Actinogen Medical — Funding the next stage of Xanamem development

Actinogen recently presented its Q423 quarterly activity update providing context on the status of the company’s development programmes involving lead candidate Xanamem, an inhibitor of enzyme 11β-Hydroxysteroid dehydrogenase type 1 (11β-HSD1) designed to penetrate the brain. As explained in our prior outlook note, much scientific literature suggests that excessive cortisol is associated with CI in patients with various chronic conditions, including age-related CI and AD. The naturally present enzyme 11β-HSD1 normally converts cortisone to cortisol inside cells and Xanamem is designed to reduce excessive cortisol production in the brain.

The company’s lead programme for Xanamem in the treatment of CI associated with AD remains on schedule and it plans to start the upcoming Phase IIb portion of the XanaMIA trial in patients with AD in H2 CY23. After the submission of updated documentation to the FDA on 5 June relating to proposed modifications in the XanaMIA clinical study protocol and providing documentation supporting the use of the new tablet Xanamem formulation, as discussed in our prior note, the 30-day waiting period for FDA feedback has elapsed, permitting the company to proceed with study enrolment. Actinogen expects to report top-line data in H2 CY25 and interim data in late CY24 or early CY25.

The Phase IIb portion of XanaMIA is a placebo-controlled study that will assess Xanamem in patients with mild or moderate stages of biomarker-positive AD, as determined through an elevated level of pTau-181 protein in the blood. The study is designed to enrol 330 patients and patients will be randomised to treatment with 5mg, 10mg or placebo once a day for 36 weeks.

As a reminder, Actinogen reported biomarker data in Q4 CY22 using blood samples from a subset of patients in the prior 185-patient XanADu study in AD patients showing clinical activity and a relatively large effect size at 12 weeks using the FDA-recognised Clinical Dementia Rating Sum of Boxes (CDR-SB) in biomarker-positive AD patients (as determined through patients who had elevated pTau). The 34 patients (16 on Xanamem 10mg daily, 18 on placebo) with pTau levels at or above 6.74pg/ml showed a 0.6 mean difference (effect size) in CDR-SB (representing a 60% relative reduction in disease progression versus placebo) at 12 weeks between the placebo and treatment arms. The primary endpoint of the XanaMIA Phase IIb study will be the change in a cognitive composite of several tests and the CDR-SB functional score will be a secondary endpoint.

Given the limitations of currently approved AD treatments, including anti-amyloid antibodies such as Leqembi, if Xanamem demonstrates positive efficacy data in improving cognition and/or decelerating AD progression versus placebo in a prospectively defined population of AD patients with elevated pTau, we believe there could be material commercial, out-licensing and/or value realisation opportunities for the drug.

As it relates to its Xanamem programme in CI associated with MDD, in late 2022 the company started the 160-patient XanaCIDD Phase II study assessing the drug candidate in patients with persistent depressive symptoms and CI despite standard-of-care anti-depression therapy. Xanamem 10mg daily or placebo is being added to patients’ existing anti-depression therapy and effects on cognition (using the Cogstate Cognitive Test Battery) and depression (using the Montgomery-Asberg Depression Rating Scale) will be evaluated.

The company indicates that enrolment is approaching 25% but it has noted that industry-wide delays by the UK Medicines and Healthcare products Regulatory Agency (MHRA) in approving study sites has impeded the study from activating sites in the UK thus far. The company had originally planned for the XanaCIDD study to recruit patients from the UK and Australia, but given the MHRA-related delays, it is now opening sites in the US to compensate for such impediments, and it is maintaining its current guidance to report study results in H1 CY24.

Having demonstrated the ability to improve cognition in two earlier trials (XanaHES and the Phase Ib portion of XanaMIA) in healthy adults, Actinogen is confident that Xanamem can exert a similar cognitive improvement effects in MDD patients; this study will also explore whether the drug can have effects on depression as well. If the XanaCIDD study is successful in showing CI improvement, the company may advance it into pivotal studies.

