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Hybrigenics — Update 18 May 2016

Hybrigenics — Update 18 May 2016

Hybrigenics

Analyst avatar placeholder

Written by

Hybrigenics

Pipeline on track, accounting standards shift

Company update

Pharma & biotech

18 May 2016

Price

€0.85

Market cap

€30m

£/€1.27

Net cash (€m) at 31 December 2015

11.3

Shares in issue

35.8m

Free float

100%

Code

ALHYG

Primary exchange

Alternext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.6)

1.2

(34.6)

Rel (local)

(3.9)

(1.0)

(24.5)

52-week high/low

€1.9

€0.8

Business description

Hybrigenics is a French biotech company. It provides protein-protein, genetic and small molecule analysis services and is conducting Phase II studies on lead drug inecalcitol in orphan adult leukaemias: chronic lymphocytic leukaemia, chronic myeloid leukaemia and acute myeloid leukaemia.

Next events

Phase II data in CML

2016

Orphan designation in CML in the EU and US

2016

Initiate Phase II in AML

Mid-2016

Analysts

Juan Pedro Serrate

+44 (0)20 3681 2534

Lala Gregorek

+44 (0)20 3681 2527

Hybrigenics is a research client of Edison Investment Research Limited

Hybrigenics reported €11.7m in cash at end 2015. This provides a runway to end 2017, funding a Phase II trial of inecalcitol in acute myeloid leukaemia (AML) in France and the US. Interim data from a Phase II study in chronic myeloid leukaemia (CML) are expected this year. Furthermore, the company has changed its accounting rules from French GAAP to IFRS; we have updated our model on this basis. This update, together with splitting inecalcitol revenues in chronic lymphocytic leukaemia (CLL) between the EU and US (reflecting different economics), increases our valuation to €137m from €120m.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

6.8

(2.2)

(8.5)

0.0

N/A

N/A

12/15

6.5

(3.6)

(10.6)

0.0

N/A

N/A

12/16e

6.1

(5.9)

(16.6)

0.0

N/A

N/A

12/17e

6.3

(6.5)

(18.1)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments, according to IFRS.

Inecalcitol clinical trials continue to progress

Inecalcitol is being tested in a Phase II trial in CML in combination with Novartis’ imatinib (Gleevec/Glivec), with interim data expected this year. Additionally, another Phase II trial in AML patients intolerant to current standard of care is slated to start dosing in the US in mid-2016. This study will recruit 110 patients and report overall survival data at the end of 2018. Inecalcitol is Phase III-ready in CLL after completing a Phase II trial; however, additional funding will be needed to conduct further studies in this indication as current cash is intended to fund the two former trials. We expect the company to secure the resources to continue this programme in two years’ time.

FY15 results presented in new accounting standards

Hybrigenics has changed its financial reporting from French GAAP to IFRS. Furthermore, the profit and loss (P&L) statement is now reported by function. This provides a better picture of gross and operating margins and shows expenses according to the activity for which they were incurred. Hybrigenics’ recurring services revenues complement its development pipeline. Services revenues increased by 2% in FY15 to €4m vs €3.9m in FY14; we project a similar increase for FY16 and FY17.

Valuation: rNPV moves to €137m from €120m

We have increased our DCF valuation to €137m or €3.83 per share, from €120m or €3.4/share, rolling our forecasts forward and updating for the FY15 gross cash position. We have updated our model for the new accounting rules. The key change to our numbers relates to inecalcitol in CLL, where we have pushed out our launch expectation by two years, reduced the probability of success to 30% and split the revenue streams into royalties from a potential partnership in US and RoW, and self-commercialisation in EU. Current cash will fund the CML and AML indications.

Inecalcitol advances through mid-stage development

Hybrigenics continues the development of its lead candidate inecalcitol, a vitamin D3 analogue, in a series of clinical trials for haematological malignancies, with an ongoing trial in CML and a planned study in AML. Inecalcitol acts by binding to the vitamin D receptor in the cell and, together with the retinoid X receptor, regulates genes involved in cell cycle progression in a more efficient fashion than calcitriol, the natural active form of vitamin D. For example, inecalcitol is up to 10 times more potent than calcitriol in inhibiting the proliferation of cancer cells. Inecalcitol is aimed at delaying the use of chemotherapy in leukaemia patients with a benign safety profile, as demonstrated in preclinical experiments and a Phase I clinical trial.

Exhibit 1: Clinical pipeline (all inecalcitol)

Indication

Status

Setting

Notes

CLL

Phase II completed

Monotherapy/untreated/
high risk of progression

21 untreated pts dosed with 2mg oral inecalcitol for at least five months; disease progression was halted in 11 patients (52% of cases). Designated as orphan drug in the EU/US. Next stage Phase III disease progression study.

CML

Phase II ongoing with potential interim results in 2016

+ first-line treatment/stable chronic phase

50 pts across six centres.

AML

Phase II start mid-16

Newly diagnosed frail or elderly pts ineligible for standard chemo + decitabine or azacytidine

Trials in the US and France planned in 2016. Designated as orphan drug in the US and EU.

