Acarix — Update 21 December 2016

Acarix is developing a doctor’s office acoustic test device and software algorithm: CADScor. CADScor is designed to be used by doctors to help assess patients’ risk of coronary artery disease (CAD). This could enable about half of the patients to be ruled out from further, expensive testing Using CADScor, about half of these people might be sent home, saving money. Acarix AB is a Swedish company (Malmö). It was founded in Denmark as Acarix A/S and has an operational office just North of Copenhagen. CADScor is a registered trademark of Acarix.

The business case rests on achieving a good penetration rate of primary care providers with the CADScor device sold for over €3,000 (Europe) and $5,000 (US). A disposable, single-use sticky patch priced at over €30 (Europe) or US$75 (US) is required to run the test. A substantial installed base of devices, if achieved over time, could generate significant sales revenues at high margin with low marketing cost. The US market alone is estimated by independent researchers to be at least 3.8 million tests per year. As a simple to use, primary care device CADScor offers a quick and relatively cheap alternative to more complex and much more expensive testing. Acarix plans to sell the test from 2017 in Germany and Scandinavia, although full government reimbursement is not likely before 2019. Distributors will be appointed for other European countries. In the US, further trials may be required and Edison expects that a de novo 510(k) or PMA application will be needed for FDA approval. Our model assumes US sales from 2021.

Edison forecasts a rise in 2016 cash outflow to SEK22m up from SEK8.6m in 2015. This is then expected to rise to SEK 72m per year from 2017 after forecast sales. In Edison’s view, Acarix is unlikely to be profitable before 2022. Limited direct sales into the German market are expected in 2017 with some sales progression in 2018. Acarix entered 2016 with cash of SEK2.1m. Acarix received a €2m private investment in October from Puhua Jingxin Guzhou Health Management Partnership (Puhua Jingxin). The Puhua Jingxin fund aligns strategic resources from Puhua Healthcare and Zhejiang Jingxin Pharmaceuticals to form a specialist healthcare fund; post-IPO it now owns 11.53%. Acarix completed its IPO in December 2016 at SEK17.60/share raising SEK140m gross, SEK125m net issuing 7.96m new shares.

The three major sensitivities relate to the diagnostic performance, acceptance within clinical guidelines and reimbursement. The sensitivity is good at 85% with specificity of 50%. For European sales, Acarix has a CE mark but CADScor needs to be included in various European guidelines. The US route to approval is not yet clear and CADScor also needs to be added into US guidelines. Reimbursement will require real-world clinical studies to show that use of CADScor leads to better patient care and cost savings. In the US, there are lucrative medical fees for more complex tests so a disincentive to use CADScor. However, there are concerns about over-testing and healthcare systems are increasingly cost focused, which could help uptake. Sales and timings for new diagnostic products are unpredictable and sales could be significantly different to these estimates.

Acarix has gained the funds it needs from the IPO to execute its market and clinical strategy to develop the CADScor business. Using a discounted cash flow model, a 12.5% discount rate and a terminal valuation based on a 1% growth rate, we calculate an indicative post-funding value of SEK728m at an exchange rate of US$/SEK of 9.8, equating to SEK31.62/share. Acarix may invest in other products and may develop further indications for its acoustic technologies.

Acarix is developing the CADScor acoustic device and sophisticated signal processing algorithms. The company is based on pioneering research from 2004 on phono echocardiography performed at Aalborg University, Denmark The technology was taken up by Coloplast and then transferred into a spinout company, Acarix A/S in 2009. Venture capital was raised in 2010 from Seed, Sunstone and Seventure Partners. Medical collaborations were established with a group of Danish hospitals. These collaborations form the basis of the current clinical trial program. The CADScor system gained a CE mark classification in 2015. A new CEO was appointed in August 2016. Acarix A/S became part of the Swedish company, Acarix AB (Malmö) in H216. Acarix has eight employees. Historic company information and accounts can be found online in the Virk.dk database. From foundation to October 2016, Acarix raised SEK121m (DKK92m) in venture capital and from Puhua Jingxin. Acarix A/S received DKK12.1m (SEK15.9m) from Danish government funding. The IPO completed on 19 December 2016 raising SEK125m net.

