Elbit Medical Technologies — Two promising private assets

Elbit Medical Technologies is an Israel-based healthcare investment company that was incorporated in 1996. As of January 2018, Elbit Medical has contributed NIS460.3m ($134.7m) to its only two portfolio companies. It is controlled by Elbit Imaging (~89% stake), an Israeli investment company that invests across the real estate sector (ie land plots in India that are designated for sale to residential projects and land plots in central and eastern Europe and Greece, held by the Plaza Centers subsidiary, which are also designated for sale) and medical industries (via Elbit Medical). Elbit Imaging is publicly traded on both the TASE and NASDAQ, with a market capitalisation of ~NIS76m ($21m), which is lower than that of Elbit Medical due to a significant amount of debt (also, Elbit Imaging may be forced to sell its shares (or a portion of its shares) in Elbit Medical to pay off that debt). Elbit Medical has invested a total of about $116m in InSightec, a market-stage medical device company developing a non-invasive thermal tissue ablation platform called ExAblate to treat a number of gynaecology, oncology and neurology indications, and about $18.7m in Gamida Cell, a late-stage biopharmaceutical company predominantly active in the field of BMT, a life-saving treatment for patients with high-risk leukaemia and lymphoma.

Using a risk-adjusted NPV analysis on its two investments, we arrive at a valuation of Elbit Medical Technologies of NIS407m or NIS1.76 per share. Based on our calculations, InSightec is the company’s most valuable asset ($579m total valuation, $110.1m for Elbit Medical’s share, compared to a post-money valuation of $610m, or $460m pre-money). The company anticipates a series of potential inflection points over the year, in particular the completion of enrolment for the CordIn Phase I/II in patients with SCD and thalassemia is in 2019 and completion of enrolment for the NiCord Phase III trial for haematological malignancies, followed by top-line data in H120.

Elbit Medical reported a cash position of $0.03m as of the end of 2017. It is important to note that the nature of the firm is lean at the corporate level and the company is not required to provide additional funding to its investments. Elbit Medical recently completed a raise of NIS182m of convertible notes and has used the majority of the proceeds to repay its NIS154m debt to Elbit Imaging. Moreover, NIS4m were set aside for ongoing operational expenses in addition to NIS18m set aside for interest payments due on the notes for the first two years. The notes lengthen the maturity profile to March 2022 and are secured by a lien on Elbit Medical’s holdings in InSightec and Gamida Cell.

Elbit Medical carries specific risks associated with investing in development-stage healthcare companies, such as regulatory hurdles, clinical trial uncertainty, understanding mechanism of action and funding requirements. However, we believe the risk is reduced to some extent due to the range of stages of development. Conversely, the portfolio lacks diversity with only two investees. InSightec is the most commercially advanced company, with three ExAblate products in the early stages of commercialisation. Although first approved by the FDA in 2004, it has yet to turn a profit. Gamida Cell’s NiCord is in late-stage development (Phase III) and is the first BMT alternative to receive FDA breakthrough therapy designation. Clinical utilisation will be a significant hurdle for the two investees as acceptance will require comparative data to mainstay treatments that have been in place for decades. Also, due to Elbit Imaging’s own high debt load (and potential requirement to sell its stake in Elbit Medical), there is a risk of selling pressure over the next year.

Elbit Medical Technologies, the biomedical investment division of Elbit Imaging, is invested in the healthcare sector through its holdings in two companies that are developing medical device and therapeutic technologies, which together cover a variety of clinical applications and the full range of development phases. Elbit Medical holds a board seat in both InSightec and Gamida Cell as they are large minority holders. The York Fund (~19%), Koch Disruptive Technologies (~16%), and the GE Group (~4%) are also significant shareholders of InSightec, while Novartis (~17%) and Clal Biotechnology Industries (~14%) have substantial stakes in Gamida Cell, fully diluted. Elbit Medical has indicated that it is focused on its current investments and does not plan to invest in additional companies in the near future.

