Retaining lefitolimod’s value

Mologen 4 January 2019 Update
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Mologen

Retaining lefitolimod’s value

Corporate update

Pharma & biotech

4 January 2019

Price

€1.90

Market cap

€18m

Net cash (€m) at 30 September 2018
(not including €8.2m gross capital raise)

0.7

Shares in issue

9.3m

Free float

73%

Code

MGN

Primary exchange

Frankfurt
(Prime Standard)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(41.3)

(59.2)

(84.9)

Rel (local)

(35.4)

(51.9)

(81.1)

52-week high/low

€12.6

€1.6

Business description

Mologen is a German biopharmaceutical company developing novel biopharmaceuticals. Lead product lefitolimod (TLR9 agonist) is being evaluated in metastatic colorectal cancer maintenance, small cell lung cancer maintenance, HIV and a combination trial in advanced solid malignancies.

Next events

FY18 results

21 March 2019

Yervoy + lefitolimod further data

2019

IMPALA top-line results

H219

Analysts

Dr Daniel Wilkinson

+44 (0)20 3077 5734

Dr Susie Jana

+44 (0)20 3077 5700

Dr Sean Conroy

+44 (0)20 3077 5700

Mologen is a research client of Edison Investment Research Limited

Mologen has announced that it has terminated negotiations with Oncologie and will retain rights to lefitolimod. With the lefitolimod IMPALA Phase III readout now expected in H219, focus will likely shift to securing a partner for lefitolimod once data are available from this pivotal trial. We have updated our valuation to reflect the termination of Oncologie negotiations. We now forecast that lefitolimod will be out-licensed post the IMPALA trial and assume similar deal terms to those Oncologie presented. We value Mologen at €169m (€18.2/share).

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

0.1

(20.8)

(4.22)

0.0

N/A

N/A

12/17

0.0

(19.3)

(2.81)

0.0

N/A

N/A

12/18e

3.0

(14.2)

(1.53)

0.0

N/A

N/A

12/19e

0.0

(17.0)

(1.84)

0.0

N/A

N/A

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

Negotiation for lefitolimod global rights terminated

Following a negotiation period between Mologen and Oncologie, a global deal was not reached, although the Greater China deal remains in place. Mologen states this was a result of new inferior deal terms being presented to what was originally agreed. Separately, Mologen announced an updated prediction on the timelines for its top-line Phase III IMPALA data readout; it is now forecast for H219 (vs H120 previously). The company now aims to out-license/sell lefitolimod post IMPALA data.

First data presented from lefitolimod/ICI combination

At SITC 2018, first clinical data was presented on the combination of the immune checkpoint inhibitor Yervoy and lefitolimod in patients with solid tumours. To date, 19 patients have been enrolled and no dose limiting toxicities were encountered at any dose level. The combination was generally well tolerated and safe. Two patients experienced stable disease for 45 weeks (primary peritoneal carcinoma) and 24 weeks (high-grade pancreatic neuroendocrine tumor), respectively (NCT02668770).

Financials: Short-term financing concerns

We forecast a reduction in FY18 revenue to €3.0m (from €6.0m) and FY19 revenue to €0.0m (€7.0m) as a result of the termination of the Oncologie deal. Q3 costs remained in line with expectations and we maintain FY18 R&D of €7.3m and SG&A of €5.5m. We forecast an FY18 net loss of €14.2m vs €11.1m. Estimated current gross cash of approximately €12m should fund Mologen until mid-2019. In addition, Mologen has announced plans for a new convertible bond of up to €2.7m and an equity capital raise (of up to 50% of the outstanding shares) is proposed.

Valuation: €169m (€18.2/share)

We value Mologen at €169m (€18.2/share) vs €188m (€16.6/share) previously, updated for the termination of the Oncologie negotiations; additionally, we have rolled forward our model, updated for FX and number of shares. We now forecast lefitolimod will be out-licensed post the IMPALA trial readout and that any potential future deal signed will have similar terms to those Oncologie originally presented.

