Acacia Pharma — Cosmo provides cash injection

Acacia has in-licensed ByFavo (remimazolam), an ultra-short-acting and reversible iv benzodiazepine sedative/anaesthetic for use during procedural sedation (PS). Cosmo Pharmaceuticals originally in-licensed ByFavo from Paion in 2016, with a view to commercialising the product through its US subsidiary Aries Pharmaceuticals. Since the closure of this subsidiary in 2019, Cosmo has looked to out-license the US rights to some of its assets. In terms of strategic fit for Acacia, ByFavo joins lead product BARHEMSYS as a product where detailing is directed to anaesthesiologists and surgical teams. Given the cost to build out its US commercial operations for lead product BARHEMSYS, utilising the speciality field force for multiple drugs makes sense and should enable operational leverage in the mid-term. However, this deal is more than a transfer of the asset’s commercial licence, as the cash injection from Cosmo (€10m equity stake and up to €35m in loan facilities) is vital to enable expansion of the US commercial team to support the launch and early detailing for BARHEMSYS (and ByFavo).

The deal is complex (see Exhibit 1) and involves two-way cash transfers, which is fairly unusual for biotech deals of this size. Access to loan facilities enables Acacia to conserve its current cash position (minus cash burn), as it uses part of the loan to meet its milestone obligations to Cosmo (eg €25m accessed on ByFavo approval and €15m out of the €35 returned in cash, with the remainder in equity), and has the net benefit of a €30m cash injection (€10m equity investment, €20m loan facility). We had previously forecast that Acacia would need to raise c £40m in H120 (following potential approval) to fund operations. The Cosmo deal reduces Acacia’s need for a public equity funding round in the near term, but additional future funding is dependent on sales execution and expansion requirements. As Julian Gilbert (former CEO) and Christine Soden (CFO) have stepped down during the last 12 months, new management is more US-centric with the appointment of Mike Bolinder (CEO) and Gary Gemignani (CFO). A US listing could make sense in time, depending on market conditions and, importantly, Acacia’s status quo (post approval of BARHEMSYS and ByFavo with sales underway).

We forecast ByFavo peak sales of $126m and believe this deal to be highly accretive to Acacia. We have maintained our SG&A forecasts, given that ByFavo should be a complementary product to BARHEMSYS and therefore little incremental investment should be required. Our model already assumes 60 personnel in the US in 2020. Acacia believes ByFavo is a highly complementary fit to BARHEMSYS, as both are targeted towards the same key physicians, have a similar value proposition (mobilising patients more quickly after procedures, are up and discharged more quickly), and use the same distribution channels and networks. Acacia has already begun the process of educating key opinion leaders on the benefits of BARHEMSYS in PONV, and will extend this to education on procedural sedation and ByFavo ahead of approval.

Acacia’s lead asset BARHEMSYS (intravenous amisulpride) is being developed for the management of PONV. Following two complete response letters (CRLs) from the US FDA during the past 18 months, deficiencies with Acacia’s previous chosen contract manufacturing organisation (CMO) had been highlighted. Acacia has nominated an alternative CMO with a track record of both manufacturing amisulpride and undergoing regular, successful FDA inspections (c 60% of its current production is already US bound). With no concerns raised in the CRLs about the clinical and safety data package, we forecast regulatory approval by the revised PDUFA date of 26 February 2020. Any slippage would further weigh on the share price and confidence in the company. Acacia plans to launch BARHEMSYS in Q320. Acacia has been slowly building its US commercial operations during the last 12 months and has 30 personnel in the US spanning six regional teams (each team has medical science liaisons, national account directors and sales leadership) and back office support staff. With near-term funding in place, Acacia plans to recruit five hospital territory managers for each of those six regions and train them during June and July. Beyond educating anaesthetic staff and surgical teams, key negotiations include formulary access for hospitals and large integrated delivery networks (IDNs). Post launch, we will monitor formulary access wins and initial sales uptake.

