Brain disease diagnosis with medical doctor seeing Magnetic Resonance Imaging (MRI) film diagnosing elderly ageing patient neurodegenerative illness problem for neurological medical treatment

Clinical pipeline is tip of the iceberg

IRLAB Therapeutics 23 June 2022 Update

IRLAB Therapeutics

Clinical pipeline is tip of the iceberg

Company update

Pharma and biotech

23 June 2022

Price

SEK35.8

Market cap

SEK1,850m

US$/SEK10.10

Net cash (SEKm) at 31 March 2022

368.0

Shares in issue

51.7m

Free float

58%

Code

IRLABA

Primary exchange

Nasdaq Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.5)

(9.6)

(4.5)

Rel (local)

4.2

9.9

17.8

52-week high/low

SEK70.0

SEK29.4

Business description

Based in Sweden, IRLAB Therapeutics is focused on developing novel drugs for the treatment of neurodegenerative diseases utilising its ISP technology platform. Its two lead assets are in late-stage clinical trials for the symptomatic treatment of Parkinson’s disease (PD): mesdopetam (D3 antagonist) and pirepemat (PFC enhancer).

Next events

Top-line Phase IIb mesdopetam data in PD-LIDs

H222

Top-line Phase IIb pirepemat data in PD-Falls

H223

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Harry Shrives

+44 (0)20 3077 5700

IRLAB Therapeutics is a research client of Edison Investment Research Limited

While clinical results from the mesdopetam (Phase IIb) and pirepemat (Phase IIb) trials are the near-term value drivers for IRLAB, in our view a growing preclinical/discovery pipeline and a robust screening platform offer the potential for long-term value. Additionally, we believe that a recent management change (appointing Richard Godfrey as CEO, with previous CEO Nicholas Waters moving to become executive vice president and head of R&D) demonstrates the company’s dedication to drug discovery and development. We reinstate our underlying assumptions and reintroduce our previous estimates for FY22 unchanged. We value IRLAB at SEK6.13bn or SEK118.5 per share (previously SEK5.5bn or SEK106/share).

Year end

Revenue
(SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/20

0.4

(91.4)

(1.92)

0.0

N/A

N/A

12/21

207.9

91.1

1.76

0.0

N/A

N/A

12/22e

42.9

(95.7)

(1.85)

0.0

N/A

N/A

12/23e

0.3

(145.1)

(2.80)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Clinical pipeline soon to be bolstered

We expect top-line data from the Phase IIb trial of mesdopetam in levodopa-induced dyskinesias in Parkinson’s disease (PD-LIDs) in H222, is the most important near-term event for IRLAB. If the data are positive, Ipsen will assume responsibility for further development of mesdopetam. The next catalyst will be the top-line readout from the Phase IIb study of pirepemat in the treatment of PD-related falls (PD-Falls), for which we expect results in H223. Management intends to restock the clinical pipeline by initiating Phase I studies with preclinical assets IRL757 and IRL942 in apathy in neurological conditions and mild cognitive impairment, respectively.

Company funded into 2024, past key readouts

We reinstate our financial estimates for FY22 unchanged. We estimate an increase in R&D expenses in 2022 and 2023 as new assets enter the clinical pipeline and pirepemat progresses through Phase IIb. With net cash of SEK368m at end Q122, and a Q122 cash burn of SEK33.1m even though we expect R&D costs to increase, we believe IRLAB is funded past near-term catalysts into 2024, with the potential for this to extend if it receives milestone payments from Ipsen.

Valuation: SEK6.13bn or SEK118.5 per share

We value IRLAB at SEK6.13bn or SEK118.5 per share (previously SEK5.5bn or SEK106/share) based on a risk-adjusted NPV of mesdopetam and pirepemat using a 12.5% discount rate and including net cash of SEK368m at end Q122. Value uplift was realised by rolling our model forward by three months and significant changes in our FX assumptions (US$/SEK10.10 versus US$/SEK8.47 previously).