Every year, many patients at low and intermediate risk of CAD visit their doctor complaining of non-specific chest pains. These patients may not have angina (chest pain caused by poor blood supply to the heart). Currently, doctors have no easy physical test to separate the worried well from those at high risk of CAD who need further investigation and will be referred for hospital tests. Currently, doctors assess the probability of CAD using questionnaires based on age, gender, clinical risk factors (diabetes, smoking) and immediate symptoms. These tend to overestimate CAD risk.

CADScor, Exhibit 1, carries out an independent, patient-specific measurement and analysis of the noise made by the blood flowing in a patient’s coronary arteries. The flow at very low noise frequencies is twice as loud due to turbulence if the arteries are partially blocked. Note that the sophisticated algorithm assesses multiple acoustic parameters.

Simple patient data is entered into the CADScor device before the test. Otherwise, there are no external inputs. Calculation of the test result, the CAD-score, is done by the device and displayed on screen; no external software is used. A CAD-score of 20 or less identifies a patient as probably not requiring further investigation for CAD. CADScore test data from trials is discussed below.

CADScor consists of a sensitive microphone attuned to low-frequency sound, a sound recording and analysis unit fixed to the microphone, an external power cable and a base station. The detachable recording and analysis unit is about the size of a small smart phone. It stores data from up to 150 patients. The base station recharges the analysis unit and has a calibration system to test the microphone every night. CADScor can be wall mounted. Software updates need to be installed manually using an integral card reader. No Wi-Fi or Bluetooth connectivity is enabled currently.

To use CADScor, a disposable, single-use, double-sided adhesive patch is placed into a small assembly tool. The CADScor device is removed from the docking station and inserted into the tool so that the adhesive patch sticks to the base and is correctly aligned. The analysis unit is then stuck to the patient so the microphone is over the space between the fourth and fifth ribs. The patch has an integral clip to hold the microphone and an RFID chip to prevent re-use. It is a critical component as it ensures the close contact needed to detect low-frequency heart sounds.

Ideally, the patient will be lying on their back and relaxed with their heart rate under 80bpm. CADScor records sound for four periods each lasting eight seconds. There are rest periods in between of 20 seconds. In recording phases, patients must hold their breath.

The analysis unit then processes the data. This could take a further one to two minutes. Acarix estimates that the total time required to complete the test is about 10 minutes. Tests will probably be run by a nurse. On completion, the CAD-score is shown on screen and manually entered into the patient’s medical record.

The coronary arteries are narrow arteries (4.7mm diameter or less) and supply blood to the heart muscle. Particularly important are the left coronary arteries supplying the left ventricle (the heart chamber that pumps blood around the body). Partial blockage of the arteries is caused by atherosclerosis: the formation of fatty deposits along the artery wall. These can become calcified.

The usual threshold for determining that CAD is at a dangerous level as when the main left coronary artery is blocked by 50% or more and when minor coronary arteries are blocked by 70% or more. As the coronary arteries become partially blocked, areas of the heart will receive less blood, causing pain on exercise (angina) as the heart muscles demand more oxygen to cope with the body’s demand for blood due to exercise or stress. This may be clear angina or it may be initially be a generalised chest pain. Most chest pain is musculoskeletal or caused by digestive problems and is not angina.

If an atherosclerotic plaque in a coronary artery ruptures, it triggers blood clot formation that may block the artery causing a heart attack (acute myocardial infarct (AMI)). According to the US Centres for Disease Control and Prevention, “coronary heart disease is the most common type of heart disease, killing over 370,000 people annually” in the US. Every year about 525,000 Americans experience a first heart attack.

