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Pushing back alfapump PMA to mid-2023

Sequana Medical 10 September 2021 Update
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Sequana Medical

Pushing back alfapump PMA to mid-2023

10 September 2021

Price

€6.46

Market cap

€120m

$1.19/€

Net cash (€m) at 31 June 2021
(excluding €0.3m lease liabilities)

14.7

Shares in issue

18.58m

Free float

50%

Code

SEQUA

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.0)

(29.0)

5.9

Rel (local)

(9.9)

(30.1)

15.5

52-week high/low

€11.8

€6.0

Business description

Based in Belgium, Sequana Medical develops devices based on its alfapump platform for the treatment of diuretic-resistant fluid overload in liver disease, malignant ascites and heart failure. Alfapump is CE marked for refractory ascites and is in a pivotal North American study for this indication.

Next events

Interim data for SAHARA DESERT alfapump DSR study

Q421

Analysts

Pooya Hemami, CFA

+1 646 653 7026

Maxim Jacobs, CFA

+1 646 653 7027

Sequana Medical is a research client of Edison Investment Research Limited

Sequana Medical indicated that due to a worldwide shortage of electronic components, it now anticipates its US premarket approval (PMA) application for the alfapump will now be submitted in mid-2023, compared to prior guidance of Q422. We have pushed back our potential North American alfapump launch estimate in recurrent and refractory ascites (RRA) to mid-2024 (from H223 previously), while our projections for the Direct Sodium Removal (DSR) programmes in heart failure are unchanged. We now obtain a new pipeline rNPV of €219.8m (vs €248.2m, previously).

H121 and timeline update

Pharma & biotech

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/19

1.0

(14.9)

(1.22)

0.0

N/A

N/A

12/20

1.0

(19.0)

(1.25)

0.0

N/A

N/A

12/21e

0.5

(22.7)

(1.25)

0.0

N/A

N/A

12/22e

1.2

(22.8)

(1.22)

0.0

N/A

N/A

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

Awaiting FDA clearance to expand POSEIDON

Sequana previously announced it is seeking to expand POSEIDON study enrolment by c 10 patients to address higher attrition rates to meet its target of 50 implantations for the primary efficacy analysis. It has submitted a protocol amendment to the FDA and communicated with the agency, but has not yet received approval for the expansion. It has withdrawn its prior timeline guidance for enrolment completion and the primary efficacy readout, and plans to provide an update once it receives clarity from the FDA. Sequana remains very optimistic that the request will be accepted and we remain confident in alfapump’s efficacy profile to date as trends shown in recent interim analyses appear to significantly exceed the primary endpoints as defined for the pivotal cohort.

H121 expenses ahead of forecasts

The H121 net operating cash burn was €11.9m, above our €8.9m forecast, primarily due to higher than anticipated R&D costs. We have increased our future R&D and SG&A forecasts going forward. While we continue to expect Sequana’s funds on hand should be sufficient to maintain operations into Q222, we now model the company will need to raise a total of €125m to reach profitability, up from our prior estimate of €85m, including an estimated €20m in 2022.

Valuation: Adjusting for new alfapump timeline

We now obtain a pipeline rNPV valuation of €219.8m versus €248.2m previously. This revision is attributable to the revised North American alfapump success probability estimate (55% vs 60% previously), the increase in our operating expense forecasts and the pushing back of the forecast North American alfapump launch date in RRA, offset by rolling forward our estimates and the slight revision in our forex assumptions. After adding H121 net cash of €14.7m (excluding lease liabilities), we obtain an equity valuation of €234.5m or €12.62 per share (€11.54 fully diluted).

Subcomponent shortages push back alfapump PMA

Sequana Medical recently provided a H121 update, with the primary takeaway being that the planned submission of a US PMA application for the alfapump is now anticipated for mid-2023, compared to prior guidance of Q422. This delay is primarily attributed to the worldwide shortage of electronic components. As part of the PMA submission, the company will be required to conduct verification and validation activities (VVA) using the many components and subcomponents to be deployed in the prototype model designed for US commercial use. The alfapump is a complex electronic medical device with more than 1300 components in total, including over 600 electronic components from over 200 suppliers. Following recent planning discussions with its suppliers, Sequana learned the lead time for obtaining some of the (sub)components needed for VVA is much longer than usual given the global shortage, and consequently it now estimates the completion of VVA would push the PMA submission timing to mid-2023.

