Guidance maintained for key programmes

Sequana reported its FY21 results on 12 April 2022, and confirmed its operating guidance for the coming months. Having recently completed all the alfapump implantations required for its North American POSEIDON pivotal study for the treatment of RRA due to liver cirrhosis, the company continues to expect to report top-line efficacy data in Q422 and plans to submit a US PMA application in mid-2023. As it relates to the company’s direct sodium removal (DSR) programmes in HF, it expects to complete enrolment for its SAHARA DESERT alfapump DSR study in patients with decompensated HF in Q222 and report top-line data in H222. The company reported continued progress with the development of its proprietary DSR Infusate 2.0, a sodium-free dextrose/icodextrin solution that it expects to provide superior therapeutic and safety profiles (to the simple 10% dextrose solution used in prior DSR clinical studies). Preclinical studies on DSR Infusate 2.0 are underway, with the company maintaining its guidance for starting a US study for short-term DSR therapy (MOJAVE DESERT) in HF patients before year-end 2022.

Our prior note reviewed the key upcoming catalysts for the alfapump system in RRA due to cirrhosis, which is Sequana’s earliest revenue opportunity, given its current CE mark (and ongoing commercialisation in France and Germany), and our forecast for potential US launch in mid-2024 provided there is positive top-line data from the POSEIDON study.

As explained in our initiation report, HF could be a larger commercial opportunity for Sequana than RRA although the company’s programmes (alfapump DSR, and short-term ‘standalone’ DSR) in this indication are at earlier development stages and we do not expect them to reach commercialisation until H226 at the earliest. HF can often lead to sodium retention and resulting fluid retention and accumulation (congestion). Congestion in HF patients is generally treated with diuretics in the first line, most commonly loop diuretics (eg furosemide, bumetanide and torsemide), but these drugs become less effective with disease progression. Consequently, there are over one million hospitalisations for HF per year in the United States1 and in Europe, and of such admissions, c 90% are due to fluid overload.2 Sequana’s DSR approach aims to resolve persistent congestion through the periodic and controlled introduction of a zero-sodium infusate solution, which is designed to remove excess sodium in patients and would then be expected to lead to more regular fluid release into the kidneys and excretion. The company’s first HF programme is based on the alfapump DSR system, which consists of three elements: the alfapump system, DSR infusate solution and a surgically implanted port (whereby controlled quantities of DSR infusate are administered externally and reach the peritoneal cavity).

The SAHARA DESERT interim results suggest that alfapump DSR can effectively and rapidly eliminate persistent congestion and restore euvolemia (normal bodily fluid volume) in diuretic-resistant HF patients. The study also suggests that DSR therapy can result in improvements in cardio-renal parameters (such as NT-proBNP) and lead to material sustained improvements in diuretic responsiveness (DR). As stated earlier, top-line data are expected in H222. In May 2021 the company reported positive results from the RED DESERT study (in chronic HF patients taking high doses of oral diuretics), showing that a controlled DSR administration using alfapump over a six-week period led to persistent reduction in the needed oral diuretic dose over nearly a year, on average.

In parallel to the alfapump DSR system, Sequana is advancing a short-term (‘standalone’) DSR treatment approach, which does not require the implantation of an alfapump device. Short-term DSR therapy will involve repeated DSR treatment for about two weeks, using DSR Infusate 2.0 in combination with a peritoneal catheter (instead of requiring alfapump implantation). Similar to alfapump DSR, the goal of short-term DSR therapy would be to treat fluid overload by allowing the renal system to itself excrete excess sodium more effectively with diuretics (improving the patient’s DR) and improve cardio-renal parameters. The short-term DSR approach would require insertion or usage of a peritoneal catheter each time DSR therapy is applied, whereas the implantation of the alfapump (‘alfapump DSR’, also referred to as ‘long-term DSR approach’) avoids the need for repeated catheter insertion.

We believe that the company’s primary rationale for advancing short-term DSR (without alfapump) therapy is primarily to provide clinicians with the option of a ‘gateway’ or one-off treatment for HF patients with persistent congestion, with the goal of transitioning them to alfapump DSR as the DSR interventions become required more often. Adding a short-term DSR approach (ie as a ‘gateway product’) may not necessarily increase the potential market for HF patients suffering from congestion, in our view, but could help accelerate DSR product adoption among clinicians by providing them with one-off DSR treatment options. However, we also note that the sustained improvements in DR shown in the RED DESERT and SAHARA DESERT (interim data) provide some optimism that a short-term DSR therapy approach could similarly also provide durable meaningful improvements in DR. The MOJAVE DESERT study will be very helpful in determining the durability and extent of DR improvement possible with ‘standalone’ DSR therapy. The results and DR shown in this study may help guide the future development path and the company may even prioritise the advancement of short-term DSR ahead of the alfapump DSR platform. The regulatory approval pathway for short-term DSR (based on DSR Infusate 2.0) could be simpler than alfapump DSR since it would be regulated as a drug by the FDA’s Center for Drug Evaluation and Research division, whereas alfapump DSR would need to be regulated as a drug-device combination.

As stated above, Sequana’s next planned study is the US-based MOJAVE DESERT trial assessing short-term DSR therapy in chronic HF patients with persistent congestion and it remains on track to start before the end of 2022. The company continues to guide that it will start the first US-based alfapump DSR trial, SONORAN (not a registration study), in H223, after the completion of long-term good laboratory practice (GLP) animal safety studies (expected in early 2023). We expect the completion of SONORAN in H224. For alfapump DSR and short-term DSR, we expect Sequana to enter into a sales and distribution partnership or agreement with an established medical device marketer with experience in the cardiovascular markets.3 We expect the company to enter into such discussions while the SONORAN study is ongoing.

