Cereno Scientific — A productive period with plenty more to come

Cereno’s clinical pipeline has been designed to address indications with high unmet needs (see Exhibit 1). The two most advanced candidates, CS1 and CS014, form the company’s histone deacetylase inhibitor (HDACi) portfolio, aiming to leverage the principles of epigenetic modulation to achieve disease modification.

CS1 reported positive data from a Phase IIa study (CS1-003) in PAH in September 2024. The primary endpoint of safety and tolerability was met with no CS1-related serious adverse events at any of the tested doses. Data from exploratory efficacy measures was also encouraging: 71% of patients improved or had stable Registry to Evaluate Early and Long-Term PAH Disease Management (REVEAL) risk scores; 86% improved or had stable functional class; and 67% had sustained reduction in pulmonary arterial pressure. Collectively, the data provide a robust foundation for the next stages of development, in our view, and management anticipates a regulatory decision on its plans for a subsequent potentially pivotal trial (Phase IIb or Phase IIb/III) in H125, followed by a potential study in H126. Meanwhile, the expanded access programme (first patient dosed in August 2024) is ongoing and should be further supported by the Fluidda agreement to visualise the effect of CS1 on inducing long-term reverse remodelling under a planned investigator-initiated trial.

The period also saw Cereno strengthening its patent protection for CS1 with new patents issued in the US (third family), Brazil (third family) and New Zealand (second family). In September 2024, CS1 received the Orphan Medicinal Product Designation in the EU, complementing the Orphan Drug Designation granted by the US FDA in 2020. This will allow CS1 10 years and seven years of market exclusivity in the US and EU, respectively, following marketing authorisation. For a more detailed discussion of the CS1 Phase IIa clinical results, see our previous update note.

Cereno’s second clinical asset, CS014 (currently in Phase I clinical development), was the focus of the company’s recent capital markets day (CMD), where IPF was announced as the primary indication targeted by the asset. This decision forms part of the company’s wider strategic pivot, whereby it will focus on the rare disease space across its development pipeline. This space is characterised by small patient populations (US: a disease affecting fewer than 200,000 people; Europe: a disease affecting fewer than one in 2,000 people) and government incentives such as research grants, tax credits, lower regulatory fees and longer market exclusivity periods, as well as reduced outlays for clinical trials (given the smaller trial size), making it appealing for drug developers to pursue such indications. Further details on the strategy and the target indication IPF can be found in our previous note. Cereno also made steady progress on the ongoing Phase I safety study, commencing the multiple ascending dose (MAD) part of the study in November 2024. This comes after the directive from the Safety Monitoring Committee that the safety profile in the single ascending dose part was within acceptable limits. The Phase I trial, which plans to recruit 48 subjects, is an open-label study designed to explore the safety, tolerability, pharmacokinetics and efficacy parameters of CS1 in healthy volunteers. Results from the Phase I trial are expected in mid-2025, with plans to initiate the Phase II study in IPF in H126.

Cereno’s third asset, CS585, is an oral, selective and potent agonist of the prostacyclin receptor, currently in the early stages of clinical development. While a definitive indication is yet to be finalised, management has indicated that CS585 is likely to target a rare disease, with antiphospholipid syndrome emerging as a potential focus. This strategic alignment with rare conditions underscores the company’s commitment to underserved markets. Phase I studies for CS585 are planned to commence in 2026, and further updates on development plans are anticipated, which may provide additional clarity on its market potential.

In Q324, Cereno reported total operating expenses of SEK39.1m, versus SEK43.5m in Q224 and SEK16.9m in Q323. We believe these to be mainly related to clinical development activities for CS1 (which completed Phase IIa patient recruitment at the end of June 2024 and reported positive top-line data in September 2024) and CS014 (which commenced the Phase I study in June 2024 and recently moved to the MAD part of the study) as well as ongoing preclinical work on CS585. The company’s reporting of operating expenses includes SEK33.7m in other external costs (primarily R&D) and SEK5.1m in personnel expenses, both lower than the previous quarter’s figures of SEK36.4m and SEK6.6m, respectively. We note that Cereno capitalises part of its R&D (reflected as income from capitalised work; SEK23.8m in Q324), resulting in a reported operating loss figure of SEK15.3m in Q324 versus a loss of SEK19.6m in Q224. With the CS1 Phase IIa trial now complete and preparatory work ongoing for regulatory discussions for the next phase of development, we expect the R&D expenses to decline in Q424.

The net loss for the period was SEK22.7m, versus SEK21.2m in Q224, driven by the increased interest expenses (SEK7.5m vs SEK1.6m in Q224), which we believe were related to the drawdown of the second SEK45m tranche of the original SEK90m bridge loan from Fenja Capital, raised in November 2023. We expect the interest expenses to rise significantly in Q424 with the recently announced SEK250m debt financing (discussed in further detail below). Free cash outflow for the quarter was SEK56.8m, rising materially from SEK37.2m in Q224, with the benefit from lower operating losses more than offset by increased working capital outflows.