According to the American Heart Association 2016 update “about 85.6 million American adults (>1 in 3) have one or more types of heart disease”. Over half of these, 45 million, are aged over 60 and so in the higher-risk groups and mostly covered by Medicare (United States government healthcare insurance for people aged over 65). It is thought that 15.5 million (between 4% and 5% of the US population) have CAD with about 8.5 million having angina (the number is falling, the 2010 AHA estimate for angina was about 10 million). The number of deaths from coronary heart disease has been decreasing, Exhibit 2.

In Germany, an overall population study by Gößwald  et al. (2013) gives a lifetime risk of angina and coronary heart disease of 8%, which would be about 6.4 million people; the higher relative prevalence level is explained by the much older age structure of the German population. Incidentally, the Max Planck Institute for the Biology of Ageing gives a figure of 1.5 million coronary heart disease cases in Germany (unsourced).

A 2014 UK survey estimated that 3% of the population had angina, the manifestation of CAD. That would be about 1.9m cases. The age profile is weighted to those over 75.

There are many specialist terms and procedures in cardiology. Exhibit 3 provides an overview. None of these tests are highly accurate because it is very difficult to rule out heart disease. This is because the coronary arteries can be blocked to different extents in different places and smaller occlusions are difficult to detect in the narrow and convoluted coronary arteries.

A systematic review of non-invasive testing for coronary artery disease was published in 2016 by the Agency for Healthcare Research and Quality, part of the US Department of Health and Human Services. This concluded: “no clear differences between testing strategies… with regard to clinical management outcomes on which to base recommendations”. The study also noted “that the frequency of all-cause mortality and myocardial infarction [heart attack] was low across all studies”.

Exhibit 4 shows the proposed positioning of the Acarix test within the set of established procedures. Pre-test probability calculations, might, in Acarix’s view, be superseded by the Acarix test in primary care settings, Exhibit 4 blue box. Acarix estimates that between 40% and 50% of patients will be excluded from further testing on the basis of its CADScor.

Pre-test probability assessment is recommended by guidelines in the US and Europe to assess a patient before any other clinical tests are run. The original Diamond-Forrester (1979) (DF) score (Exhibit 5) is simple to do using gender, age and simple chest pain symptoms. Men are at much more risk so score highly relative to women. Post-menopause, women do catch up in risk but start from a low baseline. The Duke Clinical Score (DCS), Pryor et al. (1993), used more parameters than DF: gender, age, cholesterol and chest pain symptoms including ECG data to determine angina type. The original DF and DCS scores were compared by Wasfy et al. (2012) against CA-CTA as a standard. They found that the original DF overestimated risk, with DCS more accurate. Many other authors also noted the overestimate of risk by DF.

The DF score has now been recalibrated and renamed as CAD Consortium 1 (CAD1), Genders et al. (2012). An online calculator gives the basic, recalibrated DF score and allows it to be further modified with clinical risk factors like smoking, diabetes and hypertension. A useful interview on this can be found at Chest Pain and Predicting CAD: Time to Change the Guidelines? CAD1 was recommended by the European Society of Cardiology in 2013. The American Heart Association and American College of Cardiology recommend either the DCS or DF scores.

Patients without chest pain symptoms might have a generalised five- or 10-year risk of future cardiovascular events, like an AMI, assessed as part of a general health check, see Exhibit 6.

The European Society of Cardiology’s 2013 PTP levels for the risk of having obstructive CAD are set out on page 2962 of the ESC 2013 guidelines, Exhibit 7.

As yet, it is not clear how the Acarix CADScor test fits into these guidelines given that the CAD-score is a new test parameter with limited published clinical data. Edison has not seen data relating the CADScore to PTP. The clinical data (see below) relates the CAD Score to CAD detected using CTA or invasive angiography.

In Edison’s view, it is likely that doctors will use the current PTP scoring systems to eliminate low-risk patients: a risk of 15% or less. PTP scoring is validated in studies, clinically accepted, available online, very fast and costs nothing. If the patient has an intermediate score, that is between 15% and 85% risk, the doctor may, in our view, use CADScor (about 10 minutes plus the test cost) to better categorise the patient. Patents with PTP over 85% will be referred as in Exhibit 7.

