TELESTA THERAPEUTICS INC T.TST

RE:RE:New coverage out

[1wascallywabbit]

TST.CN: Sleeper North of the Border with Priority Review; Initiating at Buy

We are initiating coverage of Telesta with a Buy rating and $1.50 price target. We believe Telesta has flown under the radar in Canada and the U.S. with a mixed company history. Fast forward to significantly streamlined operations, and importantly, Priority Review granted by the FDA for MCNA use in bladder cancer with a February 2016 PDUFA date. MCNA has the potential to address a significant unmet medical need and we look toward increased partnering potential for the product.

Telesta's sole focus currently is the potential success of MCNA for the treatment of BCG failure patients with bladder cancer. MCNA is a mycobacterium formulation of bacterial cell wall and nucleic acids which has a dual mechanism of action: 1) it is a direct inducer of apoptosis of tumor cells and 2) it activates the immune system against tumor cells.

Following significant discussions with the FDA, MCNA has been granted Priority Review with a February 27, 2016 PDUFA date and the company is now preparing for the recently announced, but expected, Advisory Committee (AdCom) to discuss MCNA, on November 18, 2015. The Priority Review is based on the unmet medical need of bladder cancer patients who have failed BCG therapy and the clinically relevant response and duration data following MCNA treatment. Additionally, MCNA can offer patients the option to avoid or delay the need for radical cystectomy. Valstar is currently the only other treatment option for this treatment group of BCG failure patients with inferior clinical data and increased side effects.

Telesta has partnered MCNA for smaller ex-U.S. territories (Canada, Mexico, South Africa, and South Korea) and the company remains in discussions for potential additional territories. Currently, the company is planning to commercialize the drug in the U.S. on its own. Based on the specialized target market we believe this is a feasible, but cash intensive option, for the company. We point to the attractiveness of a U.S. partnership or even acquisition of Telesta. The company has significantly de-risked the MCNA story, in our belief, based on: 1) positive pivotal data, 2) an accepted BLA and 3) a granted Priority Review. Therefore, having completed the lion’s share of the work ahead of the scheduled AdCom and PDUFA date, we believe the company could garner a significantly improved valuation on its accomplishments. Management has indicated that there has been a significant amount of partnering interest in the program; however, based on the recent financing, has the leverage to explore its options carefully.

Important Disclosures & Regulation AC Certification(s) are located on the last page of this report.

SUMMARY

 

VALUATION

We assign a Buy rating on shares of Telesta with a $1.50 price target. Our valuation of Telesta is based on our probability-weighted clinical net present value (NPV) valuation model. We believe this method is appropriate in capturing the value of the clinical stage pipeline. It allows for the flexing of assumptions based on key factors such as chance of success, peak sales estimates, and year of commercial launch. Factors which could impede shares of Telesta from reaching our price target include negative results from clinical trials, regulatory risk and financing risk.

RISKS

• Single product and binary risk. Following the significant consolidation the company underwent, Telesta’s risk profile rests entirely on MCNA. Should the product hit any hurdles, the shares could be negatively impacted significantly as the company would likely need to look toward shifting its funds to the development of another asset(s). The upcoming AdCom and FDA decision also represents a strong binary risk from an investment profile perspective and therefore, might not be suitable for all investment strategies.
• AdCom: Company faces some difficult questions: Phase III missed primary endpoint. However, the FDA did grant Priority Review. We expect the upcoming AdCom to be a lively event, in our belief, as Telesta will need to publicly answer key questions the panel is likely to focus on. At the forefront will be the Phase III missing the primary endpoint of 40% disease-free survival (DFS) at one-year in relation to the positive data obtained in the study. This is the proverbial “catch-22” because this topic was a key discussion point between Telesta and the FDA prior to acceptance of the BLA and the granting of Priority Review since there has not been a therapy approved for BCG failures since Valstar in 1998. Additionally, the FDA/AUA hosted a Bladder Cancer Workshop in May 2013, defining the unmet need and confirmed that a single-arm trial design was appropriate for potential approval since no suitable comparator is available. Overall, we believe there will be a positive vote by the panel, however, there is a chance that an additional trial may be required for full approval of the drug.
• Launch and commercial risk. Telesta has projected a significant increase in expenses for fiscal 2016 as it prepares for the potential commercialization of MCNA. The company has discussed putting in place a U.S. based infrastructure. While part of our investment case focuses on the potential of a larger partnership or acquisition, we also point out that there is increased risk surrounding a drug launch when conducted only by the smaller cash constrained company. However, the company currently believes that its current cash resources are sufficient to launch the product successfully and achieve profitability instead of needing to raise additional funds

COMPANY DESCRIPTION

Telesta Therapeutics Inc., a biopharmaceutical company, engages in the research, development, manufacture, and commercialization of human health products and technologies worldwide. Its lead product is mycobacterial cell wall-nucleic acid complex (MCNA), a complex biologic immunotherapy/immunomodulator designed for the treatment of non-muscle-invasive bladder cancer in humans. The company was formerly known as Bioniche Life Sciences Inc. and changed its name to Telesta Therapeutics Inc. in November 2014. Telesta Therapeutics Inc. was founded in 1979 and is headquartered in Pointe-Claire, Canada.

 

Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Disclosures:

Within the last twelve months, ROTH has received compensation for investment banking services from Telesta Therapeutics Inc. (OTC: BNHLF).

ROTH makes a market in shares of Telesta Therapeutics Inc. (OTC: BNHLF) and Endo Pharmaceuticals Holdings and as such, buys and sells from customers on a principal basis.

Shares of Telesta Therapeutics Inc. (OTC: BNHLF) may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.

Shares of Telesta Therapeutics Inc. (OTC: BNHLF) may not be eligible for sale in one or more states.
 

On September 28, 2010, ROTH changed its rating system in order to replace the Hold rating with Neutral.

On May 26, 2011, ROTH changed its rating system in order to incorporate coverage that is Under Review.

Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month.

Distribution of IB Services Firmwide
			IB Serv./Past 12 Mos. as of 10/08/15
Rating	Count	Percent	Count	Percent
Buy	236	81.10	137	58.05
Neutral [N]	34	11.68	15	44.12
Sell	1	0.34	0	0
Under Review [UR]	19	6.53	14	73.68