Hepion Pharmaceuticals — Competing in the NASH dash

Hepion Pharmaceuticals is a clinical stage biopharmaceutical company currently focused on developing its NASH drug candidate, CRV431. CRV431 is a cyclophilin inhibitor demonstrated to have an anti-fibrotic effect in preclinical liver disease models. Hepion has suggested that CRV431 affects two processes in hepatic stellate cells, which are the primary cells implicated in liver fibrosis. The proposed anti-fibrotic mechanisms of action are decreased expression of fibrosis-related genes, and decreased cyclophilin B-dependent collagen synthesis and secretion resulting in CRV431’s potential therapeutic effects in NASH. The company is currently conducting Phase I multiple ascending dose (MAD) study with expected results in mid-2020, and intends to initiate a Phase IIa clinical study in June 2020.

We arrive at an initial valuation of $56.9m or $6.30 per basic share ($6.22 diluted) based on a risk adjusted NPV analysis and a 12.5% discount rate (our standard for pre-commercial products). We model the commercialization of CRV431 in both the US and European markets with entry into the US in 2026 followed by Europe a year later. In the US, we assume a launch price of $13,000 per year, while in Europe we expect $8,400 per year due to more stringent regulations on pharmaceutical pricing. We assign a probability of success of commercialization at 10% for each market since the company is in early stage clinical trials.

Hepion reported a loss from operations of $7.8m in 2019, and we expect R&D spending going forward to increase as the company progresses in clinical studies. We forecast Hepion will need $115m in additional capital to complete development of CRV431, which we record as illustrative debt. In 2019, Hepion raised $21.2m in total gross proceeds, with $20.0m arising from equity offerings and warrant exercises, and $1.2m in non-dilutive proceeds from the sale of net operating losses. Since YE19 as of 30 April 2020, also raised $11.3m via an ongoing at-the-market equity facility. We estimate the company will need to raise an additional $15m (which we model as illustrative debt) in 2020. Hepion also completed a reverse split at a ratio 70 to 1 in May 2019.

At this stage, Hepion’s main risks are associated with clinical development of CRV431. While the company initiated its first clinical trial in June 2018, there are several competitors already in Phase III with expected product commercialization within the next one to two years. Given the crowded competitive landscape, the situation is two-pronged relating to Hepion. The company will be competing for market share against already established players; however, those early-entry competitors will have had paved the road in establishing reimbursement precedence, physician education, and patient education, and Hepion could also benefit from the clinical failures and successes of those before them and tailor its clinical trial designs accordingly. While partnerships can reduce funding needs, the amount of capital needed to reach commercialisation independently, which the company estimates will occur 2026, could result in substantial dilution. Share issuances over the next few years could potentially be multiples of the current shares outstanding (assuming no sharp increase in the market valuation). Finally, there are some risks to the company associated with the ongoing COVID-19 pandemic as the pandemic may impact Hepion’s clinical trials via current study participant retention and future participant willingness to enrol.

In 2016, the company, known as ContraVir Pharmaceuticals at the time, merged with Ciclofilin Pharmaceuticals to strengthen the overall antiviral hepatitis B drug portfolio with the addition of Cicofilin’s lead asset CPI-431-32, now known as CRV431. Later in 2019, the company adjusted its focus toward chronic liver disease and is advancing CRV431 as a therapeutic candidate for the treatment of non-alcoholic steatohepatitis (NASH). Following the strategy shift, the company officially changed its name in July 2019 to Hepion. Hepion is headquartered in Edison, New Jersey, while the research and development facility is located in Edmonton, Canada.

CRV431 is a cyclophilin inhibitor being developed for the treatment of non-alcoholic steatohepatitis (NASH). Cyclophilins are a family of enzymes implicated in several pathologic processes that can result in liver diseases such as NASH, which is generally defined as liver inflammation and damage caused by the accumulation of fat in the liver. The company has been testing CRV431 in a range of NASH model systems with results that suggest CRV431 exhibits anti-fibrotic effects in the liver. Hepion is currently conducting a multiple ascending dose (MAD) human study with results expected in mid-2020 and plans to initiate a Phase IIa clinical trial in June 2020 (Exhibit 1).