Currently, if patients are felt to be an intermediate CAD risk, they may be referred for a functional test Exhibit 8. For reference, CADScor has a sensitivity of 85% and a specificity of 50% according to the latest clinical trial (see below).

Although there are very good statistics on AMI rates and invasive catheterisation rates for diagnosis and treatment, the market being targeted by Acarix is larger and much more diffuse. It basically comprises some proportion of patients who report chest pain to a primary care physician.

As a starting point, the number of Medicare-funded invasive angiograms in the United States was fairly level up to 2009 (Riley et al, 2009) at around 1 million per year. Private insured cases probably take this to 1.3m (AHA 2016 update). Following the initial primary care consultation, there were a further 350,000 Medicare-funded angioplasty procedures and a further 200,000 coronary artery bypass graft procedures (invasive surgery used when angioplasty is not possible). So half the patients tested invasively did not need therapeutic intervention. This again indicates the need for better screening systems in primary care.

Patel et al. (2010) found that after elective coronary angiography, only 37.6% of patients actually had obstructive CAD and 39.2% of the patients had no CAD. This study covered 398,978 patients across 663 hospitals. The authors concluded that: “Better strategies for risk stratification are needed... to increase the diagnostic yield of cardiac catheterization in routine clinical practice”.

Ladapo et al. (2014) found that 45 in every 10,000 primary care or hospital outpatient visits resulted in a cardiac stress test: that is 3.8m referrals (out of 863m primary care visits of all types).1 These referrals were of patients who had no prior diagnosis of CAD, the target market for CADScor.

Of these 3.8m referrals, about 1.1 million patients had chest pain and 2.7m had other symptoms. They could also be split into 1.3m low risk and 2.5m high risk on the basis of clinical symptoms.2 Ladapo concluded that: “At least 34.6% [of the cardiac tests ordered] were probably inappropriate, with associated annual costs… of $501m”. Referrals were for either an ECG treadmill stress test, a stress echocardiogram or stress myocardial perfusion imaging. The most “popular” functional test was stress imaging with 87% use. This is also the most expensive (over $600) but gives direct heart perfusion images. If positive, patients may be referred for CTA or ICA

An analysis of UK healthcare records by Ruigómez et al. (2006) found that 1.5% of primary care visits in 1996 were due to unspecified chest pain and that 11% of these individuals were diagnosed with CAD within a year. In a control group, only 1% were. The relative risk was 14.9 times greater after statistical adjustments. This primary care data shows both that chest pain symptoms are common and can be due to CAD and that CAD (diagnosed with a year) is rare.

In the UK in 2013, there were 340 million primary care consultations at an average of six per year per patient (source: British Medical Association). If 1.5% of the patients had nonspecific chest pain (850,000 cases) about 92,000 might have CAD after CTA.

Extrapolating to the bigger EU states plus other rich European countries (population about 400 million) implies about 5m chest pain consultations per year with about 500,000 CAD cases diagnosed. However, these are very rough figures.

To become a mainstream test, CADScor and the CAD-score will have to be incorporated into the various national guidelines for the diagnosis of angina and coronary heart disease, Exhibit 9. These are surprisingly varied indicating that conclusive clinical studies are lacking in many areas. It can also take a number of years to be accepted and to be included in the next guideline iteration.

There has been interest for many decades in developing acoustic methods to determine coronary artery disease. The problem has always been that the sound of blood flow in the small coronary arteries is very faint compared to the other sounds made by the heart and body. Consequently, the algorithm used to select the noise features and analyse them is a key proprietary advantage. Acarix has patented a number of innovations in this area, see below. It is easier to get software patents approved in the United States than it is in Europe. Enforcement can also be difficult.

