Iris II and Prima continue to advance

Pixium Vision 15 July 2016 Update

Pixium Vision

Iris II and Prima continue to advance

Update - clinical trials

Healthcare equipment
& services

15 July 2016

Price

€7.81

Market cap

€99m

Net cash (€m) at 31 December 2015

24.2

Shares in issue

12.7m

Free float

26%

Code

PIX

Primary exchange

Euronext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.8

11.4

28.5

Rel (local)

4.7

14.7

46.5

52-week high/low

€8.40

€4.48

Business description

Pixium Vision is a French medical device company developing retinal implants for patients with retinitis pigmentosa and macular degeneration. A CE mark application was submitted in late 2015 on its initial product, Iris. A sub-retinal implant, Prima, is also being developed simultaneously.

Next events

H116 results

August 2016

Receipt of CE mark for Iris II

H216

First in-human dosing for Prima

H216

Analysts

Pooya Hemami

+1 646 653 7026

Maxim Jacobs

+1 646 653 7027

Pixium Vision is a research client of Edison Investment Research Limited

Pixium Vision implanted its first Iris II epi-retinal implant in January 2016 as part of a 10-patient European study as it awaits clearance from a CE mark application. It also reported supportive animal data on its next-generation implant, Prima, slated to start human studies by YE16. Our rNPV valuation is €10.28 per share, down from €10.50 previously.

Year
end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

2.4

(11.6)

(1.18)

0.0

N/A

N/A

12/15

3.3

(15.6)

(1.23)

0.0

N/A

N/A

12/16e

3.0

(13.5)

(1.06)

0.0

N/A

N/A

12/17e

5.5

(23.5)

(1.85)

0.0

N/A

N/A

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

Iris II starts human studies

The Iris II implant contains 150 electrodes and is designed to partially restore vision in visually impaired patients by electrically stimulating the retina. Following safety data from an earlier device iteration (Iris I) comprising 50 electrodes, Pixium started a 10-patient study in early 2016 with the first implant occurring in France in January. A CE mark application filed in late 2015 for Iris II could lead to approval in H216. Iris II has more electrodes than the 60-electrode Argus II (the only approved competing retinal implant), which could potentially deliver a higher visual acuity.

Prima planned to start human testing by YE16

The next-generation implant, Prima, is inserted below the retina (sub-retinal) and could potentially provide sharper acuity than Iris II while offering a simpler and less invasive surgical technique. This could expand potential utilisation to the late-stage macular degeneration market. By targeting bipolar cells, Prima operates more upstream in the retinal signal processing than epi-retinal implants, reducing power requirements and allowing it to function wirelessly. Primate data presented at ARVO shows proof-of-concept of retinal signal responses to Prima prototype. A first-in-man study is planned by YE16 and commercialisation could occur in 2019.

Valuation: €10.28 per share including H116 cash

While we have raised our penetration forecasts, we also pushed back our US Prima launch timeline to 2021 (vs 2019 previously), and raised working capital/capex assumptions for future Iris or Prima launches. Our pipeline rNPV is €113.5m (vs €109.0m, previously). After including H116 estimated net cash of €17.5m, we obtain an equity valuation of €131.0m, or €10.28 per share (vs €10.50 previously). Upcoming catalysts, such as Iris II CE mark clearance and in-human testing of Prima, could de-risk the programmes and raise our valuation. We expect a cash burn rate of €14.9m in 2016, rising in the coming years due to higher R&D spending given plans for US Iris II trials and EU/US Prima studies, and Iris II launch activities. We assume Pixium will raise €20m in financing in 2016, and €30m in both 2017 and 2018. For illustrative purposes only, we have added these requirements to long-term debt, and our models do not include the potential dilutive impacts of future equity offerings.

Iris II implant getting ready for prime time

Pixium Vision’s higher-resolution successor to its Iris I neuromodulation-based sensory vision device, Iris II, is advancing through clinical testing. Many retinal diseases, such as retinitis pigmentosa (RP) and age-related macular degeneration (ARMD), permanently damage photoreceptor cells, impairing their ability to translate visual stimuli into electrical signals transmittable into the optic nerve and brain. The premise behind Pixium’s vision restoration systems (VRS), such as Iris II and Prima, is to replace the signal processing functions of damaged retinal photoreceptors by electrically stimulating retinal cells, which would then transmit the information towards the brain via the optic nerve.

