Evenamide focus, Supernus to sell Xadago in US

Newron Pharmaceuticals 22 May 2020 Update
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Newron Pharmaceuticals

Evenamide focus, Supernus to sell Xadago in US

Portfolio update

Pharma & biotech

22 May 2020

Price

CHF1.76

Market cap

CHF31m

€1.05/CHF; $1.03/CHF; $1.08/€

Cash and investments (€m) at 31 Dec 2019

39.2

Shares in issue

17.85m

Free float

99.6%

Code

NWRN

Primary exchange

SIX

Secondary exchange

XETRA

Share price performance

%

1m

3m

12m

Abs

(71.6)

(73.0)

(77.8)

Rel (local)

(71.6)

(70.1)

(78.6)

52-week high/low

CHF8.08

CHF1.59

Business description

Newron Pharmaceuticals is a CNS-focused company. Xadago for Parkinson’s disease is sold in Europe, Japan and the US. Evenamide, a novel schizophrenia therapy, may start Phase III trials from 2021.

Next events

H1 report

15 September 2020

Evenamide safety work outcome

H121

Analysts

Dr John Savin MBA

+44 (0)20 3077 5700

Dr Susie Jana

+44 (0)20 3077 5700

Newron Pharmaceuticals is a research client of Edison Investment Research Limited

Given that sarizotan did not meet the primary or any secondary endpoints in the pivotal Rett syndrome STARS study, Newron is focusing on its novel schizophrenia drug, Evenamide. This clinical programme, due to resume in 2020, is on hold due to COVID-19, but Phase III may start in Q321. A new marketing partner (Supernus) has taken over US Xadago sales (2019 royalties of €4.8m), which should yield higher growth. A dyskinesia trial is planned to expand the indication. Newron drew down a €7.5m EIB loan in April (a €15m loan facility remains) and had €39m cash at end December 2019. This provides cash throughout 2021. Our indicative value has been revised to CHF121m (formerly CHF340m) after removing sarizotan sales and costs.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

4.03

(15.01)

(0.84)

0.0

N/A

N/A

12/19

7.04

(20.16)

(1.13)

0.0

N/A

N/A

12/20e

5.59

(14.47)

(0.81)

0.0

N/A

N/A

12/21e

6.67

(20.19)

(1.13)

0.0

N/A

N/A

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

STARS failed to shine

The pivotal Phase II/III sarizotan Treatment of Apnoeas in Rett Syndrome (STARS) trial showed a negative outcome, but with no statistics released. In our withdrawn former CHF340m valuation, this had a 30% probability of success and a discounted value of CHF211m. Stopping further development might have some marginal cost savings in 2020 and 2021. The biggest impact will be on funding as no sarizotan revenue will be available from 2022 to fund ongoing Evenamide pivotal studies.

New focus on Evenamide for schizophrenia

Newron will now focus on Evenamide for schizophrenia. A four-week exploratory safety study in patients with schizophrenia, as requested by the FDA, is planned before Phase III; Newron estimates that this should complete in early 2021. This could enable two Phase III studies to start from about mid-2021. We have not changed our expectation of sales starting in 2025; the marketing route is unclear.

Valuation: Evenamide partnering or funding needed

The new Xadago US sublicensee, Supernus, might boost sales but Xadago royalties are not likely to grow enough to compensate for the vanished sarizotan revenues from 2022. The proposed but not yet agreed levodopa-induced dyskinesia (LID) trial, perhaps completing in 2023 at a cost of €10m, could increase Xadago sales. Newron had €39m cash in December and drew a further €7.5m EIB loan in April. The EIB agreement leaves €15m potentially available. The funding gap in 2022–25 might be filled by Evenamide partnering and/or a capital raising until possible launch in 2025. Our model, with sarizotan removed, now indicates a value of about CHF121m (CHF6.8/share) at current FX rates, formerly CHF340m, excluding any partnering milestones and funding dilution.

Xadago growth might rise with new marketing partner

Xadago is licensed, outside Japan and Asia, to Zambon, a private Italian company. Zambon is strong in Europe with 20% of its sales in the home Italian market. It launched Xadago in Europe during H115, with Newron receiving double-digit royalties on sales. Our royalty rate forecasts are around 12–13%. Total product royalties rose in H2 to €2.6m vs €2.1m in H119: €4.8m in total. The Italian price cap has been removed, which may help revenues given the strength of Zambon’s local sales in Italy.

