Back to the serious stuff

For some time there didnt seem to be too much happening with the CDC Task Order 18, a bit of smoke now and then but not much in the way of fire. However, in the wrap up of the 2011 ATS conference we now have access to some data and it gets interesting when you put it into a chart;

The following might help to explain the discrepancy with the TST positive rate

"The number of patients was 2,500 at baseline, but by the time we got to 18 months, only 1,709 had skin tests," said Dr. Daley, adding that was due to dropouts and refusals of additional skin testing.

Which validates the CDC stated preference for QFT when TST return rates are poor.

Update: on reflection it would seem that return rates were not an issue as QFT and Spot were also retested. Poor return rates would have added to the discrepancy.

ComputerShare update

Further to the last episode ComputerShare rang me back (all these phone calls - why am I so popular all of a sudden?)

Yes, they can confirm that all votes are regularly counted and that information is passed onto the company, in this case Cellestis.

"It is a completely open process," he said

"oh good, does that mean shareholders can also have a peek?" I asked.

It was worth a try.

Mixed messages

The Scheme Booklet employs some confusing symbols eg

Is that a tick of approval?

Now if I was a psychologist trained at interpreting subliminal messages...

How many times do I have to tell you?

I did a quick search on the Deloitte valuation to see how many times the term "generic" was used....using my fingers to count I ran out of digits so started on my toes...if you didnt get it the first time they certainly made sure you eventually got the message.

However there was one counterargument put forward, tucked away under the heading 4.8.2 Specific risks relating to Cellestis

This risk is mitigated in part by the current requirement that any third party seeking to develop and market a unique or generic product that competed with QFT would need to satisfy applicable regulatory requirements associated with the release of the product. These regulatory requirements are currently relatively strict in numerous countries into which Cellestis presently distributes QFT, most notably in the United States, Australia and Japan.

Well of course we all know that the US is CST biggest market - because CST told us so.

Some Quick Facts about the U.S. TB Market…

Largest single market for QFT....US remains main driver of sales and growth

One gripe I have with the IEV is that they appear to spend a lot of time accentuating the negatives whilst virtually eliminating the positives. I guess that is the nature of their business, always looking at the downside.

Vote early and vote often.

I rang Computershare and asked the young thing when did they open and record votes and do companies have access to the voting numbers? She didn't understand the question, told me that she would ask around and promised to ring me back.

She didn't so I rang again. This time the young man was more certain telling me that they opened the votes after close of voting.

As it turns out they were either lying, stupid or a mixture of both.


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Doctors prescribe the future.

A survey by Medical Observer of GPs vision of future trends revealed a wishlist of biochips and genomics utilised in a point of care computer game;

...With innovations in medical technology continuing at pace, professor of general practice at the University of Sydney Tim Usherwood said regardless of whether GPs were early adopters or not, a greater shift of technology into the GP surgery was inevitable.

“Genomics and proteomics are about to hit medicine in a big way. We will reach the stage where it becomes much easier to predict the future onset of disease long before it happens and take pre-emptive action,” he said.
 

...Chair of the AMA Council of General Practice Dr Brian Morton said he was confident GPs could adopt current innovations such as tablet and cloud computing to become more mobile.

“General practice is pretty good at taking up new technologies, and with the younger generation coming on board, there’s going to be more of it,” he said.

Risky business

Latest Australian Medicare data is supportive of Cellestis 2007 forecast;

Not your average Joe.

At +200 pages the Scheme Booklet is quite a document with a lot to comprehend. Those who are busy, who have commitments, who are time poor (ie everybody) could be forgiven for skipping the detail and reading the conclusion;

The Independent Expert has concluded that the Scheme is fair and reasonable and in the best interests of Cellestis Shareholders

Shareholders might wonder as to how the IE knew of their particular circumstances. Some shareholders might be retired and could do with the cash whilst others are still acquiring and not in need of dealing with a Capital Gains Event. Some shareholders might be institutional and need some profits to bolster a sagging portfolio whilst others, who have only recently bought in as an investment, will possibly incur a loss. So how can the IE determine what is in your best interests?