The primary difference between the Iris II epi-retinal1 implant and the Iris I is that Iris II has 150 electrodes, compared to 50 on the Iris I. The higher electrode count and density of Iris II could improve the level of visual resolution perceived by the user. The higher resolution capacity of Iris II can help better differentiate this device compared to existing VRS implants, such as Second Sight’s (EYES, Nasdaq) Argus-II epi-retinal implant (currently the only approved implant VRS device in the US and Europe, and which has 60 electrodes). Another potential advantage of the Iris II vs Argus II is that it can be explanted more easily (ie to allow for the implantation of potentially improved later-generation VRS devices in the future).

  Lying at the surface of the retina.

The Iris I has been studied in eight patients across five European sites to date, with favourable safety data. Pixium has used the six-month data from these subjects as part of its Iris II CE mark filing in December 2015, and has committed to follow these patients for 12-18 months to further study longer-term performance and be better positioned to provide further supportive data to enquiries from European regulators or reimbursement authorities. Given the similarities between the Iris I and Iris II devices and their assembly, Pixium believes the existing safety data on Iris I support its CE mark filing for the Iris II.

Iris II European study commences human testing

Subsequent to the CE mark filing, Pixium started a European clinical study on Iris II, and in January 2016 implanted the first human Iris II implant in a 47-year old RP patient at the University Hospital in Nantes, France. The study plans to recruit 10 patients and monitor them at pre-defined intervals for up to 18 months post-implantation, and assess performance in functional visual tasks between when the headset is activated and when it is disabled. The firm received clearance from regulators in France, Austria, Germany and most recently (late May 2016) the UK for the Iris II clinical study, and Moorfields Eye Hospital is registered as a clinical trial site. The company expects that all its future Iris implantations (either for clinical studies or subsequent to commercial clearance) will use the higher electrode-density Iris II implant, rather than Iris I.

The firm anticipates commercial Iris II approval and potential launch in H216. In 2016, Pixium intends to make an Investigational Device Exemption (IDE) application for authorization to commence clinical trials on the Iris II in the US in H216, although we expect initial implantations will likely start in 2017.

Prima inches closer to human studies

While Pixium readies Iris II for further human testing and potential commercial launch, it is also advancing its next-generation VRS platform, Prima, for human feasibility studies. The Prima is a miniaturized wireless sub-retinal implant that can potentially offer better visual resolution than Iris II, while also requiring a less complex surgical procedure for instillation. Like the Iris systems, the Prima system comprises three components:

1.

an implantable portion containing electrodes designed to communicate with retinal cells

2.

a portable visual interface (bio-inspired camera) in the form of spectacles integrating a camera and an information transmission system, and

3.

a handheld device allowing the user to adjust settings.

While Iris II is an epi-retinal device (implanted at the surface of the retina, designed to stimulate retinal ganglion cells), the Prima sub-retinal device is implanted underneath the retina. Instead of stimulating the retinal ganglion cells (more downstream in the visual signal processing), Prima aims to stimulate bipolar cells (more mid-stream in physiological visual signal processing). In normal visual function, healthy photoreceptor cells (located on the outer portion of the retina, or closer to the choroid and sclera) send information to bipolar cells (located within the retina), which then relay information into ganglion cells (which are on the inner portion of the retina). Because Prima functions more upstream, it allows for more physiological or natural image signal processing and also requires less electrical energy than Iris (since functioning inner retinal cells amplify the raw electrical signals before sending them to the optic nerve). The reduced energy requirement lends itself to Prima being capable of operating through a wireless photovoltaic approach, which eliminates the need for permanent trans-scleral wires (as needed by Iris II) and allows the eye to remain intact.

Exhibit 1: Schematic of eye displaying location of Iris and Prima implants

Location of Iris in the epi-retinal space (above inner surface of retina) of the macula (central region of retina)

Location of Prima in the sub-retinal space of the macula.

