Acarix — Hearing the beat of 2018

CADScor is a doctor’s office, acoustic test device and software algorithm, designed to be used by doctors to help assess patients at risk of coronary artery disease (CAD) and normally presenting with chest pain that might be angina but could have other causes. The target market, as defined in the published Dan-NICAD substudy, is patients who have been though initial screening and are being considered for invasive testing. Using a CADScor V3 cut-off of 20 or less and based on Danish clinical practice, about half of these patients could be sent home without further testing. Acarix AB is a Swedish company (based in Malmö). It was founded in Denmark as Acarix A/S and has an operational office just north of Copenhagen. It completed its IPO in December 2016.

As a simple-to-use device, CADScor offers a quick and relatively cheap alternative to more complex and much more expensive testing. The business case rests on selling units to 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 each test. A substantial installed base of devices, if achieved over time, could generate significant sales revenues at a high margin. In the US, Ladapo et al. (2014) found that 3.8 million hospital referrals a year were unnecessary.

Acarix has been selling test from Q217 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 we expect that a de novo 510(k) or PMA application will be needed for FDA approval. The US market alone is estimated by independent researchers to be at least 3.8 million tests per year.

The current position is that initial sales have been lower and slower than hoped, but sales in the targeted markets have been made. The sales forecast from 2019 used by Edison at the IPO still appears reasonable given the market size. The revised probability adjustments made for valuation purposes (see below) relate to the speed of clinical acceptance and ability of Acarix to run further studies for approval in the US and to gain national acceptance and reimbursement in Europe. A further Danish trial (Dan-NICAD II) has been announced. This study will add significantly more validated CAD patients to the Acarix CADScor algorithm database for further improvement of the scoring algorithm. The expected performance improvements should lead to further acceptance of this new risk scoring method among key opinion leaders.

Every year, many patients at low and intermediate risk of CAD visit their doctor complaining of non-specific chest pains. CADScor, Exhibit 1, is a small medical diagnostic device that carries out an independent, patient-specific analysis of the noise made by the blood flowing in a patient’s coronary arteries. This can identify patients with a low risk of CAD. 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. Consequently, 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.

Simple patient data are 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. CADScor test data from trials are discussed below.

Patients with a high pre-test score (based on a clinical risk profile) and who are diagnosed with possible typical angina (chest pain caused by poor blood supply to the heart) would be referred for further tests. CADScor is not recommended for use in this high-risk patient type.

The Dan-NICAD data set, still unpublished in full, is a composite of three studies totalling 2,271 patients, of whom 203 had CAD: 8.9%. Using the full data set, Acarix has cited a negative predictive value (NPV) of 97.1%, that is 97.1% of negative results will be correct. For more explanation and terminology, please see our initiation note published on 21 December 2016.

The three data sets are as follows.

As CADScor V3 is a recent iteration of the algorithm, patients from the DanRisk and AC003 studies were retrospectively included in Dan-NICAD by the use of historic sound recordings if of adequate quality. CADScor V3 is more demanding in terms of acoustic quality and needs a clearly defined heartbeat profile separating the short heart contraction (systolic) phase from the heart filling (diastolic) phase. The acoustic measurements are made in the diastolic phase. In the Winther et al 2017 study, 14 patients tested with CADScor V2 could not be re-analysed with V3 and were excluded on these grounds. Clinically, this is not an issue so long as the device reliably recognises that a CAD-score cannot be calculated, it is meant to test sound quality.

Winther et al 2017 recruited 1,675 patients in Denmark who had been referred by primary care physicians for further specialist tests. The patients were split into test optimisation (593 patients) and validation (1,082 patients) cohorts. Of these, 325 had a detailed gold standard invasive imaging test and 145 were found to have partial blockages causing a functional reduction in heart blood supply (factional flow reserve reduction of over 80%). All patients had CACS and all but four had a CTA.