Nonalcoholic fatty liver disease (NAFLD) is one of the most common causes of chronic liver disease with an estimated global prevalence as high as one billion.1 NAFLD includes a spectrum of fatty liver diseases that range in degree of severity from early to chronic liver disease (Exhibit 2). Early liver disease is characterized by isolated steatosis, which is the abnormal retention of fat within the liver and tends to be reversible with treatment. NASH, on the other hand, tends to manifest as the most severe form of NAFLD and is generally characterized by the additional presence of liver damage with or without fibrosis. If NASH is left untreated, it may lead to chronic liver conditions such as cirrhosis, hepatocellular carcinoma, or liver failure.2

In the US alone, it is believed that approximately 21% of people have NAFLD, which accounts for 52 million individuals3. Additionally, the rise of several underlying conditions, such as obesity, diabetes, high blood pressure, and hyperlipidemia, have been implicated in causing liver diseases such as NAFLD and NASH. Among adults in the US, the prevalence of obesity increased from 33.7% in 2007–08 to 39.6% in 2015-2016.4 In 2013–16, an estimated 9.4% of US adults were diagnosed with diabetes, as compared to 8.1% in 2009–12.5 With the anticipated increasing prevalence of conditions leading to NAFLD and NASH following the rising rates of predisposing factors, the economic burden related to chronic liver disease is expected to be substantial. In a 2016 study modeled on the population of the US and four European countries, Germany, France, Italy, and the UK, assessed the associated annual and per patient costs relating to NAFLD. The study concluded that the annual cost of NAFLD in the US was $103bn and €35bn annually across the four European countries.

While the exact pathogenesis of NASH is not completely known, a commonly proposed hypothesis is the ‘two-hit’ model where two points of consecutive events lead to the manifestation of NASH (Exhibit 3). The two events are, first, the accumulation of fat in the liver cells making the liver sensitive to the second step, that is, a cascade of metabolic responses triggering tissue damage, inflammation, and ultimately fibrosis.6 Other causative factors have also been proposed, including genetic predisposition, abnormal lipid metabolism, oxidative stress, lipotoxicity, mitochondrial dysfunction, altered production of cytokines and adipokines, gut dysbiosis, and endoplasmic reticulum stress.7 The disease has a degree of molecular complexity which has undoubtedly complicated efforts to develop NASH-specific therapeutics.

Insulin resistance is when cells in the muscles, fat, and liver are unable to easily utilize glucose from the bloodstream for energy production and if the pancreas is unable to produce enough insulin, extra glucose will remain in the bloodstream. Over time type 2 diabetes could develop and trigger an inflammatory response which contributes to the overall degree of inflammation that is characteristic of NASH manifestation. Another contributing factor to NASH pathogenesis is hepatic lipotoxicity, which is lipid accumulation within the liver where normal organ function is hampered. In a compromised liver, the cellular mechanisms are overcome by the flux of free fatty acids (FFAs) that lead to downstream effects of hepatocyte dysfunction or cell death. The cellular dysfunction or cell death, in turn, triggers a cascade of inflammatory responses that further exacerbate disease progression. Additionally, several physiological and pathological conditions can lead to the accumulation of misfolded proteins and the downstream effects are typically apoptosis. Finally, metabolic dysfunction and oxidation also trigger a widespread inflammatory response further exacerbating the situation and causing scarring of the liver. Fibrosis (scarring) can then hamper liver functionality leading to more severe stages of chronic liver disease.