InSightec is a commercial-stage medical device company headquartered in Israel with global offices located in the US, Japan and China. Founded in 1999, the company has privately funded the development of ExAblate, which comprises magnetic resonance imaging and high-intensity focused ultrasound (MRgFUS) to perform non-invasive thermal tissue ablation for a range of clinical applications where first-line pharmacotherapies may be inadequate and subsequent conventional therapies include open surgery, chemotherapy and radiotherapy, which are commonly associated with significant morbidity and mortality as well as extended in-patient stays and recovery times. Broadly, InSightec’s objective is to increase safety and simplicity of surgical procedures by minimising invasiveness where existing therapies have fallen short.

The ExAblate platform is versatile and, hypothetically, can be used to treat to a range of indications. The system can target (using MRI) and thermally ablate or destroy (using high-intensity focused ultrasound sonication) soft tissue without the need for a surgical incision. Independently controlled ultrasound transducers are arranged such that acoustic energy is precisely focused on a small region of interest at adequate temperatures to achieve coagulative necrosis of tissue. MRI is used to guide treatment in real time, while magnetic resonance (MR) thermometry feedback allows the physician to monitor patient safety and to adjust system parameters for optimal results. The ExAblate platform comprises three main components: a patient table, which carries the ultrasound transducer via interchangeable cradles for a variety of clinical applications, an operating console, which is a computer installed with ExAblate software that provides the operator with a graphical user interface (GUI) to control the system, and an equipment cabinet, which houses the required electronics and amplifiers to power the system as well as the water cooling system. InSightec’s ExAblate technology is covered by 168 patents worldwide, with the most recent patent providing protection through to 2029. Nonetheless InSightec’s patent portfolio does not entirely preserve its market.

InSightec has developed the ExAblate 2100 V1 (Body) and ExAblate 4000 (Neuro) systems as MRgFUS non-invasive alternative therapies for a variety of gynaecology, oncology and neurology indications. The location of the focused ultrasound (FUS) transducer is unique to each ExAblate system. The 2100 system includes a conformal bone FUS transducer with a built-in water cooling system, which allows for adaptable patient positioning and access to additional treatment sites, as well as an endorectal FUS transducer designed to treat prostate cancer. The two FUS transducers can be attached to the patient table with a robotic arm. Finally, the ExAblate 4000 FUS transducer is integrated into a hemispherical positioning system fixed to the MR patient table and is specifically designed for neurology indications.

By way of full clinical validation under the pre-market approval (PMA) route, the company has achieved FDA approval and CE markings for the ExAblate 2000 (and 2100) systems for the treatment of symptomatic uterine fibroids and pain palliation caused by bone metastases and for its ExAblate 4000 system for the treatment of medication-refractory essential tremor. Moreover, the company has received CE markings for the treatment of prostate cancer, tremor-dominant Parkinson’s disease and neuropathic pain, and is investigating these further in clinical trials in an effort to achieve FDA approval (see Exhibit 2 for a brief summary of InSightec’s pipeline). The future success of the ExAblate platform is highly dependent on the company’s ability to achieve the following critical requirements: scientific acceptance (positive clinical trial data indicating efficacy and safety), adoption (revenues growing) and reimbursement.

InSightec’s ExAblate device is approved for the treatment of uterine fibroids (leiomyomas or myomas), which are benign tumours of uterine muscle that affect 70% of women on reaching the menopause. While the majority of uterine fibroids are asymptomatic, only 25% of women experience symptoms (ie heavy menstrual bleeding, which can lead to anaemia, painful periods, abdominal protrusion, bowl dysfunction) severe enough to require treatment.1 The ExAblate procedure for symptomatic uterine fibroids, coined Curawave, uses MRI to direct FUS acoustic waves to target the volume of a fibroid, which penetrates tissue at a focal point at temperatures between 65-85°C, causing protein denaturation resulting in cell death, coagulative necrosis and irreversible cell damage.2 In a Phase III safety and efficacy trial, 70.6% of the 109 patients reached the primary endpoint, which was a 10-point improvement in the transformed symptom severity scale of the Uterine Fibroid Symptoms Quality-of-Life (UFS-QOL) questionnaire six months before treatment. Although small, a mean tumour volume reduction of 13.5% was also noted. This is modest compared with typical myomectomy results, which is the surgical removal of individual fibroids either abdominally, vaginally or laparoscopically that also preserves the uterus.3 Additionally, a 12-month, follow-up extension revealed that of 82 evaluable ExAblate patients, 23 women underwent either hysterectomy, myomectomy or uterine artery embolization,4 which is comparable to the estimated 25% of myomectomy patients who reportedly undergo hysterectomy after treatment.5 Although hysterectomy results in infertility, the procedure remains the most effective treatment option as the surgical removal of the entire uterus and cervix eliminates the risk of fibroid recurrence.6 One analysis comparing quality-adjusted life years (QALY) of uterine artery embolization (17.39), myomectomy (17.31) and hysterectomy (17.18) for uterine fibroids (UF) in premenopausal women demonstrated that the use of MRgFUS (17.36) falls within the range of currently accepted standards for cost-effectiveness,7 and is therefore a viable first-line treatment, particularly for women in their childbearing years, as it preserves the uterus.

