the results of the Pivotal Trial were public as of November 2, 2016. However, management’s “intuition” was wrong. The market doesn’t seem to be impressed with the data. Stellarex is still far behind its competitors in Europe and is performing like the “worst-in-class” DCB we believe it is.

 

There is a bit of pattern here if you have eyes. This management team is full of BS. See Section XII for more BS.

 

VI.          Stellarex market penetration failure thus far

 

As of the end of 2016, SPNC’s Stellarex had captured 1% and 4.9% of the worldwide and European markets, respectively. Stellarex is not approved in the U.S. and was launched in Europe in January 2015.

 

 

Table 7

 

1 - We calculated $148.8M in revenues for 2016 given that the market was $310M for 2016 and MDT had 48% market share. All figures were derived from the RJ Report.

2 - Figure verified from a Needham & Company April 26, 2017 analyst report

3 - According to the RJ Report

4 - Imputed based on remaining unknown portion of the total $310M market according to the RJ Report

5 - Imputed based on remaining unknown portion of the total $89M Ex-US market and expectation that all or close to all ex-US sales were in Europe.

 

VII.       Fortuitous flattening or manufactured data?

 

When we began researching the results of the Pivotal Trial we noticed an oddity in the slope of the Patency curve presented for the Stellarex data. Every DCB trial we have reviewed thus far has shown a downward sloping curve throughout a key time period where measurements of Patency were taken. What is odd is that the chart below clearly displays the Stellarex data producing a flattening of the downward sloping curve, i.e. the blue line (the “Stellarex Patency Curve”). The fact that the flattening happens to occur in approximately the l9 days immediately prior to the primary endpoint of 365 days, as seen in the yellow highlighted area, is quite fortuitous. If just a few of the PAD patients involved in the Pivotal Trial had visited their surgeon for follow-up clinical tests prior to the primary endpoint instead of the weeks thereafter, the Pivotal Trial appears as though it would not have reached statistical significance and would have been deemed a failed trial.

 

The Vascular Device Expert stated:

 

“At best, if you are willing to accept arbitrary dates for measurement of Patency, the Spectranetics data approaches equivalency to data published years earlier by Medtronic and Bard. It is important to note, however, the timing of the reduced intervention rate immediately before the primary end point (i.e. the yellow box in Table 5). Whether this was a fortuitous coincidence or a convenient delay in scheduling for the interventional procedures (enabled by an un-blinded study), it is unlikely that this point will go unnoticed by the FDA. In this relatively small study, simply delaying a re-intervention in 4 or 5 patients could very easily make the difference between hitting the primary endpoint and missing it.”

 

Stellarex Pivotal Trial Results:

 

 

Table 8

 

Table 9, below, is a snapshot of the last 19 days prior to the primary endpoint as it is presented in Table 2. This sharp upward movement represents the divergence of the Stellarex DCB results from the traditional angioplasty (i.e. PTA) results. The sharp movement upwards is a result of the Stellarex Patency Curve flattening out while the PTA Patency curve accelerated its downward movement.

 

 

Table 9

 

We met and spoke with the following individuals about Table 8 and Table 9.

 

 

Table 10

 

1 – In-person meetings on April 18, 2017 and May 19, 2017

2 – Telephone call on June 2, 2017

 

SPNC spent $30 million to acquire Stellarex and stated that another $75 million would be spent to commercialize Stellarex. The RJ Report confirmed the majority of this $75 million appears to have been spent by the end of 2016. SPNC management are under a lot of pressure to ensure Stellarex becomes a profitable product. We won’t make any direct allegations today but the flattening of the Stellarex Patency Curve is suspect. We wonder if the Pivotal Trial data has been compromised.

 

We conducted research to determine how common data tampering or “misconduct in clinical trials” may be at top-tier research universities according to physicians themselves. A late 2006, early 2007 survey of 5,000 faculty members, selected at random from within 500 departments across 50 randomly selected, top-tier research universities in the United States found that 23.4% or over 1,000 of the respondents admitted to engaging in 1 or more of the 10 most serious misbehaviors” during the last 3 years. Exhibit 6 lists the ten most serious types of misconduct which includes “Making up research data, other than in situations such as simulation studies.” Data tampering is clearly somewhat common. Our research should not be brushed aside just because it is alarming.

 

SPNC and the co-primary investigator himself, Dr. Sean Lyden, disclosed that there were multiple instances of missing data, i.e. “multiple-imputation of missing data” in connection with the Pivotal Trial. This special disclaimer was included within a PowerPoint presentation conducted by Dr. Lyden on November 2, 2016 but was not mentioned in the press release issued on the same day. The premise behind “multiple-imputation of missing data” is that a software program can predict and “fill in” the missing data in a clinical trial. While in recent years this process has become generally accepted in practice by the medical community, other clinical trials that make use of this process describe the actual significance and proportion of the data that was imputed. SPNC has not disclosed what level of significance missing data had on the results of the Pivotal Trial and whether or not the flattening of the Stellarex Patency Curve was a result of the software-generated data or not.