Awaiting FDA clearance for expanding POSEIDON enrolment

Regarding the POSEIDON pivotal study in patients with RRA due to liver cirrhosis, Sequana reported positive data in July from the second interim analysis in patients in the roll-in cohort.1 At the time Sequana announced that, based on an analysis of attrition rates between study enrolment and alfapump implantation, it anticipated c 10 additional patients will need to be enrolled in the pivotal cohort (above the pre-specified study size of 60 for the pivotal cohort approved by the FDA) to meet its target of 40 evaluable implantations for the primary efficacy analysis. Initially the company planned to enrol 60 patients in the pivotal cohort, to implant at least 50 of these patients with the alfapump (following the three-month pre-implant observation period and eligibility reassessment) and have at least 40 of the implanted patients evaluable for the primary endpoint analysis at six months after implantation. Due to the higher attrition rate between initial enrolment and implantation, Sequana is seeking to enrol 10 additional patients to still have 50 patients for alfapump implantation and 40 for the primary endpoint analysis (as originally planned).

The POSEIDON study allows for up to 30 patients to be enrolled in a training (or ‘roll in’) cohort (which will be excluded from primary efficacy analysis), to ensure centres are experienced with the alfapump before the actual study (pivotal) cohort is enrolled.

Sequana had submitted a protocol amendment to the FDA to extend the patient enrolment and has had discussions with the agency on the topic, but has not yet received approval for the requested enrolment expansion. As a result, the company has withdrawn its prior guidance for POSEIDON enrolment completion (previously Q321) and the attainment of the primary endpoint readout (previously Q322). The company plans to provide an update once it receives clarity from the FDA on study expansion. Company management remains very optimistic the agency will approve its request, but the process is taking longer than the company had originally envisioned.

In the unlikely event that the FDA does not agree to the expansion of enrolment, Sequana would still proceed with its pivotal efficacy analysis as intended, but we estimate the study’s evaluable pivotal cohort would then consist of c 35 patients, thereby dampening the statistical power compared to the planned target of c 40 in that cohort. As a reminder, the primary effectiveness outcomes of POSEIDON include:

the proportion of patients with a 50% reduction in the overall average frequency of therapeutic paracentesis (TP) per month in the post-implant observation period (reflecting month four to month six after implantation) as compared to the pre-implant observation period; and

whether at least 50% of patients receive a 50% reduction in their monthly frequency of required TP post-implantation compared to the average monthly number of TP required pre-implantation.

As outlined in our recent note, the second interim analysis of the study roll-in cohort showed that subjects had a greater than 90% reduction in mean frequency of TP versus baseline, and all patients experienced at least 50% reduction in mean TP frequency per month versus baseline. As these trends substantially exceed the primary endpoints as defined for the pivotal cohort, it appears there could be a sufficient efficacy buffer or margin (assuming the pivotal cohort data would be similar to the roll-in cohort data to date) for the pivotal cohort to still potentially meet the primary endpoint targets despite the lower number of patients. Nonetheless, allowing the study to reach the company’s intended target for pivotal cohort implantations would provide it with the desired (pre-planned) statistical power and thus the highest likelihood, in our view, of meeting the primary endpoint. We expect Sequana will continue to actively seek FDA clearance for cohort expansion and in any event, we are confident the company will report the completion of enrolment before Q222 and primary endpoint data no later than Q123.

Given the new guidance for the alfapump PMA submission, we have revised our US and Canadian launch expectation to mid-2024, from H223 previously.

Financials

Sequana had a 30 June 2021 net cash position of €14.7m (€21.8m in cash offset by €7.1m in long-term debt) excluding €0.3m in lease liabilities. The H121 normalised operating loss (EBIT) was €11.5m, up from €9.0m in H120. H121 net operating cash burn was €11.9m, coming in higher than our €8.9m assumption. This was primarily due to higher than anticipated R&D-related costs (consisting of clinical, quality and regulatory, supply chain and engineering activities), collectively coming in at €7.9m versus our €6.0m forecast and to a lesser extent on higher than expected SG&A costs (€3.7m versus our €3.2m estimate). Given these trends, we have increased our R&D and SG&A forecasts for H221 and future years, resulting in increased net operating cash burn rates for 2021 and 2022 of €22.6m and €23.9m, versus our prior assumptions of €17.6m and €18.9m, respectively.