In the US in Q116, Zambon sublicensed Xadago to US WorldMeds Pharma. FDA approval was gained in Q117. In April 2020, US WorldMeds sold the Xadago rights to Supernus Pharma, a quoted US company, as part of a package of CNS products. Supernus cites that the US Parkinson’s disease market is anticipated to grow from $1.5bn to $6.2bn by 2026. We anticipate that Supernus will invest in its CNS franchise and will have over 246 sales reps potentially available, a five-fold rise. This could drive Xadago sales more rapidly than we have forecast previously. Under the sublicence, Newron shares 50% of Zambon’s US royalties.1 Given the importance of the US market, this sharing arrangement might be a drag on royalty growth. Newron does not disclose sales by region, so detailed forecasting is not feasible.

  Edison outlook note 13 October 2017. We assume about a 6% effective US royalty rate to Newron.

In 2011, Newron entered into an exclusive licensing agreement with Meiji to develop, manufacture and commercialise the drug in Japan and Asia. Under an agreement between Eisai and Meiji in March 2017, Eisai has the exclusive rights to market safinamide in Japan, as well as to develop and market safinamide in Asia. The approval of Xadago in Japan in late 2019 gave a €2.3m milestone.

Indication

Xadago is indicated for the treatment of adult patients with idiopathic Parkinson’s disease (PD) as add-on therapy to a stable dose of levodopa (L-DOPA) alone or in combination with other PD medicinal products in mid- to late-stage fluctuating patients. Xadago is a monoamine oxidase type B (MOA-B) inhibitor. MOA is the enzyme that breaks down dopamine, so reducing its activity gives more consistent brain dopamine levels.

One of the issues with oral dosing of dopamine (given as the prodrug L-DOPA) is inconsistent blood levels, which lead to ‘off’ periods when Parkinson symptoms return. MOA-B inhibitors are used as one of several possible therapeutics to limit off time. Other treatments to deal with this include direct continuous delivery of L-DOPA gel to the small intestine via an external pump, but this is very expensive. Deep brain stimulation is also used.

A noted complication of L-DOPA treatment, the main Parkinson’s therapy, is dyskinesia – uncontrolled tremors that can occur both when treatment is working (‘on’) and in off periods. Dyskinesia is a very complex condition and opinion is still uncertain about why and how to treat it. It develops progressively in many patients after several years of L-DOPA therapy.

In the MOA-B class, the leader is Azilect (rasagiline, Teva), approved by the FDA in 2006 and EMA in 2005. Rasagiline is an irreversible MOA-B inhibitor, which means it destroys the enzyme activity after it binds. Other MOA-B drugs like Xadago and Zelapar (selegiline) are reversible. Rasagiline started to become generic in 2016. It has a wide label for use alone or in combination with other Parkinson’s disease medications. Azilect had peak sales in 2014 of $519m (EvaluatePharma) but generics are now under $50m in Europe and the US combined. Due to a late approval, it is a branded product in Japan (Takeda) accounting for about half of global sales. Selegiline seems never to have gained a significant market share with very low sales.

Label extension

Newron expects to start a pivotal label extension study to support Xadago use in L-DOPA induced dyskinesia (LID). This trial has been expected for some years and may start in H220, although the need for a final agreement with Zambon, possibly involving Supernus, and limitations on vulnerable patients in clinical studies due to COVID-19, make timelines uncertain. The trial is stated by Newron to be a six-month, double-blind, placebo-controlled study. This will take about two years to recruit, run and analyse. It could announce data in 2023 with a fast review. Newron plans to fund the study up to a capped investment of €10m. In return, Newron would receive a €4m milestone on approval and a marginally enhanced royalty rate on all Xadago sales. Management indicates that, on approval, the deal could payback in a year with milestones and higher royalties if overall sales rise by 6% or more. This is therefore an obvious investment.

Evenamide: Delayed extra safety data

In H119, the FDA delayed the planned pivotal studies of schizophrenia drug Evenamide due to safety concerns. Newron is now carrying out additional preclinical work and is planning a four-week exploratory study in patients with schizophrenia to allay these concerns and get approval to run Phase III studies. In March at the AGM, a delay due to COVID-19 was announced. As yet, this small trial has not been posted on clinical trial databases. Our estimate is that, assuming the FDA is satisfied, the Phase III programme might start about mid-2021. However, this is clearly subject to events. The Phase III programme could take 18 months to run and covers two trials; designs have not been published.

