Mendus — Multi-front progression during FY22

Mendus currently has two clinical programmes aimed at applying the company’s capabilities in allogenic cell therapies and dendritic cell (DC) biology to address serious unmet medical needs. Mendus is focusing on the development of its two clinical assets, vididencel (DCP-001) and ilixadencel, in three main indications: AML (vididencel), ovarian cancer (OC, vididencel) and gastrointestinal stromal tumours (GIST, ilixadencel). A summary of the development pipeline is shown in Exhibit 1.

The ADVANCE II trial (NCT03697707), currently in the long-term follow-up stage, is investigating the use of vididencel as a potential AML maintenance therapy to prevent relapse in patients who have responded to previous therapy but still harbour measurable residual disease (MRD). Positive survival data from the trial (reported in December 2022 at the American Society of Hematology, ASH) meeting established proof-of-concept for vididencel as an AML maintenance therapy and demonstrated a potentially competitive profile for the treatment, in our view. Mendus is also developing vididencel as a first-line monotherapy treatment for OC in the Phase I ALISON study (NCT04739527), for which management reported positive interim safety data at the European Congress on Gynaecological Oncology 2022. Additionally, Mendus is pursuing the development of its DC-based immune primer, ilixadencel, for the treatment of GIST, in combination with tyrosine kinase inhibitors. The Phase II TROY study for ilixadencel is expected to begin enrolment in 2023. However, we expect management’s more immediate strategic focus to be on the clinical development of vididencel, exemplified by the planned Phase I and Phase II studies in post-HSCT patients and in combination with azacitidine, respectively, as explained further below.

Following encouraging interim results in May 2022, updated survival and immunomonitoring data from the Phase II ADVANCE II trial (NCT03697707), presented at the 64th ASH annual meeting in December 2022, provided important clinical proof-of-concept for vididencel’s use as a potential maintenance therapy in AML patients who are in complete remission but still have MRD. At a follow-up period of 19.4 months, median relapse-free survival (mRFS) had not yet been reached with 12 out of the total 20 patients remaining in complete remission and disease free in long-term follow-up ranging from 16 to 47 months following initial vaccination. Five of 20 patients had converted to MRD-negative status following vididencel’s administration, with all MRD-negative patients remaining alive and disease free at the time of read out. Median overall survival stood at 30.9 months. Vididencel continued to display a good safety profile, which will be an important characteristic when aiming to expand the addressable population to post-HSCT and chemo-unfit patients, in our view. Patients have now entered a long-term follow-up stage, which we expect will provide mRFS data in FY23.

Considering the recently presented survival and immunomonitoring data and the emerging importance of MRD as a prognostic biomarker for patient survival, we continue to believe that vididencel could form an important part of maintenance therapy regimens for AML patients in complete remission who still harbour MRD. The significant length of patient survival demonstrated in the ADVANCE II trial is especially positive news for Mendus, in our view, as the company continues to build vididencel’s competitive profile as an AML maintenance therapy. In addition, we expect this positive data will aid in hastening any licensing/acquisition talks and drawing further industry attention to Mendus’s DCOne development platform.

With clinical proof-of-concept in hand, management plans to focus on maximising vididencel’s potential as an AML maintenance therapy in FY23. The positive data, to date, from ADVANCE II suggests, in our view, that vididencel could have a very competitive profile versus the only other approved AML maintenance therapy, oral azacitidine (launched by Bristol Myers Squibb in 2020, with estimated 2028 global sales of $723m according to EvaluatePharma). However, ADVANCE II has only assessed vididencel monotherapy in AML patients achieving complete remission, which is achieved in c 60–80% of adult AML patients following induction chemotherapy. Management believes that further opportunities are present in the AML maintenance setting, specifically in post-HSCT and as a potential combination treatment with standard-of-care azacitidine, and the company now plans to initiate further trials:

In our view, expanding vididencel’s applicability to these populations will be key to maximising the treatment’s potential in AML. Mendus has already reported an encouraging preclinical rationale for the combination of vididencel with venetoclax and/or azacytidine, and vididencel’s consistently demonstrated clinical safety profile, in our view, supports the investigation of the treatment’s use in both post-HSCT and chemo-unfit populations and we see this as a sensible strategic decision. More specifically, if Mendus can expand vididencel into chemo-unfit patient populations, the drug’s addressable market in maintenance AML would significantly increase. This is assuming that vididencel’s current setting addresses c 40% of the AML market (chemo-fit patients under the age of 65), while the remaining c 60% of the market consists of patients over 65 years of age deemed unfit for chemotherapy who could be targeted with the vididencel/azacitidine combination. However, the company has not fully communicated the planned study designs and timelines. For more details on the AML treatment landscape, see our recent thematic report. Management has also communicated that it may consider investigating the use of vididencel in other blood-borne malignancies such as myelodysplastic syndromes and/or chronic myeloid leukaemia.

We value Mendus at SEK1.9bn or SEK9.31 per share (SEK1.8bn or SEK9.1 per share previously), based on a sum-of-the-parts calculation including a risk-adjusted NPV calculation for vididencel in AML and OC and ilixadencel in GIST, and a net debt position of SEK10.2m at 31 December 2022 (gross cash of SEK41.9m, net of SEK29.2m in short-term debt and SEK22.8m in long-term debt. Our latest valuation reflects the overall impact of rolling forward our model by a year, foreign exchange movements and, more importantly, adjusting our underlying assumptions based on the clinical developments in 2022 and licensing deal terms based on similar recent deals in the space. Exhibit 2 shows a full breakdown of our valuation assumptions for vididencel and ilixadencel.

Based on management’s development priorities over 2022, we have revisited our licensing deal assumptions for vididencel and ilixadencel. Our valuation assumes a licensing deal will be found for vididencel in 2024 based on full survival data from the Phase II ADVANCE II trial, which we anticipate in H224. Based on our assessment of recent licensing deals in the AML space (see Exhibit 3), we assume a total deal value of $980m, consisting of an upfront payment of $90m, $297m in development milestones and $593m in potential sales milestones. To reflect vididencel’s potential in AML and OC, and considering the relative stages of each programme, we assign two-thirds of licensing payments (upfront, and sales and development milestones) to the treatment’s use in AML and one-third to its use in OC.

For ilixadencel, we now include an upfront payment of $42m and total potential milestone payments of $250m based on past licensing deals for assets in development for the treatment of GIST (Exhibit 3). However, our model now also assumes that a licensing deal for ilixadencel, based on its use in GIST, will be found in 2025 (previously 2024), which we expect following data from the anticipated Phase II TROY trial that has been delayed somewhat from the previously anticipated timelines (now expected in FY25 from FY24 previously).

Please note that we were previously valuing the company’s DCOne technology separately (c 10% of our last published valuation), assigning it 20% of the estimated licensing deal value, but have now removed it from the valuation, instead assigning this portion of the deal value to the two vididencel programmes. While we acknowledge the platform’s potential in other indications, there is significant uncertainty related to timelines, partnerships and clinical targets and we felt it prudent to not ascribe any numbers to it at this time. We also currently do not value any of the company’s early/preclinical stage development activity but note the upside potential on clinical progression.

We continue to forecast a potential launch of vididencel as an AML maintenance therapy in 2027 in the United States and European Union, assuming a peak penetration rate of 30%. While our estimate for global peak sales remains unchanged at $680m, the NPV and rNPV benefit from the rolling forward of our valuation as well as the higher licensing income we now assume. For OC, we estimate a potential launch in 2031, with global peak sales unchanged at $760m in 2036. Similar to the AML programme, the OC programme also benefits from a shorter discounting period and higher assumed licensing income. In total, we value vididencel at SEK8.2 per share (88% of our total valuation), allocating SEK4.61 per share to its use in AML and SEK3.61 per share to its use in OC. For ilixadencel’s use in GIST, we now push out the expected launch date to 2029, from 2026 previously, as Mendus is yet to commence Phase II. The NPV and rNPV, however, benefit from higher expected licensing deal terms (as discussed above) and we now value ilixadencel at SEK230m or SEK1.15 per share.