 

SPNC likely controlled the collection, monitoring and analysis of the data produced by the Pivotal Trial. A formal report of the European Trial was published in April 2017. In this report, the author disclosed SPNC’s role in the European Trial as follows.

 

“Study data were collected, monitored, and analyzed by the study sponsor (currently The Spectranetics Corp)…Independent core laboratories analyzed all images including duplex ultrasound (DUS; VasCore, Massachusetts General Hospital, Boston, MA) and angiography (SynvaCor, Springfield, IL)”

 

The FDA Expert stated the following:

 

“Given that the results of the European Trial were submitted to the FDA as support for FDA approval of Stellarex, I have to believe SPNC ensured the design of the Pivotal Trial and European Trial were similar if not exactly the same. Otherwise the FDA’s level of questioning on the topic of trial design would be increased substantially.”

 

VIII.     Competition

 

1.     A saturated U.S. market

 

We obtained a copy of a Raymond James analyst report dated May 9, 2017 that stated the following:

 

Management estimates that there are close to 1,500 centers in the U.S. using DCBs with the top 30% likely generating 70% of the volume. Spectranetics, through its laser atherectomy platform, has a presence in nearly all of the high volume DCB centers. Management believes that the vast majority of these accounts carry both the Medtronic and Bard devices and expects hospitals to continue to carry two devices going forward. Notably, Spectranetics believes that less than 20% of the 1,500 hospitals have contracts in place that could potentially box Stellarex out of a center.”

 

The Interventionalist stated:

 

“Penetrating markets that are firmly established by players such as Bard and Medtronic is no simple task.  With a head start of 3 and 6 years respectively, these titans of the medical device industry have a strong grip on the market for drug coated balloons.  One of the key challenges to displacing an established product line in the hospital is that purchasing contracts are either directly or indirectly linked to broader product bundles.  Without overwhelming clinically significant head to head data, or the ability to significantly undercut pricing, it is extremely unlikely that hospitals will break existing supply contracts to adopt a new device with little clinical history. Additionally we are seeing a great deal more bundling of products in pricing structures in the cath labs so stand-alone products or smaller bundles can have a tough time navigating the buying groups in hospital purchasing. Building an effective sales, marketing, and distribution network is a resource intensive task in the best of circumstances.  With weak clinical data and little long-term data, it is highly improbable that any new player entering the field would meet growth targets to justify a billion dollar market cap.  Reimbursement for such products is also unclear and CMS has not focused until recently on PAD.”

 

This is not going to go well and the forecast of hockey-stick like growth is at best egregious.

 

2.     New ideas and treatment approaches

 

Shockwave Medical is a minimally invasive solution to PAD that uses sound waves to break up plaque. According to the RJ Report:

 

“While we have some lingering questions on reimbursement, we like the technology and believe Shockwave has an opportunity to be a meaningful player in this space. Shockwave expects to launch in 2017.”

 

3.     Other current DCB competitors in the EU could approach the U.S. market soon

 

There is nothing but FDA approval stopping these other competitors, approximately 3-4 legitimate competitive products, from entering the U.S. SFA market. Although BCR has a U.S. distribution agreement with BCR, we believe Boston Scientific’s Ranger will eventually seek FDA approval.

 

IX.          SPNC’s license to lie

 

SPNC likes to hype up its products and is accustomed to failing to meet expectations. Why else would they include the most aggressive disclosure in this regard we have ever seen. SPNC’s most recent annual report on Form 10-K stated the following, which we consider to be an attempt to suggest management has a “license to lie”:

 

“We have made certain assumptions relating to the AngioScore and Stellarex acquisitions that have proven in the past and may prove in the future to be materially inaccurate.”

 

Investors may want to consider this management team’s history. Between March 2015 and September 2015 SPNC’s stock dropped from $34 to $11, roughly 66%, as the hype associated with its AngioScore acquisition met reality. Stellarex appears on the same path as AngioScore – although it appears as though SPNC’s death spiral after reality hits on Stellarex may be even more explosive given that AngioScore at least represented a mature business that could cushion the fallout. Stellarex represents a start-up inside a public company and is in effect a bit of an all or nothing play – in our view.

 

X.        Stellarex will strain and possibly break SPNC’s finances

 

All figures included in the financial projection in Table 11 are from the RJ Report. The financials in Table 11 were used to generate the financials in Table 12, which includes only a few modifications by SkyTides. Between 2016 and 2018 SPNC projects Stellarex sales to grow at a 218% combined annual growth rate (“CAGR”). SPNC and every sell-side analyst seems to view FDA approval of Stellarex in late 2017 as a forgone conclusion. This extreme growth is projected even though:

 

1.     SPNC claims the Stellarex clinical data is equivalent rather than superior to MDT’s clinical data.

2.     Stellarex has disappointed in Europe

3.     SPNC would be the third entry into the U.S. DCB market if approved by the FDA and would be commercializing Stellarex approximately three (3) years after MDT and BCR entered the market.