A new CADScor algorithm, V3, was developed based on the data. However, this algorithm cannot be applied to all patients due to the increased acoustic demands of CADScor V3. In particular, 14 patients were excluded because of a short systolic period.1

The patients recruited are meant to be a typical referred patient group. On average, this Danish Caucasian population seems rather healthy: BMI was 26kg/m2, age 57, 15% active smokers, less than 6% diabetic, moderate waists (93cm/36 inches). Whether this profile will be the same in, for example, the US where obesity (BMI >30) is a major issue with 30%+ prevalence is an interesting question. Will CADScor get a good enough signal though layers of subcutaneous fat?

Interestingly, physicians seem to be very cautious about ruling out CAD. Only 28% of patients had typical angina,2 so nearly three-quarters were low risk. In fact, only 10% of the tested cohort had clinically relevant CAD after full evaluation. On clinical risk scoring systems like Diamond-Forrester (see Exhibit 2), only 2.4% were high risk (>85%) – the level recommended for immediate referral – with 15% as low risk (<15%), so debatable if even CADScor should be used.

This apparently high referral level of low and intermediate risk patients may reflect a medical concern that an incipient heart attack (acute myocardial infarction, AMI) might be missed. It shows that a rule-out test should be very valuable as a clinician tool so long as clinicians view it as reliable. Note also that these referrals were made after a specialist outpatient examination.

The study started by using CADScor V2. However, CADScor V2 was less accurate, at 58.1% accuracy, compared with 68.9% accuracy using the updated DF scoring system. Accuracy is the number of correct test results, whether positive or negative.

Accordingly, the enhanced CADScor V3 algorithm was developed and the data re-analysed. The new CADScor V3 data set included 1,437 patients3 and 140 CAD cases. The training and validation set outcomes are combined in the paper as the authors state that these were statistically the same.

CADScor V3 analyses eight acoustic parameters, of which five are new.4 On acoustic analysis alone, CADScor V3 had similar accuracy to the DF score. Enhanced accuracy was achieved by incorporating three clinical parameters into the V3 algorithm: gender, age and hypertension.5 Age and gender are also key parameters used in DF scoring.

CADScor V3 was optimised against anatomically measured obstructive disease. Using this benchmark, the accuracy was 72.4% vs 65.9% for DF.

The results for both anatomic and haematological (FFR) outcome are in Exhibit 3.6 For clarity, we have also shown the data for the CADScor V3 validation set as shown in supplementary data supplied by Winther et al.

Of 1,437 patients analysed with the CADScor V3 algorithm, 712 (49.5%) had CADScor values of 20 or less so were defined as negative. Of these 96.2% were correct designations so 27 patients with CAD were incorrectly diagnosed as negative. Of the other 725 patients with CAD-scores over 20, 113 were true positives so 15.6% of positive values were correct. This is as expected for a negative screening test in a population with a low prevalence of a disease (under 10% in this case). Clinically, about half of the referred patients could be excluded from further testing.

The drawback is that 19% (27 cases) of the 140 true cases are missed. This may mean that physicians will still seek other tests to find the cases with CAD. Acarix is assumed to keep investing in R&D to improve the accuracy of its test beyond about 70%.

This was a complex study using a large patient cohort. There is some minor confusion within the paper on the exact patient numbers in different cohorts, but the overall results in Exhibit 3 are very consistent. However, this was a trial run to develop and validate a test and so might, using the algorithm V3, be over-fitted to the data (a possibility discussed by the authors) and have been affected by the specific Danish population recruited. For marketing, Acarix may need to run prospective studies in different populations with national opinion leaders and also investigate populations with higher levels of obesity and Type II diabetes. The new Dan-NICAD II study will add significantly more validated CAD patients to the Acarix CADScor algorithm database for further improvement of the scoring algorithm. The expected performance improvements should lead to further acceptance of this new risk scoring method among key opinion leaders.

The US is likely to require a large clinical prospective study if a PMA-based approval is sought.7 However, if the FDA regards the current data set as adequate, then a de novo 510(k) application may be possible. A de novo application, if accepted, is a relatively straightforward and much faster and cheaper process.

It is particularly difficult to forecast the initial sales of any ground-breaking new product and no public reimbursement for the test is currently available in the key German market. Rates of adoption can be slow given the often conservative attitudes of doctors. On the basis of very limited sales data to 30 September 2017 (two quarters only), we have adopted a revised 2017 and 2018 forecast. This is inevitably volatile and will be revised as more sales data emerge.

