Vic VTL Short

12/20/2015 Value Investors Club / VITAL THERAPIES INC (VTL)
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VITAL THERAPIES INC VTL S

June 29, 2015 by sabordesoleda... (/member/sabordesoleda.../40871)
2015 2016
Price: 20.14 EPS N/A N/A
Shares Out. (in M): 24 P/E N/A N/A
Market Cap (in M): 483 P/FCF N/A N/A
Net Debt (in M): -90 EBIT 0 0
TEV: 393 TEV/EBIT N/A N/A
Borrow Cost: Available 0-15% cost
Description

Overview
WebelievethatVTLoffersthechancetoshortaPhase3trialthathasshownnoevidenceofefficacy
inpriorstudies.Thisisadevicethathasbeenindevelopmentforalmost2decades,undergone
bankruptcyduetorepeatedlackofefficacyinclinicaltrials,andnowresurrectedinaHailMaryattempt
foraPhase3inaverydifficulttotreatpatientpopulation.TheirSECfilingsspecificallywarnthatthe
FDAspecificallynotedthattherewasnoevidenceofefficacyinPhase2towarrantbeingtakeninto
Phase3.Withthestocktradingat$20andunder$4/shareincashthereis5075%downsidetothe
stockwhenthePhase3trialfailsinthe3Q15.

History
VitalTherapies,Inc.wasformedinMay2003toacquiretheassetsofVitaGen(formerlyHepatix)ina
bankruptcyproceeding.ThepredecessorcompaniesdevelopedtheELADSystem,completingtwo
pilottrialsinacuteliverfailureandtworandomized,controlledPhase1andPhase2trialsinFHF,but
failedtoattractfundssufficienttocontinuedevelopmentofthesystem.BeginninginJune2003,VTL
refocusedthecompanytopursueregulatoryapprovalandcommercializetheELADSysteminChina.
In2007,VTLcompletedapivotaltrialinacuteliverfailureinsubjectswithviralhepatitisinChina,and
wesubmittedanapplicationformarketinginChina.However,theapplicationisstillunderreviewin
ChinaandapprovalisdependentongarneringUSapprovalfortheELADsystem.

InApril2014,VTLsold5.175Msharesat$12ashareandraised$62.1MinitsIPO($51.9Mnet).
BankofAmericaandCreditSuisseactedasjointbookrunningmanagersfortheoffering.VTLsold
another2.05Msharesat$17.50persharefornetproceedsof$32.8.

http://valueinvestorsclub.com/idea/VITAL_THERAPIES_INC/136908#description 1/14
ELADSystem
VTL'smainandonlyvaluedriveristheELADSystem,anextracorporealartificialliverwhichismeant
tohelpbridgethegaptotransplant.TheELADsystemdrawsbloodfromthepatientviaacentral
venousline.Thatlineisthenpassedintoabedsideunitwhereplasmaultrafiltrateisisolatedbya
generator.Theplasmapassesthrough4cartridgesoftheC3Acellstoallowfortransfersoftoxins
fromtheplasmaandmetabolitesintotheplasmathisisthepartmeanttomimictheliverfunction.
Thisplasmaisthenfilteredandrecombinedwiththebloodcellsandthenreturnedtothepatient.This
isacontinuoustreatmentfor5days.

HereisapictureoftheELADsystem


TheELADsystemusesaC3Acelllinesforthetherapy.TheC3Acelllineisderivedfromhumanliver
cells.WedonotethatC3Acelllinesarecommerciallyavailableforresearchpurposes,howeverVTL
doeshaveaproprietaryversionofthiscelllinethattheyusefortheELADsystem.

Whileitisbeneficialtohavecertainhumanlivercelllinesprovidesomeofthefunctionsoftheliver,
thesecelllinesnaturallyarenotabletoreplicatetheliverfully.Forexample,theureacycleisnon
functionalinC3Acells,cannotprovideammoniadetoxificationinabioartificialliversystem.
(http://www.ncbi.nlm.nih.gov/pubmed/17680661
(http://www.ncbi.nlm.nih.gov/pubmed/17680661))

LiverFailure
Theliverperformsawiderangeofnecessaryfunctionsincludingdetoxificationofmetabolites,protein
synthesisandotherbiochemicalsnecessaryfordigestion.Inthecaseofaliverfailure,theonly
treatmentshowntoimprovesurvivalisalivertransplant.Duetothevariousfunctionsperformedby
theliver,itisverydifficulttofullyreplicateallofthemthroughanartificialtreatmentorsystem.