4.     MDT and BCR have more capital and a much stronger hospital presence

5.     MDT and BCR sell products to hospitals in much larger quantities than SPNC, i.e. tens or hundreds of millions as opposed to ½ or $1 million. As a result, both MDT and BCR can offer a slight discount on large product purchases and effectively out-maneuver SPNC with every hospital administrator SPNC attempts to sell Stellarex to.

 

 

Table 11

 

*Per RJ Report, we have not updated this projection for changes in any assumptions or figures that became publicly available after the issuance of the RJ Report. We consider these changes, such as actual cash balances as of December 31, 2016, or total debt outstanding adjusted for the debt refinancing SPNC announced on June 9, 2017, to be immaterial in the context of this report.

 

 

 

 

Table 12

 

1 - Stellarex growth projected at overall market rates referenced in the RJ Report, 27% and 31% in 2017 and 2018, respectively. SkyTides assumes $2M in U.S. revenues in 2017 which is equal to the amount projected by RBC Capital Markets in an April 28, 2017 analyst report.

2 - Costs of goods sales for 2017 and 2018 reduced by 25% of Stellarex revenues given purported 75% gross margin on Stellarex

3 - Change is equal to SkyTides adjustment to decrease in Stellarex sales and costs of goods sales, timing differences related to collection of accounts receivable and payment of accounts payable not considered.

*** These financials presume Stellarex obtains FDA approval in 2017 as management anticipates. We question whether FDA approval will happen.

 

XI.     A likely dilutive event is near

 

SPNC is currently valued at approximately $1.3 billion. Its stock price is currently within 5% of its 52-week high. SPNC’s most recent quarterly report reported cash at March 31, 2017 was $44 million. The RJ Report projected negative cashflows of $18.5 million for 2017 leaving just $29 million in cash as of December 31, 2017.

 

It is our experience and common sense dictates that a public company almost certainly will attempt to raise additional capital when (1) the company’s solvency is threatened and (2) if sufficient capital can be raised at reasonable terms. However, in this case, SPNC has a debt covenant to always maintain at least $10 million in its bank accounts. Our projections suggest this debt covenant could be threatened in 2018. SPNC really only has two options as far as we can see.

 

(1)  Fully draw down on the remaining $11 million in revolving credit but this is a short term solution and the line may not continue to be available as time goes on

(2)  Access the equity markets using its $200 million shelf registration to ensure cash balances can be maintained far above solvency-threatening levels

 

We noted that a large additional debt financing at low interest rates appears unlikely as SPNC already has $290 million in long term debt on the books. The debt covenants associated with this debt preclude SPNC from issuing additional debt at terms that would likely be necessary in order to successfully issue new additional debt.

 

So what is stopping SPNC from executing a $100-$200 million equity sale? Assuming SPNC management are willing to offer a discount to the buyers, we see absolutely nothing standing in the way. They have already warned investors that this shelf is available to SPNC. They are within their rights to sell shares at any time, up to $200 million, or about 20% of the current market capitalization. In this context, without considering the content in this report, we see the short-term downside risk in SPNC shares as being nothing short of substantial. We estimate a $100-200 million equity sale would need to be done at a severe discount to the market price.

 

XII.       AngioScore fairy tale and other lies, omissions and deceit

 

1.     AngioScore fairy tale, pending class action allegations

 

On June 30, 2014 SPNC acquired AngioScore. According to a Class Action filed on August 27. 2015 (the “Class Action”), throughout 2014 and into 2015, surgeons in the U.S. were increasingly using DCBs provided by MDT and BCR to treat PAD. Even though analysts continually pointed out to Drake that the DCBs were competitive with SPNC’s products, Drake refused to admit that DCBs were having any effect on SPNC’s business at the time or looking ahead. In fact, Drake promoted the idea that DCBs would somehow be complementary to SPNC’s business. On February 19, 2015 SPNC projected AngioScore revenues for 2015 of $62-$66M.

 

On April 23,2015, SPNC announced earnings that fell well short of estimates. Sell-side analysts began to question Drake about the impact of DCBs on SPNC’s business. Drake continued to suggest otherwise, stating “drug-coated balloons will be a tailwind for atherectomy.” As seen in the chart below, SPNC’s stock dropped from approximately $35 to $25 per share as a result of the poor results.

 

On July 23, 2015, SPNC announced it would reduce AngioScore revenue guidance by approximately 10% to $56M for 2015. This decrease in revenue guidance was alarming to investors after Drake had remained positive and promoted AngioScore throughout the last year that SPNC had owned AngioScore. However, the large drop in the stock price, from approximately $25 to $15 per share was also due to the fact that Drake appeared to be caught blatantly lying to investors. On the earnings call Drake finally admitted “we under-estimated the impact of drug-coated balloons.” He also finally admitted there would be no complementary effect that DCBs would have on SPNC’s business.

