So, yes, my blog has been unused for a while. I don’t tend to have much to post here anymore, so it’s become more tumbleweeds than relevant content. I find myself writing a lot on slack and reddit, which sucked the wind out of my blog. Ah well.
So, if you’re not interested in investing, you’re just going to want to skip this post entirely.
In the name of finding a purpose for the blog, it’s going to be a bit more of a dumping ground for a while. For today, it’s a dump for some due diligence I did on a company called Endra Lifesciences, which was rejected by the publisher because the company is too small (Yes, really, it’s a public company, but it is too small for most people to care about it, apparently.) and because I didn’t adequately discuss the downside of the company. For a company this size, the worst case downside is 100%, obviously. The company is worth about $10M, and if they fail, I would assume the worst. What’s there to discuss about the downside?
Anyhow: Below is the follow up post to one I wrote elsewhere.
A quick summary of where we are:
I’ve already discussed Endra, a company focussed on a Thermal Accoustic add-on for Ultrasound (TAEUS), bringing a host of new capabilities to the cheap and efficient ultrasound platform which currently is ubiquitously used in the clinic. Endra’s first order of business has been to use it for detecting fat around the liver, a major component of Non-Alcoholic Fatty Liver Disease (NAFLD). This is currently a major market, with several companies working on treatments. However, the diagnostic space around it is dominated by Magnetic Resonance Imaging (MRI) and Biopsies.
Compared to MRI and Biopsies, TAEUS and ultrasound are cheaper and non-invasive, making it a very preferable alternative to either one. MRIs are an order of magnitude more expensive, and biopsies involve someone taking a piece of your liver. TAEUS simply scans your liver, much the same way you’d have an ultrasound for any other disease – or during pregnancy to check on the health of the fetus.
I’m going to leave out the explanation of how TAEUS works, and some of the market background – those are all in my previous article on Endra (and on the company’s website). Instead, I want to focus on the last press release. ENDRA Life Sciences Reports Completion and Top Level Findings of Second Phase of Robarts Research Institute Liver Fat Feasibility Study
What metric to use?
Endra, in previous press releases, has used a metric, known as R^2 (R-squared), to compare the values they get with those of other technologies. It’s a basic statistical tool that tells you how much alike two groups are. It’s one of the things you learn in Stats 101, in the first few weeks. It makes perfect sense, if you have a value that’s the “ground truth” to compare with. (eg, if one of your measures have very little error, and you want to compare with that.)
However, Statisticians generally don’t use this metric for complex analyses. It’s best left for use by undergraduates studying artificial populations. Instead, most analyses tend to use Receiver operating characteristics as a better way of comparing two different methods. It yields two important bits of information: Sensitivity and Specificity. If you read any papers on comparing algorithms, software or hardware, you’re going to get an analysis that shows these values – and for good reason: they actually tell you what’s going on, where R^2 does not.
In this case, the R^2 value for the correlation between MRI and TAUES released (R^2=0.54) effectively says “These results don’t look the same”, but the explanation for why is just a few lines below. Let me explain:
Sensitivity is the measure of how often you find the true positives, which is the people who are correctly identified as having the diseases. If you have a test with a sensitivity of 50%, your test will diagnose you correctly half of the time. Obviously a high sensitivity is desirable, because you don’t want to send sick people home without treatment.
From the recent press release, they claim TAEUS has a sensitivity of 90%, which is pretty good for a non-invasive test. Even better, they provide estimates that MRI (the next best competition, at more than 10x the price) has a sensitivity between 68% and 87%. We should interpret that as indicating that the TAEUS device is between 1- and 1.3-times better than MRI at identifying patients with NAFLD.
That’s already the first indication of why the R^2 value is so poor – MRI tends to miss patients with NAFLD. That skews the “similarity” between the MRI and TAEUS datasets. I had bought in to the “R^2 is a good measure” with the last article, assuming MRI had both good specificity and sensitivity, but the current trials have shown that’s not the case. Thus, R^2 is bundling up a the error from both techniques, making it look pretty bad.
Specificity is the other key, describing the true negatives. In diagnostics, this is the group of people who you correctly diagnose with not having the disease. Here’s where MRI shines: According to Endra’s PR, MRI comes with a specificity of 83-98%, meaning you rarely accidentally diagnose someone with NAFLD when they don’t have it. TAEUS comes in at 75%, meaning that some people will be diagnosed with the disease when they don’t have it.
Is that bad? well, no! Actually it isn’t.
Having two tools with complimentary sensitivity and specificity is actually the desired outcome! Think about this: I have 100 patients that need to be screened, of which 10 of them have NAFLD. (Yes, I’m making up these numbers, since we don’t actually know the number of people who have NAFLD, because it’s too expensive to screen everyone right now…). I have a cheap tool that can identify the patients with the disease, but might include a few extras who don’t, and I have an expensive tool that can rule out people who don’t have the disease? How do you work this?
Easy! You screen everyone with the cheap tool, leaving you with a group of about 13-14 people, who can then be screened on the expensive tool to rule out the 3-4 people who were accidentally included. The overall costs decrease, because you’ve prevented 85% of the people from needing the expensive tool.
Even better, you no longer need to do biopsies, because you have two tools that will give you the right answer when combined – at a fraction of the cost of the biopsy + MRI tool kit that exists right now.
Much of Endra’s current share price is discounting the TAEUS platform because of the poor R squared value, but completely ignoring the golden nugget they left in the PR right next to it. If you’re not a statistician, you probably missed that entirely.
Thus, Endra is currently sitting at a bargain price after de-risking the platform.
GE, one of the biggest ultrasound manufacturers, remains a significant partner for commercialization, and many of the management talent acquisitions have come from GE in recent months. (eg. Amy Sitzler, Vice President of Engineering and Programs). What’s left, however are publications and certifications, which we know are now on deck. The publication for the full data set, from which this latest PR was an extract, should come out in about a month, and will hopefully explain the full data set better than the PR.
Certifications should also be on their way, given that two of Endra’s goals for the remaining part of 2019 include filing for both a CE mark (European mark for safety) and US 510(K) designation (U.S. certification for safety and efficacy) (see slide 12).
Current Financial Status:
On top of the $2.2M cash on hand at the end of June, Endra raised a further $2.8M, as predicted, in July, however, they chose to do it via a private placement. From recent shareholder updates, we also know that their R&D costs ($1.3M for 3 months, p.4) are supposedly dropping rapidly, now that the bulk of the R&D is behind them. That, however, leaves a pretty big question mark on how long the $5M will last. If R&D costs have completely dissipated, we can expect to see it last well into the new year. Additionally, if outstanding warrants are exercised (the latest batch have an exercise price of $1.49), Endra could pull in close to another $3M, at anytime. Most likely, they should have received their CE mark, and possibly their 510(K) before they need to raise again – and by then, we can expect to see the first units rolling out into Europe, making them revenue generating.
Endra, as before, remains a risky investment, given its small size, but the amount of risk just decreased dramatically, despite the drop in share price. They are well positioned for success, and should have no problem raising money, if they need to, and should be transitioning into commercial distribution in the next 4-6 months in Europe, and in under a year in the U.S.