The majority of people with NASH do not have disease-specific symptoms and diagnosis usually occurs incidentally while the individual is undergoing tests for unrelated symptoms or conditions. Resultantly, there are wide fluctuations and variances in estimates relating to NAFLD and NASH prevalence rates. The incidental diagnosis is typically found with imaging since there are generally no characteristic physical examination findings; however, a liver biopsy is the gold standard for definitively diagnosing NASH. Patients diagnosed with NASH and who present with advanced fibrosis or have liver cirrhosis are considered to have advanced liver disease and are expected to be most likely to receive treatment under the care of a healthcare provider. Based on a predicted NAFLD prevalence rate of 21% among adults, an estimated 52 million Americans and 123 million Europeans may be living with the disease as of 2019.9 Of those individuals, an estimated 20% are expected to progress to NASH which accounts for 10.4 million Americans and 24.5 million Europeans.10

Using Medicare data and a study conducted by Noureddin et al., we extrapolated an estimated general diagnosis rate of 11%.11,12 This results in an estimated general NASH diagnosis rate of 11%, which translates to 1.1 million Americans and 2.63 million Europeans who have been diagnosed with the condition. Within the diagnosed population, we estimate that 20% of cases may progress to bridging fibrosis defined as an advanced stage of liver fibrosis, while another 17.8% may progress to cirrhosis which is considered the most severe stage of scarring.13,14 This narrows down a target population of 0.4 million in the US and one million Europe (estimated in 2020). It is expected that these patients, classified as having bridging fibrosis or cirrhosis, will be ideal candidates for NASH-specific therapeutics.

Prognosis of NASH is dependent on several factors including the stage of liver disease, presence of other underlying conditions, and overall likelihood of disease progression since it is unclear why some patients with NASH do not progress past the early stages while others go on to develop cirrhosis or hepatocellular carcinoma. In general, a reduced survival rate in NASH patients is linked to higher rates of associated cardiovascular disease and malignancy2. One study found that patients with NASH had a higher likelihood to die from cardiovascular or liver related causes.15 Authors cited that of the study subjects diagnosed with NASH, 15.5% died from cardiovascular disease, 5.6% from extrahepatic malignancy, 2.8% from liver-related causes such as metastatic hepatocellular carcinoma and variceal hemorrhage.

Since there are no NASH specific drugs approved in the US, current management regimens rely on treating underlying conditions, such as obesity, hypertension, and diabetes, in an effort to stop or stall the progression of NASH. One study that assessed the effect of weight loss of at least 5% bodyweight found that 10 of 43 patients had a significant decrease in fat liver.16 Another study suggested that 19% of patients who lost of mean of 3.8% of bodyweight reported regression of fibrosis; however only 50% of all patients had achieved that percentage weight loss.17 This implies that lifestyle change compliance can be low even in supervised clinical trials. There has also been a rapid increase of patients undergoing liver transplants due to NASH as the waitlist expanded by 80% in 2016.18 Due to this increase, NASH is now the leading indication for liver transplant in women and expected to become the leading transplant indication for all patients within the next few years.18 The approval of a NASH-specific therapeutic would be a long-awaited breakthrough that would change how disease management is approached and the resultant prognoses.

CRV431 is a derivative of cyclosporine that has exhibited inhibitory effects of several different proteins in the cyclophilin family. A widely known cyclophilin antagonist is cyclosporin A (CsA), which reshaped solid organ transplantation after its approval in 1983 as an immunosuppressant. The immunosuppressant activity of CsA is driven by its inhibition of calcineurin, and cyclophilin binding appears secondary to this function. Cyclophilins are enzymes that facilitate proper protein folding and have been implicated in NASH, liver fibrosis, HCC, and other liver diseases making these enzymes potential therapeutic targets.19 Specifically, cyclophilins catalyze the cis-trans isomerization of proline peptide bonds. A high proportion of collagen is comprised of proline, an amino acid, and cyclophilins regulate a key step in the biochemical process that leads to the proper folding of proline. If proline is not folded correctly, then collagen formation could be hampered which would then also possibly affect liver fibrosis.

Three cyclophilins have been implicated in contributing to the manifestation of NASH and liver fibrosis: CypA contributes to collagen formation in liver cells, CypB modulates collagen cross-linking, and CypD plays a central role in regulating the mitochondrial pore.20 Theoretically, the reduction of collagen formation and cross-linking could affect the development of collagenous tissue, such as skin, tendon, and bone; however, cyclosporine has not been observed to affect such development. Additionally, Hepion has not reported adverse side-effects stemming from the downstream effects of cyclophilin inhibition in its preclinical work or human studies.