ExAblate is also approved for pain palliation of bone metastases. Metastatic bone disease (MBD) is the spread of cancer from another organ to the skeleton, most commonly originating from the prostate, breast, lungs, thyroid and kidney. According to the American Academy of Orthopaedic Surgeons, approximately 50% of the 1.2 million new cancer diagnoses made annually can metastasize to the skeleton. Bone pain is the most common symptom of MBD and is described as aching or burning sensations with periods of debilitating discomfort.8 ExAblate for pain relief in cancer patients with bone metastases uses MRgFUS to target the volume of a tumour and penetrate the tissue at a focal point at temperatures between 65-85°C to cause thermal coagulation to the periosteal membrane that contains pain-sensitive nerve fibres.9 The safety and efficacy of MRgFUS for pain palliation of MBD was evaluated in a randomized Phase III trial in 147 patients with persistent pain following radiation therapy. Three months post-treatment, 72 of the 112 patients who received MRgFUS experienced a decrease from baseline in worst numerical rating scale pain score (0-10, with higher scores indicating more severe pain) and 23.2% patients experienced a complete response (a pain score of zero), while seven of the 35 patients who received a “sham procedure” (placebo) experienced a change from baseline with 5.7% reporting a complete response.10 In addition, 47% of patients who received MRgFUS therapy either reduced or entirely stopped their morphine-equivalent daily dose intake.11 Correspondingly, external beam radiation therapy, which is a widely accepted approach for localised MBD pain management, provides between 60-80% of patients with effective pain control and approximately 25-30% with complete response.12 With regard to adverse events, MRgFUS recipients reported sonication and post-procedure pain and, notably, there were reports of third-degree skin burn, fractures and neuropathy.13 Risk of fracture is also associated with radiation therapy and MBD pathology.14 Alternative surgical procedures involve tumour excision, filling defects with bone cement and stabilisation with orthopaedic fixation devices to provide additional support. However, routine surgical risks are higher for patients with MBD due to weakened overall health. Ideal treatment for pain palliation of bone metastases should be safe, effective, somewhat quick and tolerable for the patient.