AlocholInducedLiverDecompensation(AILD)isaformofliverfailurewhoseimmediatepreceding
eventwasingestionofalcohol.AILDcanoccurinpatientswithorwithoutunderlyingliverdisease.
ForpatientsseveretoxicliverdamagecausedbybingedrinkingitisknownasAcuteAlcoholic
Hepatitis(AAH).Forpatientswithchronicdiseaseduetoanotherformofliverdiseasesuchasviral
hepatitis,andthenprecipitatedbyalcoholintake,itisreferredtoasnonAAH.Thereiscurrentlyno
effectivetreatmentforliverfailureexceptforlivertransplant.

ELADClinicalDevelopment

Thereare3ongoingclinicaltrialsinvolvingtheELADsystem.VIT208isthepivotalPhase3trialthat
willreadoutinthe3Qthisyear.

HereisatableoftheclinicaltrialsfortheELADsystem.

Source:SECFilings& www.clinicaltrials.gov (http://www.clinicaltrials.gov/)

ThecurrentPhase3developmentprogramisbasedontheresultsoftheVTI206Phase2study.

InthisP2,62patientswererandomizedwith29assignedtoELADand33tocontrol.Theoverall
resultswerenegativewith11(37.9%)patientsaliveintheELADgroupvs.13(39.4%)inthecontrol
armaccordingtoanalysisthatconsidersallpatientsrandomized.


InJanuary2011,theDataSafetyandMonitoringBoardaskedthatthecompanydiscontinuethenon
AAHcohortsincetherewasnopossibilityofanytreatmentbenefitinthissubset.ThusVTLfocused
ontheAAHsubset.Therewere37patientsenrolledintheAAHsubset.However,VTLexcluded8of
themtoexamineaPPanalysis.Thiswhileapredefinedanalysisisnotthestandardwaythatdata
wouldbepresented(itwouldbeeitherallpatientsrandomized,ITT,ormodifiedITT,mITT).Asyou
canseebelowthedroppingof2patientsfromthedenominatorintheELADgroupallowedtheOS
survivaltolookbetter.

Source: http://vitaltherapies.com/wpcontent/uploads/2013/08/TepermanATC2013.pdf
(http://vitaltherapies.com/wp-content/uploads/2013/08/Teperman-ATC-2013.pdf)

Basedonthisheavilyminedanalysis,theywereabletoshowamarginaltrendtowardsbenefitwitha
pvalueof0.27.(NotethemodifiedYaxisinthechartbelowtohighlighttheslighttrendinsurvival
improvement).
Source:VTL10KFiling

ThereisnoexplanationgivenforwhytheELADsystemworksinthissubsetbutnotintheother
subset.Giventhesmallsizeofthestudyitisverylikelyduetochance.Confoundingvariablesinclude
theopenlabelnatureofthestudy,andunclear(potentiallyunbalanced)standardofcaretreatments
betweenthearms.

Thecompanyisquicktopointoutthatthisslightsurvivaltrendcorrelatedwithanreductioninbilirubin,
whichisabiomarkerindicativeofimprovedpatienthealth.However,wefinditoddthatthisalsowas
reducedinthenonAAHsubset,leadingtothequestionastohowprognosticthisbiomarkerisforthis
treatmentasitwasreducedinbothAAHandnonAAHsubsets,butinonetheELADgroupperformed
betterthancontrolwhileintheotheritperformedworsethancontrol.Thisisespeciallytruesinceas
anextracorporealbioartificialliver,itsbenefitshouldnotbedependentonetiologyofthedisease.


Nevertheless,thereisreasontobebelievethisimprovementinbilirubinisarealeffect,thoughits
benefitonoverallsurvivalisverytenuous.Otherextracorporealsystems,suchastheMolecular
AdsorbentsRecirculationSystem(MARS),haveshownsomebenefitinbilirubinbutthishasnot
translatedintoasurvivalbenefit.

Phase3ClinicalTrials

WebelievethatgiventhelackofevidenceinPhase2,thereisnoreasonthistreatmentshouldbe
takenintoPhase3.Thesmallsamplesizeoftheoverallstudymakesitimpossibletointerpretthe
resultsinasmallsubset.Theopenlabelstudyofthetriallikelyalsointroducedbias.Webelievethat
theVTI208Phase3studywhichwillreportoutin3Qofthisyearishighlylikelytofail.