Source: Edison Investment Research, Pixium Vision presentation

Overall, because the device uses wireless micro photodiode implants (not requiring permanent wire attachments), the surgical procedure to install the device can be easier and less invasive than implanting the Iris II. Pixium continues to work on refining the surgical technique ahead of its first expected human implant (planned in late 2016) in Europe.

Pixium and a team at Stanford University provided preclinical data at the Association for Research in Vision and Ophthalmology (ARVO) conference earlier in 2016. Data studied on ex-vivo2 blind primate retina (an animal model close to the human retina) confirmed that there are localised, pixel (location-specific) responses in the retinal ganglion cells, following sub-retinal stimulation using the Prima prototype. Safety and efficiency testing is being carried out on rodents and other animal models as well.

  Living cells, but tested outside the host organism.

Improved potential resolution of Prima could open door to ARMD market

Pixium believes the Prima could potentially allow for higher resolution than Iris II; animal studies suggest that Prima could reach up to 20/250 in humans (reflecting 8% of the resolution seen by healthy individuals, and generally enough for crude facial recognition). This could be sufficient to provide meaningful improvements and justify implantations in patients with late-stage ARMD (such as those with retinal scarring or geographic retinal atrophy reducing best-corrected vision in both eyes to below 20/200). Hence, this adds the possibility for wider clinical use than the RP markets targeted for Iris II, and supports the implantation of Prima in areas where there is less grave vision loss than advanced RP cases. Altogether, Prima’s potential additional detail and contour resolution enhancement could be advantageous for the visual functioning of many late-stage ARMD patients.

Also like Iris, the Prima uses asynchronous time-based image sensor (ATIS) technology for the imaging camera and sensor, which enables real-time delivery of pertinent visual information with relatively lower bandwidth than a traditional frame-by-frame capture and delivery system. The ATIS method sends signals that respond to movement and changes in contrast, which is more similar to the way the human eye functions, as opposed to sending frame-by-frame images, which carries redundant information and encompasses higher power, processing and bandwidth requirements. Given the wireless photovoltaic approach used by Prima (versus transscleral wires), bandwidth and energy conservation are critical for optimal functioning. The Prima requires clear optical media to function effectively, so patients with significant corneal scarring may be contraindicated (and any cataracts would need to be removed prior to implantation).

Financial forecasts and commercial assumptions

We have made adjustments to our financial model with regards to Iris and Prima. We continue to assume Iris II sales in RP, and Prima sales occurring in both RP and ARMD indications. As Prima has yet to be implanted in humans, we apply a lower probability of success (10% vs 40%) in our valuation. Over time, given its potential for improved vision and a less invasive implantation, Prima may cannibalise Iris sales in RP.

We now assume initial Iris sales in the EU will occur in 2017 (vs H216 previously), and we continue to model US commercialisation (through the PMA pathway) in 2018, although this assumption could be ambitious as the IDE for a US study has not been adopted yet. We expect the company will start human studies on Prima in late 2016, and ramp up to commence an IDE for a US Prima study in 2017 as well. We continue to model Prima launch in Europe in 2019. We now anticipate PMA approval and US commercial introduction for Prima in early 2021, as we believe that the FDA review process for Prima will take longer than the European CE mark process, and that the FDA may require more comprehensive Prima study data than the European regulators.

Exhibit 2: Pixium Vision upcoming catalysts

Event

Timing

Receive CE mark clearance for Iris II

H216*

Start human studies for Prima implant (Europe)

H216*

Initial Iris II sales in Europe

2017**

Start human studies for Iris II and Prima in US

2017**

PMA approval and Iris II commercialisation in US

2018**

CE mark approval and EU commercialisation for Prima

2019**

PMA approval for Prima and US commercialisation

2021**

Event

Receive CE mark clearance for Iris II

Start human studies for Prima implant (Europe)