Most recently, ExAblate Neuro was approved for the treatment of medication-refractory essential tremor (ET). ET is a neurological disorder that is characterised by uncontrollable rhythmic oscillatory movement of the limbs, primarily of the hands and arms, as well as in other forms affecting the head and vocal cords.15 Although ET does not shorten life expectancy, it significantly debilitates an estimated seven million people in the US.16 At this time, treatment options merely target symptom relief. First-line pharmacotherapies such as propranolol (a beta-blocker), primidone (an antiepileptic) and a variety of drugs that increase gamma-aminobutyric acid neurotransmission have limited efficacy.17 Neurosurgery (ie thalamotomy and deep brain stimulation [DBS]) is a viable, yet historically invasive option, for the estimated 50% of ET patients refractory to medication.18 19 The ExAblate Neuro procedure, coined Neuravive, targets and sonicates a precise volume of the ventral intermediate (VIM) nucleus of the thalamus (ie thalamotomy) non-invasively at temperatures between 55-60°C, creating a thermal lesion to disrupt brain activity causing the tremor. The safety and efficacy of ExAblate Neuro was evaluated in a double-blind Phase III trial in 76 patients with moderate to severe tremor of the hand. The primary endpoint was change in hand tremor score based on the clinical rating scale for tremor (ranging from 0 to 32, with higher scores indicating more severe tremor) in the contralateral MRgFUS thalamotomy group (56 patients) compared to the “sham procedure” group (20 patients) from baseline to three months post-treatment. Three months after treatment, the average tremor score of the MRgFUS thalamotomy group improved by 47% compared to an average 0.1% in the placebo group. Tremor score of the MRgFUS group 12 months post-treatment maintained an average 40% improvement.20 Documented adverse events include gait disturbance, ataxia and numbness of the face and hand. These events were expected as they are similar to alternative neurosurgical procedures involving the thalamus.21 While considerably less invasive, the MRgFUS thalamotomy tremor score improvement reported here is modest in comparison to contralateral radiofrequency thalamotomy (which requires an open craniotomy to create a small lesion on the VIM thalamic nucleus) and gamma knife thalamotomy (a minimally invasive procedure in which a single dose of radiation is used to destroy neurons at the VIM thalamic nucleus), which correspondingly result in 60–90% tremor reduction.22 Bilateral thalamotomies are associated with higher rates of haemorrhage and infection as well as disabling side effects including intellectual or cognitive impairment.23 DBS is an alternative approach that involves the surgical placement of electrodes in the thalamus wired under the skin to an implanted impulse generator in the chest, which stimulates the thalamus to interfere with tremor-producing activity. Although DBS is associated with risks such as infection, haemorrhage and hardware malfunction, it is reversible and often the preferred surgical method to treat ET.24

Interestingly, a cost-effectiveness analysis comparing MRgFUS to radiosurgery and DBS demonstrated that unilateral thalamotomy for ET with MRgFUS was in fact more cost-effective than both alternatives based on average expected costs (Medicare reimbursement) and utilities gained from treatment.25 It is important to note several limitations of this comparative study. Firstly, this is a decision analysis comparing clinical outcomes of existing trials (literature search) for the three procedures and not a randomized control trial. Also, Medicare reimbursement for MRgFUS was not determined before the publication of this study, although estimates were made comprising codes for intraoperative mapping, MRI, and stereotactic radiosurgery planning, consultation and use.26

InSightec generates revenue through the sale of ExAblate systems and corresponding annual service contract costs and consumables. The marketing strategy (sales and marketing FY17 expenditure: $17m) is to target distribution to private and/or public hospital systems in developed markets via direct and indirect global salesforce (ie distribution agreements in Korea, Slovakia, Lithuania, India, Australia, and Sydney, thus far). However, the terms of these agreements have not been disclosed.

The company is tackling reimbursement on both a national and regional level in the US and EU. Medical centres are also working with health insurance companies to achieve this (ie Amper Kliniken medical centre in Dachau, Germany collaborated with the Techniker Krankenkasse health insurance company to achieve reimbursement for uterine fibroids in Germany). According to the company, an estimated 99.8 million people in the US can receive coverage for MRgFUS for pain palliation of bone metastases. As of January 2018, the Centres for Medicare & Medicaid Services (CMS) cover beneficiaries with $17,500.50 for the Neuravive procedure (ExAblate Neuro for ET). Prior to this reimbursement win, according to the company, 94 ExAblate Neuro commercial procedures were performed worldwide in Q217. In June, InSightec announced that Medicare coverage is available to patients in 10 US states for the treatment of ET and, as of 1 July 2018, six additional states will also provide coverage. Further, InSightec has received positive Draft Local Coverage Determination from local Medicare administrative contractors (from an additional 22 states), which may expand Medicare coverage for the treatment of ET to a total of 38 US states. To our knowledge, Medicare does not have national coverage determination for MRgFUS for uterine fibroids, however, local coverage determinations may exist. In late June, Insightec received positive guidance from the National Institute for Health and Care Excellence (NICE) of the UK’s Department of Health for unilateral treatment of ET with ExAblate Neuro. Additionally, St. Mary’s Hospital in London, which is the first and only site in the UK with ExAblate Neuro technology, has launched its MRgFUS service for the treatment of ET and has treated 16 patients to date.