Clinical pipeline expected to see growth in 2023

As a reminder, IRLAB has two clinical-stage assets: mesdopetam and pirepemat. Mesdopetam is a D3 receptor antagonist being investigated in an ongoing Phase IIb trial for PD-LIDs, for which top-line results are expected in H222. IRLAB successfully licensed global rights to mesdopetam to Ipsen in July 2021, receiving $28m upfront and remaining eligible for up to $335m in additional milestones plus low double-digit royalties on sales. Pirepemat, IRLAB’s second clinical asset, is currently being investigated for the reduction of PD-Falls in a Phase IIb trial (NCT05258071). The study is expected to take c 18 months to complete, with top-line data available in H223, after which we anticipate that IRLAB will seek a licensing partner. IRLAB has guided that a pivotal Phase III study for pirepemat could start in 2024.

Preclinical and discovery pipeline expanding

IRLAB has reported three programmes in the preclinical development/discovery phase:

IRL942 is in preclinical development for the treatment of cognitive impairment in central nervous system (CNS) disorders. The Centers for Disease Control and Prevention estimates that c 12% of adults aged 65 years or more experience cognitive decline in the United States, representing a significant potential market. IRLAB claims that IRL942 has shown an improvement in cognition function in animal models by activating frontal-subcortical circuits. It intends to initiate a Phase I trial with IRL942 for the treatment of cognitive impairment in 2023.

IRL757 was nominated as a new drug candidate in March 2022. It is in preclinical development for the treatment of apathy, a common symptom in most neurodegenerative disorders. IRLAB asserts that 10 million US patients and a similar number in the EU may be affected. We note that there are currently no drugs approved for the treatment of apathy in CNS disorders. IRLAB intends to initiate a Phase I trial for IRL757 in the treatment of apathy in early Q323.

P003 is focused on the discovery of novel molecules with superior efficacy and reduced side effects/treatment complications compared to levodopa (L-DOPA). The therapeutic response to L-DOPA in PD treatment can vary over time and the P003 programme aims to produce an L-DOPA replacement that effects a sustained optimal response in patients. The company sees this as a potential opportunity to disrupt the PD treatment market. However, we note that given the low cost, high efficacy and acceptable safety profile of L-DOPA, the bar for success in the P003 programme will be set high. IRLAB is planning to initiate a Phase I trial with a P003 candidate in 2023.

ISP platform drives pipeline momentum

IRLAB’s proprietary drug discovery engine, the Integrative Screening Process (ISP) platform, is based on a unique combination of systems biology (phenotypic screening) and efficient AI-based machine learning methods. Phenotypic screening selects compounds based on an observed biological effect (phenotype) irrespective of the mechanism by which it is caused. This approach can be especially valuable when the underlying pathophysiology of a condition is not well understood, for example in PD, Alzheimer’s disease (AD) and many other CNS conditions. The company asserts that the unique combination of phenotypic screening and machine learning allows precise, resource- and cost-efficient drug discovery of high-quality, CNS-targeting compounds.

The ISP platform is founded on a database of phenotypic, pharmacokinetic, safety and biomarker data from c 1,600 compounds, including c 400 known CNS therapeutics representing all CNS classes. These data are managed by an AI-based machine learning algorithm that allows IRLAB to link the chemical properties of compounds with potential CNS activity. Based on these links, the platform can make chemical structure predictions for potential drugs. The resulting structures are synthesised and tested in living organisms, using algorithms to analyse animal movement patterns. A large amount of biomarker data is also gathered and, regardless of results, the full set of findings are fed back into the ISP database for analysis. To date, the ISP platform has developed 12 drug candidates for development including mesdopetam, pirepemat and those in the preclinical pipeline. Currently, IRLAB’s strategy focuses on developing the ISP platform and using it to produce new drug candidates. However, given its unique nature, we believe the platform has the potential to be out-licensed to partners for their own drug discovery programmes.