TheVTI208Phase3studywillrandomize203patientswitha1:1randomizationtoeitherELAD+
standardofcareorstandardofcare.Theprimaryendpointwillbesurvivalat90days.Theirpowering
assumptionsforthePhase3assumethatthecontrolarmwillhave50%survivalandthatthe
experimentalarmwillhave70%survival.Wewouldnotethata20%absoluteincreaseinsurvivaland
a40%relativeincreaseinsurvivalishighlyunlikelyforanytreatmentinsuchasickpopulationand
completelyunjustifiedgiventheresultsofthePhase2study.Theappendixhasalinktothebaseline
characteristicsoftheVTI208study.

TheVTI210studyisinaslightlydifferentpopulation.Thisstudywillbefocusedonpatientsinthe
acutealcoholichepatitispopulation,whichisasubsetoftheAILDpopulationinVTI208.Enrollment
forthisstudystillongoing.ThecompanyexpectstheresultsofVTI210toreadoutinearly2017.

ThoughtheFDAhasallowedthemtomoveintoPhase3,ithasdonesowithanumberof
reservations.IntheirregulatoryfilingsVTLnotestheFDAdoesnotviewtheirPhase2studyas
indicativeofanybenefit.

Forexample,theFDAhasnoteditsviewthatpreliminaryclinicalevidence,atthistime,doesnotindicatethat
theELADSystemmaydemonstrateasubstantialimprovementoverstandardofcare.

TheFDAwasalsoconcernedwiththeiranalysisplanforVTI208astheydidnotfollownormal
protocol.ItappearstheFDAhadtotaketheunusualstepofreprimandingthemtoremindthemof
howtoproperlyconductaPhase3clinicaltrial.Thisspeaksto

InMarch2013,weinitiatedVTI208,aPhase3randomized,controlled,openlabelclinicaltrialwithatargeted
enrollmentof200subjectswithalcoholinducedliverdecompensation.TheprimaryendpointofVTI208isoverall
survivaluptoatleaststudydayninetyone.TheVTI208clinicaltrialcompletedenrollmentinJanuary2015with
203subjectshavingbeenenrolledat40clinicalsitesinU.S.,UnitedKingdom,orU.K.,andAustralia.Weexpect
toreporttoplineresultsfromtheVTI208clinicaltrialinthethirdquarterof2015.Thisisaquarterlaterthanwe
hadpreviouslyprojectedduetoourdecisiontowaituntilthedatabaseislockedbeforeanyanalysisofthe
results,ratherthanstartingtheanalysisafterthelastpatientenrolledhascompleteduptoatleastthestudyday
ninetyonesurvivalperiod.Afterdialoguewithregulatoryauthorities,wedecidedthatanearlieranalysiscarriesa
riskofcompromisingthedataand,therefore,decidedtowaitfordatabaselocktobesafe.Ifthestudyis
statisticallyandclinicallysuccessful,weexpecttosubmitaBiologicsLicenseApplication,orBLA,totheU.S.
FoodandDrugAdministration,orFDA,inthefirsthalfof2016.

Inaddition,VTLnotesthattheFDAhassaidthatVTI208maynotbeenoughforapprovalgiventhe
limitationsofanopenlabelstudyandpotentialconfoundingissuesthatmaynotbewellcontrolledfor.

Forexample,theFDAhasexpressedconcernabouttheopenlabeldesignofstudyVTI208,ourpivotalstudyin
AILD,andtheneedtoapplyaconsistentstandardofcareandtostandardizepostdischargecare,bothbeing
issuesthatcouldsignificantlyconfoundthestudyresults,impactmorbidityandmortalityandcausetheFDAor
otherregulatoryauthoritiestorequirethatwerepeatclinicaltrialswithdifferenttrialdesigns.

[T]heFDAhascommentedthatevenifoneofourPhase3clinicaltrials,includingVTI208,isastatisticaland
clinicalsuccess,asecondconfirmatorytrialthatsubstantiatespositiveresultsmaybenecessarytosupporta
BLA

Ittotality,thenumberofcommentsVTLmakesabouttheFDAreservationswiththeirclinical
developmentprogram,isstrikingforus,andveryuncommon.Itseemslikelytousthatunlessthereis
astrikingevidenceofefficacyintheVTI208programtheFDAwouldnotletthemfileonthisprogram
alone.InparticulargiventheconcernstheFDAseemstohavewiththeiroveralltrialconduct,itwould
notbesurprisingtousiftheFDAanalysisdifferedsignificantlyfromVTL'sanalysis.