As the algorithm is a software construct, it has been adapted and calibrated as more data has been acquired. The current version is 3.0. Version 2.0 was used for the CE mark in the AC003 trial. There is no requirement to reapply for a CE mark unless there is a substantive change. However, at some point in clinical development, the software needs to be fixed for regulatory purposes, with future iterations validated against that reference point. The FDA also requires medical software to be written and tested appropriately. This section looks at the acoustic algorithm used, which is the key proprietary advantage, and then looks at the trial data available to date.

Exhibit 10 shows a sound profile of a heartbeat. In the systolic phase, the left ventricle contracts to force blood around the body. This creates various sounds including the opening and shutting of heart valves. The diastolic phase is when oxygenated blood from the lungs flows from the left atrium into the left ventricle. This is a largely passive so fairly quiet. This period, between S3 and S4 in Exhibit 10 (labelled diastasis), is when CADScor samples the noise of the coronary arteries.

Exhibit 11 shows the acoustic spectrum at three levels of coronary artery disease.

There are significant differences in sound power between non-CAD patients and those with non-obstructive and obstructive disease. Decibels are logarithmic so the peak difference of over 4 dB (at 100 Hz) means that the coronary arteries of patients with CAD are twice as noisy as the arteries of non-CAD patients. This seems to be due to turbulent blood flow over partial occlusions.

The current algorithm looks at eight characteristics of the acoustic spectrum up to 1,000 Hz and mainly uses the lowest frequency region of up to 200 Hz (management information). To obtain this acoustic information requires a calibrated microphone of the appropriate sensitivity and a low background noise.

The acoustic processing uses a patented combination of mathematical techniques. These include the frequency power ratio, principal component analysis, auto mutual information and the amplitude of the fourth heart sound.

The patents listed at the European Patent Office (EPO) are in Exhibit 12. Hyperlinks are provided.

In this area of acoustic signal processing, there are often several ways to approach a problem and equipment can be designed differently. The key patent may be US 8,911,383 B2, a granted patent on “An adhesive patch for monitoring acoustic signals” with a US patent extension of 411 days. This is also granted in Europe.3 The Acarix patch is the key to profitability and generic competition on the high-margin patches would limit the return on investment. The patches have an RFID chip, offering direct protection against generics.

Edison cannot comment on the strength of patents or any infringement issues if they exist.

The Acarix CADScor test aims to exclude (“rule out”) patients from further testing. Exhibit 13 explains the simple statistics but somewhat confusing terminology used in this section.

So far, all the trials conducted by Acarix, Exhibit 14, have been run in Denmark. The best reported study is AC003. The large Dan-NICAD has been completed with preliminary data, but not yet formally published. Edison has seen only limited data.

This study was used for registration of the CE mark for the CADScor system. There were 228 patients who could be analysed fully, of whom 63 had CAD, 41 had partial occlusion of less than 50% (intermediate risk) and 124 had no CAD. All of these either went through either coronary CT angiography or invasive coronary angiography to determine their level of coronary artery disease. The study was published as Winther 2016.4 The study found that the Version 2 CAD-score diagnostic accuracy was 72%, lower than (but not statistically different to) the adjusted Diamond Forrester score at 79%. Statistical analysis showed that combining the Version 2 CAD-score and the Diamond Forrester score gave an accuracy of 82%.

In version 3 of the algorithm, the three Diamond Forrester parameters are entered into CADScor. This then calculates the PTP using basic CAD1 score parameters. If this is over 85%, the patient should be referred to further testing.

If the doctor decides to run a CADScor test, the acoustic measurement is adjusted using age, gender and hypertension parameters to produce the final CAD-score, Exhibit 15.

The Dan-NICAD study is not yet published, but Acarix has made available limited preliminary data. Exhibit 16 shows the outcome, as currently known, of the study (standard version 3 algorithm).

The trial recruited 1,676 patients, of whom 1,437 were available for analysis. About 10% (144 assumed) of those are stated by Acarix to have had CAD identified by CTA.