It is because they have left out that important phrase, "as a whole." It isn't your best interests that have to be considered, it is the best interests of shareholders as a whole. Like the abstraction "a reasonable man" the phrase is merely a concept used by the legal fraternity to discuss various aspects of law.

Individuals are then left to ponder how they lost their rights, as an individual, to make their own decisions.

Dr Who?

Our expert considers, after consultation with Cellestis, that the use of DCF to be inappropriate and has selected the capitalisation of maintainable earnings method due to a number of factors including this;

Cellestis as a business does not have a finite lifespan

Given that few if any businesses are infinite what does this mean?

Nothing really, as there are no limits on time given there is nothing to consider. I think that a reasonable person would not expect that Cellestis would be any different to any other business - like life, all business is finite.

Generally the subject of infinity would be better addressed by a philosopher or theologian or your local guru. It is hardly a reasonable risk factor.

Uncontrolled value.

Our expert has taken the view that

we consider a control premium at the lower end of the range to be appropriate for Cellestis

The control premium selected is.......I can't find it......it isnt in Annexure 3....I guess it is what you want it to be.

So basically the IE tells us that the $3.55 less the control premium (let's assume 55 cents, or ~18% - is that reasonable?) gives us a value of $3 per share, which is what it was before the announcement.

So we have an Independent Expert paid $154,000 to tell us that the share price was "fair and reasonable?"

Running with the hare and hunting with the hounds

Our expert has declared that

The share market valuation of listed companies provides evidence of an appropriate earnings multiple for Cellestis

In a submission to ASIC (Deloitte response to ASIC Consultation Paper 143) Deloittes made it clear that with regards to DCF

alternative valuation methodologies that may be used to value an Asset are likely to be less reliable that a DCF approach. In our view, other alternative approaches such as a market based method (resources multiples observed from comparable transactions) are approximations of a DCF approach and require or imply significant assumptions to be made which are often difficult to apply with a reasonable basis

Comparable transactions? Market based method? Where have we heard those before?

The CSAG Model is prepared using a variation of the discounted cash flow methodology. We consider the capitalisation of earnings multiple approach to be more appropriate in determining the value of a Cellestis share for the reasons set out in the Independent Expert’s Report.

However, Deloittes rejection of DCF was influenced by CST management

As independent expert we had access to management of Cellestis who were able to provide to us with their view on the key drivers of Cellestis’ business. Having taken this into account, we did not feel comfortable with adopting the discounted cash flow approach as the primary valuation approach.

In this regard the expert was not independent.

But is it art?

In an effort to justify the Qiagen offer this graphic was created

Our expert considers it appropriate to value a share in Cellestis using comparable transactions because

there is an adequate number of publicly listed companies with operations sufficiently similar to those of Cellestis to permit meaningful analysis of the comparable companies’ operating margins and earnings multiples observed from share trading and comparable transactions.

Our expert chose a number of companies that;

..are considerably larger than Cellestis
..have a significantly broader range of products and operations.
..face a number of different risks and opportunities compared to Cellestis
..are domiciled in the USA.
..with operations.. differ significantly from those of Cellestis.
..has a significantly more diversified product range than Cellestis
..have a more mature product portfolio than Cellestis

Just about different in every way. Our expert readily concedes

there are no listed companies that are highly comparable to Cellestis

however this was not seen as being a barrier to their creation of comparisons.

Playing silly buggers

Our well paid expert runs us through scenarios where revenue, expressed as a percentage changes to market share, expressed as a percentage...then calls it "value per share."

And then they have the nerve to say that CSAG assumptions are "unreasonable."

Doctor, I have this problem

Our expert reasonably tells us

the fragmented market for latent tuberculosis testing, particularly in the USA and Europe, poses a significant challenge to Cellestis in continuing growth in QuantiFERON-TB Gold In-Tube sales.

OK, that makes sense. But then our expert also reasonably tells us

Cellestis has achieved strong revenue and earnings growth in the past few years and is expected to continue to do so in the near term as QuantiFERON-TB Gold In-Tube continues to develop its market share

If sales continue as expected you would think that the "fragmentation" would diminish accordingly, que?

