I was recently introduced to Vital Therapies, Inc. (Nasdaq: VTL) and the person who introduced me is a sharp investor and knows how to find biotech winners. At first blush Vital Therapies seemed like the classic whiffed in Phase 3, new CEO wants to take another shot and no thank you for me. I offered to take a call with the company and after the call; I was convinced this is a special company with a special management and Board comprised of winners.
We all know, at least you should know, that there is no such thing as easy money in small cap biotech and investing in small cap biotech is a phenomenal way to lose money the majority of the time, at least in my near 20 years of experience. Skepticism is healthy and warranted in small cap biotech but there are times when I come across a biotech company that checks all the boxes. Vital Therapies check all the boxes I have in my due diligence process and I comfortable writing that I will be shocked if their Phase 3 trial is not a success.
Let’s first look at the people behind Vital Therapies. The CEO of Vital Therapies, Russell Cox, left Jazz Pharma (9.3B mkt cap) where he was the COO to take the reins at Vital. Who leaves the comfy corporate confines of a $9.3B company to take on a $230M market company? Answer, someone who sees a future. Mr. Cox walked from at least an $800K annual salary (CFO of Jazz salary reported to be $817K in 2017) plus a bonus to take on Vital Therapies. Now let’s look at the Chairman of the Board, Faheem Hasnain who took on the position of Chairman in September 2017. Mr. Hasnain was formerly the CEO of Receptos. Celgene purchased Receptos for $7.2B in 2015. Prior to Receptos, Mr. Hasnain was the CEO of Facet Biotech which Abbot purchased in 2010. Why on Earth would Mr. Hasnain join Vital Therapies and serve as the Chairman of the Board AND buy stock on the open market recently unless he sees opportunity? Someone who is the CEO of a company that gets purchased for $7.2B is not looking to be embarrassed and also wants to continue their winning ways. These are just two of the people involved with Vital Therapies. Take a look at the bio of Director Cheryl Cohen, former CCO of Medivation which was purchased for $14B by Pfizer. Muneer Satter, a former partner of Goldman Sachs who has been buying consistently on the open market. These are world class people who are winners!
Now let’s take a look at the science. Vital Therapies is a biotherapeutic company developing a cell-based system for the treatment of acute forms of liver failure. The company’s lead product candidate, the ELAD® System or VTI-208, is in a Phase 3 clinical trial evaluating ELAD in alcohol-induced liver decompensation, is a human cell-based, bio-artificial liver support system. I will cut right to the chase, Vital Therapies is expecting to report top-line results in the third quarter of 2018. ELAD has received orphan designation in the United States and Europe for the treatment of acute liver failure. Although VTI-208 failed to reach either the primary or secondary endpoints in the initial Phase 3 study, data from pre-specified and post-hoc analyses of this study has shown trends that may indicate a potential to increase survival rates in certain subsets of subjects with liver failure due to acute hepatocellular insult and alcohol use. In March 2018, the company completed enrollment for a Phase 3 trial in severe alcoholic hepatitis, known as VTL-308. In short, the previous Phase 3 trial, which failed because patients with multiple organ failure were enrolled in the study along with people who did not have multiple organ failure. When we saw the data from the previous Phase 3, those patients treated without multiple organ failure had positive outcomes. The current Phase 3 study is only treating those patients WITHOUT multiple organ failure which means if the data we already saw from the last Phase 3 study is replicated, this trial succeeds.
For the record, neither my firm nor I or any family member of mine currently has a position in Vital Therapies as of the date of this publication but I/we will have a position AFTER I publish this article, therefore I am not front running anyone. I am an RIA (registered with FINRA) and I also wield a fair amount of influence given I have approximately 187,000 Twitter followers: https://twitter.com/?lang=en. I mention all this because I don’t want some 20 something year old kid who is likely to get hired by a fund that is actively short this stock, to take a shot at me or this article and for it to hold any water whatsoever. If someone wants to knock the company based on its science fire away, but should anyone fire at me for writing this article and being bullish, well, I suggest you question the intentions of that person should they surface. I actually really hope someone does publish a bash piece on Vital Therapies given 12% of the float is short. With over 3m shares short and average volume of a mere 140K shares a day, it will take a short investor 21 trading days to cover their position assuming they represent ALL the buying over that 21 day period.
In conclusion, should Vital Therapies provide positive Phase 3 data in Q3 this year, Vital Therapies may represent a multibillion dollar opportunity. Vital Therapies is one of the most exciting biotech investment opportunities I have come across in my career. The current Phase 3 study is significantly de-risked in that we already know this treatment worked based on the previous Phase 3 study data. The company is run by winners who have been involved in some of the biggest successes in biotech in the past decade and insiders have been actively buying stock. Vital Therapies is a classic example of investors reading a headline that said failed Phase 3 and as such they have ignored the company and opportunity. Vital Therapies is also heavily shorted and thinly traded which is a recipe for disaster for investors shorting shares as positive data could lead to a massive short squeeze (stock moving considerably higher as short sellers are forced to buy the shares they sold back at higher levels). Vital Therapies should not be ignored as it may offer significant upside to investors who are willing to do more than 2 seconds of due diligence and take the time to understand the value proposition Vital Therapies represents. That value proposition is potentially transformative for the company in terms of revenue generation and potential upside for an investor which is why the smart money owns and is buying shares of Vital Therapies.
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