Spectral MD Holdings LON:SMD the Texas-based medical technology company recently published its audited results for the year ended 31st December 2022.
Speaking to The Armchair Trader, Nils Windler, chief financial officer, explained that Spectral emerged as a spinoff from a research project to develop an application to predict the progress of bedsores and pressure wounds at the University of Texas. The company was founded in 2009 and is based in Dallas.
In 2012, the research team at Spectral was approached by US Federal Agency, Biomedical Advanced Research and Development Authority (BARDA) following the events of September 11th 2001. BARDA were looking for an application that would speed up the triage of burns and blast injuries in a mass-casualty event.
Mass-casualty triage
The Artificial Intelligence research that Spectral was conducting could be developed to triage burns victims in a mass-casualty event.
The AIM-listed company reported R&D revenue up 67% from USD15.2m in 2021 to USD25.4m, which was used for funding burn indication development as well as the development of a handheld prototype of DeepView SnapShot for potential military battlefield and first-responder usage. The company also reported cash on hand of USD14.2m down from USD16.1m in 2021. Operating losses were USD2.9m.
Spectral MD Holdings opened trading at 30.5p today (6th March). The company has offered a year-to-date return of -2.9% and a one-year return of -4.7%, with its shares ranging between 27p and 37.2p over a 52-week period, giving the company a market capitalisation of GBP41.5m.
Spectral’s main product is the DeepView Wound Imaging System, which is a non-invasive imaging platform that uses AI and machine learning algorithms to assess the depth, size, and temperature of wounds. This system has the potential to improve wound assessment and management, particularly in patients with chronic wounds, burns, and diabetic foot ulcers.
Advanced algorithms
The DeepView system works by capturing multispectral images of the wound area, which are then processed using advanced algorithms to create a detailed 3D map of the wound’s characteristics. This information can be used by healthcare providers to optimize treatment plans, monitor healing progress, and predict potential complications.
Windler explained: “The technology captures images of the [burn] wound and [through the system’s proprietary AI and optical imaging technology] assesses whether the wound will heal – in that case the patient is transferred to recovery, the wound bandaged and treated – or whether the wound will require surgery – in which case the patient is referred to a burns surgeon.”
Currently, said Windler, the surgeon has to wait 21-days for diagnosis. This is partially-due to the stipulations of medical insurance companies, and partially-due to the fact a surgeon has to assess the wound by naked eye which has only a 50% to 70% diagnostic accuracy. Spectral’s DeepView technology can offer 92% diagnostic accuracy on Day One and the company says it can reduce average length a patient needs to stay in hospital by 4.9 days with a cost savings of around USD14,500 a stay.
The firm’s technology is also being developed to assess the progress of Diabetic Foot Injury.
In addition to wound imaging, Spectral is also developing other imaging technologies for various medical applications, including a system for assessing burn depth and a device for detecting skin cancer.
Grant funding
Spectral has received several grants and awards for its innovative technology, including a Small Business Innovation Research (SBIR) grant from the National Institutes of Health (NIH) and recognition as a finalist in the 2020 Medical Design Excellence Awards.
Cornerstone to Spectral’s progress has been the BARDA programme. Under the terms of the USD24.9m BARDA contract, Spectral is reimbursed for qualifying spending as it enrols subjects and progresses its clinical objectives. The invoicing occurs monthly and includes a mark-up to cover indirect administrative expenses associated with the contract.
The research on the BARDA contract has progressed and Windler said that the company is entering the next stage of the BARDA evaluation, which includes clinical validation and data validation in the hope of moving onto the next funding event, which will fund the rest of the clinical studies. Following the successful completion of this stage is a USD400m contract, half of which is for delivering the devices and the other half for the AI algorithms and training and support.
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“The AI data set is key here – the barrier to entry is the AI, not the imaging technology,” said Windler.
Max Herrmann, an analyst for Stifel said: “Spectral MD’s 2022 results again showed the company is making good progress towards achieving its key objectives whilst maintaining strong financial discipline helped by significant funding from the US government’s BARDA.”
Stifel rates Spectral as a ‘Buy’ with a target price of 155p.
Federal tender
“Spectral plans next to meet with the FDA ahead of initiating its Burn AI Validation study later this year. Successful completion of the study is also expected to trigger further funding from BARDA via its exercise of Option 2 of its BURNS II contract worth USD21.9m. Perhaps more importantly, the US government has issued a ‘Sources Sought Notice’ for burn wound imaging technologies to which Spectral has responded.”
Bridgewise, which itself uses AI to rate stocks has Spectral as a ‘Hold’. It said: “Looking at Spectral MD’s financials of 4Q22 reflected decent results. This typically translates into the stock performing on par with market performance for the upcoming quarter. Therefore, Spectral MD received an overall score of 76.”
The company is progressing well, paediatric enrolment in Burn AI training study was completed in February 2023 and a US federal contract opportunity initiated for Health and Human Services Burn Wound Imaging technology. Spectral responded with proposal and will be evaluated for contract fulfilment.
Improved accuracy
The DFU study produced successful interim results reporting AI diagnostic accuracy improvement from 81% to 86%. The company also said its US clinical study is on track with additional sites being incorporated in 1Q23, providing data to support FDA and UKCA regulatory submissions and has initiated an EU clinical study with the Royal College of Surgeons in Ireland conducted at Connolly Hospital in Dublin, Ireland.
Rob Rees, of broker SPAngel said: “We believe Spectral MD is making significant progress towards a potential US federal procurement contract. BARDA recently issued a Sources Sought Notice (SSN) for burn wound imaging technologies. We believe the technology requirements of the SSN strongly aligns with that of DeepView. [Spectral] is responding to the SSN and BARDA is evaluating respondents in terms of how they could fulfil the agencies requirements.”
He continued: “Whilst not a commercial contract, the issuance of an SSN for technologies similar to DeepView bodes well for further discussions in terms of a federal contract award, such as Project BioShield. We expect Spectral MD to strike a federal contract in FY24E with procurement beginning in FY25E.”
SPAngel rates Spectral as a ‘Buy’ with a target price 174p.
Quadruple valuation
W.H. Ireland, the broker recently reiterated its risked sum-of-the-parts fair valuation of SMD at 157p per share, giving the company a market cap of GBP214m compared the current market capitalisation of GBP41.5m.
Windler explained that as part of its commercialization process, Spectral is considering charging customers a recurring annual licence fee for its equipment. “We’ll send the equipment to the emergency room, or end-user at close-to-production-cost-price, but then agree an annual licence fee and per-use charge.”
Spectral MD is a really interesting company – operating in a space where AI, imaging technology and medical diagnosis collides. If successful with the clinical and data trials with BARDA, the door could really open up for significant further funding for its burns diagnosis equipment. Add to that the work that Spectral is doing with the US Department of Defence in miniaturizing its burns diagnosis technology from emergency room to handheld, battlefield-deployable technology for the US military and possible applications with first-responders, and its progress on Diabetic Foot Ulcer diagnosis, the company could be on the cusp of something really exciting.
In all, given the way that its technology can expediate diagnosis and treatment, Windler said: “[We] will drive the cost of healthcare down,” as well as help patient get the treatment they need to make a speedy recovery.
Spectral is definitely ‘one to watch’ as it is making significant strides in the field of medical imaging and has the potential to improve patient outcomes and healthcare delivery as well as aiming for the moon in terms of valuation.
