Carmat — Update 5 May 2016

On 12 April 2016, Carmat shareholders approved the terms for a €50m financing secured in late February. Following the ratification, 1.35m shares were issued at €37.06 per share (increasing Carmat’s total shares outstanding by 29.5%). Carmat finished 2015 with €3.0m in gross cash (€0.8m in net cash, after factoring €2.2m in debt), and the financing is expected to fund Carmat’s planned pivotal EU study for gaining CE mark clearance to market its bioprosthetic heart in Europe.

New investors included Air Liquide’s venture capital arm (investing €1m) and CorNovum, an investment holding company held by the French government and its public pension fund, which invested €17m. Existing Carmat investors, Airbus Group (Matra Défense) and Truffle Capital, took positions of €11m and €7m, respectively, and the family offices of Pierre Bastid and Dr. Antonino Ligresti both invested €7m. All investors pledged not to sell their shares for at least two years (or until the Carmat bioprosthetic heart receives CE Mark clearance). Carmat also pledged not to raise any additional equity capital for at least 180 days post-settlement. We estimate that after this financing, Airbus Group and Truffle Capital will hold approximately 22.5% and 18.2% of Carmat’s outstanding stock. Given a clause in firm’s governance structure that doubles the voting rights of shares held and registered for at least two years, their voting rights are estimated at approximately 27% and 23%, respectively.

Carmat completed the four-patient feasibility study in January 2016, after the death of the fourth patient to complications unrelated to the performance of the bioprosthetic heart itself. There was a minor delay in recruitment after the second patient’s death, as despite a survival of nine months post-implantation the device malfunctioned due to a disruption in micro-steering electronics following a micro-leak. Carmat identified the cause of the malfunctioning and then worked on corrective measures, including a software tool predicting malfunctions, and received authorisation from French regulators to resume the study. Carmat’s analyses confirmed that the malfunctioning was not due to an inherent flaw in product design, but rather issues stemming from the early stage of production not unusual for a complex medical device.

Overall, while the sample size was low, the first three patients (75%) met the company’s targeted success of a survival duration of at least 30 days post-implantation. The Agence de Biomédecine, a French organisation overseeing transplant procedures and organ donations, reported in 2013 that the 30-day survival rate in heart transplants (the ‘gold standard’ comparator for an artificial heart) is approximately 80% for patients above age 60. The Carmat bioprosthetic heart’s primary advantages are that:

Carmat intends to finalise the protocol and obtain the necessary approvals in H116 from French authorities (including the Agence Nationale de Sécurité du Médicament et des Produits de Santé, ANSM) to start a pivotal study that could lead to CE clearance and EU commercialisation. Carmat anticipates that recruitment could begin in H216.

The company is planning for the pivotal study to recruit between 20 and 25 patients, and take place in France and several other European countries. The implanted patients would be followed for up to 180 days. The firm also anticipates that regulators would permit more relaxed inclusion criteria than the feasibility study, which was limited to terminal stage patients (such as end-stage irreversible biventricular heart failure) and/or those in an immediate life-threatening situations. The target population in the pivotal study could potentially include patients with Stage IV chronic heart failure (CHF).

Carmat anticipates that it would be able to recruit patients into the pivotal study in parallel rather than sequentially, according to the number of clinical trial sites participating. This can significantly improve the recruitment rate, as the feasibility study took about two years to recruit four patients. A much more rapid level of recruitment is needed to satisfy the firm’s belief that the pivotal study could be completed in 2017 or 2018. Our model assumes completion in late 2017, with CE Mark clearance and commercialisation in H218.

Carmat is also a participant in the EUnetHTA – SEED (Shaping European Early Dialogues for health technologies) programme, which enables the firm to engage in preliminary dialogue with regulators and public payers for potential reimbursement of the Carmat prosthetic heart, ahead of commencing pivotal studies.

Carmat also anticipates that once the CE mark is obtained, it will advance the incorporation of a second-generation hydrogen-generating power source developed by PaxiTech. This battery could allow up to 12 hours of autonomous operation and charge while weighing under 3kg, extending the implant’s overall flexibility and versatility (the current heart uses 3kg five-hour lithium ion battery). A supplementary regulatory filing could be undertaken to permit the usage of this battery with the Carmat bioprosthetic heart.

Operating expenses for Carmat, including staff, materials and other clinical costs for the feasibility study were €19.3m in both 2015 and in 2014. Carmat also received a €3.15m research tax credit in 2015; it expects to receive one for €3.2m in 2016. Overall, operating cash burn (after including net interest expenses) was €17.2m in 2015. As the firm plans to start a CE mark-enabling pivotal study in H216, it does not expect its cash burn rate to rise significantly; management suggests the upcoming annual burn rate could rise by €1-2m compared to recent trends. Based on this projection, we estimate it should have enough on hand to fund operations into H118, and thus potentially through the completion of the pivotal study.