As a reminder, DSR Infusate 2.0 is a proprietary formulation of the sugars dextrose and icodextrin, and is intended to deliver a superior therapeutic profile (ie potentially reducing the amount of infusate that needs to be administered to render an equivalent therapeutic response) and better safety (with longer and slower dwells) while providing the potential for a higher-margin recurring revenue stream. The infusate solution is a vital part of the DSR treatment approach since it will need to be administered repeatedly (providing revenue per infusion), and a simple 10% dextrose solution (ie the DSR formulation used in SAHARA DESERT and RED DESERT) would not carry the premium pricing potential of a more specialised formulation (eg DSR Infusate 2.0). We expect all human DSR studies after SAHARA DESERT will employ DSR Infusate 2.0 (as will the commercial products assuming eventual approval), starting with the MOJAVE DESERT study.

Sequana’s FY21 results showed a larger loss than expected, primarily due to higher than anticipated R&D costs. FY21 revenue, generally consisting of alfapump sales in France and Germany, were €0.37m (down 61% y-o-y), lower than our forecast of €0.53m. Sales were affected by COVID-19 health restrictions and by the company’s prioritisation of alfapump supply towards the POSEIDON and RED DESERT clinical trials. The company’s sales and marketing expenses decreased 10% y-o-y to €2.1m, primarily due to a reduction in European commercial activities.

As highlighted in prior notes, product uptake in Europe has been relatively limited since alfapump’s launch in the region in 2013 and is likely to remain so in the near to medium term, as most of the refractory ascites in these regions is being attributed to alcoholism or hepatitis, the treatment of which may not be as effectively integrated into the healthcare systems. As a reminder, we expect the opportunity for alfapump in North America to be much more robust given the rising prevalence of NASH in this region. NASH-related cirrhosis is expected to account for a larger proportion of RRA cases in the US and Canada, and these patients are generally older (and thus more likely to be contraindicated for transjugular intrahepatic portosystemic shunt, an alternative treatment for RRA), insured (those aged over 65 have government-run Medicare insurance in the United States) and well-integrated into the healthcare system.

Total SG&A costs (including sales and marketing expenses described above) came in at €7.2m, slightly above our €7.1m estimate. R&D costs (which include clinical expenses, quality and regulatory costs, supply chain and engineering costs) were €16.9m (+43% y-o-y), above our forecast of €15.6m, with the increase largely due to the costs associated with the trials underway during the period (POSEIDON, RED DESERT, SAHARA DESERT) and development work on DSR Infusate 2.0. In addition, regulatory, supply chain and engineering costs rose due to preparation work conducted for the planned regulatory submissions for alfapump in the United States and Canada.

Overall, the reported FY21 operating loss increased to €22.6m in FY21, up from €17.8m in FY20 and above our forecast loss of €22.3m. FY21 net operating cash burn was €23.6m, above our estimate of €22.6m.

Following FY21 results, we have increased our R&D cost forecasts to reflect the increased expense run-rate shown in FY21. FY22 R&D costs willl also include costs for GLP (preclinical) work required for the DSR programmes and costs associated with the ramp up of the MOJAVE DESERT study. We now expect FY22 R&D costs of €16.5m, up from €15.5m previously. While we have raised our FY23 R&D costs to €13.5m (from €12m previously), we expect R&D costs to decline year-on-year in FY23 given our expectation that relative savings following the conclusion of POSEIDON will likely offset the start-up costs for the SONORAN study.

Altogether we now expect net operating cash burn rates of €23.4m and €22.0m in FY22e and FY23e, respectively, from our prior forecasts of €23.0m and €20.5m, respectively.

Sequana reported €9.6m gross cash at 31 December and €7.3m in long-term debt, resulting in a net cash position of €2.3m, excluding €0.76m in lease liabilities. The company strengthened its balance sheet through an equity issue in early March, raising €28.4m (gross) though the issue of 5.167m shares at €5.50 per share.

The company continues to expect its funds on hand to support its operating cash runway into Q223. Importantly, it has sufficient funds to fund the company well through the POSEIDON study’s primary endpoint data readout and the SAHARA DESERT top-line results, both expected before the end of 2022. We believe the POSEIDON primary endpoint readout in particular is very critical and, if positive, could trigger a re-rating of the stock as it would signal an improved likelihood of success for advancing the alfapump system in RRA for the all-important US market, which is the largest driver of our valuation for the product in this indication.

We maintain our future total financing expectations of €100m, which we model that Sequana will raise over the next few years until it starts to generate sustained positive operating cash flows (which we continue to expect in H127). We have reduced our alfapump (in RRA) sales forecasts for Europe given recent trends but have not adjusted our forecasts for North American markets, nor have we modified any of our short-term DSR or alfapump DSR forecasts.

Based on our assumptions described above and the Q122 financing, we currently estimate 31 March 2022 net cash of c €23.7m (vs our previous estimate of €25.4m).

We continue to value Sequana Medical using a risk-adjusted NPV model with a 12.5% cost of capital for alfapump in North America and alfapump DSR (and short-term DSR), and a 10% rate for alfapump in ex-North American markets (where it is commercialised).

Following the adjustments described above, we now obtain a pipeline rNPV valuation of €287.8m versus €296.4m, previously. After adding Q122e net cash of €23.7m (excluding lease liabilities), we obtain an equity valuation of €311.5m or €13.12 per share (€12.19 fully diluted), versus €13.55 previously (€12.59 fully diluted). While we note that the valuation for alfapump in Europe and ex-North America regions is now negative given our reduced European market estimates, we view the overall effect of alfapump commercialisation in these regions as positive, as they help provide support (ie clinical data, quality, manufacturing and regulatory expertise) to the projected commercialisation in the core North American markets.