Factor Therapeutics — Update 23 February 2017

Factor Therapeutics’ lead product, VF-001, is an advanced biologic product for wound care that harnesses a targeted growth factor approach to accelerate healing. It is a synthetic protein combining fragments of the extracellular matrix protein vitronectin with the insulin-like growth factor 1. It was shown to be safe and well tolerated in an open-label Phase II trial in 53 patients with non-healing venous leg ulcers; in that study, one-third of ulcers healed after 12 weeks of treatment with VF-001 combined with standard compression bandaging. The company had previously applied for CE mark approval for VF-001 from the European Medicines Agency (EMA), but withdrew the application in 2015 when additional preclinical and safety data was requested.

Factor has achieved a significant milestone with the initiation of a 168-patient randomised, placebo-controlled Phase IIb trial of VF-001 in patients with venous leg ulcers (NCT02973893). The first subject was enrolled in December, with enrolment planned to be expanded to a total of 26 sites across the US; according to clinicaltrials.gov there were 14 sites actively recruiting patients as of 15 February. Management suggests the number of active sites is now closer to 20.

The study will test two doses of VF-001 vs placebo (randomised 1:1:1) in conjunction with standard care. The lower-dose group will receive the same 14µg dose that was used in the previous open-label Phase II trial, while the dose in the high-dose group will be 10-fold higher at 140µg. Subjects will receive weekly applications of VF-001 (or placebo) for 12 weeks in addition to standard moisture-retentive dressings and compression bandaging, and will be followed for a further 12 weeks after the completion of the treatment period.

The trial is designed to recruit patients with VLU of moderate severity, by excluding patients with less severe ulcers that are likely to heal with standard care alone as well as those with the most severe ulcers that are unlikely to fully heal within the 12-week study window despite the treatment with VF-001. The key selection criteria will be wound size and duration, which were identified as key predictors of ulcer healing by Margolis et al. (2000).1 Subjects enrolled in the trial will have either medium-size (2.5-5cm2) ulcers that have been present for at least six months, or large (5-15cm2) but recent ulcers that have been present for less than six months. The selected patients will be similar to the Margolis 1 (intermediate) patients, who showed the greatest improvement in healing in the open-label VF-001 Phase II, when compared to a historical comparison group.

Subjects will also be excluded if they have other features that are likely to interfere with healing, such as diabetes, infection of the ulcer, or arterial insufficiency.

Subjects must have undergone treatment with compression therapy and moisture-retentive dressings for at least one month before the screening visit. Following screening, subjects will undergo standardised compression therapy for two weeks before the first study treatment. Patients with rapidly healing ulcers (>30% reduction in ulcer area during the run-in period) will be excluded from the trial.

The primary endpoint is the percentage reduction in ulcer area at the end of treatment. This will allow the study to identify the time when there is the greatest difference between VF-001 and placebo, which could influence the design of Phase III studies.

Secondary endpoints include the proportion of patients with complete ulcer closure after 12 weeks of treatment, which is the FDA’s preferred efficacy endpoint (complete ulcer closure would be the primary endpoint for subsequent US Phase III studies). Time to ulcer closure, pain reduction and improvement in quality of life are additional secondary endpoints.

Factor plans to issue an update on recruitment in late Q117, and is targeting a top-line efficacy data read-out in Q417.

The US-based Phase IIb trial has been designed to comply with the data-gathering requirements outlined by the EMA as part of the company’s withdrawal of its previous application for CE mark approval in 2015. The data from the current trial could be included in a CE mark resubmission to the EMA in 2018.

Positive results in the Phase II trial would also provide evidence of efficacy to support partnering discussions and negotiations for pricing in the EU.

Factor is preparing an IND submission for a Phase II trial of VF-001 in diabetic foot ulcers (DFU). The company expects to provide an update on the preparations for the IND submission around the end of March 2017. Clinical development in DFU is a logical next step for VF-001, as most other advanced wound-care products that are approved for treating VLU are also approved for DFU, including Apligraf, Oasis Wound Matrix and ReGenerCell.

Factor is developing a high-viscosity gel formulation of the active ingredient in VF-001, which it has termed VF-002. It is anticipated that a gel formulation may increase efficacy by remaining in contact with the wound for longer. A high-viscosity formulation may also provide additional IP protection for VF-002.

Factor has entered a collaboration and intellectual property option agreement with a team of dermatology researchers at Monash University, led by Associate Professor Ian Smyth. The team at Monash has identified a library of anti-inflammatory small molecules that target key inflammation pathways that play a role in wound healing. Several of these molecules are candidate therapies for orphan diseases such as Harlequin ichthyosis. Harlequin ichthyosis is a severe genetic disorder that mainly affects the skin. Infants with this condition are born with very hard, thick skin covering most of their bodies.

In September 2016 Dr Robert Ryan was appointed to the board of Factor. Dr Ryan was formerly CEO of Scioderm, and has extensive experience in developing therapies for orphan skin diseases.

The company has started preclinical work for its ocular wound-care programme to assess the potential of VF-001 and other vitronectin-targeted growth factors in ocular wound healing. It expects to provide an update on the progress in this project in mid-2017.

We have updated the cash balance to end H117 (31 December 2016) and have rolled forward our risk-adjusted discounted cash flow model for the half-year, which increases our valuation to A$108m (vs A$102m); all other valuation assumptions are unchanged. Our valuation is equal to A$0.15 per share (vs A$0.14 per share), both on an undiluted basis and after diluting for the 13.2m options on issue (exercise price 3.5-11c; all of the options would be in the money if the stock was trading in line with our valuation).

Exhibit 1 shows our (unchanged) market assumptions for VF-001 for VLU and DFU indications and the contribution of product royalties and milestone payments to the rNPV. For a detailed description of valuation assumptions see our initiation report dated 28 October 2016.

The key risk for Factor is a failure to demonstrate efficacy in the Phase IIb VLU trial. A number of potential competitor products have failed to meet the primary efficacy endpoint in pivotal VLU trials. Even if the trial results are positive, there is a risk the company may not succeed in obtaining regulatory approvals, including from the US FDA and the European Medicines Authority. The FDA classifies VF-001 as a biological drug so it is likely to need to demonstrate efficacy in one or more pivotal Phase III trials to gain regulatory approval.

Factor has indicated that it intends to rigorously screen potential subjects for the Phase II trial to eliminate subjects whose VLU is on a healing trajectory after at least six weeks of standard compression therapy (at least four weeks of therapy before enrolment followed by a two-week run-in period). If these stringent criteria eliminate a high proportion of screened candidates, then recruitment could take longer than anticipated.

If the Phase IIb trial takes longer than anticipated or the company is not able to attract a suitable commercial partner then it may need to raise additional funds in the future. There is no guarantee that funds will be available at favourable terms.

We leave our financial forecasts unchanged following the release of H117 results (encompassing the six months ending 31 December 2016). Net loss in H117 was A$1.4m, comprising operating expenses of A$3.6m and other income of A$2.3m (including a A$2.2m R&D rebate). We forecast total operating expenses for FY17 of A$8.4m, which allows for expenditure to increase to A$4.8m in H217 as the recruitment commences in all 24 sites in the Phase II trial. The company has submitted amended claims for R&D rebates covering FY12-14, which are undergoing assessment by the Australian Tax Office. In our forecasts we assume that additional rebates totalling A$0.4m will be recognised in H217, taking the total recognised in FY17 to A$2.6m.

Cash at 31 December was A$12.7m, which should be sufficient to fund operations beyond the reporting date for the key Phase IIb trial.