Cereno Scientific — All eyes on Q3 readout after Q1 update

Heading Cereno’s portfolio of candidates for both rare and common cardiovascular diseases is CS1, a delayed immediate release formulation of valproic acid with disease-modifying potential for PAH, underpinned by its epigenetic mechanism as a histone deacetylase inhibitor (HDACi). The candidate is currently being assessed in a Phase II clinical trial (n=30), and is leveraging Abbott’s CardioMEMS technology for detailed and continuous measurements of pulmonary pressure and haemodynamics. In recent months, Cereno successfully extended patent protection for CS1 in Mexico, Europe and Canada, strengthening its commercial potential. Another highlight from January 2024 was the FDA granting an Expanded Access Program (EAP; also referred to as ‘compassionate use’) to CS1 for PAH. The EAP allows patients who completed the Phase II trial to continue taking CS1, enabling Cereno to develop a more comprehensive data package as it prepares for regulatory discussions regarding a follow-on, potentially pivotal Phase IIb/III trial. The high reported interest from patients and investigators in the EAP also suggest a perceived patient benefit, in our view. Prior interim updates from the Phase II trial included an encouraging patient case study (reported in June 2023) and a Data Quality Control Review (reported in October 2023), both of which suggest that CS1 could provide a clinically meaningful benefit to PAH patients. While we are optimistic about the outcome of the Phase II trial, we acknowledge that detailed conclusions cannot be drawn until the final analysis is conducted once the study is complete. According to the Q1 update, these results are anticipated in Q324, consistent with prior guided timelines.

Cereno’s second asset, CS014, is also an HDACi with epigenetic effects. It is being advanced as a potential treatment for thrombosis prevention. An important feature of this candidate is the potential efficacy, without increased risk of bleeding, supported by various preclinical models. CS014 aims to offer a solution to a key challenge associated with current standard-of-care antithrombotic treatments. With the global antithrombotic market estimated to reach c $46bn by 2028 (according to BCC Research), we believe there is a sizable opportunity for Cereno in this space. In January 2024, Cereno announced that it obtained a UK patent for CS014, the first patent received for this candidate, strengthening its positioning. As discussed, management is gearing up to launch its first-in-human Phase I study for CS014. This trial has been designed to evaluate the safety and tolerability of CS014, and will be conducted in Sweden starting from Q224, provided the EMA accepts the CTA that was filed in April 2024.

CS585 is the company’s third asset, and is in the earlier stages of preclinical development. While the precise indication for the candidate is yet to be determined, it has shown promise as a potential treatment for thrombosis prevention without increased risk of bleeding. CS585 is a selective, potent, and oral prostacyclin receptor (IP) agonist, and the promise shown in preclinical research has been recognised with a publication in Blood. In April 2024, Cereno secured extended patent protection (Notice of Allowance) in Europe for the CS585 program, creating a strong foundation for further development efforts. While preclinical work is ongoing, we expect the selection of a clinical indication within the broader cardiovascular disease area for CS585 by end-2024, with the next program update expected at the European Hematology Association conference on 15 June 2024.

The first quarter of 2024 also saw several new appointments to the company’s R&D and business development teams, which we believe is aimed at supporting the company’s longer-term strategic goals as its clinical pipeline progresses. Notably, Dr Rahul Agrawal was appointed as the chief medical officer (CMO) and head of R&D in February 2024. Dr Agrawal has significant experience in designing and leading clinical trials across therapeutic areas (such as cardiovascular, renal and respiratory) and has been involved in launching seven new drugs on the market. We expect Cereno to leverage this expertise to support its clinical programs, particularly CS1 as it approaches topline readouts and potential progression to pivotal stage studies. Other key appointments during the quarter include Tatiane Abreu Dall’Agnol as medical director, Julia Fransson as director of business development and Megha Ranjan as project director.

In Q124, Cereno reported an operating loss of SEK13.8m, up 213.8% y-o-y from the Q123 figure of SEK4.4m, albeit 25.1% lower than the Q423 figure of SEK18.5m. Since the company capitalises its R&D, the operating profitability is driven by personnel costs and other external expenses, which increased year-on-year. Personnel costs more than doubled to SEK6.3m from SEK3.1m in Q123, which we believe can be partially attributed to the several new appointments made by the company since the beginning of FY24. The net loss for the period was SEK15.4m, versus SEK4.4m in Q123, and was also affected by a higher interest expense (SEK1.6m in Q124, none in Q123) related to the SEK90m bridge loan (SEK45m drawn down to date) raised from Formue Nord Fokus in November 2023. The Q124 free cash outflow was SEK38.0m, up 69.4% y-o-y from the comparative figure of SEK22.4m due to a combination of greater operating losses and R&D expenses. Capitalised R&D, as reflected in the cash flow statement as intangible acquisitions, was SEK21.6m in Q124, versus SEK15.4m in Q123, and was majorly attributed to the ongoing Phase II clinical trial for lead asset CS1 in PAH. The Q124 performance was in line with our expectations, and we therefore keep our FY24 and FY25 operating expense estimates mostly unchanged. We continue to project operating losses of SEK42.7m and SEK44.8m in FY24 and FY25, respectively. We project cash burn of SEK127.1m in FY24 (SEK128.9m previously) and SEK133.3m in FY25 (SEK135.0m previously).

We continue to value Cereno using a risk-adjusted NPV model (with a discount rate of 12.5%), reflecting contributions from its Phase II clinical candidate CS1 and the Phase-I ready CS014, expected to enter the clinic in Q224. Our underlying assumptions were detailed in our recently published initiation report and have been kept unchanged following the Q124 results. Note that there is potential upside to be had with the expected Phase II readout from CS1 in Q324, Phase I trial initiation for CS014 and inclusion of the other preclinical asset CS585 in our valuation, as it advances to the clinic.

Our implied enterprise value benefits from rolling forward our model and a higher pro forma net cash position has a positive impact on the overall equity value. Overall, we now ascribe a valuation of SEK2.46bn, versus SEK2.32bn previously. However, the per share valuation drops to SEK8.8 from SEK9.9 previously, given the higher share count following the warrants exercise (281m shares outstanding vs 233.8m previously). A breakdown of our valuation in presented in Exhibit 2.

Cereno closed Q124 with a net cash balance of SEK3.8m (gross cash of SEK49.2m and loans of SEK45.4m, including the SEK45m bridge loan). The cash balance was bolstered with a post-period capital injection of SEK73.6m (net proceeds) from the conversion of the TO3 warrants. In total 99.6% of the warrants were exercised, with the company issuing 47.9m new shares at SEK1.6/share for total gross proceeds of SEK76.7m. Given the exercise price was at a significant discount to the company’s prevailing trading price near expiry (over SEK3/share), we were expecting the warrants to be exercised and had already reflected this in our model.

Looking ahead, if the remaining SEK45m tranche from the SEK90m debt facility is also drawn down (which we expect to happen in H224, unless the company explores other fund-raising avenues), we now expect the pro forma gross liquidity (SEK167.8m) to be sufficient to fund operations through Q225 (excluding debt repayments). We continue to estimate the need for the company to raise SEK150m by Q225 to fund further operations as well as service the SEK90m debt repayment due in May 2025, which we reflect as illustrative debt in our model. As highlighted in our initiation report, we assume a licensing deal in 2026, 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 SEK200m per year starting in FY26, until the commercial launch of CS1 in 2029 (a total of SEK750m between FY25 and FY28). If the company uses equity issues for this funding, we estimate that it would need to issue c 184m shares (assuming the current share price of SEK4.08), which would result in our per share valuation diluting to SEK6.9 per share, from SEK8.8 per share currently.