The ideal target indication will be patients who are refractory to clozapine, a common anti-psychotic agent. These patients currently have no other treatment options; Newron estimates there are 20,000 clozapine-refractory patients in the US. An approval in this indication would give a solid market base that Newron estimates could be worth several hundred million dollars. Note that meeting the primary endpoint in the single clozapine-resistant study would potentially suffice for this indication.

Newron will also seek a general schizophrenia indication for patients who are not well controlled on their current anti-psychotic medicine, about 70% of cases. In Newron’s estimates, this could have a market potential of over US$1bn a year. In the general anti-psychotic market, the leading agents are now generic, but Evenamide might add onto current therapy rather than seek to replace it. Both the general and clozapine studies need to be successful for FDA approval in this wider indication and safety would need to be acceptable.

If a filing is made by H124, the product could be marketed from H225. The form of matter patent expires in 2028 but the duration of the clinical programme means that additional US patent cover, up to five years, could be gained by patent extensions.

Newron previously estimated that as the studies are on an out-patient basis, they could be funded from company resources. Now, in the absence of sarizotan profits, either further funding from 2022 or Phase III partnering will be needed in our view. The trials will need to be large enough to show safety, given current concerns and the use by patients of multiple medicines. A marketing partner for a mass-market anti-psychotic will be needed, but Newron has plans to sell direct to the smaller clozapine-resistant market. There are therefore a number of strategic issues for Newron to resolve.

Valuation

Our previous valuation has been updated by the following adjustments.

In the short term, 2020 and 2021, we retain our Xadago sales forecast of steady growth. We note the potential for Supernus (with its fivefold larger CNS salesforce vs US WorldMeds) to boost sales. As yet, Supernus has not issued any sales guidance. Growth may also be affected by the COVID-19 situation in the US. We continue to keep the Xadago forecast under review.

Sarizotan sales are eliminated from our model. Pre-marketing costs formerly expected in 2020 and 2021 respectively of €2.5m and €10m are removed.

We have not changed the Evenamide peak sales potential and still assume launch in 2025 and US patent extension to 2033. If COVID-19 further delays trials, this could slip to 2026. In the EU, there will be 10-year exclusivity to 2034.

We assume R&D in 2020 reduces slightly with COVID-19 delays to the small Evenamide study, which is not a high cost. However, trial costs are assumed to increase from H221. Newron has previously given guidance of €35–38m in clinical trial costs over the next few years.

Debt has risen due to use of the EIB loan facility. This had a discounted (fair) value of €16.7m in the 2019 balance sheet (December 2019) reflecting €17.5m face value of debt. The fair value has been used in our value assessment. A further €7.5m was drawn in April 2020 and is added (gross) to the debt. A further €15m of debt is assumed to be drawn in 2021. Cash use in 2019 was €22m. Note that debt is converted to CHF for valuation.

We added a line to reflect core cash flows from R&D and general and administrative costs. These are discounted at 10%, as commercial costs, and adjusted for tax. We assume 2020 costs will be slightly lower at core R&D of €7.5m and administration costs of €8m a year (net of warrant gains). We assume costs are as before from 2021 and rise at 5%. We have adjusted the discount period, which now starts from 2021 as we are now in mid-May; this raises the overall cost estimate by about €10m over the period.

The rNPV valuation, which uses a 12.5% discount rate for clinical-stage assets and a 10% discount rate for commercial assets (Xadago in PD), is shown in Exhibit 1. This uses 11 May 2020 FX rates, which have altered both US$ vs the euro and the euro vs the Swiss franc. The revised value is CHF121m (formerly CHF340m) or CHF6.8/share. This is much higher than the mid-May market value of CHF33m. This may reflect the market perception of low reported revenues and of further funding requirements. It may also reflect the risks of schizophrenia drug development and the lack of a clear statement regarding the FDA’s concerns on Evenamide or any other published data.