InSightec’s ExAblate systems are presently deployed in 120 medical centres worldwide. We estimate the systems cost on average $1.2m in addition to corresponding annual service fees and consumables. InSightec reported revenues of $32.1m for FY17 (Q217 revenue: $6.8m, which includes three Neuro systems ($4.2m), one neuro upgrade ($0.5m), one body upgrade ($0.2m) and service fees of $1.9m). Although the company’s first product was approved in 2004, it has yet to make a profit and COGS account for approximately 50% of its current revenue. We expect sales to grow together with the publication of long-term cost-effectiveness studies, reimbursement and the approval of new indications.

Although a significant monetary investment for hospitals, MRgFUS therapy can potentially have a substantial impact on reducing healthcare costs by minimising the risk of infection, reducing hospitalisation time and recovery time. In addition to positive safety and efficacy trial results, we believe that cost-effectiveness and long-term studies comparing ExAblate to mainstay treatments for each approved indication, such as the UF and ET cost-effectiveness trials noted previously, will be critical to adoption and reimbursement. However, we are not aware of InSightec’s future plans for conducting additional longer-term cost-effectiveness studies at this time.

The clinical presence of the platform is limited by the number of compatible MRI systems installed in hospital settings. According to the Organisation for Economic Co-operation and development (OECD), as of 2016 there were more than 5,400 MRI units active in US hospitals (roughly 16.67 per one million of the US population).27 This numeric excludes MRI units installed in outpatient imaging centres as we assume MRgFUS procedures will require the presence of a specialized surgeon. According to EvaluateMedTech, the diagnostic medical imaging market is led by Siemens Healthineers, GE Healthcare and Philips with 26%, 21%, and 19% of the market share in 2016, respectively. At this time, all of the ExAblate systems are exclusively compatible with GE Healthcare’s 1.5 and 3.0 Tesla MR scanners (GE Healthcare is also a minority shareholder in InSightec). Going forward, we expect the number of active ExAblate units to increase as the company achieves FDA approvals for prostate cancer, Parkinson’s disease and epilepsy, etc. We therefore assume a penetration of about 2% of the global medical imaging market share by 2028 for each indication (see Exhibit 3). Furthermore, in 2016 InSightec announced a collaboration with Siemens Healthineers to develop compatibility between ExAblate Neuro with the Magnetom Aera 1.5T and Skyra 3T clinical MR scanners, which we expect will provide InSightec with the opportunity to expand its presence in the global MR market. The project is expected to conclude in December 2018.

Focused ultrasound (FUS) is an early-stage therapeutic technology with far-reaching implications. According to the Focused Ultrasound Foundation, there are over 50 companies worldwide developing high-intensity FUS for a variety of indications from pain management to neurological disorders covering a full range of clinical stages from preclinical to post-market. Similar to ExAblate, select technologies are also pairing FUS with imaging modalities to guide and monitor treatment (see Exhibit 4 for a selection of FUS therapies in clinical use). Image guidance via ultrasound or MR is vital to FUS surgery to provide anatomical and real-time treatment feedback. Although an ultrasound imaging system may be smaller and significantly less expensive than bulky MRI systems, ultrasound guidance systems are suboptimal for determining temperature changes and are also restricted by depth and for spatial resolution of treated tissue.28 ExAblate is the only FDA- and CE-approved system that incorporates MR and high-intensity FUS.

InSightec’s most recent $150m Series E financing (in which Elbit Medical did not participate) led by Koch Disruptive Technologies, marking the first investment of Koch Industries’ new venture capital arm, will likely support the development of future applications in oncology (liver, pancreas and breast cancers) and neurosurgery (targeted drug delivery for Alzheimer’s, brain tumours and obsessive compulsive disorder) based on the ExAblate technology and we expect to update our valuation and estimates with the release of more detail on these programmes.