With substitutions at amino acids 1 and 3 of the cyclosporine ring, Hepion claims that CRV431 inhibits CypA, CypB, and CypD without the immunosuppressant feature characteristic of CsA. The company proposes that CRV431 has a very low affinity for binding calcineurin which should remove the immunosuppression effect. In turn, Hepion believes this would allow CRV431 to decrease liver fibrosis by affecting the causative processes in hepatic stellate cells, which are the primary collagen-producing cell types implicated in liver fibrosis. The company noted that: 1) decreased expression of fibrosis-related genes; and 2) decreased CypB-dependent collagen synthesis and secretion are a result of CRV431 action.

While CsA was shown to exhibit clinical toxicities, such as nephrotoxicity, hypertension, and dyslipidemia, it is suggested these side effects appeared to be a function of the immunosuppressive activity rather than cyclophilin binding.21 The company believes CRV431 is unlikely to cause these clinical toxicities, specifically nephrotoxicity, since the proposed mechanism of action excludes calcineurin binding. Additionally, Hepion cited alisporivir, a non-immunosuppressive CsA analog, was dosed to over 2,000 patients at high doses with no renal toxicity.21 The company reported that preclinical toxicology studies of CRV431 implied a good safety profile and is currently conducting a multiple ascending dose Phase I study.

Hepion holds a composition of matter patent (US 9,200,038) on CRV431. This patent extends through to 2030 and could gain an additional five years under the Hatch-Waxman Act. In 2017, the company was granted a new patent (US 9,714,271) which ends in 2031. Hepion cited the new patent significantly extends the claims of the original CRV431 patent family allowing for a broad coverage of many compounds within their library of cyclophilin inhibitors

Hepion was initially developing CRV431 for the treatment of hepatitis B; however, the company shifted its focus to NASH in 2019 as Hepion felt the preclinical data for NASH was more compelling than for hepatitis B. Hepion has reported results from several preclinical animal models with chemically induced NASH and/or liver injury with liver fibrosis (Exhibit 4). Data across those studies (mostly conducted by third parties and partially funded by the company) have consistently shown results suggesting CRV431’s potent anti-fibrotic effects alongside a comparator drug panel of other NASH-drug candidates currently in development, as explained below.

In November 2019, Hepion published CRV431 results in mouse models of liver fibrosis and NASH.2121 Liver fibrosis in mice was induced via chronic dosing of carbon tetrachloride (CCl4), a hepatotoxin known to cause liver injury, at which point 50mg/kg/day of CRV431 was orally administered for six weeks. As a comparator, Ocaliva, which is also in development as a NASH treatment by Intercept Pharmaceuticals (and already FDA-approved for primary biliary cholangitis), was included and dosed at 10mg/kg/day. Results showed that CRV431 decreased the amount of fibrosis by 43% when compared to Ocaliva (at 10mg/kg/day), which showed no significant effect. Also, in mice treated with a combination of CRV431 and Ocaliva, fibrosis reduction was similar to that of CRV431 alone21. Of note, Intercept cited that Ocaliva dosed at 25mg/day in humans significantly improved fibrosis and key components of NASH versus a 10mg/day dose.22

In a second mouse model, streptozotocin followed by a high fat diet was used to induce diabetes and a fatty liver. Oral daily treatment with CRV431 at 50mg/kg showed decreased fibrosis levels of 37% to 46%, when compared to the control group, at treatment durations of 3-14 weeks, 8-14 weeks, and 20-30 weeks (Exhibit 5).

Similar results were seen in different study of rats were treated with thioacetamide to induce liver injury and fibrosis either in combination with CRV431 or vehicle control. Hepion reported that of the 10 rats treated with CRV431, none displayed development of cirrhosis, while five of 10 rats in the control group did develop cirrhosis. Using a histological stain to measure fibrotic scarring, a mean reduction of 49% in the CRV431-treated group was shown when compared to the control group, which the company claimed to suggest that CRV431 was primarily responsible for attenuating the progression of cirrhosis during the study.