Initial Iris II sales in Europe

Start human studies for Iris II and Prima in US

PMA approval and Iris II commercialisation in US

CE mark approval and EU commercialisation for Prima

PMA approval for Prima and US commercialisation

Timing

H216*

H216*

2017**

2017**

2018**

2019**

2021**

Source: *Company guidance. **Edison Investment Research estimates

We have increased our peak penetration assumptions for both RP and ARMD, as we assume that a larger proportion of the estimated populations with profound vision loss (20/200 or worse) of the RP (targeted by Iris and Prima) and ARMD (Prima) will obtain treatment. As a means of comparison, we previously estimated that peak transplantations for Prima in ARMD would occur in 2022 and be approximately 1,400 in the US and 2,200 in Europe; we now assume peak Prima ARMD transplantations to occur in 2024, with about 3,700 in Europe and 2,500 in the US. Given the lack of treatment alternatives for potential late-stage ARMD patient populations of over 830,000 persons in Europe3 and over 550,000 in the US, we believe this adjustment is plausible, as it still represents a minor fraction of the pool of affected patients.

  Wong WL, Su X, Li X et al. Lancet Glob Health. 2014 Feb;2(2):e106-16.

Exhibit 3: Financial forecasts for Iris and Prima

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

Iris in Retinitis pigmentosa (RP)

EU population (m)

512

513

514

516

517

518

520

521

Retinitis pigmentosa prevalence

0.025%

0.025%

0.025%

0.025%

0.025%

0.025%

0.025%

0.025%

Total EU RP population (000)

127.9

128.3

128.6

128.9

129.3

129.6

129.9

130.3

Unit sales in EU

32

249

683

869

806

590

427

329

Average revenue per treatment (€)

78,000

78,811

80,214

81,758

83,354

85,022

86,723

88,468

Total EU revenue (€000) for IRIS-RP

2,525

19,607

54,789

71,086

67,206

50,152

37,041

29,141

US population (m)

330

332

335

337

340

342

345

347

Retinitis pigmentosa prevalence

0.03%

0.03%

0.03%

0.03%

0.03%

0.03%

0.03%

0.03%

Total US RP proportion (000)

98.9

99.7

100.4

101.2

101.9

102.7

103.4

104.2

Unit sales in US

0

25

203

494

660

691

496

263

Average revenue per treatment ($)

N/A

144,000

145,376

148,105

150,972

153,957

156,852

160,124

Total US revenue ($000) for IRIS-RP

0

3,627

29,497

73,134

99,690

106,405

77,784

42,120

Prima in Retinitis pigmentosa

Unit sales in EU

-

-

108

391

719

874

876

878

Average revenue per treatment (€)

N/A

N/A

81,900

81,900

81,900

82,922

84,580

86,272

Total EU revenue (€000) for PRIMA-RP

-

-

8,881

32,050

58,903

72,469

74,108

75,784

Unit sales in US

-

-

-

-

94

346

618

702

Average revenue per treatment ($)

N/A

N/A

N/A

N/A

151,200

153,276

156,241

159,272

Total US revenue ($000) for PRIMA-RP

-

-

-

-

14,277

52,992

96,576

111,735

Prima in Macular degeneration

Prevalence of Late ARMD in >45 age group

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

Estimated EU treatment population (000)

818.9

821.0

823.1

825.2

827.3

829.4

831.5

833.7

Unit sales in EU

-

-

176

640

1,395

2,797

3,738

3,748

Total EU revenue (€000) for PRIMA-ARMD

-

-

14,399

52,423

114,241

232,115

316,192

323,343

Estimated US treatment population (000)

527.5

531.5

535.5

539.5

543.5

547.6

551.7

555.9

Unit sales in US

-

-

-

-

336

1,229

2,198

2,494

Total US revenue ($000) for PRIMA-ARMD

-

-

-

-

50,764

188,415

343,380

397,281

Assumed $/EUR rate

1.11

1.11

1.11

1.11

1.11

1.11

1.11

1.11

Worldwide total revenue (€000)

2,525

22,875

104,643

221,446

388,756

668,080

893,772

924,786

Source: Edison Investment Research

Valuation: Adjusting US Prima launch, working capital

While our longer-term revenue assumptions have increased, we have also adjusted our model to account for a longer than previously expected US launch timeframe for Prima (2021 vs 2019 previously). We have also increased assumptions for the working capital and capex expenditure that could be necessary for manufacturing and commercial supply for the Prima and Iris implants. Given these adjustments, we now obtain a risk-adjusted firm NPV (enterprise value) of €113.5m (vs €109.0m, previously) which, after adding €17.5m of estimated net cash at 30 June 2016, provides an equity valuation of €131.0m, or €10.28 per share.