CRPC

Phase IIa completed

+ docetaxel/all

Dose-finding and safety study established daily 4mg oral dose – 40 out of 47 of patients exhibited an 85% reduction in PSA levels within three months, compared to a 65% reduction in PSA levels on docetaxel alone (in external registration study).

Phase IIb proof-of-concept next development stage.

Source: Hybrigenics, Edison Investment Research

In CLL, inecalcitol is positioned as a treatment that can delay the start of chemotherapy. Proof-of-principle data in early-stage untreated patients with CLL were published in July 2014 showing that inecalcitol was able to slow the progression of disease in half of patients. Out of 21 evaluable CLL patients, 11 experienced stabilisation of disease as measured by their blood lymphocyte counts (BLC), including one patient who achieved a 95% decrease in BLC after 10 months of treatment. This programme is awaiting funding before it begins the more expensive Phase III trials.

Based on preclinical data published at ASH in December 2013,1 the company is running a Phase II clinical trial in CML patients in combination with imatinib. Inecalcitol in combination with imatinib has demonstrated synergistic effects in experiments in vitro by inhibiting the proliferation of CML stem cells, which are involved in relapse. The trial aims to replicate this effect and prolong remission or eliminate the disease altogether. The study started in January 2015 and is expected to end in H117.

Vitamin D3 Analog Inecalcitol Synergizes With Imatinib To Inhibit Selectively The Growth Of Chronic Myeloid Leukemia (CML) Progenitors and Stem Cells.

Lastly, as mentioned in our previous update note, the company has focused on AML for the next clinical trial of inecalcitol. In particular, a Phase II study in 110 patients, 55 in the US and 55 in France, will start during the summer with the dosing of the first patient. This is a double-blind, placebo-controlled trial in AML patients unfit for chemotherapy. Patients will receive decitabine infusions together with oral inecalcitol (4mg) or placebo. The primary endpoint is overall survival, and response rate and tolerance are secondary endpoints.

Hybrigenics and Servier have recently ended their four-year research collaboration for the discovery of new deubiquitinating enzymes (DUBs) for various indications. A new partnership agreement focused on oncology is being negotiated.

Inecalcitol’s intellectual property has recently been strengthened with the grant of two new patents in the US until 2031. These patents were already granted in Europe and other key geographies. Additionally, inecalcitol has Orphan Drug designation in the EU and US for AML and CLL. The company plans to apply for orphan status in CML based on forthcoming data from the ongoing trial.

Financials: change to new accounting rules

Hybrigenics has reported FY15 results in accordance with IFRS, which represents some changes in the way revenue is recognised, mostly related to the following:

■

Services invoicing, in which the full amount is recognised when the service is completed.

■

Research tax credits that are now included in other revenue, along with grants, subleases and others.

■

The Servier upfront payment of €1.7m has retrospectively been distributed over the three-year period of the contract.

Exhibit 2: Comparison between French GAAP and IFRS

Concept (€000)

2014 French GAAP

2014 IFRS

Service revenue

4,000

3,923

Servier and pharma revenue

883

1342

Other revenues (research grants and sub leases)

979

1,509

Total revenues

5,862

6,774

Operating expenses

9,486

6,036

Operating loss

3,624

2,539

Net loss

2,920

2,578

Source: Hybrigenics

Under the new accounting rules and based on the FY15 P&L statement, revenues from the services division grew 2% in FY15 to €4m, below our forecast of €4.4m mainly due to domestic market conditions.

In FY16, we forecast a modest growth of services sales of 3%, to €4.2m. However, due to the end of the research collaboration with Servier we do not forecast any revenues from this segment until a continuation of the previous agreement, or a new one, is negotiated. We project revenues from grants, subleases and other activities to be constant and now include 30% of R&D costs as research tax credits, according to the new accounting rules. This results in 6% lower total revenues of €6m.1 from €6.5m in 2015.

We estimate FY16 operating costs of €8.4m vs €7.8m in FY15 due to the CML and AML trials. We include the costs of further clinical development in CLL, estimated at €20m.

Cash and equivalents at the end of 2015 were €11.7m; during 2015 Hybrigenics raised a total of €9m gross through issuing 6.37m shares at €1.41. €6.5m was raised in a public offering, whereas €2.5m was raised in a private placement. Our cash consumption for FY16e and FY17e is approximately €6m per year. Hence, we estimate that Hybrigenics is funded until 2017, covering the cost of the CML and AML trials. However, we project a funding shortfall at the end of 2017, which for illustrative purposes we include as long-term debt. Other forms of funding are a capital raise or a partnership. Additionally, Hybrigenics has an undrawn €5m equity line with Yorkville.

Updating our DCF-based valuation to €137m

As a consequence restating the financial model, we have updated our DCF valuation to €137m from €120m. We are now assuming potential initiation of a pivotal trial in CLL in 2018 (two years later than our previous assumption), splitting future revenues into two regions to reflect the fact that the intention is to partner in US and RoW while keeping rights in the EU. We remove all the prostate cancer indications from our model until we have more clarity on the company’s plans, together with any future revenues from the collaboration with Servier (which has now completed) until a new deal is in place. We also roll forward our valuation by one year and update for end-2015 cash. The main value driver is inecalcitol, while we value the services division at 2x FY16e revenue at €8.4m. Finally, we revisited epidemiology data for AML in Europe and updated our valuation accordingly.