 

 

The Class Action also alleges that Drake and others developed and implemented a channel stuffing scheme to sell bulk product to SPNC customers at the end of each reporting period to ensure SPNC met its guidance. This channel stuffing operation appears to have been operating for several years from late 2013 until Q1 2015 when SPNC was no longer able to keep up with the charade. A confidential witness referenced in the Class Action documents suggested that most of SPNC’s sales were being booked at the end of each quarter because customers were well aware of SPNC’s scheme and knew they could get bulk discounts, sometimes up to 50% off, if they just waited until the end of the quarter. The Class Action is pending so all of these topics are just allegations. However, we’ve read the complaint and accompanying legal filings and would not want to be in Drake’s shoes in this respect.

 

2.     Lack of disclosure of largest recall in SPNC’s history

 

On November 28, 2016, SPNC informed its customers, but not its investors, of the largest recall in its history. A total of 17,048 units (references: 1, 2, 3) were recalled on that date. Just one day later, on November 29, 2016, SPNC conducted its Q3 2016 earnings call. There was not one mention of the recall during the earnings call.

 

In 2010, SPNC informed investors of a recall which was at the time its largest ever recall that involved a total of 5,080 units. We question why management determined the 2010 recall was worthy of being disclosed to investors but the November 2016 recall was not.

 

3.     Lack of disclosure of numerous patient death allegations by physicians

 

Since May 25, 2016, a total of twelve (12) adverse event reports involving patient deaths have been filed with the FDA that included direct allegations against SPNC devices. SPNC has not disclosed these allegations or the patient deaths to investors.

 

 

Source

 

Table 13

 

We noted that the majority, i.e. 10 of 12, of the SPNC patient death allegations occurred prior to SPNC’s Q3 2016 earnings call on November 29, 2016. However, management did not mention the SPNC patient death allegations on the earnings call. Additionally, the SPNC patient death allegations were not disclosed in the Q3 2016 quarterly report or in any other filing with the SEC.

 

Disclaimer: The FDA data presented above is not definitive. The data relies on voluntary reporting by third party health professionals and SPNC itself. As a result, the number of actual patient deaths involving or due to SPNC’s devices could be understated. Additionally, the reports identified above include a health professional’s assessment and are in no way considered an official cause of death.

 

4.     Failure to report adverse event reports to the FDA

 

In an inspection report dated January 21, 2016 (the “483”), the FDA inspector stated the following about an event that occurred on March 11, 2015 that had yet to be reported to the FDA almost a year later:

 

“An MDR report was not submitted within 30 days of receiving or otherwise becoming aware of information that reasonably suggests that a marketed device may have caused or contributed to a death or serious injury…your firm has not reported this event to date…You did not immediately report to the Director, CDRH, FDA, an accidental radiation occurrence reported to or otherwise known to you involving a product introduced ***** into commerce by you. Specifically, the following complaints…have not been reported to date.”

 

The FDA Expert stated the following:

 

Any deliberate attempt, which these examples all appear to be, to withhold details about a patient death or accidental radiation occurrences (“ARO”) from the FDA is a very serious matter. These particular events appear to have been withheld from the FDA for between 4 and 28 months. These apparent deliberate attempts to withhold information about patient deaths and ARO events are alarming, to say the least. By withholding this information, both the FDA and physicians themselves are limited in their attempts to ensure patient safety.

 

5.     Identifying patient deaths as “injuries” in FDA adverse event reports

 

The following events were labeled as an “injury” in the adverse event reports filed by SPNC but each event actually involved a patient death and a medical professional alluding to the SPNC device as the cause or contributing factor in the death.

 

“This event is being reported with the LLD as the suspect device as it was the traction platform being used to pull the lead free from the Myocardium.”

 

Source

 

“At this time, the physician continued the procedure using only traction placed on the LLD. A perforation of the svc occurred resulting in patient death. This is to reflect on the LLD as it was the traction platform in which to extract the lead.”

 

Source

 

The FDA Expert stated the following:

 

Physicians are generally shy to assign blame whenever an undesirable patient outcome occurs. The wording of these two reports conveys to any informed reader that the physician is alleging that each death was caused by the SPNC device – specifically the LLD. The fact that SPNC labeled each of these reports as an “injury” rather than a “death” is alarming given the physician specifically identified the SPNC device as the target of the report.

 

XIII.     Ex-Stellarex business

 

SPNC management and the sell-side are all-in on Stellarex. Our research on the other products and “base business” of SPNC that exists today has been limited thus far. From what we have seen so far the products SPNC has today seem to suffer from either not being very well differentiated, late to market in general, or of poor quality. We did not see much reason to research these other products at this point given the two comments we highlight below from the sell-side.