Exhibit 4: Pixium Vision rNPV assumptions

Product contributions (net of R&D and Marketing costs)

Indication

Status

rNPV (€m)

rNPV/ share (€)

Probability of success

Launch year

Peak WW sales (€m)

Iris

Retinitis Pigmentosa

CE mark application filed

86.4

6.78

40.0%

2017

157 in 2021

Prima

Retinitis Pigmentosa

Preclinical

27.6

2.16

10.0%

2019

176 in 2024

Prima

Age-related Macular degeneration

Preclinical

105.3

8.27

10.0%

2019 (EU); 2021 (US)

681 in 2024

Corporate costs & expenses

G&A expenses

(22.2)

(1.74)

Net capex, NWC & taxes

(83.7)

(6.57)

Total rNPV

113.5

8.91

Net cash (debt) (H116e)

17.5

1.38

Total equity value

131.0

10.28

FD shares outstanding (000) (H116e)

12,740

Source: Edison Investment Research

In addition to clinical and regulatory risks, the success probabilities (40% for Iris, 10% for Prima) applied in our risk-adjusted NPV also include and account for the inherent risk in generating and sustaining demand for implantable devices among stakeholders (patients, ocular health professionals and reimbursement authorities). We note that in 2015, there were only 75 implantations for Second Sight’s Argus II device (approved by both FDA and CE mark) worldwide, including 32 in North America (two units were implanted in North America in Q116 and 10 worldwide). Hence there may be a material perception barrier and market acceptance barrier that needs to be overcome among stakeholders, in order to achieve the penetration levels we forecast. This will depend largely on the performance of the Iris and Prima implants; currently Argus II is estimated to provide visual acuity improvement to 20/1262 (approximately 1.6% of normal visual acuity) and should Iris and/or Prima achieve material improvements to such levels (Prima is projected to potentially reach 20/250 or 8% of normal acuity), then we believe the market penetration assumptions in our model can be reached, despite the relatively low uptake of the Argus II to date.

We also highlight that while Prima accounts for the majority of our pipeline valuation, our current model only assumes a 10% probability of success for this product. Pixium expects to complete preclinical electrical safety studies in the coming months, which could bring the product closer to human testing and potentially lower its development risk. This catalyst, and other Prima-related milestones (such as commencing human studies and/or showing early signs of safety), could increase our success probability forecast. As a means of comparison, raising the Prima success probability to 15% or 20% would raise the firm rNPV (excluding net cash) to €154.3m or €195.2m, respectively. Subsequent human data showing material visual acuity and functional improvements in late-stage ARMD patients could further de-risk the programme. Our 40% probability of success (unchanged) for Iris II takes into consideration the demonstrated safety data among patients who have already used the device. The granting of a CE mark for Iris II, anticipated by the company in H216, would be a catalyst to justify an increase in our probability estimate for this programme.

Financials

Pixium’s gross cash position was €20m in cash at the end of Q116, down from €24.4m at YE15 (net cash at YE15 was €24.2m after considering €0.2m in short-term debt/advances). We expect a cash burn rate (operating cash flow plus net interest minus net capex) of €14.9m in 2016, increasing to €29.4m in 2017 and €26.9m in 2018. We expect the 2016 burn rate to be lower than the 2015 rate of €17.6m, given that as the Iris II CE mark dossier has been filed, we believe research expenses on the product should decrease in 2016. The anticipated increase in cash burn in 2017 and beyond is partly due to increased R&D spending as expected for human trials in the US for Iris II, and in both the US and Europe for Prima (both of which we expect will be in full swing in 2017). In addition, capex and working capital requirements are forecast to increase to accommodate initial Iris II commercialisation in Europe in 2017, and in the US in 2018 (assuming PMA approval).