Gamida Cell is developing cell and immune therapies to treat haematological cancers and orphan genetic diseases (Exhibit 5). Gamida Cell is predominantly active in the field of BMT, a life-saving treatment for patients with high-risk leukaemia and lymphoma. Julian Adams, PhD, was named chairman and CEO in November 2017. As a biotechnology industry pioneer, he has held senior leadership roles at a number of biotechnology companies and, most notably, is known for playing a key role in the discovery and developed of Velcade (bortezomib) for multiple myeloma.

According to the US Department of Health and Human Services, approximately 17,500 people in the US are diagnosed with hematologic diseases annually, where the primary course of treatment is allogeneic BMT, in which stem cells are collected from a matching donor and transplanted into the patient. Preferably, a donor should “match” 10 out of 10 human leukocyte antigen (HLA) markers and only 30% of patients match with a relative. This leaves the remaining 70% in need of an unrelated donor. Patients are matched with eligible donors by HLA typing and it can take several weeks or longer to identify an appropriate donor. According to one study, the average time from donor centre-initiated HLA typing to donation is 125.4 days.29

UCB has been utilised in clinical practice as an alternative graft source to peripheral blood for c 30 years.30 UCB for transplantation only requires partial matching (a minimum requirement of four out of six HLA biomarkers) and has lower rates of graft-versus-host disease (GvHD).31 However, the use of UCB for BMT is limited by the minimal number of stem and progenitor cells. Low cell dose is associated with delayed engraftment and a longer neutropenic period, which is related to higher morbidity and transplant-related mortality.

The company’s proprietary technology uses the small molecule nicotinamide (NAM), which is a form of vitamin B-3, to inhibit differentiation while the cells proliferate in culture, which increases the limited population and quality of stem and progenitor cells (CD34+/CD38-/Lin- cells) and also enhances cell functionality, ie migration, homing, engraftment.32

Gamida Cell’s leading product, NiCord, expands UCB cell graft ex vivo and enriches the specific subpopulation of stem and progenitor cells to treat haematological malignancies such as leukaemia and lymphoma. Essentially, CD133+ cells selected from a single unit of UCB are cultured for 21 days in nicotinamide resulting in a c 100-fold expansion of dose stem and progenitor cells, which are then cryopreserved until transplanted into patients. This expansion is a substantial advantage over a single UCB graft.

In Phase I/II data in 35 evaluable patients with acute leukaemia, myelodysplastic syndrome (MDS) and lymphoid malignancies presented at the American Society of Haematology (ASH) in December 2017, NiCord demonstrated a median time to neutrophil engraftment of 11 days and a median time to platelet engraftment of 34 days. According to matched data from the Center for International Blood and Marrow Transplant Research, standard UCB treatment results in a median time to neutrophil engraftment of 21 days and a median time to platelet engraftment of 46 days. These data indicate that NiCord has the potential to be the graft of choice for patients without a matched donor.

NiCord is the first BMT alternative to receive FDA breakthrough therapy designation, and was also granted FDA and EMA orphan drug designation. Enrolment is underway for a 120-patient Phase III study of NiCord, which will take place worldwide. This trial is investigating the ability of NiCord to provide a graft with an ample amount of cells that have fast and vigorous in vivo neutrophil and platelet producing potential to improve transplantation outcomes (as low cell dose is associated with delayed engraftment and poor outcomes). The primary endpoint for the trial is time to neutrophil engraftment following transplantation (on or before the 42nd day post-transplant) compared to a non-manipulated cord blood unit. The company intends to utilise the funds from its recent $40m fund-raising to progress its Phase III trial, which is expected to complete enrolment in H219 with top-line data expected in 2020.