Valuation
VTLendedthe1Q15with$90Mincash.Theyhave24Msharesoutstandingandthushad$3.75
cash/share.Theirmonthlycashburnrateinthe1Q2015was$4.7Mandtheircurrentprojectionis
thattheyexpecttohavecashuntil3Q16.IfVTI208fails,theywouldattempttoextendtheircash
runwaytoallowforthereadoutofVTI210in2017.

WebelievethatwhenVTI208failsthestockwilltradetonearcashlevels.Likelyinthe$3$5range.
ThoughtheyhavestatedthatintheeventoffailurewithVTI208theywouldhopetobeabletoextend
thecashtoallowforVTI210readout,sincethepopulationsareoverlappingthismeansthatVTI210
maybestoppedearlyforfutility.

Webelievesimplyshortingthestockisthebestwaytogetinvolved.Borrowisavailable,and
relativelyreasonableat1015%giventhatthedatareadoutwillbeinthenext12months.Another
optionistoselltheSeptember$22.50callstobuytheSeptember$20puts,atthemidpointwouldcost
approximately$3toputon.

Appendix

Glossary
AILD Alcoholinducedliverdecompensation
AAH Acutealcoholichepatitis
FHF Fulminanthepaticfailure

ClinicalPublications
http://vitaltherapies.com/newsandlinks/upcomingevents/ (http://vitaltherapies.com/news-and-
links/upcoming-events/)

Phase3StudyBaselineCharacteristics
http://vitaltherapies.com/wpcontent/uploads/2015/04/EASL2015VTLePosterARandomizedOpen
labelMulticenterControlledStudytoAssessSafetyandEfficacyofELADaHumanCellBasedBio
ArtificialLiverSupportSystemELADinSubjectswithAlcoholInducedLiverDecompensation
AILD.pdf (http://vitaltherapies.com/wp-content/uploads/2015/04/EASL-2015-VTL-ePoster-A-
Randomized-Open-label-Multicenter-Controlled-Study-to-Assess-Safety-and-Efficacy-of-ELAD-
a-Human-Cell-Based-Bio-Artificial-Liver-Support-System-ELAD-in-Subjects-with-Alcohol-
Induced-Liver-Decompensation-AILD.pdf)

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
WebelievethatVTLoffersthechancetoshortaPhase3trialthathasshownnoevidenceofefficacy
inpriorstudies.Thisisadevicethathasbeenindevelopmentforalmost2decades,undergone
bankruptcyduetorepeatedlackofefficacyinclinicaltrials,andnowresurrectedinaHailMaryattempt
foraPhase3inaverydifficulttotreatpatientpopulation.TheirSECfilingsspecificallywarnthatthe
FDAspecificallynotedthattherewasnoevidenceofefficacyinPhase2towarrantbeingtakeninto
Phase3.Withthestocktradingat$20andunder$4/shareincashthereis5075%downsidetothe
stockwhenthePhase3trialfailsinthe3Q15.

Messages
Messages
Subject ELAD
Entry 07/01/2015 08:04 PM
Member ef901
Thank you for your post. I'm a pre-IPO investor in VTL, have visited the facilities / met with mgmt before, and
continue to own shares. However, your points are well taken and you clearly know the company better than me. A
couple of questions / thoughts:
1) VTL moved to Phase III partially because they had three randomized, controlled Phase II studies conducted in the
US, Europe, and China demonstrated survival trends for ELAD. You didn't mention the Europe / China studies - why?
2) Phase II biomarker data: You noted the reduction in bilirubin. In addition, serum creatinine was reduced in the
first six days and sodium increased (which you did not mention) - I thought both were positive indicators for ELAD
effectiveness, no?
3) If Phase III is effective, contrary to your expectations, where do you think the price will go (upside scenario)?
What probabilities do you assign to Phase III failure vs. effectiveness?
Thanks!
Subject Re: ELAD

Entry 07/04/2015 05:49 AM
Member sabordesoledad
First of all, congratulations on getting in pre-IPO. Investing is always about price paid vs. value, and you
invested in a very different value proposition than where the stock is currently.