Management change will boost focus

In Q222, the company announced the appointment of Richard Godfrey as its new CEO, replacing Nicholas Waters (one of IRLAB’s founders) who will become executive vice president and head of R&D. Richard brings a wealth of life science leadership experience, having spent 12 years as CEO of BerGenBio before becoming the COO at LifeArc, a leading medical research foundation. We believe the change will allow Nicholas to focus his expertise on IRLAB’s core activities, namely the research and discovery of novel CNS active compounds. We see this change as a sensible strategic decision by the company and believe it will put management experience to the most effective use.

Valuation and financials

We reinstate our previous underlying assumptions for the valuation of IRLAB unchanged (for details see our initiation report). We value the company at SEK6.13bn or SEK118.5 per share (previously SEK5.5bn or SEK106/share). Value uplift results from rolling our model forward by three months and significant changes to our underlying FX estimates (US$/SEK10.10 versus US$/SEK8.47 previously). We continue to use an rNPV of mesdopetam in PD-LIDs and PD-Psychosis and pirepemat in PD-Falls using a 12.5% discount rate and incorporating net cash of SEK368m at end Q122. A summary of our valuation is shown in Exhibit 1below.

Exhibit 1: IRLAB rNPV valuation

Product

Launch

Peak

Peak sales ($m)

Value
(SEKm)

Probability

rNPV (SEKm)

rNPV/share (SEK)

Mesdopetam - PD-LIDs

2026

2032

1,207.4

5,782.3

50%

2,903.0

56.1

Mesdopetam - PD-Psychosis

2027

2033

688.0

2,985.2

30%

916.4

17.7

Pirepemat - PD-Falls (postural hypotension)

2027

2033

1,036.2

6,563.9

30%

1,944.6

37.6

Net cash at endQ122

 

 

368.0

100%

368.0

7.1

Valuation

 

 

15,699.4

 

6,132.0

118.5

Source: Edison Investment Research

We reinstate the estimates for FY22 essentially unchanged from our update note published on 30 March. Based on management’s R&D plans, we estimate total R&D expense of SEK60.5m in FY23, a decrease of 50% y-o-y (SEK122.4m in FY22e). We note that this does not include costs for two Phase I trials of new preclinical assets, which management intends to begin in 2023. We will review our estimates when the company provides more detail on these. In total, we estimate an operating loss of SEK95.2m in FY22 (we expect SEK42.9m in deferred revenue from the Ipsen deal to be recognised in FY22) and SEK144.3m in FY23, as pirepemat moves through Phase IIb and IRL757 and IRL942 enter Phase I trials. With net cash of SEK368m at end Q122, a Q122 cash burn of SEK33.1m (SEK32.8m in operating cash flow plus SEK0.3m in capex) and the expected increase in operating expenses in FY22 and FY23 (we estimate SEK138.1m and SEK144.5m, respectively), we believe the company is funded past near-term catalysts into 2024. We note that potential milestone payments from the Ipsen licensing deal for mesdopetam (up to $335m due), could extend our estimated cash runway.

Exhibit 2: Financial summary

Accounts: IFRS, year-end: 31 December, SEK’000s

 

 

2019

2020

2021

2022e

2023e

PROFIT & LOSS

 

 

 

 

 

 

 

Total revenues

 

 

448

404

207,906

42,893

282

Cost of sales

 

 

0

0

0

0

0

Gross profit

 

 

448

404

207,906

42,893

282

Total operating expenses

 

 

(96,296)

(91,862)

(155,330)

(138,078)

(144,535)

Research and development expenses

 

 

(79,381)

(75,989)

(97,436)

(122,436)

(60,505)

EBITDA (reported)

 

 

(92,916)

(89,202)

56,050

(91,445)

(140,773)

Operating income (reported)

 

 

(95,848)

(91,458)

52,576

(95,185)

(144,254)

Operating margin %

 

 

N/A

N/A

N/A

N/A

N/A

Finance income/(expense)

 

 

(272)

(195)

(795)

(796)

(796)

Exceptionals and adjustments

 

 

0

0

0

0

0

Profit before tax (reported)

 

 

(96,120)

(91,653)

51,781

(95,980)

(145,050)

Profit before tax (normalised)

 

 

(95,121)

