Newron Pharmaceuticals — Moving full steam towards pivotal studies

Newron is a biopharmaceutical company focused on the development of innovative treatments for conditions of the central nervous system (see Exhibit 1).

The company’s first marketed product is Xadago (safinamide), which is used as an add-on therapy for patients with Parkinson’s disease (PD). With support from partners Zambon, Supernus and Meiji Seika, the drug has generated steady royalty income for Newron (€3.4m in H124 versus €3.2m in H123), although with approaching maturity (market exclusivity in place until at least 1 December 2027) the strategic focus is now on advancing evenamide, a drug that holds blockbuster potential, based on highly encouraging data from prior clinical trials.

Evenamide is currently in the late stages of clinical development for poorly managed schizophrenia and TRS. It has a unique mechanism of action as a voltage-gated sodium channel inhibitor and modulator of post-synaptic glutamate release, which aims to move beyond the traditional dopamine hypothesis of schizophrenia pathophysiology. The mechanism appears to be effective, reflected in the positive clinical data reported to date. In January 2024, the company reported final results from the Phase II study 015 (extension of study 014) in TRS, which demonstrated statistically significant improvements across all standard efficacy measures including Positive and Negative Syndrome Scale (PANSS), Clinical Global Impressions-Severity (CGI-S) Scale and Level of Functioning (LOF) measures versus baseline. Over 70% of patients experienced a clinically meaningful reduction in schizophrenia severity and c 50% of patients no longer met the protocol severity criteria for a diagnosis of treatment-resistance at the 12-month timepoint. 25% of patients were described as achieving remission, which has not been observed previously in TRS patients to our knowledge, raising the expectation for an efficacious treatment strategy for this sub-population. The drug also showed desirable safety and tolerability. The sentiment towards evenamide improved further with the release of the results from the Phase II/III study (008A) in April/May 2024, focused on poorly managed schizophrenia, which also met its primary endpoint of improvement on the PANSS score from baseline, and the key secondary endpoint of improvement on the CGI-S scale. Notably, 31.3% of patients receiving evenamide were rated ‘much improved’, versus 17.3% on placebo, consolidating the already robust data from study 014/015, albeit in a larger, randomised, placebo-controlled setting.

The next focus area for Newron will be to reproduce these observations in the upcoming, potentially pivotal Phase III programme (study 017), which management expects to commence in H125. We note that while this is a slight delay from the previously communicated late-2024 expectations, it is not entirely unexpected given that partnering discussions can be a protracted business as the company seeks to maximise the potential commercial terms with prospective partners. Study 017 will be a randomised, double-blind, multinational, potentially pivotal trial, designed to compare evenamide to placebo as an add-on treatment in at least 400 TRS patients. The primary endpoint will be the change from baseline in PANSS scores at week 12. This will be followed by a continuation to week 26 and to one year to evaluate long-term safety. The reported data to date provide a strong foundation in addressing schizophrenia, in our view, and we believe the announcement of a transaction in the coming months will be Newron’s next significant catalyst.

Schizophrenia afflicts c 1% of the global population and despite the availability of several treatment options, one-third of the population remains treatment resistant and a further 40% respond poorly to prescribed medication. While the second-generation antipsychotic clozapine has been approved for TRS, it is prescribed to only around 5% of patients, in part due to a strong side-effect profile. Evenamide has proven to be safe in completed clinical studies, with study 008A data reporting safety and tolerability similar to placebo (25.0% for evenamide vs 25.8% for placebo).

As discussed above, while study 017 will focus on TRS, we see a high probability of the company seeking to expand the trial design (or undertake another new trial) to assess the drug’s utility in patients responding poorly to existing schizophrenia treatments. Together with TRS, this cohort covers c 70% of the total affected schizophrenia population, a material commercial opportunity for Newron.

Given that lead asset evenamide is still undergoing clinical development, Newron’s primary source of revenues has been the royalty income stream from its marketed product, Xadago (safinamide), targeting PD. In H124, the company reported royalty income of €3.4m, up 6.1% y-o-y, and we believe this to be attributed entirely to Xadago. However, no other income related to customer contracts was recorded in the period (€2.3m in H123), resulting in overall revenue declining by c 38%. Total operating expenses increased by 13.2% y-o-y to €11.1m in H124, with R&D expenses contributing c 58% (€6.5m; €5.7m in H123). The increase in R&D expenses was attributed to the clinical work on evenamide, particularly the Phase II/III study 008A, with reported top-line results in April/May 2024. With clinical activity complete and the Phase III study 017 now expected to commence in H125, we anticipate H224 R&D expenses to be materially lower. SG&A expenses in H124 were €4.6m, compared to €4.1m in H123, due to higher costs related to consultancy and other professional services. Overall, the company reported an operating loss of €7.7m, 78.4% higher than the €4.3m in operating losses recognised in H123. The net loss for the period was €9.6m (€7.0m in H123) and included €2.2m in interest expenses related to the €40m European Investment Bank (EIB) loan. Following the renegotiation with the EIB in March 2024 on loan terms and maturity (discussed below), we expect interest expenses to rise in H224. Reflecting the operating performance, cash outflow from operations increased to €8.8m, from €5.6m in H123.

