The end of a challenging year

2020 was a complex year for Allarity because the new management had a mandate to revitalise the company, but many of its plans were stymied by the COVID-19 pandemic. Management’s strategic objectives were to focus and relaunch the company’s clinical development programme and to realign its capital structure to improve its chances of attractive new development. The timelines for both of these goals have been extended due to the impact of COVID-19.

The biggest impact of the pandemic has been on Allarity’s development programmes, which all experienced delays in 2020. On the company’s 2020 earnings conference call, management guided towards the ongoing Phase II clinical studies for Ixempra (in metastatic breast cancer) and stenoparib (in ovarian cancer) completing in 2022, which is consistent with our current timeline. A total of 10 patients have been enrolled to date in the stenoparib study (out of a target of 30), compared to eight in November 2019. The company has not reported on the enrolment to date for the Ixempra Phase II, which started in March 2021.

In addition to these clinical programmes, Allarity plans to submit an NDA application for dovitinib and a PMA for DRP diagnostic in 2021, which would position it for an initial approval decision in 2022. This timeline has continually been pushed out by COVID-19 related delays, and we have consequently extended our timelines for its development. We expect the company to need to carry out additional clinical studies to support marketable claims with dovitinib and its DRP, and we have delayed the initiation of these studies until 2022 after receipt of the initial approval decision (from initiation of studies in 2021 previously).

The company announced on 2 April 2021 that it has submitted a PMA application to the FDA for approval of the dovitinib DRP. This is ahead of the company’s planned NDA submission of dovitinib later this year in 2021, for approval. The goal is that the DRP can serve as a companion diagnostic for dovitinib to diagnose patients with renal cell carcinoma (RCC) who are likely to be responders to the drug.

The current marketing submission is using data and patient samples gathered during the pivotal Phase III study of dovitinib performed by Novartis. We should note that the DRP was not used during this study to guide the treatment of patients, so this data is fundamentally retrospective in nature. The FDA has not historically approved PMA applications for new diagnostics intended to diagnose or guide the treatment of a disease on the basis of retrospective data. The approval of a drug/companion diagnostic combination normally requires both the drug and the diagnostic to be examined together in a prospective clinical study, ie one in which the determination of the DRP is gathered before treatment. Approvals outside of this (prospective trial) paradigm are generally limited to updates to existing drug device combinations once the utility of the biomarker has been established. An example of this would be an update to a HER2 test kit for Herceptin, where the change to the kit is minor and HER2 has been established as an effective biomarker for decades. In the case of the DRP, the utility of the biomarkers it is examining has not been established yet, and therefore prospective clinical studies will likely be needed, in our view.

We do not know the exact contents of the application the company has submitted to the FDA, and we do not know the precise claims the company is making. The application could be phrased in such a way as to avoid making claims that the DRP is designed to diagnose or guide the treatment of a disease. It may be possible (albeit still unlikely, in our view) to receive marketing approval with sufficiently diluted claims in the application, but then the company would be limited to only using these same claims in its marketing for the product. Although the product would be approved in this case, it is unlikely to be commercially viable without sufficiently establishing the utility of the drug device combination and being able to present such evidence in its claims and/or marketing materials. This scenario is comparable to the upcoming NDA submission for dovitinib being made on the basis of non-inferiority to Nexavar: if approved although it would establish the legal marketability of the product, it would establish no benefit over Nexavar or any other TKI for the treatment of RCC. We remain consistent in our assumption that additional clinical studies will be needed regardless of the outcoming of the current PMA submission (dovitinib DRP) and the upcoming dovitinib NDA submission to support the commercially necessary marketing claims for dovitinib and the dovitinib DRP.

However, a benefit of the current PMA submission is that the FDA is likely to provide very useful feedback that can be used to effectively guide future clinical trial design. The agency will outline any deficiencies in the data for the current application, which can provide useful insight into its thinking regarding which parameters will be important for a registration-enabling clinical study. Moreover, the PMA process is a relatively inexpensive (as low as $91k if Allarity can qualify as a small business, $365k otherwise) way to gather such information.