Actinogen reported an operating cash burn of A$3.8m in Q423 and A$8.8m in FY23, with the latter coming in mildly above our prior A$8.5m estimate. The company reported a cash balance of A$8.46m at fiscal year-end of 30 June 2023. Subsequently Actinogen announced a A$10m shareholder rights issue programme, whereby existing shareholders (at the record date of 14 August) will have the right to, for every 4.54 shares held, purchase one new share at an exercise price of A$0.025 per share. If exercised, for every two new shares issued under the offer, subscribers will also receive a 36-month option to purchase an additional share at A$0.0375 per share. If the rights offer is fully subscribed, the company will receive A$10m in gross proceeds and issue 400m shares (excluding considerations for the attached 36-month options). The closing date of the rights offer is 4 September and the newly issued shares are expected to be tradeable as of 12 September. Given that Actinogen shares are currently trading at A$0.03 each, we believe it is likely the rights issue will be heavily subscribed and possibly fully subscribed. Hence, our financial model now includes an assumption for the full exercise of the A$10m rights offer in H124.

With the funding from the rights offering, we believe Actinogen is now funded into Q1 CY24 (Q324). We have not made any substantive adjustments to our future cost expectations but may revise our forecasts once formal FY23 results are released (anticipated before the end of August). We now model that Actinogen will raise an additional A$20m before end-FY24 given our expectations of increases in R&D expenses as the Phase IIb portion of the XanaMIA study ramps up and as the XanaCIDD study progresses. We assume an FY24 free cash outflow rate of A$38.3m, versus A$38.4m previously. Clinical trial and overall operating costs are expected to increase further in FY25 as the number of enrolled patients under ongoing assessment increases.

We maintain our expectations for potential launches of Xanamem in the AD and MDD indications in CY28 in both indications. Our base-case projection assumes that Actinogen will independently fund all studies needed for regulatory approval in these indications and, given our expectation of successful completion of the Q3 CY23 A$10m rights offering, we have reduced our total projected future funding need (excluding the A$10m rights offering) to A$445m (A$455m previously).

Our valuation continues to be based on a risk-adjusted NPV (rNPV) analysis, which includes A$8.46m in net cash at the end of June 2023. We apply a discount rate of 12.5% and include Xanamem in the two lead indications. We continue to use a probability of success of 10.0% for Xanamem to reach the market in the AD indication and 12.5% in the MDD indication. Given that the rights offering has not yet concluded (and no new shares have been issued), our valuation continues to be based on the existing number of shares outstanding and the end-FY23 net cash position. We have rolled forward our estimates and now obtain a total pre-financing equity valuation of A$645m (vs A$640m previously), or A$0.36 per share (vs A$0.35 previously). However, if we assume the rights offer is subscribed in full (A$10m), the equity valuation per share would be reduced to A$0.30 given the additional 400m shares that would be issued.

As stated earlier, even assuming completion of the A$10m rights offering, we model the company will raise an additional A$20m before the end of FY24. In total, we forecast A$445m in additional financing will be required before FY29 to fund the development of both the CI-MDD and AD programmes, after which, provided it receives regulatory approval, the company should be able to generate sufficient operating revenues to reach recurring profitability. Our model assumes all financing will be raised through illustrative debt, as per usual Edison methodology. If our projected funding need of A$445m is raised through equity issuances at the prevailing market price of c A$0.03, our effective value per share would decrease to A$0.065.

The amount of fund-raising estimated to be necessary for Actinogen to independently bring Xanamem to commercialisation in these indications is larger than the company’s current market capitalisation, although we note that the funding intervals may be staggered over the next several years, which may alleviate potential challenges associated with raising funds in excess of a company’s market capitalisation. We also believe Actinogen will seek non-dilutive funding arrangements and/or partnership arrangements (actions towards the latter would likely particularly increase after the XanaMIA Phase IIb portion is completed), which may reduce the overall funding need, but such scenarios are not included in our forecasts.

Considering that AD pivotal trials are reported to cost more per patient than studies in nearly any other therapeutic area, we believe Actinogen will likely explore partnerships or non-dilutive funding strategies if the XanaMIA Phase IIb data are positive.