Framing the debate

Of course everything our expert says is reasonable

Cellestis has achieved strong revenue and earnings growth in the past few years and is expected to continue to do so in the near term

and everything shareholders say is unreasonable

in our opinion, the revenue growth assumptions adopted in the CSAG Model are optimistic.

When it comes down to comparable revenue growth they do admit that

There are no other listed companies whose only product is a diagnostic test for latent tuberculosis

so they compared Cellestis revenue growth with large global healthcare companies, which is somehow reasonable.

Is there a doctor in the house?

Our expert tells us that

Overall, we do not consider the CSAG’s Valuation of a Cellestis share to be reasonable...

(in part) because

due to the a wide range of reasonable scenarios for the key assumptions underpinning the discounted cash flow valuation, which can lead to a wide range of possible valuation outcomes.

However,  our experts own valuation is reasonable and fair because

Our discounted cash flow analysis considered the following three growth scenarios for Cellestis

These 3 scenarios are based on

revenue growth of 30% p.a. during the initial years

with subsequent revenue growth shrinking to 8%, 5% and 3% respectively.

According to our expert this change from 30% to 8,5 or 3% is reasonable whereas

in our opinion, the revenue growth assumptions adopted in the CSAG Model are optimistic. The revenue growth assumptions imply that Cellestis will achieve a market share of 36% by 2020. In our opinion, this is not a reasonable assumption

CSAG have used the growth projections provided by Cellestis, which one would think a reasonable assumption and ones which our expert also chose to use

Cellestis has achieved relatively stable EBIT margins over the past two years, despite significant foreign currency fluctuations... at the Company’s Annual General Meeting in November 2010, management advised that it expects underlying growth for the business to be in the range of 30% to 40% during FY 2011...Based on the above considerations, we have estimated future maintainable EBIT to be in the range of AUD 15.0 million to AUD 16.0 million,

In this regard it would appear that our expert considers shareholders assumptions to be unreasonable, even when based on company forecasts.

ASIC are dismissive of experts using hypothetical assumptions

We consider that prospective financial information based on hypothetical assumptions (rather than reasonable grounds) is likely to be misleading and provide little information value to investors.

advice which our expert appears to have ignored.

Apples with oranges

In an attempt to discredit the CSAG position Deloittes remarked

CSAG did not provide any cross checks of its valuation of a Cellestis share. Common cross check methods adopted by market practitioners include reference to the recent share trading of the company concerned and a comparison to earnings multiples observed from trading in the securities of comparable companies and comparable transactions which have occurred within the industry.

It is a requirement of ASIC that experts should

 - if possible use more than one valuation methodology and compare the values derived from using different methodologies to minimise the risk that the opinion is unreliable; and

 - justify its choice of methodologies and describe the methods used

At this point it is worth clarifying that the function of ASIC is to protect shareholders and investors. Therefore the argument that shareholders should somehow comply with ASIC requirements re "market practioners" is ludicrous.

Assumptions gone wrong

Deloittes claim that the reason for their analysis of CSAG position is that

The Cellestis Board had concerns about the reasonableness of these materials and requested the Independent Expert to consider the CSAG letter, the documents referred to in the letter and any other material that it regarded as appropriate, and to prepare the Independent Expert’s Supplementary Report opining on the CSAG materials.

Their primary objection to the CSAG valuation appears to be that

the assumption underpinning revenue growth in the CSAG Model is that as QuantiFERON-TB Gold In-Tube is a superior product to its competitors, Cellestis will be able to increase market share significantly over the next ten years. In our view, that assessment has not been borne out by the performance of Cellestis to date, which has seen Cellestis achieve a market share of approximately 5% despite the QuantiFERON technology being available in the market for more than seven years.

Deloittes are inferring that QuantiFERON-TB Gold In-Tube has been marketed for seven years, an assumption which is flawed and misleading. By their own timeline QuantiFERON-TB Gold In-Tube was approved by the FDA in 2007. In an announcement to the ASX CEO Tony Radford said

With the In-Tube system the initial blood incubation needs virtually no labour and no set-up time. It makes a QFT test as simple as a routine antibody test, and extends the availability of QFT testing by streamlining the logistics, as its simple incubation process can be done almost anywhere. The FDA approval now allows our US customers to enjoy the cost-savings, and the quality result of In-Tube, as well as a better processing fit with hospitals and lab systems”.