We continue to expect Sequana’s funds on hand should be sufficient for it to maintain operations into Q222, but the projected higher cash burn rate and the additional c 9 months to our forecast of a North American alfapump launch increases our forecast cash need until the point at which the company would become cash-flow positive (whereby alfapump sales in RRA will exceed R&D and other opex costs). We now anticipate the company will start to generate positive operating cash flows in H127 (from H226 previously). We now also model the company will need to raise a total of €125m up until this milestone, up from our prior estimate of €85m. We now model the company will raise €20m in 2022, €25m in 2023, and additional €80m before FY27. As per our usual policy, we model these financing requirements as illustrative debt.

Valuation

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 a 10% rate for alfapump in ex-North American markets (where it is commercialised). Given the added uncertainty relating to the timing of the POSEIDON study completion and on whether the FDA will eventually accept the company’s pivotal cohort expansion request (although we believe it is very likely it will), we have reduced the probability of success for alfapump in the North American market to 55%, from 60% previously. We continue to remain confident in alfapump’s efficacy profile to date (given the interim POSEIDON data cited above) and expect to return the success probability estimate to 60% if the company receives approval to expand POSEIDON enrolment.

Exhibit 1: Sequana Medical rNPV assumptions

Product contribution

Indication

Stage

NPV (€m)

Prob. of success

rNPV (€m)

rNPV /basic share (€)

Launch year

Sales (€m) in 2032

alfapump in North America (net of R&D and SG&A costs)

Refractory and recurrent ascites and malignant ascites

Pivotal studying ongoing

201.1

55%

104.7

5.63

Mid-2024

175.6

alfapump in Europe and ex-NA regions (net of SG&A costs)

Refractory and recurrent ascites and malignant ascites

Commercial/ marketed

2.1

100%

2.1

0.11

2013

3.4

alfapump DSR and short-term DSR

Fluid overload in heart failure

Human feasibility studies

736.6

25%

169.2

9.11

H226 in US

434*

Corporate costs

(56.2)

100%

(56.2)

(3.02)

Total

883.7

219.8

11.83

Net cash (H121) excluding lease liabilities

14.7

14.7

0.79

Total equity value

898.4

234.5

12.62

Basic shares outstanding (000) (27 July 2021)

18,577

Outstanding warrants and share options

1,747

FD shares outstanding (000) (27 July 2021)

20,324

Source: Edison Investment Research. Note: *Reflect estimate of projected transfer pricing revenue to Sequana Medical rather than end-market commercial sales.

We now obtain a pipeline rNPV valuation of €219.8m versus €248.2m, previously. Altogether, the reduced rNPV is attributable to the revised North American alfapump success probability estimate, the increase in our operating expense forecasts and the pushing back of the forecast North American alfapump launch date, offset by the rolling forward of our estimates and the slight revision in our forex assumptions ($1.19/€ versus $1.21/€ previously). After adding H121 net cash of €14.7m (excluding lease liabilities), we obtain an equity valuation of €234.5m or €12.62 per share (€11.54 fully diluted).

Exhibit 2: Financial summary

€(000)

2018

2019

2020

2021e

2022e

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,029

971

963

525

1,214

1,396

3,609

Cost of Sales

(158)

(198)

(202)

(105)

(243)

(279)

(722)

Gross Profit

871

773

761

420

971

1,117

2,888

General & Administrative

(8,206)

(7,102)

(6,738)

(7,103)

(7,038)

(8,529)

(13,412)

Net Research & Development

(5,816)

(7,652)

(11,835)

(15,606)

(15,500)

(12,000)

(12,500)

Operating profit before exceptionals

(13,150)

(13,981)

(17,813)

(22,289)

(21,567)

(19,412)

(23,025)

EBITDA

 

 

(13,070)

(13,737)

(17,506)

(22,117)

(21,380)

(19,275)

(22,921)

Depreciation & other

(81)

(244)

(307)

(172)

(187)

(137)

(104)

Operating Profit (before amort. and except.)