Exhibit 3: Valuation assumptions for inecalcitol

Status

Launch date

Peak sales ($m)

Risk adjustment

Market penetration

Royalty

Inecalcitol CLL – US

Phase III ready

2023

180

30%

15%

25%

Inecalcitol CLL – EU

Phase III ready

2023

180

30%

15%

N/A

Inecalcitol CML

Phase II

2020

257

30%

15%

25%

Inecalcitol AML – US

Phase II

2020

62

30%

15%

25%

Inecalcitol AML – EU

Phase II

2020

45

30%

15%

N/A

Source: Edison Investment Research

In 2016, the company is expected to report interim data from a Phase II trial in CML. Following the data from this trial, Hybrigenics intends to apply for Orphan Drug status for inecalcitol in this indication in the US and EU. Lastly, the Phase II trial start in AML is expected in mid-2016.

Exhibit 4: Sum-of-the-parts DCF valuation

Driver

Value per share (€)

Value (€m)

Inecalcitol CLL – US

0.8

27.7

Inecalcitol CLL – EU

2.1

74

Inecalcitol AML – US

0.3

10.9

Inecalcitol AML – EU

0.6

20.6

Inecalcitol CML

1.4

49.0

Milestones

0.3

10.2

Services Division

0.2

8.4

Risk-adjusted expenses including R&D

(0.6)

(22.4)

Tax

(1.5)

(52.5)

Net cash at end FY15

0.3

11.7

Total

3.8

137

Number of shares

35.8

Source: Edison Investment Research

Exhibit 5: Financial summary

€'000s

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

6,774

6,483

6,118

6,290

Cost of sales

(3,417)

(3,858)

(4,244)

(4,583)

Gross profit

3,357

2,625

1,874

1,707

EBITDA

 

 

(2,081)

(3,559)

(5,954)

(6,378)

Operating profit (before intangible amort. and except.)

 

(2,170)

(3,709)

(6,104)

(6,528)

Intangible amortisation

(89)

(150)

(150)

(150)

Exceptionals

0

(252)

0

0

Share-based payments

(201)

(225)

(236)

(248)

Operating profit

(2,539)

(4,414)

(6,569)

(7,004)

Net interest

(26)

49

177

56

Profit before tax (norm)

 

 

(2,209)

(3,622)

(5,928)

(6,472)

Profit before tax (reported)

 

 

(2,499)

(4,327)

(6,392)

(6,948)

Tax

0

(14)

0

0

Profit after tax (norm)

(2,209)

(3,636)

(5,928)

(6,472)

Profit after tax (reported)

(2,578)

(4,341)

(6,392)

(6,948)

Average number of shares outstanding (m)

25.9

34.2

35.8

35.8

EPS - normalised (c)

 

 

(8.5)

(10.6)

(16.6)

(18.1)

EPS - FRS 3 (c)

 

 

(9.7)

(12.7)

(17.9)

(19.4)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross margin (%)

50%

40%

31%

27%

EBITDA margin (%)

N/A

N/A

N/A

N/A

Operating margin (before GW and except) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed assets

 

 

1,837

1,717

1,463

1,233

Intangible assets

1,023

820

670

520

Tangible assets

598

585

504

423

Investments

216

312

289

290

Current assets

 

 

15,708

19,584

13,483

7,958

Stocks

262

150

165

126

Debtors

1,701

1,513

1,428

1,468

Cash

9,644

11,716

5,685

159

Other

4,101

6,205

6,205

6,205

Current liabilities

 

 

(3,018)

(2,135)

(2,139)

(2,142)

Creditors

(2,116)

(1,787)

(1,789)

(1,791)

Short-term borrowings

(862)

(288)

(288)

(288)

Other

(40)

(60)

(62)

(64)

Non-current liabilities

 

 

0

(629)

(629)

(1,629)

Long-term borrowings

0

(114)

(114)

(1,114)

Other

0

(515)

(515)

(515)

Net assets

 

 

14,527

18,537

12,178

5,420

CASH FLOW

Operating cash flow

 

 

(3,042)

(5,262)

(5,884)

(6,378)

Net interest

49

28

177

56

Tax

0

(14)

0

0

Capex

(455)

(395)

(147)

(147)

Payment of deferred consideration

0

0

0

0

Capitalisation of development costs

0

0

0

0

Expenditure on intangibles

0

0

0

0

Acquisitions/disposals

0

(153)

0

0

Financing

11,619

8,331

(177)

(56)

Dividends

0

0

0

0

Net cash flow

8,171

2,535

(6,031)

(6,525)

Opening net debt/(cash)

 

 

(1,611)

(8,782)

(11,314)

(5,283)

HP finance leases initiated

0

0

0

0

Other

(1,000)

(3)

0

0

Closing net debt/(cash)

 

 

(8,782)

(11,314)

(5,283)

1,243

Source: Company accounts, Edison Investment Research

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Cerulean Pharma — Update 17 May 2016

Cerulean Pharma

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