In addition, the trial analysis included a historic negative control cohort of 754 patients of whom 606 were included in the dataset. These individuals were selected from the 1156 patient DanRisk study, results in Diederichsen 2012) and confirmed to have no CAD by CTA,

The 228 patients from AC003 were also included; there were 63 CAD cases. This gives 2,271 patients, of whom 207 are believed to have CAD: about 9%. Note that exact numbers have not been provided by Acarix.

The accuracy was 75%, below the combined DF CAD-score found in AC003 of 82%.

Exhibit 17 compares the various algorithms tested. The V3 algorithm is based on Version 2 with clinical risk factors added. The Version 3 algorithm has decreased the sensitivity from 90% to 85%, and increased specificity from 45% to 50%, Exhibit 17.

Note that the NPV and PPV values are calculated using the clinical population from the trial. Different clinical populations will give different PPV and NPV values. The AC003 trial had a high proportion, 28%, of CAD patients. This automatically increased the PPV and reduced the NPV.

In Dan-NICAD, by adding in a 606 patients with no CAD into the analysis, the percentage of CAD patients dropped to about 9%. The combination of a very low specificity with a low percentage of true cases in the population studied explains the reduction in the PPV to 15%. The same effect explains the increase in the NPV to 97%.

Acarix has no stated path to FDA approval for the CADScor system. The options are in Exhibit 18. The US would be the biggest market, but there are serious regularity barriers

Edison is unable to judge which route is possible but, given the specific diagnostic claim being made, it is possible that the FDA may require a PMA application. This could delay US launch.

Acarix has not made available any economic analysis. CADScor works economically if it stops enough healthy people from being referred on, so saving money, time and hospital resources.

To find patients that probably do not need further testing, CADScor is tuned for high, 85%, sensitivity. This detects most cases of CAD. However, CADScor also identifies 50% of patients who do not have CAD as positives (the specificity). This means that only half the patients are excluded even though a low percentage, maybe 10-15% overall, will actually have CAD – depending on the population tested. Note that many of these false positives may actually have some level of partial coronary artery blockage but this is not defined as CAD unless 50% obstruction or more is found.

Currently, US healthcare insurers tend to require that they give prior authorisation for non-acute cardiology investigations (Acarix commissioned market survey) to control costs. If healthcare providers were to require a CAD-score as an extra check after PTP scoring before they authorised more expensive testing, the device will have established a solid and sustainable position in the healthcare market.

Acarix has supplied some regional Danish healthcare statistics5 on the number of patients referred and tested for possible CAD. The data show that of 2,954 cases in 10 centres during Q216, 80% had intermediate or no CAD, about 4% were unknown and about 16% had CAD. There was a wide variation between centres, the range of no and intermediate CAD risk was from 72% to 92%. This is a real sample of the types of cases that CADScor could be used to screen.

Applying the Dan-NICAD sensitivity and specificity and treating unknowns as not having CAD, the outcome is shown in Exhibit 19. If all these patients had been tested with CADScor, the PPV would be 24%, that is about one in four cases referred would be true CAD cases. Of the negative results, 19 out of 20 would be correct. Potentially, 1,314 people would have avoided further testing. However, 70 of those should have been tested further.

Acarix has not carried out any formal economic studies. Exhibit 20 is an attempt by Edison to try and quantify the potential savings to the healthcare system based on the Danish data cited above and applying US costs (as cited in Exhibit 8). It was noted earlier that 87% of cases in the US were tested using nuclear imaging. From CTA studies, it is assumed by Edison that 20% of patients have a CTA; this could be higher.

This shows possible savings of nearly $1.5m for these patients less the cost of the test itself ($440k) making $1.1m net savings or $380 per patient. Note that the CADScor cost cited of $150 includes healthcare staff time to run the test plus the cost of the sticky patches and an element for amortisation on the device cost. Acarix may get $132k after distributor margins. This of course is from one region of Denmark for one quarter of the year and assuming US pricing.