 

(13,150)

(13,981)

(17,813)

(22,289)

(21,567)

(19,412)

(23,025)

Exceptionals including asset impairment

74

18

41

17

0

0

0

Operating Profit

(13,077)

(13,964)

(17,771)

(22,272)

(21,567)

(19,412)

(23,025)

Net Interest

(883)

(878)

(1,178)

(416)

(1,229)

(3,157)

(5,254)

Profit Before Tax (norm)

 

 

(14,033)

(14,859)

(18,991)

(22,705)

(22,795)

(22,569)

(28,279)

Profit Before Tax (FRS 3)

 

 

(13,960)

(14,841)

(18,949)

(22,688)

(22,795)

(22,569)

(28,279)

Tax

(24)

(136)

(157)

(129)

0

0

0

Profit After Tax and minority interests (norm)

(14,057)

(14,995)

(19,148)

(22,834)

(22,795)

(22,569)

(28,279)

Profit After Tax and minority interests (FRS 3)

(13,983)

(14,977)

(19,106)

(22,817)

(22,795)

(22,569)

(28,279)

Average Number of Shares Outstanding (m)

10.0

12.3

15.3

18.3

18.7

18.7

18.8

EPS - normalised (€)

 

 

(1.41)

(1.22)

(1.25)

(1.25)

(1.22)

(1.20)

(1.50)

EPS - normalised and fully diluted (€)

 

 

(1.41)

(1.22)

(1.25)

(1.25)

(1.22)

(1.20)

(1.50)

EPS - (IFRS) (€)

 

 

(1.40)

(1.22)

(1.25)

(1.25)

(1.22)

(1.20)

(1.50)

Dividend per share (€)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

242

829

772

640

486

385

371

Tangible Assets

184

765

705

561

407

305

292

Investments in long-term financial assets

58

63

67

79

79

79

79

Current Assets

 

 

3,099

8,522

13,441

12,142

8,372

10,295

7,717

Short-term investments

0

0

0

0

0

0

0

Cash

1,318

5,586

11,016

11,035

7,099

9,705

6,017

Other

1,782

2,935

2,425

1,107

1,273

590

1,701

Current Liabilities

 

 

(18,727)

(5,315)

(5,966)

(4,950)

(3,464)

(2,490)

(2,805)

Creditors

(6,654)

(4,855)

(5,966)

(4,950)

(3,464)

(2,490)

(2,805)

Short term borrowings

(12,073)

(459)

0

0

0

0

0

Long Term Liabilities

 

 

(3,374)

(3,110)

(8,135)

(7,839)

(27,839)

(52,839)

(77,839)

Long term borrowings

(2,582)

(2,261)

(7,473)

(7,089)

(27,089)

(52,089)

(77,089)

Other long term liabilities

(792)

(849)

(662)

(750)

(750)

(750)

(750)

Net Assets

 

 

(18,760)

926

113

(8)

(22,445)

(44,650)

(72,556)

CASH FLOW

Operating Cash Flow

 

 

(8,987)

(17,596)

(15,791)

(22,087)

(22,674)

(19,202)

(23,344)

Net interest and financing income (expense)

(883)

(878)

(1,178)

(416)

(1,229)

(3,157)

(5,254)

Tax

(5)

(9)

(36)

(85)

0

0

0

Net Operating Cash Flow

 

 

(9,875)

(18,482)

(17,005)

(22,588)

(23,902)

(22,360)

(28,598)

Capex

(39)

(106)

(138)

(71)

(34)

(35)

(90)

Acquisitions/disposals

0

0

0

0

0

0

0

Financing

2

26,165

19,000

22,768

0

0

0

Dividends

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

Net Cash Flow

(9,912)

7,576

1,857

109

(23,936)

(22,394)

(28,688)

Opening net debt/(cash)

 

 

0

13,337

(2,866)

(3,543)

(3,946)

19,990

42,384

HP finance leases initiated

0

0

0

0

0

0

0

Other

(3,425)

8,627

(1,179)

293

(0)

(0)

0

Closing net debt/(cash)

 

 

13,337

(2,866)

(3,543)

(3,946)

19,990

42,384

71,073

Lease debt

na

504

387

343

343

343

343

Closing net debt/(cash) inclusive of IFRS16 lease debt

13,337

(2,362)

(3,157)

(3,603)

20,333

42,727

71,415

Source: Company data, Edison Investment Research

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This report has been commissioned by Sequana Medical and prepared and issued by Edison, in consideration of a fee payable by Sequana Medical. 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Sequana Medical and prepared and issued by Edison, in consideration of a fee payable by Sequana Medical. 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

1185 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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