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VTL Vital Therapies, Inc. - Initiation Note

Vital Therapies, Inc.

BUY (VTL, $4.05)

Phase 3 VTL-308 Trial Appears Well-Suited To Show A Benefit From ELAD; Financing Overhang Removed: Initiating BUY/$12 TP

March 30, 2017

Jonathan Aschoff, Ph.D.

212.417.8277

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We are initiating coverage of Vital Therapies, Inc. with a Buy rating and a 12-month target price of $12. Vital’s lead product candidate, an extracorporeal liver assist device (ELAD), is an external human cell-based liver support system designed to allow a patient’s diseased liver to potentially regenerate to a healthy state. Our valuation is based entirely upon projected future ELAD sales in the US and EU, with product launches projected in 2H19 and 2H20, respectively, provided that ELAD succeeds in Phase 3. Vital would realistically be able to cover the roughly 200 key treatment centers by itself, and our financial model and valuation reflect that path.

The most important investment catalyst for Vital is the mid-2018 release of Phase 3 ELAD results in severe acute alcoholic hepatitis (AAH), a fatal condition caused by a patient’s relatively recent binge drinking. Clinical success in this subset of AAH would allow Vital to target 20,000 US and 30,000 EU patients that have a high likelihood of near-term death. ELAD would have no competition other than standard of care, which is background therapy in the Phase 3 VTL-308 trial, and thus would be expected to be given along with ELAD.

To be fair, ELAD has had a checkered clinical past, but the population targeted by VTL-308 is highly likely to respond to ELAD therapy. VTL-308 entry criteria are based upon the 60 of 203 patients from the last Phase 3 trial (VTL-208) that had liver dysfunction above a certain threshold, but kidney dysfunction, clotting dysfunction and age below certain thresholds, thereby allowing for a truly sick population that most importantly has a substantial amount of liver dysfunction relative to other dysfunctions. This subgroup from VTL-208 yielded impressive and statistically significant overall survival results, and the robust enrollment into VTL-308 (53 of 150) thus far speaks to the useful size of the market opportunity despite the restrictive enrollment criteria.

ELAD addresses a large and completely unmet market opportunity. For ELAD therapy, we believe that Vital should be able to charge at least $150,000 in the US and over $100,000 in the EU, representing a combined peak market opportunity of $6 billion. We note that Vital's current market value is equal to only 5% of the US opportunity and thus view the company to be substantially undervalued.

Current cash should last into mid-2018. Vital had about $60 million in cash as of YE16 and in 1Q17 raised an additional $32.5 million, which should be sufficient to support its activities into mid-2018, by our projections.

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