 

In the RJ Report, the analyst stated the following:

 

“We conservatively model a modest deceleration in base business growth (ex. Stellarex).”

 

In a UBS analyst report dated December 19, 2016, the analyst explained his assumption for one of the core business segments (28% of sales) for SPNC:

 

“Flat to down performance of lead management and lasers, consistent with the slow-down and bottoming of these businesses we saw in 2016.”

 

We believe any “excitement” and good or bad news related to SPNC in the coming year will be related to Stellarex.

 

XIV.     Conclusion

 

SPNC’s management team decided to acquire AngioScore in May 2014. Just 4 months later the first DCB was approved in the U.S. SPNC has since stated that AngioScore suffered directly as a result of the advent of DCBs. So, management responded by committing to its own DCB, Stellarex, knowing they would be late to market and would be facing a mature market led by the same company that sold them their DCB. This management team has no vision. They are chronically late to the party on any new technology. Worse yet, the management team has no ethics and is wholly untrustworthy, as we have outlined in this report.

 

The immediate risk for shareholders now is clearly the FDA approval. We are not going to take a guess on the likelihood of approval later this year but we will say we are far more skeptical Stellarex will obtain FDA approval than most investors or analysts we have come across thus far.

 

The Interventionalist stated:

 

“Peripheral arterial disease is a complex clinical model to push through the FDA.  With extremely broad disease parameters in terms of lesion length, lesion location, runoff, previous interventions etc., the FDA has a strong tendency to require large clinical trials and ultimately allows very narrow labeling parameters.  While current new technologies may have the benefit of being able to mimic established protocols in a non-inferiority setting, the existing clinical data is not remarkably compelling.  Given the FDA’s propensity to demand larger trials and longer time points in this clinical setting, near-term approval is hardly a ‘slam dunk.’  While Medicare (CMS) has a vested interest in offering reimbursement to new competitors, they do so in the context to enable price erosion and are becoming much more interested in comparative data and superiority of next generation products.  The combination of poor penetration and price erosion would hardly seem the hallmarks of a strong market entry dynamic.”

 

We would not want to be a shareholder of SPNC given the content of this report. We anticipate some shareholders may wait out SPNC and hope for an FDA approval for Stellarex. For those shareholders, we suggest they consider that if Stellarex does obtain FDA approval, we believe the Stellarex data does not show consistent and believable statistical significance to encourage surgeons to choose Stellarex. Worse yet, in our view, it is an absolute that SPNC will attempt a capital raise soon or soon after/if they obtain FDA approval for Stellarex. No matter the terms, we doubt that will be a desirable outcome. Where is the upside here given SPNC has yet again made a poor play and hitched their wagon to a product no one will want while at the same time perhaps some bad luck has occurred and the entire DCB market has stalled and may never reach the pie in the sky market estimates SPNC and its sell-side analysts have been promoting. Lastly, this report outlines why SPNC’s other products are unlikely to save the company. Ultimately, we see SPNC liquidating or selling off “its parts” at some point in the next few years. When this happens, after paying down its roughly $300M in debt we’re not sure equity shareholders will be left with any value.

 

We have a $8 price target on SPNC shares. Our premise is simple. The market price is roughly $27 and the sell-side, in the CG Report, placed a $19 value on the Stellarex franchise. We place no value on the Stellarex franchise. We believe Stellarex is failing in Europe and will not be approved or will fail in the U.S. We believe it is and will continue to be a drain on SPNC finances and eventually be disposed of by SPNC. Upon disposal, we’re not sure there will be any value in the technology given that the DCB market is already highly saturated, in our view, and Stellarex does not offer an advancement on current technology offered by MDT and BCR. Furthermore, there is a significant risk that creditors would receive any value leftover on a Stellarex disposal, rather than SPNC shareholders.

 

Exhibit 1 – Clinical data published by MDT, BCR and SPNC

 

Table 1 was developed using U.S. pivotal trial clinical data published by each company that has an FDA approved DCB as of the date of this report or is attempting to obtain FDA approval now. The clinical data referenced in Table 1 was published by MDT, BCR and SPNC. Kaplan-Meier 12 month patency rates for MDT were obtained here.

 

Calculations to determine “best-in-class” and “worst-in-class” products are included herein. References to “N/A” mean not applicable due to the fact that each measure is not a “performance-related” measure. References to “N/D” mean the specific data relating to this measure was not disclosed by the company.

 

 

Exhibit 2 – Original Graphs Published by MDT, BCR and SPNC

 

MDT (originally shown as 24-month data, cropped here to show 12-month data):

 

 

BCR:

 

 

Stellarex:

 

 

 

Exhibit 3 – Example of divergence calculation used in Table 2

 

SkyTides made measurements of the divergence of the DCB Patency vs the PTA Patency for each of the charts provided in Exhibit 2. These measurements were approximations based off of the charts themselves as the raw data has not been made publicly available from the companies. The charts clearly show the divergence of the DCB Patency vs the PTA Patency for MDT and BCR was significant and continuous. The divergence for Stellarex was minimal and was far less than either MDT or BCR. The calculation methodology is shown in the example below.