Based on the H124 results and further visibility on the company’s clinical trial plans, we have made certain adjustments to our estimates. We continue to estimate the company signing a licensing agreement in Q424 for an upfront payment of €25m, which we have included on a risk-adjusted basis as licensing revenue in FY24. We note that this figure is subject to modification based on the actual terms of the deal to be signed by Newron. We also estimate €6.8m in royalty income for Xadago during the year, resulting in an overall revenue estimate of €24.3m, similar to our last published figure. For FY25, we now remove the licensing income we had previously assumed, given the slight pushback in trial timelines. Our revised revenue estimate for FY25 is €7.3m, versus €27.1m previously. We also trim our R&D expense estimates for FY24 to €10.4m (from €14.4m previously) due to the reasons stated above (delay in initiation of Phase III clinical trial). For FY25, we reflect a major decline in R&D (€3.6m vs €15.6m previously) on the expectation that the partner will take over all development work for evenamide, from Phase III clinical trials onwards. On the other hand, we increase our SG&A estimate for FY24 slightly to €8.1m, from €7.9m previously, to reflect the H124 run rate. The corresponding figure for FY25 stays unchanged at €8.3m. Overall we now project an operating income of €5.8m in FY24 (€2.0m previously) and an operating loss of €4.5m in FY25 (operating profit of €3.2m previously).

At end-H124, Newron had a gross cash position of €7.9m, plus €4.3m in other current financial and liquid assets. The cash balance was supported by capital inflow from the private placement of up to 2.05m shares (for proceeds of up to €15m at €7.3/share, a 5% discount to the last trading price of €7.7) to an institutional investor in March 2024 (to be exercised by 31 January 2025). We calculate the investor to have subscribed to 1.15m shares by end-June 2024, for proceeds of c €8.4m. We also understand that a further 200,000 shares have been subscribed to post-period for an estimated €1.5m. In total, options to subscribe for 1.35m of the 2.05m shares have been exercised by the investor to date, for total proceeds of €9.9m. The company also has €48.5m of debt on its books, comprising the €40m loan from the EIB as well as accrued interest. As highlighted in our previous update note, Newron successfully renegotiated its terms with the EIB in March 2024, resulting in deal maturity for the first three (of the total five) traches to be pushed out to late 2025/26. The first €10m tranche will now be due in November 2025 (versus June 2024 previously) with the other four tranches maturing in 2026. Based on our cash burn projections, we expect the current gross cash position to provide a runway for the company through H125, consistent with management guidance and past the planned initiation of the Phase III trial. If we were to include the assumed €17.5m in risk-adjusted upfront payment from the evenamide partnership deal (which we reflect in our model), the cash runway would extend further.

We value Newron using a risk-adjusted net present value (rNPV) approach for its two programmes. For the marketed asset Xadago, we project cash flows to the end of market exclusivity in 2029 in Europe and December 2027 in the US (which accounts for c 10% of the global royalty income for the drug), assuming a steady decline thereafter. We also assume a discount rate of 10%, which is the Edison standard rate for commercial-stage biopharma assets. Evenamide, which we had previously segregated under two separate target indications (TRS and poorly responding patients), is now combined under one programme. This is based on our assumption that the company may explore the drug as a label expansion opportunity in the poorly responding cohort, following the TRS trial. Given the encouraging clinical data to date and the significant unmet need, we estimate peak sales potential of €1.1bn, adding evenamide to the coveted list of blockbuster drugs, if successful. We also increase the probability of success to 70%, from 60% previously, and continue to estimate a launch timeline of 2027 (notwithstanding the slight delay in trial initiation, as indicated previously). For evenamide, we use a discount rate of 12.5% given the higher risk associated with a clinical-stage asset.

Based on the aforementioned modifications and adjustments related to forex changes and capital position, our overall valuation for Newron improves to CHF245.8m, versus CHF219.1m previously (Exhibit 2). The per share value rises as well to CHF12.8 (from CHF12.3), although the upgrade was truncated due to the higher number of shares outstanding (19.26m vs 17.85m in our last update).

Our valuation assumes that Newron will sign a global licensing deal for evenamide in Q424 with a total deal value of €650m (including development and commercial milestone payments) and an upfront payment of €25m. We also assume a tiered royalty rate of 12–15% based on certain sales targets. Any change to these will entail an adjustment to our valuation.

As an added sensitivity, if we were to assume no partnership deal for evenamide and Newron undertaking the Phase III clinical studies on its own (assuming a trial cost of €45m), we estimate that the company would need to raise c €80m in funds (excluding the potential c €5m still available under subscription from the institutional investor) across FY25–27 before the expected market launch later in 2027. If these funds are raised through an equity issue, Newron would have to issue 10.4m shares (at the last trading price of CHF7.71/share), resulting in our per share valuation diluting to CHF10.8 from CHF12.8 currently (shares outstanding would increase from 19.3m to 29.6m). We note that the estimated €80m in capital requirement includes the funds deployed in repayment of the €40m EIB loan between FY25 and FY26. If Newron were to be successful in renegotiating its repayment terms with EIB again, the requirement for external capital would reduce proportionately.