In November 2019 and January 2020, the company reported results from two studies utilizing human precision cut liver slices (PCLS) where the tissue was exposed to transforming growth factor beta (TGF) and platelet-derived growth factor (PDGF) to induce of inflammation and fibrosis.

In assessing future potential applications of CRV431 following NASH as the initial indication, Hepion announced results from studies that suggest CRV431 decreased production of extracellular matrix (ECM) molecules, such as collagen and fibronectin, in fibroblast cells derived from several different organs. The cell types utilized in the study were lung fibroblasts from a patient with idiopathic pulmonary fibrosis (IPF), cardiac fibroblasts, dermal fibroblasts, renal mesangial cells, and LX2 hepatic stellate cell line. The collagen and fibronectin over-production in these cell types have been implicated in fibrotic scarring of injured organs. The company stated that CRV431 dose-dependently decreased procollagen and fibronectin secretion in all cell types with similar magnitude. Hepion believes CRV431’s inhibition of cyclophilin B reduced ECM molecule production leads to the possibility that CRV431 could be evaluated for a host of other disorders.

Since CypB is expressed in all cell types, its downstream inhibition could have adverse effects on collagenous tissue. One study conducted in mouse models of osteogenesis imperfecta (OI), brittle bone disease, suggested that deletion of CypB resulted in abnormal bone development in newborn mice and osteoporotic features in adult mice.23 CRV431 is known to down-regulate CypB, but gene deletion (knockout) is often expected to show more severe phenotypic effects than protein down-regulation using a drug, in part because gene deletion eliminates the protein during animal growth and development. Moreover, Hepion’s chief scientific officer, Dr Daren R. Ure, and colleagues noted that even though the genetic deletion of CypB results in severe effects on collagenous tissue development, pharmacologic inhibition (such as through CRV431) has not shown such significant tissue disturbances.24

While still focusing on hepatitis B, Hepion completed a Phase I single ascending dose (SAD) study October 2018 to evaluate the safety and tolerability of single doses of CRV431 at increasing dosages, while also assessing the pharmacokinetics (PK).25 A total of 32 healthy subjects were enrolled and dosages of 75mg, 225mg, 375mg, and 525mg were administered. The company reported a favorable safety profile and no serious adverse effects (SAEs) occurred and noted only mild to moderate adverse effects (AEs) mostly unrelated to the study. The types of AEs reported included gastrointestinal and (non-specified) nervous system disorders, among others. None of the AEs were grade 3 or 4 and rates were similar to that of the placebo group. Following the completion of the SAD study, Hepion shifted its focus to NASH and initiated the Phase I multiple ascending dose (MAD) study in August 2019 to evaluate the safety and tolerability of multiple oral doses of CRV431. Utilizing 16 healthy volunteers, study doses were set at 75mg, 150mg, 225mg, and 300mg and administered over 28 days. The company reported that the 75mg, 150mg, and 225mg levels were safe and well tolerated, which allowed commencement of the 300mg dosage level in May 2020. Hepion cited that higher doses may need to be explored to fully assess CRV341’s safety and maximum tolerated dose, but that will be determined following completion of the 300mg cohort.

Hepion intends to initiate a Phase IIa pilot trial, dubbed AMBITION, in June 2020 with expected results by year end. The main objective of the study is to assess the safety and tolerability of a once daily 75mg dose of CRV431 over 28 days. The secondary objective is to assess anti-fibrotic activity of CRV431 and to generate exploratory anti-fibrotic biomarker data, such as collagen biomarkers, matrix metalloproteinases, lipidomics, and genomics. The study will be a multi-center, single-blind, placebo-controlled design with a cohort of 18 subjects who have presumed NASH with stage 2 or 3 fibrosis. Twelve subjects will receive the drug and six will receive placebo. The company also plans to initiate another Phase II NASH study in H121 with approximately 100 patients to assess the efficacy of CRV431 over the course of 24 weeks.

There are currently no approved medications for NAFLD or NASH in the US, but given the high prevalence of NAFLD and NASH, there has been significant effort to develop drugs for these large markets with an FDA decision on Ocaliva is expected in coming weeks. Hence, there is a reasonable probability that at least one NASH therapeutic will be approved and on the market by the time CRV431 completes clinical development.