Lefitolimod: Seeing it to the end

On 15 August 2018, Mologen signed a non-binding term sheet with Oncologie for the global assignment of lefitolimod. At the end of the exclusivity period on 15 November, Mologen terminated the negotiations as the companies had not reached a mutually satisfactory conclusion. Mologen states this was a result of new inferior deal terms being presented to them in the negotiation period. Original deal terms were valued at over €1bn in milestones (€200m in development milestones and up to €900m in commercial milestones), in addition to royalties on net sales. Approximately €23m of these milestones were in near-term considerations split across cash payments, convertible bonds and R&D funding.

To date, Mologen has received €5m from Oncologie, €3m as a result of the original Asia-focused deal signed in February 2018 and a €2m bond subscribed by Oncologie on 3 September 2018 (€9.702/share). While negotiations for the global deal have been terminated, the Asia-focused deal with Oncologie signed in February remains in place. The deal is potentially worth over €100m in milestones and double-digit royalties. We currently have no information regarding the strategy in this region. Mologen will now focus on financing itself to the completion of the IMPALA trial and the readout of top-line data, at which point it will then aim to out-license or sell lefitolimod.

Valuation: €169m (€18.2/share)

Our valuation of Mologen has decreased to €169m (€18.2/share) vs €188m (€16.6/share) previously. The valuation is based on a risk-adjusted, sum-of-the-parts DCF model, applying a standard 12.5% discount rate and including estimated net cash of €5.2m (includes September end cash and €8.2m gross capital raise). The reduction in value is predominately driven by a push back in timelines of any potential deal and there is also a small negative impact on our valuation from the loss of near-term revenue from the Oncologie deal. We now forecast a new deal will be negotiated for lefitolimod in 2020. As we have little visibility on ongoing deal negotiations and any potential parties involved, we have assumed any new deal would have similar terms to the original Oncologie deal. While better terms could potentially be negotiated with the Phase III data in hand, negotiations will hinge on multiple factors including, but not limited to, Mologen’s financial position, changes in market dynamics and advances in treatment paradigms.

Due to the aforementioned range of variables influencing any deal terms achieved, we have included a sensitivity analysis on our forecast milestone and royalty rate in the indication (Exhibit 1). Upside or downside to our base valuation will be reliant on the strength of the results from the IMPALA trial and any potential partners will likely focus on the magnitude of improvement in overall survival of lefitolimod arm versus the control arm.

Additionally, with an earlier expected readout of IMPALA in H219, we now forecast a launch in mCRC of 2021 (versus 2022 previously). For an overview of all our valuation assumptions, please see Exhibit 2. We have also updated our number of shares outstanding to reflect the €8.2m gross capital raise and have rolled forward our model and updated it for FX rates.

Exhibit 1: Effect of forecast royalty rate and milestones for lefitolimod in mCRC on Mologen’s overall valuation

Total EU + US milestones

Average royalty rate

c $100m

c $125m

c $150m

c $175m

c $200m

8%

125

130

136

140

144

10%

142

147

152

156

161

12%

158

163

€169m

172

177

14%

175

179

185

189

193

16%

191

196

201

205

210

Source: Edison Investment Research

Exhibit 2: Valuation assumptions

Product

Status

Market launch

NPV (€m)

Peak sales ($m)

Probability of success

Royalty estimate

rNPV (€m)

rNPV share (€)

Key assumptions

Lefitolimod – CRC – US

Phase III-ready

2021

68

308

65%

12%

42.5

4.6

~135,000 CRC cases/year; 25% metastatic + 5% regional; 60% chemo response; 25% peak share (2026); $40,000 treatment price; 2028 patent expiry, c $150m milestones in total across EU and US

Lefitolimod – CRC – EU

Phase III

2021

113

581

65%

12%

71.2

7.7

~345,000 CRC cases/year; 25% metastatic + 5% regional; 60% chemo response; 25% peak share (2026); $30,000 treatment price; 2030 patent expiry, c $150m milestones in total across EU and US

Lefitolimod – SCLC –- US

Phase II-ready

2024

26

118

15%

12%

4.5

0.5

~225,000 lung cancer cases/year; 15% SCLC; 75% advanced SCLC; 70% chemo response; 15% peak share (2027); $40,000 price; 2028 patent expiry, c $50m milestones in total across EU and US