Cord blood is currently used for the treatment of certain cancers (acute lymphoblastic leukaemia, acute myeloid leukaemia, Hodgkin’s lymphoma), blood disorders (sickle cell anaemia, thalassemia) and bone marrow failure syndromes (severe aplastic anaemia, severe autoimmune neutropenia), as well as metabolic disorders and immunodeficiencies. Using NAM technology and UCB, Gamida Cell is developing CordIn to treat aplastic anaemia (AA), sickle cell disease (SCD) and thalassemia, whereas BMT is the mainstay treatment. AA is a blood disorder with variable worldwide incidence. A review compared annual national incidences of AA in China with 7.4 per million, four per million in the US and 2.34 per million reported in the EU.33

Likewise, SCD is a common genetic blood disorder that affects approximately 100,000 Americans, the majority of whom are African American, and millions of people worldwide.34 Individuals with SCD in the US contribute to up to $1.6bn in healthcare utilisation.35 Gamida Cell recently presented the results from its 13-patient trial of CordIn in 13 patients with sickle-cell disease (SCD) who were in need of allogeneic bone marrow transplant (BMT) at the 2018 BMT Tandem Meetings (Salt Lake City). Engraftment was observed after a median of seven days post-treatment in all 13 patients. In the nine patients with long-term follow up, transfusion independence with a normal haemoglobin profile was achieved. However, two patient deaths were reported, one due to secondary graft failure and the other due to severe graft versus host disease (a common complication from BMT). The company plans to continue development although we do not yet include this programme in our valuation as it is still relatively early and timelines are unclear. The company expects to conclude patient enrolment for the CordIn Phase I/II in patients with SCD and thalassemia is in 2019. An additional Phase I/II in patients with AA was recently initiated and is expected to complete patient enrolment by the end of 2019.

Furthermore, Gamida Cell is developing donor-derived natural killer (NK) cells for blood and solid cancers such as B-cell lymphoma and multiple myeloma. The market for multiple myeloma treatments is significant as there are approximately 30,000 new cases per year in the US alone.36 Revlimid, a leading treatment for multiple myeloma in addition to myelodysplastic syndromes, marketed by Celgene, had $6.97bn in sales in 2016. NK cells are a type of lymphocyte, or white blood cell, that play a central role in lysing infected or transformed cells and therefore offer an innovative approach to cancer treatment. Advances in cell processing and engineering, and improved methods of characterisation, purification and expansion, have led to increased interest in using NK cells for cancer immunotherapy.37 Companies such as NantKwest, Affimed and Celgene are working to develop NK cells for cancer immunotherapy. In a mouse model, NK cells expanded with NAM demonstrated higher retention in bone marrow, spleen and peripheral blood than untreated NK cells. The results were presented at ASH in December 2017 and, based on these preclinical findings, the company has initiated a Phase I trial with the University of Minnesota in 24 adult patients with multiple myeloma and lymphomas. Gamida Cell provided an update on the first two patients treated with NAM-NK at the Inaugural American Association for Cancer Research (AACR) in June 2018 from the ongoing study. A favourable safety profile was demonstrated in the two patients with no severe adverse events (grade 3 or 4) and no dose-limiting toxicities. However, the patients did experience short-term neutropenia and thrombocytopenia although this was expected. The dose escalation portion of the trial is underway and enrolment is ongoing (Exhibit 6).

Gamida Cell also presented preliminary efficacy data from one patient with follicular lymphoma treated with NAM-NK at dose level 1 in March 2018. The patient had evidence of donor NK cell expansion in peripheral blood and biopsy of the residual mass revealed no evidence of lymphoma. We cannot draw any conclusions from the initial safety and efficacy data at this time based on the limited number of patients. The primary endpoint of the trial is the safe maximum tolerated dose of NAM-NK cells and the study is expected to read out preliminary data in 2019. The company has stated that NAM-NK cells can be manufactured cost-effectively and can potentially be distributed as an off-the-shelf product. If validated, this offers a significant opportunity for the company because, historically, NK cell expansion into a clinically significant quantity has presented challenges as NK cells only represent a minor portion of peripheral blood mononuclear cells.38

Elbit Medical’s investment in development-stage healthcare companies carries the inherent risk associated with the ability of the investees to not only develop products but also source additional funding. However, the current portfolio certainly lacks diversity, with only two investments. InSightec is the most commercially advanced company with three ExAblate products on the market with FDA and CE approvals for three distinct indications in gynaecology, oncology and neurology. Although its first product reached the market in 2004, the company has yet to turn a profit and MRgFUS carries the stigma of an expensive experimental technology. Gamida Cell is the higher-risk asset, although in late-stage development for NiCord as it carries the associated risks of drug development such as high R&D costs, regulatory risk, etc. Although the collection of cord blood has raised resource and ethical issues, the commercial storing of UCB has been implemented since 1996 and is relatively uncontroversial at this point in time.