ByFavo (remimazolam) is an ultra-short-acting and reversible iv benzodiazepine sedative/anaesthetic designed for use during procedural sedation (PS) such as endoscopy, bronchoscopy and colonoscopy. It offers both rapid onset and offset of action, and this differentiating profile (the opportunity to substitute both midazolam and propofol) should drive US market uptake for short, painful procedures such as colonoscopy. ByFavo has been shown to be a safer, faster alternative to approved sedatives, and potentially carries a reduced risk of cardiac and respiratory depression, which is particularly significant for older patients with comorbidities. Studies have shown that ByFavo is suited for three indications requiring varying depths of sedation – general anaesthesia, procedural and ICU sedation – while maintaining the vital physiological and neurological functions of the patient (source: American Society of Anesthesiologists’ guidelines on the continuum of sedation). A comparison of the characteristics of remimazolam with standard sedatives is shown in Exhibit 2. Acacia’s deal with Cosmo relates to the use of ByFavo in procedural sedation.

Based on the results of Paion’s clinical development programme for procedural sedation, we believe there is a high likelihood that ByFavo will be granted marketing approval on or before its 5 April 2020 PDUFA date. Paion has completed three US-based Phase III studies of remimazolam compared to placebo with midazolam rescue in procedural sedation. This includes studies in patients undergoing colonoscopy and bronchoscopy procedures, plus a further Phase III study in higher-risk patients undergoing a colonoscopy. Remimazolam was highly successful in inducing sedation in the three US Phase III studies. Exhibit 3 shows that in each of the studies, over 80% of patients achieved the primary efficacy endpoint, versus less than 4% of placebo-treated patients and less than 35% of those treated with midazolam. The primary outcome measure was a composite endpoint of no need for rescue medication, completion of the procedure and no more than five doses within any 15-minute window (no more than three doses in 12 minutes for midazolam). Failure of a patient to achieve the composite endpoint usually meant that one or more additional doses of midazolam as a rescue medicine were required to achieve adequate sedation and complete the procedure.

We expect the shorter procedure times with remimazolam compared to midazolam to be important drivers of market uptake. Exhibit 4 summarises sedation and recovery times for remimazolam and midazolam in the three Phase III studies. In each study, total induction and recovery times were between 17 and 20.3 minutes shorter for remimazolam than for midazolam (average 18.4 minutes). In the clinical setting, midazolam is often administered at higher initial doses and with shorter intervals between top-ups than is recommended on the label. However, our review of published studies found that although this led to faster induction of sedation (six minutes), average recovery times were significantly longer (30 minutes), so the total induction and recovery time in the published studies averaged 36 minutes, slightly longer than the 32-minute total for midazolam in Paion’s Phase III colonoscopy study. It is possible that more rapid administration of midazolam results in higher total doses, leading to slower recovery from sedation.

With the average time savings with remimazolam being almost 20 minutes and the average duration of the colonoscopy examination itself being less than 20 minutes, the results demonstrate that clinical centres could significantly increase throughput by switching from midazolam to remimazolam. We expect this improved throughput to drive significant uptake of ByFavo in the addressable market of ~24.5m procedures per year in the US (source: Cosmo Pharmaceuticals).

We forecast $126m peak sales in the US in 2025 based on a 20% penetration rate of 17.6m available patients (90% of patients undergoing the 24.5m procedures are eligible for moderate sedation, and we assume 80% of these are covered in the US). We assume pricing of $25/dose (based on company guidance) versus $1/dose of midazolam.

Our valuation of Acacia Pharma, at €881.6m or €13.8/share, vs €631m or €11.8/share previously, is based on a risk-adjusted NPV model. Valuation uplift is derived from the addition of US ByFavo sales in procedural sedation to our forecasts following the recent in-license agreement. We ascribe a 90% probability of success, reflecting its regulatory status. Our sales forecasts for BARHEMSYS for rescue treatment and prophylaxis of PONV, and the chemotherapy-induced nausea and vomiting (CINV) opportunity for the US market remain unchanged (Exhibit 5). We include end December 2019 net cash of $7m in our valuation ($17m cash and $10m Hercules debt) and use a 12.5% discount rate.

We have incorporated the Cosmo deal in our forecasts for Acacia Pharma. Given the complex structure of the deal, the impact is as follows:

Acacia has changed its reporting currency from UK pounds to US dollars as of 1 January 2019. We retain our sterling-denominated forecasts for now and will change to US dollars following publication of the FY19 results.