Lefitolimod – SCLC – EU

Phase II

2024

17

124

15%

12%

3.2

0.3

~310,000 lung cancer cases/year; 15% SCLC; 75% advanced SCLC; 70% chemo response; 15% peak share (2028); $30,000 price; 2030 patent expiry, c $50m milestones in total across EU and US

Lefitolimod – HIV – Worldwide (WW)

Phase I

2025

100

405

15%

12%

13.1

1.4

~36.7m cases/year (prevalence), 46% treated, 5% peak share (2034), $20,000 price, patent expiry 2036 (expected – not yet granted), c $130m milestones in total WW

Lefitolimod & ICI – ASM (SCLC used as model) – WW

Phase I

2028

73

511

15%

12%

10.9

1.2

~1.8m lung cancer cases WW, 12.50% SCLC, 5% peak share (2033), $30,000 price, patent expiry 2036 (expected, not yet granted), c $150m milestones WW total

Lefitolimod – mCRC – China

Phase I

2028

67

203

5%

12%

17.8

1.9

~200 CRC cases/year; 25% metastatic + 5% regional; 60% chemo response; 10% will receive additional treatment, 1% peak share (2033), €5,000 price, patent expiry unknown, c $100m milestones in total China

Portfolio value

717

163

17.6

Cash

5.2

0.6

Net cash at 30 September 2018 + €8.2m gross capital raise (assume net €8m)

Total

169

18.2

9.27m shares out

Source: Edison Investment Research

Financials: Funded until mid-2019

We now forecast a reduction in FY18 revenue to €3.0m from €6.0m previously, and FY19 revenue to €0.0m from €7.0m previously, as a result of the termination of the Oncologie deal, mainly due to a loss of R&D funding. Q3 costs remained in line with expectations and we continue to forecast FY18 R&D of €7.3m and SG&A of €5.5m. For FY19, we forecast costs will remain relatively flat (R&D €6.9m and €5.5m) with a slight reduction in clinical trials costs as the IMPALA trial comes to completion. We now forecast an FY18 net loss of €14.2m vs €11.1m previously. Estimated current gross cash of approximately €12m (includes €8.2m gross capital raise) should fund Mologen until mid-2019.

Mologen has recently announced plans to issue a new convertible bond in January 2019 with a nominal value of €2.7m, a term of eight years and fixed interest rate of 6.0%. If the convertible bond is fully placed, the company expects to be financed until late summer 2019. In addition, Mologen has proposed an equity raise at a yet to be determined subscription price to increase the share capital by up to 50% of the current outstanding shares. There are currently no timelines for this proposed capital raise and we do not include this in our current forecasts. We note the proposed capital increase causes a natural stock overhang and would cause a dilution of our per share value of Mologen. To enable sufficient funding past the end of FY19, we have also modelled €15m of illustrative debt in 2019.

Mologen currently has a variety of debt instruments. In September 2018, the company issued a €2m convertible bond to Oncologie without subscription rights. The bond is 0% interest mandatory convertible notes with a term of five years. The conversion price is a 10-day volume weighted average of the stock price plus a 30% premium. In February 2018, Mologen entered into an agreement with Luxembourg-based financing provider European High Growth Opportunities Securitization Fund (EHGO). Under this agreement, Mologen can require EHGO to subscribe to €500,000 in 24 tranches for a total of €12m convertible bonds over a two-year period. As of the Q118 results, two tranches have been exercised and both have been converted.

In November 2016 (2016/2024 bond: €2.54m) and in January 2017 (2017/2025 bond: €4.99m), two convertible bonds were placed. Terms of these were recently renegotiated with the 2016/2024 bond having its conversion price reduced to €2.74 from €7.50 and its interest rate increase to 8% (from 6%). In addition, the conversion price of the 2017/2025 bond was reduced to €2.46 from €7.61. A special right of termination has been included in the terms and conditions of both convertible bonds if the new terms are not implemented by 30 June 2019. The result of these negotiations will be submitted to vote by all bond creditors on 28 February 2019.