 

 

 

Exhibit 4 – European and other trials

 

The FDA does accept results of clinical trials conducted in foreign countries. However, these results are considered only as supplemental and are not the primary consideration the FDA reviews when making a decision on a marketing approval. Furthermore, in this case, the results of the European Trial, which presumably involved the similar if not the same clinical trial design and the same product as the Pivotal Trial, i.e. Stellarex, showed a significant inconsistency in the patency curve for the DCB (i.e. the blue line below) and the PTA (the red line) that we don’t consider it possible the FDA will see the European Trial as a supportive trial to the Pivotal Trial. We believe there are questionable attributes associated with the Pivotal Trial, i.e. the fortuitous flattening in Month 12 AND questionable flattening and lack of unique measurements for the DCB arm throughout the first 330 days of the European Trial. We are not focusing our attention on the European Trial in this report for these reasons.

 

Pivotal Trial:

 

 

European Trial:

 

 

We discount the value of any other trial conducted by SPNC that was not randomized. We believe it is a well understood reality that surgeons, the FDA and Medicare place little if any reliance on non-randomized clinical trials.

 

On January 24, 2017, SPNC doubled down on its claims of success with a press release:

 

“ILLUMENATE Global validates the earlier ILLUMENATE US Pivotal results, achieving best-in-class 12-month primary patency rates”

 

Given that the ILLUMENATE Global Study is a non-randomized trial we don’t believe the results from this trial provide any legitimate evidence support SPNC’s claims. We also noted that  press releases issued in 2015 specifically identified the global study as a non-randomized study but SPNC made the decisions to remove this reference in its November 2, 2016 press release when describing the study. This is just one more example of the lack of integrity this management team continually exhibits.

 

We discussed the European Trial with the FDA Expert who stated the following:

 

“European data can be bought and paid for. Medicine in Europe is socialized. As a result, physicians are not paid well and will do anything in their power to continue enjoying a revenue stream that is funded from U.S. companies – many of whom have large sums of capital – rather than relying solely on the European governments to earn a living. I am not saying these are bad people. I am saying they are biased and that bias will unintentionally or intentionally impact the results of trials in many instances.”

 

Exhibit 5 – Expert Biographies

 

FDA Expert

 

The FDA Expert is a medical device industry specialist who has participated in over 200 U.S. clinical trials. During his career, he has played a significant role in the processing of over 150 unique 510K or PMA submissions to the FDA. He holds advanced degrees in multiple fields including molecular physiology. He currently advises surgeons throughout the U.S. on the benefits, drawbacks and improvements possible as they relate to products offered by dozens of medical device manufacturers. We believe his experience qualifies him as an expert in the analysis of clinical data and the FDA submission and approval processes. He is unaffiliated with SPNC. He has not conducted business with SPNC in the past and has no plans to do so in the future. SkyTides has agreed to compensate him in exchange for his expert opinions as they relate to SPNC products and the relevant competition. To our knowledge, he did not hold any shares short or hold any put contracts on SPNC shares or its competitors, respectively, at any time.

 

Medicinal Chemistry Professor

 

The Medicinal Chemistry Professor is an assistant professor of medicinal chemistry at a top 25 School of Pharmacy in the U.S., as ranked by U.S. News in 2016. He holds a Ph.D. in Organic Chemistry from Massachusetts Institute of Technology (“MIT”). He previously completed MIT and National Institute of Health fellowships. He has authored and had 20+ articles accepted for publishing by respected medical journals in the last ten years. We believe his experience qualifies him as an expert in the analysis of clinical data and organic chemistry.

 

The Medicinal Chemistry Professor was interviewed by SkyTides on June 2, 2017 by telephone. He was informed of the actual purpose and short bias of our research. He was shown Patency charts published by MDT, BCR and SPNC along with clinical data reported by each company. He is unaffiliated with SPNC. He has not conducted business with SPNC in the past and has no plans to do so in the future. He has not been compensated in exchange for his expert opinions as they relate to SPNC products and the relevant competition. To our knowledge, he has not held any shares short or any put contracts on SPNC shares or its competitors, respectively, at any time.

 

Endovascular Expert

 

The Endovascular Expert is Board Certified and Fellowship trained in endovascular surgery. His expertise includes endovascular surgery, vascular surgery and surgical oncology. He estimated he performed over 300 surgeries for patients suffering from PAD in the last 12 months. He estimated 50 of the surgeries used a drug-coated balloon manufactured by BCR. He has participated in numerous clinical trials involving medical devices used in endovascular and vascular surgeries. He is a published author, having appeared in numerous scientific journals on issues and cases related to vascular surgery and surgical oncology. He is also a contributing author of numerous chapters in textbooks on general surgery and vascular surgery. He completed a five-year residency in general surgery and a subsequent fellowship in vascular surgery. He is a Fellow of the American College of Surgeons.