There are currently over 200 ongoing clinical studies for NAFLD and NASH on clinicaltrials.gov representing the scope of activity seen in this space. Moreover, there have been a large number of deals in the space. Gilead alone signed three NASH deals in 2019: with Insitro (preclinical, $15m upfront, $235m milestones, low double digit royalties), Glympse Bio (biomarker collaboration, terms undisclosed), and Novo Nordisk (combination therapy partnership, terms undisclosed). Other prominent recent deals include Boehringer Ingelheim’s preclinical deal with Yuhan ($40m upfront, $830m milestones, tiered royalties), and Novartis’s preclinical deal with Pliant ($80m upfront, undisclosed milestones, tiered royalties).

Clinical trial timelines were significantly shortened once the FDA adjusted its guidelines so that new drug candidates only need to show a reduction of severity of liver inflammation (steatohepatitis) and fibrosis as primary endpoints, compared to the previous standard of having to demonstrate that fewer patients progressed to cirrhosis or died of liver failure. The former standards could take several decades to observe outcomes, while the updated guidelines are much shorter with tissue changes that can be measured over 6–24 months.26 NASH therapeutics currently in development fall under several different drug classes (Exhibit 6), which can generally be grouped into two categories: those that aim to treat liver disease directly by addressing fibrosis (such as CRV431) or inflammation, and those that aim to treat the underlying causes, such as glucose metabolism or hyperlipidaemia. Drugs that inhibit apoptosis signal-regulating kinase 1 (ASK1) and C-C motif chemokine receptors 2/5 (CCR2/5) target liver disease directly, while farnesoid X nuclear receptor (FXR), peroxisome proliferator activated receptors alpha/delta (PPARα/δ), and thyroid hormone receptor beta (THR-β) agonists treat the underlying causes.

Intercept Pharmaceuticals filed a New Drug Application (NDA) to the US Food and Drug Administration (FDA) in September 2019 for its synthetically modified bile acid Ocaliva in the treatment of fibrosis and in May 2020 it announced that the 9 June 2020 FDA advisory committee meeting relating to the NDA has been postponed to accommodate the review of additional data requested by the FDA, which we anticipate would push back a potential NDA decision into H220. Ocaliva (obeticholic acid, OCA) is an FXR agonist and in 2019, Intercept reported interim Phase III clinical trial results from its REGENERATE study for OCA and one of two primary endpoints were met. The first primary endpoint, improvement in fibrosis, was met with data showing OCA led to an improvement of one stage or greater in fibrosis without worsening of NASH after 18 months. Of the second primary endpoint, resolution of NASH, OCA did not lead to significantly more frequent resolution of NASH without the worsening of fibrosis.27 Of note, 51% of patients taking OCA reported experiencing mild to moderate itching as a side effect and 9% of those individuals stopped take the drug as a result. Meanwhile, the company completed enrolment in January 2020 for its other Phase III study, REVERSE, which aims to evaluate OCA in the treatment of compensated cirrhosis due to NASH.

Madrigal Pharmaceuticals is solely focused on the treatment of NASH and initiated two Phase III studies in March 2019. The company’s lead asset, MGL-3196 (resmetirom), is a thyroid hormone receptor beta (THR-β) selective agonist and the first Phase III study, MAESTRO-NASH, will assess resmetirom’s efficacy in the treatment of NASH in patients with stage 2-3 fibrosis, while the second Phase III, MAESTO-NAFLD-1, is a safety and biomarker study. Madrigal expects interim data results in H121 following the second liver biopsy in patients after 52 weeks of treatment and the company stated it plans to file for accelerated approval based on those results. In a Phase II study completed in February 2018, 25% of all patients treated with resmetirom and 37% of patients treated who were on adequate doses of the drug met the Phase III NASH resolution endpoint.