As expected, Mendus reported no revenues in FY22, however it recorded other income of SEK3.4m pertaining to patent transfer to Elicera Therapeutics and foreign exchange gains on accounts payable. Total operating expenses for FY22 were SEK137.1m, a 5.3% y-o-y increase and higher than our estimate of SEK129.1m. The higher operating expenses year-on-year indicate continued focus on the development of vididencel, ilixadencel and the DCOne platform, along with additional expenses related to the new facility in Leiden, the Netherlands. Operating costs for the period comprised R&D-related expenses (SEK87.0m) and administration costs (SEK44.7m, excluding depreciation). Net cash outflow from operations was SEK109.3m in FY22, lower than the FY21 figure of SEK138.0m, benefiting from favourable working capital movements including lower prepaid expenses during the period (SEK1.9m in FY22 versus SEK10.2m in FY21). While there were no surprises in the year-end report, we have adjusted our FY23 estimates based on actual FY22 financials and have introduced FY24 estimates. Notably, we have increased our R&D estimates for FY23 to SEK99.3m, from SEK82.7m, in line with anticipated clinical progressions. However, we expect R&D expenses to decline sharply in FY24, as we assume full out-licensing of vididencel in 2024, with the partner taking over Phase III development and commercialisation. As a result, our estimates for FY23 and FY24 operating losses stand at SEK149.5m and SEK67.4m, respectively.

In August 2022, the company secured up to SEK250m in financing commitments, consisting of a shareholder loan of SEK50m from Van Herk Investments and up to SEK200m in convertible bonds from Negma Group. Management requested and received the first loan (SEK10m, which carries a 6% cumulative interest) under the Van Herk Investments agreement in October 2022, and drew down the first tranche (SEK13.7m) of the convertible bond agreement with Negma in January 2023. At the time of writing, SEK40m of the shareholder loan and SEK186.3m of the convertible facility remain available for drawdown (SEK226.3m). With an FY22 gross cash position of SEK41.9m and assuming Mendus fully exercises the committed financing available, we believe that the company will have sufficient funds to support its clinical programmes and working capital requirements into H224, based on our projected burn rates.

While the convertible bonds hold no coupon, we note the convertible terms agreed with Negma include a variable conversion rate based on an 8% discount to the average closing price in the 10 days prior to the conversion request by Negma. The bonds therefore have the potential to materially dilute existing investors, with the magnitude of dilution dependent on the extent to which Mendus draws down the SEK200m facility and the trading price at the time of conversion (the facility is available for drawdown in tranches of SEK10m over a period of 30 months). Following drawdown of the first tranche (SEK13.7m), at the time of writing, Negma has converted 77 bonds worth SEK25k each (of a total 548) into 952,657 newly issued shares, representing c 0.48% of shares outstanding. For context, while the first conversion (on 27 January 2023) was undertaken at SEK2.46/share, the latest conversion on 23 February 2023 was at SEK1.67/share, a c 32% discount over the initial price. If all remaining 471 outstanding bonds in tranche one (worth SEK11.78m) are fully converted at the last converted share price (SEK1.67), it would result in an issue of 7.05m new shares (3.5% of current shares outstanding). Extrapolating this, if the entire SEK200m of convertible debt is used by Mendus, the ensuing stock conversion, assuming a price of SEK1.67/share, will result in the issue of 118.6m shares, diluting existing shareholders by c 37%. An upside case would be inking of a partnership/licensing agreement earlier than our anticipated timeline of late 2024. We highlight that, as per Edison policy, we currently incorporate the financing arrangement as debt in our model (updated as and when the debt-to-equity conversions happen), although we anticipate that the Negma facility likely will be fully used and be converted to equity.