Note that Exhibit 20 assumes that all the 1,314 negative CADScor patients in Exhibit 19 are “cost saved” and it is further assumed that 20% of these would have undergone a CTA test as well as a functional test making 1,576 tests. In real life, all 2,954 from Exhibit 19 underwent further testing although the data does not disclose what tests were used or the Danish costs incurred.

Extrapolating this to the 3.8 million US referrals found by Ladapo gives a theoretical saving of $1.4bn per year. However, these gains, if achievable, are spread across the entire healthcare system and individual providers will see less benefit.

It should be re-emphasised that this is not a proper health economic study, but simply an indication of what such a study might look like. This does not take into account any quality life year assessments. Acarix will need to run real-life clinical trials to establish clearly how the device is used in practice and to prove the cost savings that can arise.

By comparison, if one substitutes stress ECG echocardiography into the above analysis (a first line test) using the Danish sample in Exhibit 19, then 533 patients would be referred (vs 1,640) and 2,421 would be “ruled out” (vs 1,314). This is despite a poor ECG sensitivity of 47.5%. The figures are better because the ECG stress specificity is much higher at 87.5% vs 50% on CADScor.

However, and this matters more to doctors, the ECG stress test will fail to find 245 patients with disease whereas CADScor would miss only 70. Acarix notes that doctors do not think that ECG stress testing is reliable. Nonetheless, in this example Danish population, because of the higher specificity, the ECG stress PPV is 42% vs CADScor 24% with NPV at 90% vs CADScor 95%.

The main competitor to the CADScor system is medical inertia and the current set of tests. Medical professionals are typically slow to adopt new tests even when they are reimbursed. Some cardiologists may be reluctant to move from established tests which they are often paid to carry out in the US. There is also a risk that healthcare providers see the CADScor as just an additional cost as they are unable to identify the savings in their accounts. This has limited adoption of other medical devices even when there is a robust, evidence-backed economic case.

Any direct competitor might come from electronic stethoscopes, of which there are many. An example of an innovative primary care device with a specific objective of reducing hospital admissions is the Cardiosleeve, approved by the FDA under a 510(k), as similar to other electronic stethoscopes on the market. However, it may not be possible to do CADScor type testing on such systems and Acarix holds patents protecting its signal processing.

A small US mid-west company, AUM Cardiovascular has a hand-held device and claims that “acoustic detection with the CADence system provides a completely new method for detecting obstructive coronary artery disease”. A clinical trial (NCT01743040) involving 1,054 patients completed in late 2015; no results have been released yet, but publication may occur in 2017: The product is stated to be CE marked. No other data are available.

Acarix entered 2016 with cash of SEK2.1m. It gained an SEK9m convertible loan from shareholders in H1. Expenditure reported was SEK11.7m to 30 September. From mid-2016, development costs were capitalised; total investment to 30 September on development and equipment was SEK9.8m. Cash on 30 September was SEK1.9m. Acarix raised further funds of €2m (SEK20m) in October 2016 from Puhua Jingxin which increased cash to SEK19m (information from management). In 2016 some SEK24m of non-cash financing costs were charged due to a technical adjustment on conversion of a shareholder loan into 3.3m shares. We assume the cost of the SEK140m IPO, expected to be about SEK15m, to be offset against the IPO funds raised. We expect cash at the end of 2016 to be about SEK125m.

Our forecast anticipates a rise in cash expenditure (burn rate) to around SEK72m per year from 2017. This is research and clinical of SEK32m, marketing of SEK20m and administration of SEK23m. Of this, we expect SEK18m of development to be capitalised plus some capital expenditure of SEK1m. Amortisation of development at SEK2.6m is expected starting in the 2017 accounts. No US trials are currently forecast or disclosed by Acarix. Limited direct product sales into the German market are expected in 2017 with sales progression in 2018. These largely consist of base units with private patients, or their insurers, reimbursing the cost. Disposable revenues should rise as the number of base units in use rises. Sales should partially offset cash use, making a net cash outflow of SEK72m for 2017. Depending on sales progression, Acarix may need further funding in 2018. A nominal SEK50m interest-free loan is included as forecasts for 2018 as a result.