Allergan entered the NASH space by acquiring Tobira Therapeutics in 2016 after the lead drug, cenicriviroc (CVC), a CCR2/5 antagonist that had failed a Phase IIb trial when it missed the primary endpoint of reducing a NASH activity score (NAS) score by two points. However, CVC did meet one secondary endpoint of improving fibrosis by at least one stage without worsening of NASH. Allergan is running the Phase III trial now with an expected top-line readout in Q420. In April 2017, Allergan initiated a Phase IIb study to test CVC’s efficacy as a combination with Novartis’ FXR agonist, tropifexor. The study is still enrolling approximately 200 patients and the estimated trial completion date is H220.

Previously at the Phase III stage was Genfit’s elafibranor, a dual PPAR α/δ agonist, which was recently reported to have failed to meet the primary endpoint (of NASH resolution without worsening of fibrosis). Elafibranor previously also missed the primary endpoint in a Phase II NASH study in 2015 as Genfit cited that inclusion of too many patients presenting with early-stage NASH led to the study’s failure; however, the company proceeded to design the Phase III trial by focusing on patients with more severe NASH progression. Genfit was also expected to initiate a proof-of-concept combination drug study in Q120, but had delayed it due to COVID-19. In light of the recent Phase III failure, the future of this study is unknown. The study was expected to evaluate elafibranor efficacy in combination with other diabetes drugs, such as sodium-glucose transport protein (SGLT2) inhibitor or glucagon-like peptide 1 (GLP-1) receptor agonist.

As an early-stage biopharmaceutical company, Hepion is faced with risks associated with clinical development. Since the company recently initiated its clinical trials in NASH, their immediate hurdle is establishing efficacy in humans as it has no such data yet. There are several other competitors already in Phase III clinical trials that expect to enter the market within the next one to two years; however, this situation is two-pronged relating to Hepion. First, Hepion will be competing for patients in similar target markets with companies who may have already had a few years to establish themselves within the healthcare industry making it more difficult for Hepion to achieve optimal penetration. However, there is a benefit to not being first to market as those companies with commercialized products will have had paved the road in establishing reimbursement precedence, physician education, and patient education along with demonstrating which clinical trial designs proved most effective and favourable with the FDA. The company also faces risks due to the relatively variable estimates relating to NASH. Since there are no approved NASH-specific drugs, little is known in terms of true addressable market size and what percentage of patients with late-stage NASH will choose and adhere to therapy.

The company will require a minimum of $115m in additional financing to complete their clinical trial program. We expect Hepion to seek this funding primarily in the capital markets, which could result in substantial dilution as share issuance over the next few years could be multiples of the current shares outstanding (assuming no sharp increase in the market valuation). Alternatively, the company may try to secure money through partnership or licensing deals, but this cannot be assured. Several members of the current executive group at Hepion previously worked together at Aurinia Pharmaceuticals as part of the team that discovered voclosporin, a Phase III immunosuppressant therapeutic for lupus nephritis, which led to a $215 million licensing deal with Hoffman-La Roche.

There are some risks to the company associated with the ongoing COVID-19 pandemic. The pandemic may impact the company’s clinical trials as current participants may get infected or choose to no longer participate in the study, while future participants may be harder to enrol. Hepion has not yet stated any disruptions, but as the situation evolves, we may revisit our assumptions.

Hepion reported a loss from operations of $7.8m in 2019, compared to $14.6m in 2018, with the reduced loss mainly attributable to costs associated with clinical development of other assets in 2018, but Hepion has since stopped any further development on such and is focusing all resources on CRV431. The company had R&D expenses of $3.2m in 2019, as compared to $7.6m in 2018, and ended 2019 with $13.9m in cash and cash equivalents. R&D costs are expected to increase in the coming quarters as the company continues to progress with clinical trials. We forecast R&D expenses to be $7.1m in 2020 and $5.1m in 2021. We also expect the company will need $115m in additional capital to complete development of CRV431, which we record as illustrative debt amounting to $15m in 2020, $50m 2023, and $50m in 2025. The $15m in 2020 is in addition to the $11.3m the company has already raised as of 30 April 2020 via an ongoing at-the-market equity facility.