Exhibit 1: Indicative valuation (CHF)

Product

Indication

Launch

Probability

rNPV
(CHFm)

NPV/share (CHF/share)

Xadago

Parkinson's disease

2015

100%

132.2

7.4

Dyskinesia

2024

50%

26.9

1.5

Sarizotan

N/A

N/A

N/A

(5.3)

(0.3)

Evenamide

Schizophrenia

2025

30%

67.1

3.8

Total direct product value

 

 

 

220.9

12.4

 

Direct costs to 2033 less tax

(123.6)

(6.9)

Cash (Dec 2019 plus €7.5m EIB)

49.1

2.8

Loans (fair value Dec plus €7.5m April EIB)

(25.5)

(1.4)

Valuation

 

 

 

120.9

6.8

Source: Edison Investment Research. Note: Converted at €1.05/CHF.

Financials, loans and cash

Reported revenues grew during FY19 to €4.8m (FY18: €4.0m) plus a €2.3m milestone from the Japanese approval. Costs in FY19 were predominantly R&D of €22.4m offset by a tax credit of €5.0m. General costs were €9.9m in FY19. There were non-cash share options costs of €2.1m split between R&D (€0.5m) and administration (€1.6m). Newron reported cash and equivalents of €39.2m at 31 December. The April €7.5m loan is shown in 2020 and the remaining €15m EIB loan shown as fully drawn in 2021. This gives Newron cash into 2022 with further funding needed to complete the development of Evenamide. Financial forecasts (in euros) are shown in Exhibit 2.

Exhibit 2: Financial summary

€000s

2018

2019

2020e

2021e

Year end December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,025

7,038

5,590

6,669

Cost of Sales

0

0

0

0

Gross Profit

4,025

7,038

5,590

6,669

EBITDA

 

 

(14,931)

(20,707)

(13,757)

(19,593)

Operating Profit (before amort. and except.)

 

 

(14,967)

(20,899)

(13,963)

(19,616)

Intangible Amortisation

(11)

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(14,978)

(20,899)

(13,963)

(19,616)

Net Interest

(41)

737

(507)

(572)

Profit Before Tax (norm)

 

 

(15,008)

(20,162)

(14,470)

(20,189)

Profit Before Tax (reported)

 

 

(15,019)

(20,162)

(14,470)

(20,189)

Tax

(16)

(45)

0

0

Profit After Tax (norm)

(15,024)

(20,207)

(14,470)

(20,188)

Profit After Tax (reported)

(15,035)

(20,207)

(14,470)

(20,189)

Average Number of Shares Outstanding (m)

17.8

17.8

17.8

17.8

EPS - normalised (c)

 

 

(84.20)

(113.24)

(81.09)

(113.13)

EPS - (reported) (€)

 

 

(0.84)

(1.13)

(0.81)

(1.13)

Dividend per share

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

487

342

342

332

Intangible Assets

30

20

20

10

Tangible Assets

106

116

116

116

Investments

351

206

206

206

Current Assets

 

 

59,512

59,946

49,912

40,674

Stocks

0

0

0

0

Debtors

15,659

20,783

19,783

19,783

Cash

43,853

39,163

30,129

20,891

Other

0

0

0

0

Current Liabilities

 

 

(4,432)

(5,595)

(7,081)

(8,081)

Creditors

(4,432)

(5,595)

(7,081)

(8,081)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(731)

(17,895)

(25,395)

(40,395)

Long term borrowings

0

(16,749)

(24,249)

(39,249)

Other long term liabilities

(731)

(1,146)

(1,146)

(1,146)

Net Assets

 

 

54,836

36,798

17,778

(7,470)

CASH FLOW

Operating Cash Flow

 

 

(15,954)

(22,210)

(16,484)

(24,189)

Net Interest

(78)

71

0

0

Tax

0

0

0

0

Capex

(40)

(51)

(50)

(50)

Acquisitions/disposals

0

0

0

0

Financing

51

0

7,500

15,000

Other

3,002

16,619

0

0

Dividends

0

0

0

0

Net Cash Flow

(13,019)

(5,571)

(9,034)

(9,239)

Opening net debt/(cash)

 

 

(60,081)

(43,853)

(22,414)

(5,880)

HP finance leases initiated

0

0

0

0

Other

(3,209)

(15,868)

(7,500)

(15,000)

Closing net debt/(cash)

 

 

(43,853)

(22,414)

(5,880)

18,358

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Newron Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by Newron Pharmaceuticals. Edison Investment Research standard fees are £49,500 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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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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

1,185 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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