The two major sensitivities relate to the diagnostic performance of the product and reimbursement. The sensitivity is very good at 85%, but the current specificity is low at 50% relative to other tests like stress ECG. For European sales, Acarix has a CE mark but CADScor needs to be written into the guidelines set by the ESC and NICE. The US route to approval is not yet clear and the FDA may require further trials. The American Heart Association and American College of Cardiology then need to incorporate the test into the guidelines. The second major challenge is to get reimbursement and that will depend on economic studies. This will require real-world clinical/economic trials to show that use of CADScor leads to better patient care and cost savings. For cardiologists in the US, there are lucrative fees associated with more complex tests, so a disincentive to use CADScor. However, there are concerns in the literature about over testing and the added radiation exposure from CTA and nuclear stress testing. The US healthcare system is slowly becoming more cost focused and European systems are already very cost conscious which could help uptake. Sales of new diagnostic products are very hard to forecast and sales could be significantly higher or lower than these estimates. Timing of events is highly unpredictable. Finally, as a Sweden-listed company, the reported accounts and company valuation will be sensitive to the US dollar and euro exchange rates as these are the two major markets. Some costs are in Danish krone so the DKK/SEK rate is also a factor.

With no track history of a comparable product on which to base a market forecast, Edison has developed a simple model based on what appear to be realistic sales targets split between the US and Canada, Germany and Scandinavia (direct sales), rest of Europe and Rest of World. The characteristics of these markets and the assumptions used are shown in Exhibit 21.

The sales of units are particularly important in the first few years of any market, but as the installed base of systems grows the consumable patch use rate becomes the key growth driver factor. Exhibit 23 shows the forecast market development up to 2021 before probability adjustment. This period is dominated by European with German full reimbursement assumed from 2019.

Exhibit 24 shows the non-risk-adjusted forecast from 2021 to 2030. This indicates Acarix 2030 sales of about $270m/€260m (SEK2.5bn) before risk adjustment. This is a significant market for a diagnostic product. The probability-adjusted sales forecast is $72m/€69m (SEK677m). From 2031 onwards, a long-term growth rate of 1% is assumed as the market may then have matured and competitors have entered as the patents will have expired. In the terminal year of 2030, Edison forecasts 4,500 units sold globally and disposable patch sales of 4.2 million units.

There are two elements to the valuation, Exhibit 25.

Firstly, the discounted value of cash flows between 2017 and 2030 is estimated using a 12.5% discount rate. A Swedish corporation tax rate of 22% is used. Tax losses to mid-2016 have been stated by management to be worth DKK40m (SEK578m). Because of the long period of marketing investment required to commercialise the product, this estimated value of cash flows to 2030 is relatively low at about SEK90m.

Secondly, as a diagnostic product established as the brand leader in its market, the company should have a continuing value. With lower marketing costs, due to the distributor strategy, and no further part investments, the profitability could be very high since most revenues could come from high-value consumables requiring a low level of marketing support. The terminal value in 2030 of SEK3.3bn discounted to 2017 gives a terminal value of SEK639m. Note that Acarix is expected invest in other products and will probably spend additional resources on developing further indications for its acoustic technologies. Cash flows from new products are not estimated as we do not have any information on possible projects.

At the IPO listing 19 December 2016), Acarix had 23m shares in issue. The combined indicative value is SEK728m implying a fair value of SEK31.62/share relative to an IPO price of SEK17.60/share.

Acarix now has the cash to invest in marketing and consider and plan US trials. Any future funding need from 2018 depends on a successful launch in Germany and on the company’s cost base. Edison forecasts profitability from 2022 if full European reimbursement is gained and a US approval is obtained. Financial forecasts to 2018 in SEK are shown in Exhibit 26. These will be updated when audited accounts for 2016 are available.

Investors are referred to the 2016 IPO prospectus issued by Acarix for guidance on detailed aspects of the company.

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