Clearly QuantiFERON-TB Gold In-Tube is a different QFT product.

Despite gaining FDA approval QuantiFERON-TB Gold In-Tube could not be properly marketed without the CDC guideline, which was released in 2010. In an announcement to the ASX Dr Antonino Catanzaro noted that

these guidelines encapsulate the enormous body of clinical evidence.. 

The development of the QFT product has been a process culminating in the release of those CDC guidelines. This process, and the impact it has had on sales, was discussed by the Chairman Ron Pitcher at the 2010 Annual Report.

in the last decade we have seen multiple regulatory approvals, national guidelines and scientific papers endorsing the value of QuantiFERON® (QFT) emerge in every major nation of the world, with sales increasing accordingly.

Deloittes simply do not understand the business.

Ever heard of "puffin muffins" or "wrestling rhinos"?

The more I read the more faults I find

Cellestis commenced sales of the second generation of its QuantiFERON range seven years ago. As the second generation product and the current generation product, QuantiFERON-TB Gold In-Tube gained acceptance in the market

It would seem that Qiagen support this style of "analysis"

The views put forward by some retail shareholders are flawed and misleading. Shareholders now have a validated analysis to make fully informed decisions," said a Qiagen official.

But of course, they would say that. Howabout repudiating CST?

I need the advice of an Independent Expert

In the Scheme booklet Deloittes initially reject the use of DCF

we do not consider it appropriate to adopt the discounted cash flow methodology as our primary valuation approach.

then subsequently use DCF

To provide additional evidence of the fair market value of a share in the Cellestis, we have considered the value of a share using a high level discounted cash flow methodology

When CSAG use DCF it is "inappropriate" yet when Deloittes use DCF it becomes "additional evidence."

Unmet expectations

Now that the Scheme booklet is on the virtual bookstands it is worth perusing the first few lines.

The Independent Expert has concluded that the Scheme is fair and reasonable and is in the best interests of Cellestis Shareholders

As a shareholder I had expected the Independent Expert to understand the subtleties of the product

Take-up of novel diagnostic products – the relatively slow take-up rates of interferon gamma release assays. QuantiFERON-TB Gold In-Tube has a market share in the region of 5% despite the QuantiFERON technology being available in the market for more than seven years.

QuantiFERON-TB Gold In-Tube has not been approved for use for seven years and Deloittes know this but have made no distinction between QFT-TB, QuantiFERON-TB Gold and QuantiFERON-TB Gold In-Tube

Thankfully most shareholders are not as silly as others take them for.

.

Have Cellestis been well and truly led up the garden path?

Consider this,

Qiagen is paying €12.90 per share to acquire a 47 percent stake in the company and to purchase all remaining shares afterward. The price represents a 71 percent premium to Ipsogen's share price of €7.53 per share on June 13, the last trading day before the deal was announced.

and this

Year over year, Ipsogen SA has seen their bottom line shrink from a loss of €2.6M to an even larger loss of €3.4M despite an increase in revenues from €6.7M to €8.4M.

Qiagen are willing to pay a 71% premium for shares of a business that consistently loses money yet we have been advised that the deal to sell Cellestis

represents an attractive price for Cellestis and provides shareholders with an opportunity to realise considerable value from their investment in Cellestis

They must think we are all stupid.

NTCA - Implementation and Assessment of QuantiFERON®TB Gold (in-tube) for the Diagnosis of Latent TB Infection in New Jersey

Data indicates that QFT has significantly reduced the workload and improved the efficiency of testing and evaluation for LTBI over TST.

NTCA - Use of the QuantiFERON-TB Gold In-Tube test (QFT-GIT) for targeted tuberculosis (TB) screening at two cubicle-style hotels

This investigation demonstrates our ability to successfully operationalize field testing using QFT in a non-traditional setting.