The above adjustments to our dovitinib timeline have significantly reduced our expected loss in 2021 (DKK69.6m from DKK189.1m), albeit these costs will be incurred in later years. Operating losses were lower in 2020 (DKK60.0m) than in 2019 (DKK174.9m), but this is largely the effect of a SEK81.6m impairment charge in FY19 when the company pared down its pipeline. On an EBITDA basis, expenses were lower in 2020 (DKK58.9m) compared to 2019 (DKK66.5m), we assume because the COVID-19 disruptions also led to some cost reductions.

Under previous management, Allarity had a large number of assets held under multiple, different, partially held subsidiaries. The new management has simplified this structure by focusing on the company’s three lead assets (stenoparib, dovitinib and Ixempra), and converting former subsidiary shareholders into general shareholders. The goal has been to make the simplified structure and focused programmes more attractive to new investors, and for the company to move away from the debt-based financing on which it had relied. Allarity has relied primarily on two financing facilities (convertible note programme with Negma Group and Park Partners, and an equity line with Global Corporate Finance separately) to finance operations, which have been highly dilutive. It reported 239m shares as of March 2021 in the annual report, compared to 121m at end 2019 and 50m at end 2018. Furthermore, the company announced in March 2021 that it was initiating a SEK100m rights offering (up to 119,520,759 units at SEK0.85 per unit with each unit comprising one share and one warrant, pending shareholder approval). The goal is that this offering will be able to finance Allarity through 2021 and into 2022. The company ended 2020 with DKK7.9m (SEK11.2m) in net debt (DKK1.81m gross cash offset by DKK9.75m debt) and subsequently called on a SEK10m tranche of convertible debt from Negma, and converted SEK0.5m in separate debt to equity.

Based on the above adjustments to our timelines, we have also adjusted the financing schedule for the company. We expect it to need DKK850m in additional capital to reach profitability in 2025. This is a slight reduction from previous estimates (DKK870m) because some of the costs of developing and launching dovitinib have been delayed until after our projection for profitability. We include these financings as illustrative debt in our forecasts (DKK100m in 2021, followed by DKK250m in each of 2022, 2023 and 2024).

We have lowered our valuation to SEK1,007m or SEK4.21 per share from SEK1,029m or SEK5.18 per share previously. This reduction is driven by adjustments in the timeline for the commercial launch of dovitinib described above. However, we have adjusted some of our assumptions regarding the clinical study we forecast after the NDA approval; we are encouraged by the FDA’s recent approval of Fotivda (tivozanib, AVEO Pharmaceuticals) for renal cancer. The pivotal study for this programme used progression free survival as the primary endpoint and enrolled 350 patients. We have adjusted our assumptions regarding the dovitinib clinical study to match this (350 patients and a PFS endpoint, from 490 patients previously, and an overall survival endpoint). The smaller patient count was possible with Fotivda because it was supported by a large safety database from previous clinical studies, and dovitinib should also have a large safety database from its prior studies. These changes reduce the total cost of this clinical programme (to $35m from $49m) and offset most of the other delays to our timeline (less than one-year net delay after considering all factors). We expect the programme to be launched in 2025 (regardless of the outcome of the upcoming non-inferiority NDA) compared to 2024–25 previously (2024 if the non-inferiority NDA were granted, or 2025 if it were declined). For more information regarding our contingency model for the product, please see our recent Outlook note.

Additionally, we include lower net cash: SEK10.7m pro forma adjusted net debt (FY20) compared to SEK6.1m net cash previously (at Q320 pro forma). These factors are offset by rolling forward our NPVs. If the ongoing rights offering (SEK100m for 119.5m shares) were fully subscribed, this would increase the company valuation to SEK1,107m, while reducing the valuation per basic share to SEK3.09.