 

The Endovascular Expert was interviewed by SkyTides in his office on April 18, 2017. He was not informed of the actual purpose and short bias of our research. He was shown Patency and TLR charts published by MDT, BCR and SPNC along with clinical data reported by each company. This information was presented to him without the brand names or company names identified so as to ensure the highest level of independence possible during our interview process. He was not compensated or promised future compensation in any way by SkyTides, any affiliate of SkyTides or anyone else associated with our research. To our knowledge, he did not hold any shares short or hold any put contracts on SPNC shares or its competitors, respectively, at the time of the interview or since the interview.

 

Vascular Device Expert

 

The Vascular Device Expert has over 20 years of commercial experience in medical device development and biomedical engineering. He holds a Ph.D, M.S. and B.S. in BioMedical Engineering. He was previously employed by Baxter International. He is a published author, having numerous scientific manuscripts in high impact journals including the New England Journal of Medicine. He is a named inventor on several U.S. patents, He has extensive experience working with the FDA and other regulatory agencies on investigational new drug applications and is currently a reviewer for NIH grants as well as several high impact journals. We believe his experience qualifies him as an expert in the analysis of the biomedical functionality of medical devices, clinical data and the FDA submission and approval processes. He is unaffiliated with SPNC. He has not conducted business with SPNC in the past and has no plans to do so in the future. SkyTides has agreed to compensate him in exchange for his expert opinions as they relate to SPNC products and the relevant competition. To our knowledge, he did not hold any shares short or hold any put contracts on SPNC shares or its competitors, respectively, at any time.

 

The Interventionalist

 

The Interventionalist has over 20 years of experience as a senior cardiologist and medical researcher. He is an Adjunct Professor of Medicine at one of the top 10 medical schools in the U.S. He oversees preclinical trials and clinical research. He has extensive experience in the development and assessment of interventional devices. He is a frequent international lecturer and an author of numerous publications. He completed fellowships at the Royal College of Physicians (London) among others. He sits on numerous scientific and medical advisory boards and has served as an expert on Cardiovascular Science, for the National Institutes of Health. We believe his experience qualifies him as an expert in the analysis of the biomedical functionality of medical devices, clinical data, CMS reimbursement and the FDA submission and approval processes. He is unaffiliated with SPNC. He has not conducted business with SPNC in the past and has no plans to do so in the future. SkyTides has agreed to compensate him in exchange for his expert opinions as they relate to SPNC products and the relevant competition. To our knowledge, he did not hold any shares short or hold any put contracts on SPNC shares or its competitors, respectively, at any time.

 

Neurological Expert

 

The Neurological Expert is Board Certified in neurological surgery. He specializes in the treatment of disorders of the central nervous system, infections of the brain or spine and vascular disorders. He has practiced medicine for over 40 years.

 

The Neurological Expert was interviewed by SkyTides on May 19, 2017 and May 23, 2017, respectively. He was informed of the actual purpose and short bias of our research. He was shown charts and clinical data. We believe his experience qualifies him as an expert in the analysis of clinical data, statistics and clinical trial design best practices. He is unaffiliated with SPNC. He has not conducted business with SPNC in the past and has no plans to do so in the future. He was not compensated or promised future compensation in any way by SkyTides, any affiliate of SkyTides or anyone else associated with our research, to our knowledge. To our knowledge, he did not hold any shares short or hold any put contracts on SPNC shares or its competitors, respectively, at the time of the interview. Since the completion of the interviews we became aware of his intention to short shares of SPNC or to purchase put contracts on SPNC shares, respectively.

 

Exhibit 6 – 10 Most Serious Misbehaviors

 

Items making up the 10-most-serious-misbehaviors composite – it is actually a list of 12 items

 

  1. Overlooking others’ use of flawed data or methods
  2. Compromising the rigor of a study’s design or methods in response to pressure from a commercial funding source
  3. Unauthorized use of confidential information about research subjects
  4. Making up research data, other than in situations such as simulation studies
  5. Inappropriately altering or “cooking” research data
  6. Compromising the rigor of a study’s design or methods in response to pressure from a not-for-profit funding source (such as government or a private foundation)
  7. Not properly disclosing involvement in firms whose products are based on one’s own research
  8. Using another’s words or ideas without giving proper credit
  9. Inappropriately altering or suppressing research results in response to pressure from a commercial funding source
  10. Relationships with students, research subjects, or supervisees that may be interpreted as questionable
  11. Inappropriately altering or suppressing research results in response to pressure from a not-for-profit funding source such as government or a private foundation
  12. Circumventing or ignoring aspects of human-subjects research requirements such as informed consent or confidentiality

 

Source

 

Exhibit 7 – CD-TLR

 

MDT and SPNC also provided graphs showing clinically driven target lesion revascularization (“CD-TLR”) data from their pivotal trials. BCR CD-TLR clinical data was not available in a chart format. We are therefore unable to include BCR CD-TLR data in our comparative chart. We chose not to focus on CD-TLR in this report after uncovering some argumentative references that question the usability of this data. We are presenting it here only to further confirm that Stellarex pivotal data was not superior. The chart below shows the divergence of the CD-TLR rates found in graphs previously published by MDT and SPNC. Our divergence calculations for these graphs mirrored those explained in Exhibit 3.