The current balance sheets of both the company and its parent indicate significant dilution risk. As mentioned previously, Elbit Medical recently completed NIS182m in offerings of convertible notes and has used the majority (NIS152m) of the proceeds to repay its debt of NIS154m to Elbit Imaging. Although the offering lengthens the maturity profile, Elbit Medical shareholders face significant dilution risk if the notes convert to equity in 2022. Elbit Imaging itself is highly indebted, with NIS227m due on 30 November 2019 (as of 1 June 2018). As of 1 June 2018, Elbit Imaging reported NIS63m in cash. Based on the company’s projections, it is dependent on its own ability to sell a portion (if not all) of its Elbit Medical equity stake to stay solvent through 2019. Elbit Medical shareholders therefore face additional selling pressure risk if Elbit Imaging is forced to sell its approximate 89% stake on the open market. However, this may be mitigated if the company is able to find strategic buyers.

We arrive at a valuation for Elbit Medical Technologies of NIS407m or NIS1.76 per share based on a risk-adjusted NPV analysis of each of the portfolio companies. These valuations are contingent on a series of assumptions about the individual companies regarding market potential costs and probability of success (see Exhibit 7 and Exhibit 8). We are able to assess probability of success in the range of 50–100% due to the advanced stages of development of the associates. We may adjust these probabilities with the publication of supporting data or with the advancement of the programmes to the clinic.

We assign our highest probability of success to InSightec at 100% as it is already on the market. By our measure, InSightec is the highest value portfolio company ($579m total valuation, $110.1m for Elbit Medical’s share, compared to a current post-money valuation of $610m), due to a number of factors including near-term revenue generation, growing clinical acceptance, as well as continuous clinical development for a number new indications. We expect the company to require additional clinical development to achieve FDA approvals for new indications (Parkinson’s disease, drug delivery for oncology etc) in which we estimate the company will spend an average of $17m per year on R&D through 2022. It should be noted that the global medical imaging market is mature, at this point, with an expected CAGR of 4.95% through 2021.39

Elbit Medical anticipates a series of potential inflection points over the next 12-18 months: the completion of enrolment for the CordIn Phase I/II in patients with SCD and thalassemia is in 2019 and completion of enrolment for the NiCord Phase III trial for haematological malignancies, followed by top-line data in H120.We are not including the issuance of NIS182m completed in Q118 in our valuation at this time. The offering lengthens the maturity profile to March 2022 and introduces significant dilution risk for Elbit Medical shareholders as the notes are secured by a lien on the company’s stakes in its associates. We also expect to update our valuation with the announcement of new deals and as the portfolio companies advance through the clinical pipeline.

Elbit Medical’s 2017 post-tax loss was $10.7m (FY16: $18.7m), which reflects ongoing investment into a portfolio of currently loss-making companies. In general, the company does not typically generate revenue. However, a capital gain of $1.75m was booked in FY15. General and admin costs in 2017 were $0.68m (NIS2.4m), which include payroll and related expenses and management fees. The company had cash on the balance sheet of $0.03m (NIS0.11m) at 31 December 2017. Elbit Medical completed an NIS180m offering of convertible notes (NIS1.47 par value in notes convertible to one Elbit Medical ordinary share) on the TASE in February 2018, as well as an NIS2m offering of Series C convertible notes (NIS2.1 par value of notes convertible to Elbit Imaging) in March 2018, which lengthens the maturity profile to March 2022. The company used the majority of the proceeds to repay its NIS154m debt to Elbit Imaging earlier this year, while NIS4m were set aside for ongoing operational expenses in addition to NIS18m set aside for interest payments due on the notes for the first two years. The notes are secured by a lien on the company’s holdings in Insightec and Gamida Cell, which therefore introduces significant dilution risk to Elbit Medical shareholders.

We outline historical financials in Exhibit 9. However, we are not providing forecasts at this time.