1. We thought about focusing on that a bit more, but ultimately decided it wasn't that relevant. Both
because they were conducted in largely different populations and in different settings. VTI-201 we
were not able to find any publications on the data. At any rate it was a small Phase 2a study mostly
for safety. The FHF trials are in a different indication than the current Phase 3 studies. And the
positive results there were mostly when pooling the data into the meta-analysis and focusing on a
subset of those prospectively indicated for transplant. The Chinese study, was not sufficient for
sFDA approval - in our opinion this is because clinical research standards in China are still evolving
and certainly were fairly nascent at the time this study was done.

So ultimately, limited read through given the way the studies we conducted (mostly small Phase 1 and
Phase 2), where they were conducted (China), and the fact they were in different indications. We believe
all these factors make it difficult to determine what if any evidence this will provide for the success or
failure of the current Phase 3.

2. We agree. Those are positive biomarkers for effectiveness, however we could not find mention of
how the non-AAH cohort did. For bilirubin, we see the drop in both the AAH and the non-AAH
cohort, but the benefit only translates to one group. Thus we are confused if this biomarker actually
correlates with survival. A similar understanding of this for the creatinine and sodium would be
helpful. Fundamentally though, we would expect improvements in these lab results (after having
looked at the MARS system and other bio-artificial livers ). Once again the question is if this ties in
with the primary endpoint (OS) and if the benefit is strong enough to make a difference.

3. The upside looks to be about $40 from the way the options are trading. The actual upside of the
stock will depend on how strong the data is ultimately. The company has stated pricing in the low
six figures, though dependent on data and long term outcomes (not just 90 day survival). We would
expect less than 10% chance of Phase 3 being successful.
Subject Re: Re: ELAD
Entry 07/04/2015 09:18 PM
Member ef901
Thank you for the thorough and well reasoned reply. You've made a compelling argument and led me to change my
position. We'll know a lot more within 90 days, should be v interesting!
Subject 2Q Earnings
Entry 08/01/2015 12:52 AM
On Thursday after the close Vital Therapies reported their 2Q earnings. Very little was new in the report other than
the fact that they disclosed that they expected to report results in the 3Q (they declined to give more exact
guidance.)
This timing is a bit odd, as the 91 day primary endpoint of the trial was reached in the end of May. In our
experience, data cleanup should have been finished by now (it typically takes 4-8 weeks to report results), and yet it
appears they are still collecting and cleaning the data.
They ended the quarter with $72M in cash and re-iterated that they have cash into the 3Q 2016. At 24M shares
outstanding they had $3 cash per share.
No change to the thesis from the company update.
What was perhaps most amusing/weird from the call was the need to address a Seeking Alpha article on the stock.

Subject Negative Trial Results Announced Friday After the Close

Entry 08/22/2015 04:21 PM
On Friday afternoon, after market close, VTL announced the trial results. The press release can be found here:
http://ir.vitaltherapies.com/releasedetail.cfm?ReleaseID=928472 (http://ir.vitaltherapies.com/releasedetail.cfm?
ReleaseID=928472)
As we predicted, ELAD showed no benefit vs. the control arm. The HR was 1.027 (meaning the control arm did
slightly better) with a p-value of 0.90.
On the conference call management went into some "pre-specified" analysis into subgroups where ELAD showed a
benefit over the control arm. Since this study was itself a trial based on subgroup analysis, it should highlight the
danger in looking for subgroups - especially when the overall trial shows no evidence of benefit.
Management is stopping the ongoing VTI-210 and VTI-212 trials in order to conserve cash and will attempt to meet
with the FDA to find a path forward in some of the subgroups that showed the most benefit in the recently released
VTI-208 data.
They stated that they currently have $62M in cash and they believe this will be enough to run a Phase III trial once
they restructure the company. This seems unlikely to us, but obviously the company has an incentive to not
telegraph they will be raising money.
We expect the company to trade to below cash over the next few days. Any meeting with the FDA will take time to
schedule, and given the agency's prior thoughts on this system, there is no guarantee that they will actually let them
conduct another Phase III.
Subject Re: congrats

Entry 08/22/2015 04:21 PM
Thanks!

Vic VTL Short

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12/20/2015 Value Investors Club / VITAL THERAPIES INC (VTL)

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VITAL THERAPIES INC VTL S

Subject Re: ELAD

No change to the thesis from the company update.

Subject Negative Trial Results Announced Friday After the Close

Subject Re: congrats

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