Our model assumes that Pixium will raise €20m in financing in 2016, and €30m in both in 2017 and 2018. For illustrative purposes only, we have added these requirements to long-term debt. Note that our financial and valuation models do not include the potential dilutive impacts of future equity offerings. We do not expect Pixium to start generating sustainable positive recurring operating cash flows until H219, at which point we forecast Prima will start generating meaningful sales for the company (in addition to Iris II).

Exhibit 5: Financial summary

€(000)

2014

2015

2016e

2017e

2018e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,427

3,296

3,000

5,525

25,875

Cost of Sales

0

0

0

(1,894)

(12,154)

General & Administrative

(2,299)

(2,680)

(3,200)

(5,781)

(8,864)

Research & Development

(10,963)

(15,169)

(12,500)

(20,000)

(22,000)

EBITDA

 

 

(10,835)

(14,552)

(12,700)

(22,150)

(17,143)

Depreciation

(813)

(1,144)

(1,131)

(1,415)

(1,628)

Amortization

0

0

0

0

0

Operating Profit (before exceptionals)

 

(11,648)

(15,697)

(13,831)

(23,565)

(18,771)

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(11,648)

(15,697)

(13,831)

(23,565)

(18,771)

Net Interest

37

52

313

22

(413)

Profit Before Tax (norm)

 

 

(11,611)

(15,644)

(13,518)

(23,543)

(19,184)

Profit Before Tax (FRS 3)

 

 

(11,611)

(15,644)

(13,518)

(23,543)

(19,184)

Tax

0

0

0

0

0

Profit After Tax and minority interests (norm)

(11,611)

(15,644)

(13,518)

(23,543)

(19,184)

Profit After Tax and minority interests (FRS 3)

(11,611)

(15,644)

(13,518)

(23,543)

(19,184)

Average Number of Shares Outstanding (m)

9.8

12.7

12.7

12.7

12.7

EPS - normalised (€)

 

 

(1.18)

(1.23)

(1.06)

(1.85)

(1.51)

EPS - normalised and fully diluted (€)

 

 

(1.18)

(1.23)

(1.06)

(1.85)

(1.51)

EPS - (IFRS) (€)

 

 

(1.18)

(1.23)

(1.06)

(1.85)

(1.51)

Dividend per share (€)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

9,932

11,087

12,456

14,191

16,563

Intangible Assets

9,259

8,822

8,822

8,822

8,822

Tangible Assets

673

2,265

3,634

5,369

7,741

Current Assets

 

 

44,866

27,682

32,795

35,607

44,977

Short-term investments

0

0

0

0

0

Cash

42,132

24,354

29,467

30,102

33,173

Other

2,735

3,328

3,328

5,505

11,805

Current Liabilities

 

 

(4,051)

(3,498)

(3,498)

(1,588)

(2,514)

Creditors

(4,051)

(3,498)

(3,498)

(1,588)

(2,514)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(245)

(315)

(20,315)

(50,315)

(80,315)

Long term borrowings

(167)

(164)

(20,164)

(50,164)

(80,164)

Other long term liabilities

(78)

(151)

(151)

(151)

(151)

Net Assets

 

 

50,503

34,956

21,438

(2,105)

(21,288)

CASH FLOW

Operating Cash Flow

 

 

(8,426)

(15,584)

(12,700)

(26,237)

(22,516)

Net Interest

37

52

313

22

(413)

Tax

0

0

0

0

0

Capex

(1,772)

(2,106)

(2,500)

(3,150)

(4,000)

Acquisitions/disposals

0

0

0

0

0

Financing

42,705

56

0

0

0

Net Cash Flow

32,543

(17,582)

(14,887)

(29,364)

(26,930)

Opening net debt/(cash)

 

 

(9,420)

(41,965)

(24,190)

(9,302)

20,062

HP finance leases initiated

0

0

0

0

0

Other

1

(193)

0

0

0

Closing net debt/(cash)

 

 

(41,965)

(24,190)

(9,302)

20,062

46,991

Source: Edison Investment Research, Pixium Vision accounts. Note: 2014 and 2015 revenues include tax credits and subsidies, which are forecast at $3m per year through 2018.

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