On 21 November, a consortium of investors, which together account for at least 5% of the share capital of the company, called for an EGM to be convened (to take place on 26 February 2019) to discuss a range of items – notably including a special audit, removal/election of board members and a new capital raise (agenda). Mologen recently announced (19 December) that the Executive Board and Supervisory Board of Mologen consider the reasons provided by the applicants for their proposed resolutions to be factually inaccurate and do not support the content of the proposed resolutions.

While we have modelled in €15m of illustrative debt in 2019 to enable funding past the end of FY19, we note any funding needs will be dependent on the results of the EGM on 26 February and the bond vote on 28 February.

Exhibit 3: Financial summary

€'000s

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

74

47

3,047

0

Cost of Sales

0

0

0

0

Gross Profit

74

47

3,047

0

Research and development (cost of materials)

(11,780)

(9,752)

(7,314)

(6,948)

Selling, general & administrative (personnel expenses)

(5,453)

(5,093)

(5,450)

(5,504)

Other operating income/expense

(3,418)

(3,860)

(3,884)

(3,845)

EBITDA

 

 

(20,577)

(18,658)

(13,600)

(16,297)

Operating Profit (before amort. and except.)

 

 

(20,813)

(18,684)

(13,603)

(16,301)

Intangible Amortisation

(172)

(23)

(9)

(5)

Exceptionals/Other

0

0

0

0

Operating Profit

(20,985)

(18,707)

(13,611)

(16,306)

Net Interest

(18)

(574)

(558)

(728)

Other

0

0

0

0

Profit Before Tax (norm)

 

 

(20,831)

(19,258)

(14,161)

(17,029)

Profit Before Tax (FRS 3)

 

 

(21,003)

(19,281)

(14,170)

(17,034)

Tax

0

0

0

0

Deferred tax

0

0

0

0

Profit After Tax (norm)

(20,831)

(19,258)

(14,161)

(17,029)

Profit After Tax (FRS 3)

(21,003)

(19,281)

(14,170)

(17,034)

Year-End Shares Outstanding (m)

4.9

6.9

9.3

9.3

EPS - normalised (c)

 

 

(4.22)

(2.81)

(1.53)

(1.84)

EPS - FRS 3 (c)

 

 

(4.25)

(2.81)

(1.53)

(1.84)

Dividend per share (c)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

62

44

50

57

Intangible Assets

37

17

10

6

Tangible Assets

25

27

39

51

Other

0

0

0

0

Current Assets

 

 

21,300

8,061

8,599

9,987

Stocks

13

16

16

16

Debtors

33

13

13

13

Cash

20,520

6,523

7,061

8,450

Other

734

1,509

1,509

1,509

Current Liabilities

 

 

(7,404)

(7,502)

(6,182)

(6,182)

Creditors

(6,530)

(4,400)

(3,080)

(3,080)

Short term borrowings

0

0

0

0

Other

(874)

(3,102)

(3,102)

(3,102)

Long Term Liabilities

 

 

(2,121)

(5,474)

(7,055)

(25,485)

Long term borrowings

(2,119)

(5,419)

(7,000)

(25,430)

Other long term liabilities

(2)

(55)

(55)

(55)

Net Assets

 

 

11,837

(4,871)

(4,589)

(21,623)

CASH FLOW

Operating Cash Flow

 

 

(19,270)

(19,696)

(16,038)

(17,025)

Net Interest

18

574

560

730

Tax

0

0

0

0

Capex

(57)

(33)

(17)

(16)

Acquisitions/disposals

13

35

0

0

Financing

12,706

477

13,048

0

Dividends

0

0

0

0

Other

0

0

0

0

Net Cash Flow

(6,590)

(18,643)

(2,447)

(16,311)

Opening net debt/(cash)

 

 

(24,592)

(18,401)

(1,104)

(61)

HP finance leases initiated

0

0

0

0

Exchange rate movements

1

(8)

0

0

Other

398

1,354

1,404

(529)

Closing net debt/(cash)

 

 

(18,401)

(1,104)

(61)

16,779

Source: Mologen accounts, Edison Investment Research

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

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United States

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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