In November 2024, Cereno announced a SEK250m short-term financing arrangement to support the company’s operations and development activities into 2026, through key upcoming milestones such as completion of the Phase I CS014 trial (H125), FDA acceptance of the CS1 Phase IIb or Phase IIb/III study (H125) and regulatory clearance for the CS014 Phase II study in IPF (H225). Secured from Fenja Capital and Arena Investors, the new financing includes a cash loan of SEK175m across two tranches and SEK75m in convertible debt. While the first cash tranche of SEK125m and the SEK75m convertible debt (total SEK200m) is likely to be available to Cereno immediately, the second SEK50m payout is conditional on lead asset CS1 receiving FDA acceptance for the next clinical phase as well as certain other financial conditions. The financing comes with a 3.87% set-up fee. Tranche 1 will be partially used to pre-pay the outstanding c SEK91m loan from Fenja Capital, which matures in April 2026. Following the debt repayment and set-up fee, management expects net proceeds from tranche 1 and the convertible debt of c SEK99m. We expect this, along with current cash on hand (SEK73.8m at end-Q324), to be sufficient to fund operations into H225, past the H125 timeline for the FDA’s expected acceptance for the CS1 Phase IIb or potentially pivotal Phase IIb/III study, which will trigger the remaining SEK50m. Combined these funds should extend Cereno’s cash runway into 2026, in line with management guidance.

The financing is split 55:45 between US-based investor Arena Investors and Fenja Capital. The SEK75m convertible debt can be converted into 12.3m company shares (at SEK6.09/share, a c 24% premium to the last closing price of SEK4.9/share) during the term of the loan. Assuming full conversion, this would dilute existing shareholders by 4.2%. The agreement also mandates Cereno issuing 5,749,017 warrants to the financiers, which can be converted to shares at a subscription price of SEK6.82/warrant until 30 April 2029 (currently out of the money). This would lead to another 2% dilution to current shares outstanding, assuming 100% conversion (netting the company SEK39.2m in exchange).

We note that the new loan is due for repayment on 30 April 2026, by which time we expect the company to potentially secure a licensing deal for CS1 (contingent on FDA acceptance for the clinical study in 2025), which should support debt servicing. The new financing also de-risks the development pathway for Cereno, which should help optimise partnering discussions, in our opinion.

We have adjusted our near-term estimates for the performance in the first nine months of 2024 (9M24), the latest debt raise and near-term operational expectations. While we continue to expect lower R&D expenses in Q424, we raise our operating expense estimate for FY24 to SEK148.8m, from SEK131.8m previously, to reflect the higher-than-expected opex in Q324. The FY25 figure remains broadly unchanged at SEK138.7m (SEK140.6m previously). We also increase our estimate for interest expense to account for the SEK250m loan, resulting in our FY24 and FY25 net loss estimates rising to SEK78.8m and SEK87.0m, respectively, from SEK58.9m and SEK56.0m previously.

Our valuation for Cereno is based on a risk-adjusted net present value (rNPV) approach, using appropriate probabilities of success for the respective phases of development and a flat discount rate of 12.5%. The calculated enterprise value reflects contributions from the company’s clinical candidates CS1 (completed Phase IIa) and CS014 (Phase I). We note that our valuation currently excludes CS585, the company’s preclinical asset, which should add to the upside potential on successful clinical transition. We recently updated our estimates for CS014, following the finalisation of IPF as the target indication, and we direct readers to our recent note for more detail. For CS1, our assumptions remain unchanged since our previous update note.

We have rolled forward our model for the Q324 results and updated our valuation for the latest net debt figure (SEK16.6m at end-Q324, including SEK73.8m in gross cash and SEK90m in debt). Our model currently assumes no conversions under the new SEK75m convertible debt facility or new warrants issued and hence the end-Q324 net debt figure is not affected. The roll-forward benefits have been offset by higher debt (following the drawdown of the second SEK45m tranche under the November 2023 loan), resulting in our valuation for Cereno remaining unchanged at SEK4.0m or SEK14.3 per share (Exhibit 2).

Our model assumes a licensing deal in 2026 for CS1, with the partner taking over development activity. However, if such a deal does not materialise and the company takes on self-development of its clinical programmes, we estimate it would need to raise SEK300m in FY26 to fund operations and service outstanding debt and a further SEK200m each in FY27 and FY28, until the commercial launch of CS1 in 2029 (a total of SEK700m between FY26 and FY28). If the company uses equity issues for this funding, we estimate that it would need to issue c 142.1m shares (assuming the current share price of SEK4.9), which would result in our per-share valuation diluting to SEK11.1 per share, from SEK14.3 per share currently.