Pluristem Therapeutics, Inc. Initiating Report A leading developer of placenta-based cell therapy products October 1, 2014 Key data Sector Rating Biotechnology BUY Target Price $21.00 Current Market Price $2.86 52 Week Low/52 Week High $2.58/$4.63 Nasdaq Composite Index 4,555 3-mth avg. volume (in 000 s) 108.1 Market Cap (in mn) $198.1 Shares Outstanding (in mn) 69.3 Employees 165 Debt 0 Patents Granted 30 Patents Pending 100 Source: Yahoo Finance as of October 1, 2014 and publicly available company documents Company Description: Pluristem Therapeutics Inc. is a leading developer of placenta-based cell therapies. The Company's patented PLX (PLacental expanded) cells are a drug delivery platform that releases a cocktail of therapeutic proteins in response to local and systemic inflammatory and ischemic diseases. These diseases collectively cost the U.S. healthcare system tens of billions of dollars. PLX cells are grown using the Company's proprietary 3D expansion technology and are an "off-the-shelf" product that requires no tissue matching prior to administration. Pluristem has a strong intellectual property position, Companyowned, GMP certified manufacturing and research facilities, strategic relationships with pharmaceutical companies and major research institutions, and a seasoned management team. Investment Summary We initiate coverage of Pluristem Therapeutics, Inc. (NASDAQ: PSTI) with a BUY rating and a $21.00/share fair value estimate, based on our Discounted Cash Flow valuation methodology. Accordingly, PSTI s shares should trade at a 590% premium to its current valuation. Our BUY rating is based on the following: PSTI is currently pursuing the development of its PLX cells for 12 different indications that are in various stages of development, from preclinical to Phase II, throughout the world. The company s proprietary 3-dimensional cell growth methods and manufacturing facility have an estimated $1 billion worth of production capacity per year, setting PSTI apart from the rest of the cell therapy market. United Therapeutics (NASDAQ:UTHR) has licensed the exclusive global rights to PLX cells for the treatment of pulmonary arterial hypertension (PAH) in a deal valued at over $55 million. CHA Bio&Diostech (KOSDAQ: 085660) has licensed the rights to PLX cells for the treatment of peripheral artery disease (PAD) in South Korea, with deal terms including a 50/50 joint venture, CHA covering all costs of clinical trials and subsequently sharing post-commercialization profits equally with PSTI. The U.S. National Institutes of Health are working with PSTI on a development program for PLX cells in the treatment of acute radiation syndrome (ARS). Major Risks to our valuation include the following: Currently, PSTI does not have marketable products with associated revenues, although it does have two out-licensing deals, one of which has already contributed upfront payments to PSTI. Larger, later stage clinical trials may not produce results that are favorable as the company s pre-clinical and earlier stage trials. Key Financial Data FY12 FY13 FY14 Cash and Equivalents (in 000 s) $,9389 $9,323 $9,407 Short Term Investments (in 000 s) $49,412 $44,890 $28,420 Total Assets (in 000 s) $47,420 $68,316 $74,023 Total Stockholder Equity (in 000 s) $37,742 $57,466 $62,123 Source: Company Reports 1 P a g e
Investment Merits PSTI cell therapies address $27.5 billion global market... 3D manufacturing process with $1 billion production capacity... United Therapeutics CEO says PSTI s cell therapy is the most transformative of United Therapeutics products in Phase I trials... One of the largest healthcare companies in South Korea partners with PSTI... 12 Indications that collectively address $27.5 billion market: PSTI is currently pursuing the development of its PLX cells for 12 different indications that are in various stages of development, from preclinical to Phase II, throughout the world. Treatments for cardiovascular, hematological, pulmonary, orthopedic, and pregnancy indications are being clinically developed by PSTI and its licensees. In Q1 2014 the Company reported that its Phase I/II trial for treating muscle injury met all primary safety and efficacy endpoints. PLX-PAD treated patients displayed a 500% improvement over the placebo group in the primary efficacy endpoint. The results provide evidence that PLX cells may be efficacious in the treatment of orthopedic injuries including muscles and tendons. In November 2011 the Company reported that its Phase I/II trial for treating critical limb ischemia (CLI) reduced the risk of amputation by 59% compared to historical data. The results provide evidence that PLX cells may be efficacious in the treatment of peripheral artery disease (PAD). Off-the-shelf cell therapy that is mass produced for specific indications is significant advantage in the market: PSTI s proprietary three dimensional cell growth and production methods set it apart from the rest of the cell therapy market. PSTI s cell manufacturing methods enable controlled production of a large quantity of different cell products for specific indications. High quality, homogeneous, commercial-grade cell batches are produced at a price that yields high gross margins. The company s facility, which recently gained approval from the health authorities of Germany, the