In May 2019, Hepion initiated a reverse stock split at a ratio of 1 for 70, which reduced the common shares outstanding from 41.3m shares to approximately 560,500 shares at that time. In 2019, Hepion raised total gross proceeds of $21.2m, primarily from a $15.6m equity offering in June, along with $4.4m in other equity issuances and warrant exercises, and $1.2m in non-dilutive proceeds from the sale of New Jersey state net operating losses (NOLs).. As stated above, since YE19 as of 30 April 2020, the company also raised $11.3m via an ongoing at-the-market equity facility. Hepion also has a small amount (20,024 common shares worth) of outstanding convertible preferred stock from previous offerings. In April 2020, the company took out a $0.18m loan (0.98% pa interest, maturing in April 2022) in relation to the Paycheck Protection Program to use for payroll costs, rent, and utilities.

As part of the merger with Ciclofilin, the company owed former Ciclofilin shareholders $17m in milestones and up 10% of shares outstanding from the time of the merger (shares to be issued at the same time(s) of the milestone payments), of which $1m and 2.5% have been delivered to date. Upon completion of the first segment of Phase I clinical activities for CRV431 in October 2018, a milestone payment was triggered. The payment was made to Ciclofilin Pharmaceuticals’ former shareholders (including Hepion’s current CEO and members of executive team) and consisted of $1m in cash along with 1,439 shares of common stock (pre-reverse split). Future milestone payments will consist of up to a combined $16m in cash: $3m and the remaining stock on completion of Phase II, $5m on completion of Phase III, and $8m on acceptance of an NDA. The remaining stock issuable is negligible as it was determined at the time of signing the deal and on a pre-reverse split basis. Additionally, the company owes a royalty of 2.5% to Aurinia Pharmaceuticals for the original acquisition of CRV431 by Ciclofilin.

We arrive at an initial valuation of $56.9m or $6.30 per basic share ($6.22 diluted) based on a risk adjusted NPV analysis and a 12.5% discount rate (our standard for pre-commercial products). We model the commercialization of CRV431 in both the US and European markets with entry into the US in 2026 followed by Europe a year later. While our model assumes that Hepion will bring CRV431 to commercialization, we believe it is more likely for the company to partner the asset since NASH is a mass, broad-market indication.

Our estimated target population size (year 2026) is 0.5m adults in the US with peak market penetration of 5%, and 1.2m adults in Europe with 3.5% peak penetration. Market penetration is based on a treatment population estimated to be diagnosed with advanced fibrosis and cirrhosis during the launch years of 2026 in the US and 2027 in Europe. We assume that there will be improvements in diagnosis and include a 2% growth in diagnosis rates per year. In the US, we assume a launch price of $13,000 per year, which we based on a combination of reported market research and current prices of drug candidates already approved in other indications. In Europe, we expected a launch price of $8,400 per year, which is based on a discount to the US product price due to more strict reimbursement regulations in Europe, as compared to the US.

We include a include 2% price growth over the life of the product in both the US and Europe. We include a gross/net sales discount of 70% in both the US and European markets. COGS are 7.5%, which includes the royalty payable to Aurinia Pharmaceuticals. We also include costs of selling in our models, which is $10m +15% of revenue for each geography (eg US and Europe) and model revenue through 2036. In our model we assume a traditional approval timeline requiring a minimum of approximately 1,026 patients (across all Phase I through registration trials) at a cost of $40,000 per patient which totals to $41m in direct trial costs. For the US market, we assign a 10% probability of success and assume product commercialization in 2026. Peak revenue in the US is expected to be $371m and is currently valued at $23.03m based on our current assumptions.

For the European market, we also assign a 10% probability of success and assume product commercialization in 2027. Peak revenue in Europe is expected to be $373m and is currently valued at $18.9m based on our current assumptions.

We separately include a negative NPV of $10.2m to account for R&D costs. This value includes milestones payable to Ciclofilin shareholders ($3m in 2020, $5m in 2024, $8m in 2025).

Due to the wide variances in estimates and data relating to the NASH treatment population along with limited information on the optimal treatment price, below is a sensitivity table depicting valuation as a function of market penetration and drug price (Exhibit 8).