NTCA - Cost effectiveness of using Quantiferon Gold (QFT-G) versus Tuberculin skin test (TST) at the St. Louis County Department of Health TB clinic among US and Foreign born populations

Screening individuals with QFT-G when the LTBI prevalence rate is low is not cost effective. It is cost effective and should be used on high risk populations such as foreign born individuals.

NTCA - The Importance of Annual Tuberculosis (TB) Screening in Health Care Facilities

Without annual TST and screening of health care workers, TB exposure would not have been suspected and the opportunity to treat recently acquired LTBI in this employee population would have been missed.

NTCA - A Tuberculosis Outbreak in Homeless Shelter -- Illinois 2007-2011

This prolonged outbreak demonstrates the potential value of identification and treatment of latent tuberculosis cases early in an outbreak. 

Tens of Thousands of Babies to Have TB Jab as NHS Bosses Admit Infection ‘Out of Control’ (United Kingdom)

Link

According to draft proposals created by London Health Programs, doctors and health trusts in London are planning to administer TB vaccine to all babies within six weeks of birth, out of concern for the high rates of TB, particularly in London. London Health Programs is a national health trust organization of frontline workers and managers that work with local health trusts to improve treatment and services. As part of the plans, general practitioners are encouraged to test all new patients for the disease, particularly those from TB endemic countries. In addition, family doctors, nurses and midwives, and home care workers would receive extra training to help them recognize symptoms of TB. According to Health Protection Agency statistics, TB rates are now at 9,040 cases in Britain in 2010.  This is the highest number recorded since 1979, when there were 9,266 cases.  London has the highest rates of TB, 40 percent of the country’s total number of cases.

Onn Min Kon, a consultant at St Mary's Hospital, London and clinical adviser for the London TB Plan, said: 'You go to Joe Public and he thinks that TB is a beaten disease and it's not a concern.

'The public needs to know it is not beaten. The risk is low but in London there are some bits where you could call it endemic.

'Rates in some boroughs are higher than parts of the Indian subcontinent.

'All of us will have plenty of examples of people who are theoretically at low risk, but have TB.'

It's a fine line between heaven and hell

According to lawyers McCullough Robertson

The recent flurry of takeover deals of Australian late-stage companies by foreign-owned global pharmaceutical companies has heralded the commercial resurgence of the industry. It signals a need for listed and unlisted companies to be aware of their potential as a takeover target and be deal ready to respond appropriately and maximise value for stakeholders. 

But its the details that must worry bidders;

• a success rate of around 55% for announced bids;
• ‘cash is king’ – over 60% of bids are for cash consideration, not scrip; 
• attractive premiums – examples ranging between 30-60% of recent trading prices

As others have already noted, the offer is clearly inadequate

this takeover undervalues the company. Unless Qiagen increases the bid price, I have recommended members of The Intelligent Investor vote against the scheme of arrangement at the meeting scheduled for late June

3rd Global Symposium on IGRAs 2012

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Sponsored by

Nice location;

Everybody will be there

Course Chairmen

Antonino Catanzaro, MD
Professor of Medicine
Department of Medicine
UC San Diego School of Medicine

Charles L. Daley, MD
Professor and Chief, Division of Mycobacterial and Respiratory Infections
National Jewish Health
Denver, Colorado

Faculty

Ibrahim Abubakar, MD, PhD
Health Protection Agency
London, England

Clifton E. Barry, III, PhD
National Institute of Allergy and Infectious Disease
Bethesda, Maryland

Matthew J. Binnicker, PhD
Division of Clinical Microbiology
Mayo Clinic Rochester, Minnesota

Rear Admiral Kenneth Castro, MD
Centers for HIV, STD and TB Prevention
Atlanta, Georgia

Jerold J. Ellner, MD
Professor of Medicine
Chief, Section of Infectious Diseases
Boston Medical Center/Boston University School of Medicine
Boston, Massachusetts

Stephan Gadola, MD, PhD
University of Southampton
Highfield Campus, Southampton, United Kingdom

Edward A. Graviss, PhD, MPH
Director, TMHRI Molecular Tuberculosis Laboratory
The Methodist Hospital Research Institute, Houston, Texas

Pranab Haldar, MD, MRCP
Institute for Lung Health
University Hospitals of Leicester, Leicester, United Kingdom