U.S., European Union, Australia, Israel, and South Korea, has the capacity to produce PLX cells for the treatment of over 150,000 patients annually, an estimated $1 billion in production value. The Company s point of care thawing device provides uniformity of administration, making PLX cells an off-the-shelf cell therapy. Out-licensing deal with United Therapeutics valued at over $55 million addresses $3.3 billion market: United Therapeutics (NASDAQ:UTHR), a $6.5 billion market cap big pharma company, has licensed the exclusive global rights to PLX cells for the treatment of pulmonary arterial hypertension (PAH). PSTI has received a $7 million upfront payment, has the potential to earn up to $38 million more in milestone payments, and up to $10 million towards establishing a manufacturing plant in the USA, plus royalties on gross profits upon regulatory approval. United Therapeutics is now conducting a Phase I study of PLX cells for the treatment of PAH in Australia. PAH, a cardiovascular disease, is incurable and fatal. It is a huge market size, yet only a handful of drugs have been developed to treat the disease. The global market for PAH therapies was $3.3 billion in 2011 and grew at a CAGR of 40% from 2002. This means if PSTI captured even 1% of the PAH market upon approval, this one indication alone would contribute $30 million in annual revenues. Licensing & JV Agreement with CHA Bio&Diostech of South Korea: CHA Bio&Diostech (KOSDAQ: 085660) has licensed the rights to PLX cells for the treatment of peripheral artery disease (PAD) in South Korea. Per the terms of the agreement, a 50/50 joint venture will be established, with CHA covering all costs of clinical trials and subsequently sharing postcommercialization profits equally with PSTI. 2 P a g e
U.S. National Institutes of Health assessing PLX-RAD cells for its stockpile of ARS medicine in case of nuclear catastrophe... NIAID is conducting its second study of PLX-RAD cells in the treatment of ARS: The U.S. National Institute of Allergy and Infectious Diseases (NIAID), part of the U.S. National Institutes of Health (NIH), is conducting a mechanism-of-action study of PSTI s PLX-RAD cells for the treatment of acute radiation syndrome (ARS). The study aims to investigate the effect of PLX-RAD cells on animals receiving total body irradiation. ARS represents a constellation of signs and symptoms that occur between several minutes and several weeks after exposure to high doses of ionizing radiation. ARS involves multiple organs, including hematological and gastrointestinal systems. The hematological syndrome follows damage to the bone marrow and is characterized by severe decreases in red and white blood cell and platelet counts, which can lead to infection, bleeding and death. The NIAID studies would provide important data to the U.S. government for its Project BioShield and its purchase of national stockpiles of medical countermeasures to nuclear threats. Investment Risks No revenues from approved products... No cell therapies sourced from placental tissues have yet to be approved by the FDA Several companies now have cell therapies in clinical trials.. No products have been approved for sale: Although PSTI is developing therapies for 12 different indications, none has been approved for marketing yet. The high cost of clinical trials and the time required to meet regulatory approval could take years. The company may need to raise additional capital to fund these trials. To date, some of PSTI s studies have been paid for by its big pharma partners. If PSTI s cell therapies do not generate favourable clinical results, the company s partners may look to either stop funding trials or terminate their licensing agreements. Regulatory risk: PSTI s cell therapies are derived from the placenta. To date, the FDA has not any approved cell transplants using manipulated cells derived from placental tissue for any indication. Competitive risk: Several companies are developing cell therapies that are in various stages of clinical development. Some of these companies are comparable in size to PSTI and others are much larger, better funded pharma companies. One or more of these companies may come to market with a cell therapy to treat one or more of the indications for which PSTI currently has therapies in development. 3 P a g e
Active Clinical Programs 4 clinical programs targeting $27.5 billion market Near Term Catalysts Several investment triggers upcoming for the balance of 2014 and first half of 2015... Outlook...so, our verdict is a BUY on this one With several clinical programs in place, we expect PSTI may achieve clinical results that would trigger additional milestone payments to the company from its big pharma partners. We projected an income statement based on PSTI s clinical programs assuming each product would capture up to 1% market share for each respective indicaiton. The resulting estimated EPS was subjected to standard corporate tax rates. Accordingly, we estimate EPS of $0.40 in 2017 and EPS of $1.25 in 2018. We used a discount rate of 15% and a P/E multiple of 25. Valuation Our valuation methodology yields a fair value of $21/share, implying a 590% premium to the current market price. Accordingly, we initiate coverage of PSTI with a BUY rating. 4 P a g e
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