The mystery of Spectral MD Holdings Ltd (AIM:SMD) is not the AI technology that could revolutionise the way burns are triaged and how diabetic foot ulcers are treated. Neither is it the US Federal funding it has received or the huge addressable markets it could conquer.
No, the mystery lies in just how it has flown under the radar since listing here in the UK over the summer.
The share price tells a story in this regard. Possibly a misleading one; particularly, if you buy into the investment thesis outlined by the company’s founder and chief executive, Wensheng Fan.
Spectral MD is the creator of DeepView, an artificial intelligence-driven imaging device that can tell with 92% accuracy whether a burn will heal naturally or require surgery.
Why is this important? Well, it saves time and money – and for the patient, it can prevent a protracted and painful convalescence. The wait-and-see approach deployed by doctors can take up to three weeks; DeepView works in seconds.
It should be said, the company isn’t solely an algorithm play. It is AI (artificial intelligence), imaging and high-tech equipment all rolled into one. Currently, the ‘kit’ is carried on a cart, but the aim is that it will be miniaturised for use in battlefield hospitals, at the site of mass casualties and in the emergency room.
The project to develop DeepView has received US$93mln in non-dilutive grant contracts from the Biomedical Advanced Research and Development Authority (BARDA). The latest phase of that contract – worth US$18.8mln – was secured in September, around six months ahead of schedule. The company expects to receive a further US$21.9mln as part of its collaboration with the government agency.
Ultimately, Spectral MD expects DeepView to be incorporated into Project BioShield, which is an American programme to stockpile medical countermeasures in case of a mass casualty event such as 9-11. BARDA is a granting agency for contracts such as BioShield, which broker SP Angel reckons could be worth as much as US$400mln in revenues by 2027.
BARDA isn’t the only organisation to lend financial support to DeepView; the Department of Defense has done so – but on a more modest scale.
Spectral MD has also partnered with Louisiana State University Medical Science Center, New Orleans, to conduct clinical studies for performance data collection for the new multispectral imaging sensor.
Well thought out strategy
In all, it wants to roll out its technology to 10 clinical sites with the aim of compiling a compelling data set that can be submitted to the US regulator, the Food & Drug Administration (FDA), by 2023. It will be what’s called a De Novo application.
“This is a well thought out, orchestrated approach,” says CEO Fan.
Alongside the deployment for burns, DeepView is also being developed to aid the treatment of diabetic foot ulcers (DFU), open wounds that are often slow to heal and need to be dressed regularly.
So far, the device has been honed to 84% accuracy, although this figure may improve over time. Next year it expects to launch a DFU validation study, after which it hopes to receive regulatory clearance.
The scale of the potential market is huge. The cost of diabetes in the US alone is put at US$237bn. Around 30% of these costs are associated with care for diabetic foot disease.
For the DFU indication, the company estimates there are over 57,000 sites that DeepView could be placed in the US with 20,000 sites within the EU and UK. The group is expecting to book its first US sales in the fourth quarter of next year and UK and EU sales in the second half of 2023.
Large additional market
For doctors and podiatrists, adoption will be driven by what they can earn from the DeepView technology. In the US for example, the current reimbursement rate would cover the outlay for the device in less than a year, which means it is making money for the clinic from year two.
“If Spectral MD can demonstrate significant clinical benefit over conventional techniques, the group will be well-placed to negotiate an additional or higher reimbursement rate for the use of the AI element of DeepView, which should further drive adoption,” said analysts at the broker SP Angel.
So, to summarise, here we have a company that has and will continue to benefit from non-dilutive US government funding that at some point (and with a fair wind) should morph into chunky government and hospital contracts.
On top of that, the group is tapping into the diabetic foot ulcer market, which, while not glamorous, is potentially lucrative. Remember DFU is just one vertical, DeepView could also be used in venous leg ulcers and critical limb ischaemia.
This then begs the question: why have the shares performed so poorly since floating?
You ask those familiar with the company and they’ll point to a technicality – Spectral MD’s Regulation S designation, which prevents American investors from acquiring the stock. That restriction will be dropped in June next year.
Broker's investment thesis
While the retrenchment may have been harsh on those who bought at the time of its initial public offering (IPO), when the Texas-based group raised £11.3mln, it also presents an opportunity.
If you buy the investment thesis put forward by SP Angel, then there is a significant upside from these levels.
The brokerage has come up with a discounted cash flow valuation for Spectral MD and DeepView of £223mln, or 124p a share. That’s almost four times the current market worth of the group.
We should temper this with a small note – SP Angel is the nominated adviser (Nomad) and broker to the company, so the research can’t be viewed as truly independent (however good the Chinese walls are between research and corporate advisory and Nomad departments). But it gives a flavour of the mismatch between the share price and Spectral MD’s intrinsic value.The recent appointment of Stifel Nicolaus as joint broker to the company suggests the European arm of the US outfit sees some potential. Stifel is well regarded in the healthcare field, both for research and the capital markets work it does with companies such as Spectral.
Interesting appointment
For example, the American investment bank is also joint broker to Renalytix, the AI vitro diagnostics firm, which in the past five years is up 576% and is currently worth almost £600mln. Crucially, Renalytix is now on Nasdaq, which understands healthcare and med-tech better than the UK audience.
Whether the guidance of Stifel has been instrumental in this regard is open to debate. In fact, success is always a team effort as Renalytix’s management, R&D team and the firm’s other broker, Investec, will tell you.
But Stifel does have form in this arena, so it will be interesting to see how the next two or three years play out for Spectral MD under its guidance.