Beate Heym, MD, PhD
Hôpital Raymond Poincaré
Boulogne-Billancourt, France

Michael D. Iseman, MD
National Jewish Health
Denver, Colorado

Laith J. Abu-Raddad, PhD
Weill Cornell Medical College – Qatar
Doha, Qatar

David Lewinsohn, MD, PhD
Oregon Health & Science University
Portland, Oregon

Toru Mori, MD, PhD
Research Institute of Tuberculosis
Japan Anti-Tuberculosis Association
Tokyo, Japan

Richard O’Brien, MD
Foundation for Innovative New Diagnostics (FIND)
Geneva, Switzerland

Mario Raviglione, MD
World Health Organization
Geneva, Switzerland

Pernille Ravn, MD, PhD
Assistant Professor
University Hospital, Herlev
Herlev, Denmark

Lee B. Reichman, MD, MPH, FACP, FCCP
New Jersey Medical School Global Tuberculosis Institute
Newark, New Jersey

Luca Richeldi, MD, PhD
University of Modena and Reggio Emilia
Modena, Italy

Neil Schluger, MD
Columbia University
World Lung Foundation
New York, New York

Jeffrey R. Starke, MD
Professor of Pediatrics
Baylor College of Medicine
Texas Children’s Hospital Houston, Texas

M. Elsa Villarino, MD, MPH
Centers for Disease Control and Prevention
Atlanta, Georgia

Robert S. Wallis, MD, FIDSA
Senior Director, Pfizer
New London, Connecticut
Professor, University of Medicine and Dentistry of New Jersey
New Jersey Medical School Newark, New Jersey

CDC on irregular IGRA

Unusual Interferon Gamma Measurements with QuantiFERON-TB Gold and QuantiFERON-TB Gold In-Tube Tests

..unusual IFN-γ measurements such as HNC, LMR, VLMR, and VLAR were encountered in a small number of QFT-G and QFT-GIT, and in most cases, such measurements were not seen on simultaneously or subsequently performed tests. To avoid erroneous diagnosis of Mtb infection, QFT-G and QFT-GIT with unusual IFN-γ measurements should be repeated with another blood sample and interpreted with caution if they recur.

1) High Nil Concentration (HNC) when IFN-γ concentration in plasma from unstimulated blood exceeded 0.7 IU/mL;
2) Low Mitogen Response (LMR) when Mitogen Response was <0.5 IU/mL;
3) Very Low Mitogen Response (VLMR) when Mitogen Response was ≤−0.5 IU/mL; and
4) Very Low Antigen Response (VLAR) when the response to a Mtb antigen was ≤−0.35 IU/mL and ≤−0.5 times the IFN-γ concentration in plasma from unstimulated blood.

Using Discounted Cash Flow to look through economic cycles and ignore market exuberance.

ASIC are not too keen on assumptions

The material assumptions disclosed should be specific and definite

or forecasts and projections

An expert should not include prospective financial information (including forecasts and projections) in its report unless there is a reasonable basis for that information. Otherwise the opinion may be misleading.

and made their thoughts known via their RG 111 Content of Expert Reports. When it comes to estimates they think that two years is about it, according to their guide on Prospective Financial Information

Short-term estimates (not exceeding two years) relating to an existing business and based on events that management reasonably expects to take place or actions management reasonably expects to occur may establish reasonable grounds for disclosing prospective financial information in a disclosure document or PDS

The problem is that a DCF requires more than two years of estimates

However, we recognise that using discounted cash flow (DCF) methodology will involve the use of prospective financial assumptions over a longer period than the two year period..So long as the focus of the disclosure in the expert report is on the valuation rather than the prospective financial information that supports it, the expert does not need to commission an independent accountant report for the DCF methodology

On this ASIC are between a rock and a hard place, to use DCF you must project forward. And why is DCF used? because Deloittes think it is the best method

Our view is that the market approach (i.e. applying multiples etc), often favoured by market participants is no longer suitable as a primary valuation method as it, more than ever, may not provide a realistic indication of intrinsic value. The income method (i.e. Discounted Cash Flow) is preferred since this looks through economic cycles and ignores market exuberance.