(91,394)

91,131

(95,721)

(145,050)

Income tax expense (includes exceptionals)

 

 

0

0

0

0

0

Net income (reported)

 

 

(96,120)

(91,653)

51,781

(95,980)

(145,050)

Net income (normalised)

 

 

(95,121)

(91,394)

91,131

(95,721)

(145,050)

Basic average number of shares, m

 

 

40.6

47.7

51.7

51.7

51.7

Basic EPS (SEK)

 

 

(2.37)

(1.92)

1.00

(1.85)

(2.80)

Adjusted EPS (SEK)

 

 

(2.34)

(1.92)

1.76

(1.85)

(2.80)

Dividend per share (SEK)

 

 

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

 

 

 

 

 

 

 

Tangible assets

 

 

5,919

4,317

8,348

8,582

8,816

Intangible assets

 

 

82,270

82,011

42,661

42,402

42,402

Other non-current assets

 

 

0

0

0

0

0

Total non-current assets

 

 

88,189

86,328

51,009

50,984

51,218

Cash and equivalents

 

 

110,527

277,009

401,897

256,585

111,577

Inventories

 

 

0

0

0

0

0

Trade and other receivables

 

 

9,351

6,732

19,542

19,542

19,542

Other current assets

 

 

0

0

1

0

0

Total current assets

 

 

119,878

283,741

421,440

276,127

131,119

Non-current loans and borrowings

 

 

0

0

0

0

0

Non-current lease liabilities

 

 

2,900

1,270

3,566

3,566

3,566

Other non-current liabilities

 

 

0

0

0

0

0

Total non-current liabilities

 

 

2,900

1,270

3,566

3,566

3,566

Accounts payable

 

 

8,438

3,683

12,302

5,521

5,797

Non-current loans and borrowings

 

 

0

0

0

0

0

Current lease liabilities

 

 

1,643

1,657

3,034

3,034

3,034

Other current liabilities

 

 

13,259

15,578

54,066

11,490

11,490

Total current liabilities

 

 

23,340

20,918

69,402

20,045

20,321

Equity attributable to company

 

 

181,826

347,879

399,481

303,501

158,451

CASH FLOW STATEMENT

 

 

 

 

 

 

 

Operating income

 

 

(95,848)

(91,458)

52,576

(95,185)

(144,254)

Depreciation and amortisation

 

 

2,932

2,256

3,474

3,740

3,481

Share based payments

 

 

0

0

0

0

0

Other adjustments

 

 

(244)

(195)

38,296

(796)

(796)

Movements in working capital

 

 

1,959

183

34,296

(49,357)

276

Cash from operations (CFO)

 

 

(91,201)

(89,214)

128,642

(141,598)

(141,293)

Capex

 

 

(137)

(394)

(708)

(551)

(551)

Acquisitions & disposals net

 

 

0

0

0

0

0

Other investing activities

 

 

0

0

0

0

0

Cash used in investing activities (CFIA)

 

 

(137)

(394)

(708)

(551)

(551)

Net proceeds from issue of shares

 

 

68,970

257,706

(180)

0

0

Movements in debt

 

 

(1,547)

(1,616)

(2,865)

0

0

Other financing activities

 

 

0

0

0

(3,164)

(3,164)

Cash from financing activities (CFF)

 

 

67,423

256,090

(3,045)

(3,164)

(3,164)

Cash and equivalents at beginning of period

 

 

134,442

110,527

277,009

401,898

256,585

Increase/(decrease) in cash and equivalents

 

 

(23,915)

166,482

124,889

(145,313)

(145,008)

Effect of FX on cash and equivalents

 

 

0

0

0

0

0

Cash and equivalents at end of period

 

 

110,527

277,009

401,898

256,585

111,577

Net (debt)/cash

 

 

110,527

277,009

401,898

256,585

111,577

Source: IRLAB company accounts, Edison Investment Research


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This report has been commissioned by IRLAB Therapeutics and prepared and issued by Edison, in consideration of a fee payable by IRLAB Therapeutics. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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