 

 

 

Exhibit 8 – Problems with lasers

 

The FDA Expert stated the following:

 

The use of laser technology brings with it more risk to the patient and in this case the surgeon than other surgical techniques. In my view, it is entirely possible surgeons may prefer to utilize drug-coated balloons rather than SPNC lasers when considering patient outcomes. Furthermore, as drug-coated balloons become more prevalent, these same surgeons may also be unwilling to choose to use an SPNC laser due to the increased risk of personal injury they appear to pose.

 

“During the case, the Glidelight became compromised on the tail tube at the handle and caused a burn to the gown, glove and finger of physician.”

 

“While using the Glidelight catheter the physician noticed a "burning" feeling.”

 

“During a procedure, the working length of a Spectranetics turbo elite laser ablation catheter frayed and burnt though the physicians glove.”

 

Exhibit 9 – SPNC device left inside patient

 

In December and November 2016, 48 adverse event reports were filed with the FDA. We noted 6 of these reports included instances of tools used by surgeons being left inside of the patient. The FDA Expert stated the following:

 

“Any patient outcome involving surgery whereby non-human parts are unintentionally left inside of a patient is clearly undesirable. These parts can be expected to migrate within the body and potentially cause additional harm to the patient beyond their original diagnosis. Worse yet, considering that surgical techniques involving SPNC devices generally involve entering and operating within the patient’s blood vessels, the potential migration of these parts inside of blood vessels could threaten the patient’s heart itself – which would surely result in death.”

 

Examples of commentary included in reports filed against SPNC devices in December and November 2016 are as follows:

 

“The tip of the ELCA laser sheath dislodged from the catheter. Removal attempts were unsuccessful.”

 

“The distal marker band from the device had dislodged in the SFA and migrated btk into the tibial artery. The marker band remains in the patient.”

 

“The Spectranetics lead locking device was cut and capped and remains in the patient.”

 

“The MD attempted to remove the device from the patient. Upon removal of the device the distal marker band was missing. The physician attempted to remove the marker band but was unsuccessful.”

 

“During the intervention, the MDT 6949 lead was cut and remains in the patient.”

 

“The physician decided to abandon the extraction with the remaining LLD in the patient.”

 

Exhibit 10 – Other hyped products

 

1.     Bridge

 

Aside from Stellarex, management has not spoken with much excitement about its other products in the earnings calls we have read through. Beyond Stellarex we believe management has promoted its “bridge” product more than any other product of late. We found this to be a sign of how poor SPNC’s product portfolio must be at this point as “bridge” represents a tiny market as indicated by the following statement from SPNC’s website:

 

“A tear in the Superior Vena Cava (SVC) during a lead extraction procedure is rare, occurring in just 0.05% of cases. But when a tear does occur, the Bridge™ Occlusion Balloon can be quickly deployed to stem blood loss and allow time for transition to surgical repair.”

 

Source

 

2.     AngioSculpt X

 

Management has spoken of AngioSculpt X, a scoring balloon product, a few times on earnings calls. We reviewed the marketing materials for the product and don’t believe it warrants much attention in this report. SPNC has a large stable of “ok” products. We’re not sure any of them can be classified as bleeding edge technology. That should be worrisome to investors because SPNC’s competitors spend every day considering new technologies and looking for additional ways to dominate the medtech space. It is a tall task to suggest a smaller medtech company like SPNC can compete with Medtronic, Boston Scientific or Bard etc.

 

 

Disclaimer: 

 

 

WE BASE OUR ANALYSES HEREIN ON OUR OWN RESEARCH AND PUBLICALLY AVAILABLE DOCUMENTS. WE ARE NOT GIVING YOU INVESTMENT ADVICE. IF YOU CHOOSE TO MAKE AN INVESTMENT IN SPNC OR ANY OTHER COMPANY, YOU DO SO AT YOUR OWN RISK.  IF YOU INVEST YOUR MONEY YOU MAY LOSE ALL OF IT. NOBODY HAS A CRYSTAL BALL, AND NEITHER DO WE. INVEST AT YOUR OWN RISK.

 

We are short shares of SPNC and are long SPNC puts. We may add to our short position at any time. All information included within this report is sourced from publicly available materials. As of the publication of this report we have not communicated with the executive management of SPNC or their shareholders.

 

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