In 2017, there were six CADScor sales and 880 patch sales to 30 September 2017. Our revised forecast (Exhibit 4) is for nine units and 1,440 patches to 31 December 2017. This is expected to generate revenues of SEK605k. In 2018, we assume a more consistent sales pattern with 19 units and up to 4,000 patches potentially sold. This would give SEK1.7m in revenue. Previous forecasts were for SEK3.0m in 2017 and SEK3.8m in 2018.

From 2019, Edison has broadly retained its current sales forecasts as the market changes once reimbursement is gained. Exhibit 5 shows the revised forecast market development up to 2021 before probability adjustment. This period is dominated by Europe, with full German reimbursement assumed from 2019.

Exhibit 6 shows the non-risk adjusted forecast from 2021 to 2030. This indicates 2030 in-market sales of about SEK2.5bn (US$290m/€260m) before probability adjustment and distributor discounts. This is a very significant potential market for a diagnostic product.

The probability-adjusted sales forecast for Acarix after distributor discounts is now SEK516m (formerly SEK677m). From 2031 onwards, a long-term growth rate of 1% is assumed as the market will have matured and competitors could have entered. European and RoW probabilities have been altered as discussed in Exhibit 7. The North American probability of 30% is unaltered.

Our valuation methodology and non-probability adjusted longer-term sales forecasts remain unchanged from our 21 December 2016 note, but we have made probability and timing adjustments discussed below based on published financial interim reports. There are two elements to the valuation, Exhibit 8.

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. There are no tax losses carried over from the acquisition of the Danish subsidiary (2016 Annual Report).

Secondly, if Acarix establishes CADScor as the brand leader in its market, the company should have a continuing value. With lower marketing costs, due to the distributor strategy, the profitability could be very high. Note that investment in and cash flows from any new products other than basic R&D to maintain CADScor’s leadership position are not estimated or included in our valuation.

At close of 2017, Acarix had 23m shares in issue. The combined indicative value is now SEK448m (formerly SEK728m), implying a fair value of SEK19.46/share (formerly SEK31.62/share). The IPO price was SEK17.60/share in December 2016.

On a scenario basis, if Acarix did not enter the US market or was not able to devise a route to FDA approval, the value might approximately halve to about SEK10/share on our current assumptions.

Changes have been made are as follows:

2016 was dominated by the IPO process, which completed in December 2016. 2017 has seen sales start partway through Q2. Financial forecasts to 2018 are shown in Exhibit 9.

Sales ytd were SEK408k with CoG of SEK152k. As only 880 patches were sold in the period and the cost of goods on these is understood to be low, most of the CoG must have been due to the six CADScor units sold, implying a CoG on these in the range of 70-80%. Acarix reported inventory on 30 September of SEK1.6m but with no associated cash flow, implying a reclassification of previously purchased development systems. Acarix might have sufficient stock to cover 2018 on the current forecast.

Acarix had modest costs in the first three quarters of 2017 at SEK14.4m before amortisation of SEK0.9m. R&D was SEK3.5m with a further SEK2.9m capitalised in H1. Amortisation of this capitalised R&D, valued at SEK20.2m on 30 September, has started with about SEK2m expected in 2018. Amortisation of “acquired rights”, valued at SEK4.4m, is at about SEK0.26m per year. There was a tax credit of SEK1.4m as of 30 September. The balance sheet shows a tax receivable of SEK2.6m which we assume is received in Q4 as cash.

The cash outflow ytd before working capital was SEK17.6m. There was a major debt repayment of SEK15m. With other working capital changes and capitalised R&D of SEK2.9m, the ytd cash outflow was SEK35.9m.

Increased but still limited direct product sales into the German market are expected in 2018. Our revised forecast assumes a 2018 cash outflow of SEK38m in 2018, but this is also affected by our assumptions of clinical trial costs. Due to the lower than expected burn rate in 2017, Acarix is likely to be funded into 2019 on the current forecast.