The commercial case for the Carmat bioprosthetic heart primarily lies in a general lack of available human heart transplants for patients who need them. Heart transplantation is considered the gold standard treatment for patients with advanced heart failure who are refractory to management with medical therapy and mechanical circulatory support. The US National Institutes of Health reported in 2010 that the potential pool of US patients for heart transplantation is over 50,000 a year, yet the number of heart transplants performed in the country has remained relatively fixed at 2,200 per year for at least a decade. A reason for this disparity is the strict criteria for potential donors (ie, aged under 61 years, not suffering from certain infectious diseases, and so on) as well as matching criteria for the recipient (ie, similar blood type, comparable height/weight; recipient must also free of certain health conditions and/or aged below 65). A similar supply/demand mismatch exists in Europe (across France, Germany and the UK there are only c 800 transplants per year)

We estimate the EU target potential market opportunity of the Carmat bioprosthetic heart can be broadly based as falling within two conditions. In both groups, the bioprosthetic heart would only be implantable in patients under age 70, and for anatomical/size compatibility, in about 86% of otherwise-eligible men and 14% of such women.

The two conditions we assume the Carmat bioprosphetic heart will be targeting are:

Altogether the EU target treatment population is around 74,000. We assume completion of the pivotal study in H217, and potential EU launch and commercialisation in H218. We continue to assume an initial average per-device market price of €160,000 (in the mid-range of company guidance of €140,000-180,000). We estimate peak market share of 15% of this target market will be realised by 2023, with EU sales of €1.9bn in that year. This is higher than our prior peak EU sales estimate of €1.2bn, with the primary difference driving our new forecast our assumption for a higher target pool (potential market) of 74,000 potential patients per year, up from 50,000 previously.

For the US market, our base case continues to assume that product introduction will be attempted using the HUD (Humanitarian Use Device) programme, instead of a Premarket Approval (PMA) process. The HUD approach is less onerous and would shorten the amount of clinical data required for commercialisation, but could limit product usage to 4,000 patients per year. Under a HUD approach, Carmat would need to provide safety evidence but unlike a PMA, there would be no necessity to provide efficacy data. We assume US HUD commercialisation in 2020, with a US market price of $200,000 per device (same as previously). We assume peak US sales of $625m by 2024 under this scenario. Our new peak US sales forecast is also higher than our prior $560m peak US sales estimate as we now assume that, under a HUD approval scenario, the product would take a larger share of the potential target HUD market. In effect, we expect US greater physician awareness of the benefits of Carmat’s heart vs other competing artificial hearts due to its utilisation in the EU. We would adjust our forecasts should Carmat proceed via the PMA route, but this would entail a higher risk adjustment, a later launch date due to the longer/larger study, and additional R&D costs of over €35m (for a >100 patient clinical trial), although the addressable market would be larger.

We continue to value Carmat using an risk-adjusted NPV approach, employing a 12.5% cost of capital. After reviewing CHD and myocardial infarction prevalence data, we estimate the potential target market as being potentially larger than previously (up to 74,000 EU patients versus 50,000 previously) but we also assume, given the complexities involved with the artificial heart programme and its manufacturing and the relatively small (n=4) sample size to date, a slightly more conservative risk adjustment (30% vs 35% previously), for the EU market. Our risk adjustment factor also considers the timeline for completing the study, as given the time needed to complete the feasibility study, there remains a risk that it can take longer than our model currently estimates to complete the pivotal study. As we estimate that CE mark clearance would be a necessary step or milestone, before the company would embark on a US regulatory strategy, we use a lower (20%) probability for commercialisation in the US.

Given the above adjustments, we now obtain an rNPV valuation of €652m, up from €611m previously. After including the €50m financing and the resulting additional 1.35m shares, we assume mid-2016 net cash position of €41.3m. After including this net cash position, we derive an equity value of €693m, which leads to a per-share equity valuation of €116.92. This valuation does not include any additional equity offerings, as future financings may be required to prepare for commercial product launch and ramp up manufacturing.

Once Carmat bioprosthetic heart commercialisation is secured, Carmat plans to use its know-how in cardiac mechanics and biomaterials to expand into other cardiovascular indications or devices (such as a ventricular assistance device), but until definitive R&D or clarification is made into such areas, we are not including such prospects in our valuation.

We estimate that Carmat’s net cash burn rate (operating cash flow including net interest costs, minus net capex) will be €18.7m in 2016 and €21.8m in 2017. We expect the burn rate to rise in 2018 and 2019 as the firm prepares for commercialisation, with the burn rates of €37.9m, and €46.8m respectively. We expect gross margin for the Carmat heart to be negative initially, but become positive by H219. Given these cash needs, we assume the firm will raise €40m in both 2018 and in 2020, to prepare for launch activities (sales and manufacturing scale-up); as per our usual methodology, we assign these financings to long-term debt.

We assume operating cash flows will start to run positive in 2020, as product sales rise and as manufacturing efficiency gains are realised. We assume EBITDA margins will exceed 50% in 2022 and thereafter.