Neovacs — Update 23 November 2016

Neovacs has a strong pipeline, Exhibit 1, led by Interferon alpha kinoid (IFN-K), which is now in the middle of an international, 178-patient Phase IIb study. Data are now expected from late-2017, formerly June 2017. This study includes a US arm, which is being expanded from five to 15 centres. In 2015, Neovacs entered into a manufacturing joint venture, Neostell, with a key supplier, Stellar Biotechnologies, to produce IFN-K. Capital of €0.4m will be invested if the IFN-K Phase IIb is positive. In late December 2015, Neovacs partnered IFN-K with Chong Kun Dang (CKD) Pharmaceutical Corp. If the current Phase IIb is successful, CKD plans to market IFN-K in Korea on a registry basis from 2018. Neovacs is based in southern Paris. It has 24 employees. Equity capital invested to June 2016 is €83m.

Neovacs uses kinoids, a novel type of vaccine that aims to create a long-lasting immune response against the natural immune response signalling molecules (cytokine and others) driving medical conditions. Kinoid technology, Exhibit 2, is detailed in our August 2016 note Lupus signature.

The patient is immunised by intramuscular injection of the Kinoid to produce polyclonal antibodies to eliminate naturally produced cytokines like INFα. A key observation is that the antibodies need to be neutralising against the cytokine. If not, the disease may not be affected. In IFN-K Phase II data, management observed that the antibodies were “strongly” neutralising with antibodies against all subtypes of INFα generated. The immune response in some patients generates a range of antibodies and can last for at least four years.

IFN-K for lupus might be protected by a patent application (WO 2012136739 A1) filed on 4 April 2012. A patent WO 2004024189 A1 (granted in the US but not Europe) filed on 16 September 2003 covers IFNα linked to KLH and WO2002011759 (8 August 2001) claims IFN or VEGF linked to KLH.

IFN-K is the lead product now in a 178-patient Phase IIb targeting Systemic Lupus Erythematosus (SLE), the most common form of Lupus. Lupus is an autoimmune disease of the connective tissues of various organs. There is no cure at present.

The 178-patient Phase IIb (NCT02665364) started in September 2015. Five doses of IFN-Kinoid are given: 240µg on days 0, 7 and 28 then a booster shot of 120µg in week 12 and week 24. The co-primary endpoint at week 36 (about nine months) is a reduction in a 21-gene interferon signature (IS) profile determined by Neovacs, plus the change in the clinical BILAG-Based Composite Lupus Assessment (BICLA) score. Our 1 August note, Lupus signature, has details.

The trial patients will mostly be recruited in Europe, Russia and Latin America. The study was extended in April 2016 to include US patients under an FDA IND. The number of US patients may have increased from the 12 originally envisaged as the number of sites is, from November 2016, being increased from five to 15. The first US patient enrolled in the trial in November 2016.

As recruitment is still ongoing, it now seems more realistic that overall recruitment might complete in Q117 (formerly June 2016), implying that the trial might read out by late 2017, but this could easily slip into 2018; Neovacs management anticipates data by late 2017.

Neovacs’ Korean partner, CKD, may launch IFN-K in South Korea in H218. CKD paid €1m upfront in 2015, with a further €4m now anticipated in 2018 if the Phase IIb is successful. A Korean IND has been granted and five Korean centres are participating in the Phase IIb. The Korean system can allow conditional approval from 2018. Management expects that over 1,000 patients will be treated between 2018 and 2020.

Benlysta, a monoclonal antibody, is the only biological agent to be approved so far for SLE, in 2011. It reduces the production of autoantibodies. Benlysta sales have been hampered by a high price of around $35,000 per year, modest efficacy and a restrictive label. Worldwide sales for Benlysta in 2015 were £230m; growth was 25% over 2014. Of these sales, 90% were in the US.

Phase III data from Anthera on blisibimod show that it failed its clinical endpoint; another example of the problems is developing lupus therapies, although secondary endpoint biological markers showed statistically significant treatment effects. This leaves anifrolumab from AstraZeneca as the most immediate potential competitor (Exhibit 3). Anifrolumab is a monoclonal against the IFNα receptor. Anifrolumab will have Phase III data by late 2018, so could be marketed from 2020.

Neovacs’ partner will need to fund and run at least two substantial Phase III studies, at least one in the US, to be competitive. It is now possible that any deal completion might be dependent on the result of the Anifrolumab studies as these will affect the IFN-K market potential; if the trial is clearly positive, AstraZeneca will have a period of at least two years to build its market.

The main market for lupus is the US with an Edison estimate of 159,000 prevalence cases. The main subsegment is African-American women with about 40,000 cases. In Europe, there may be 170,000 prevalence cases, but data are harder to get and more uncertain.

In Korea, various surveys indicate 9,000-11,000 treated patients with a prevalence of about 13,250. Neovacs management estimates 20,000 cases overall in the population. Treatment is in specialist centres so the market should develop quickly.

Potential further indications for kinoid technology are autoimmune diseases like dermatomyositis, an autoimmune skin condition with a prevalence of about 70,000 cases. There is no cure. Neovacs plans a 15-patient Phase I trial. This is now unlikely to start before 2017.

Neovacs is in preclinical development with Vascular Epithelial Growth Factor Kinoid (VEGF-K). VEGF stimulates the formation of new blood vessels in cancer growth and in wet acute macular degeneration (AMD).

The cancer market is dominated by Roche’s Avastin (bevacizumab) with 2015 sales of CHF6.68bn (US$6.9bn). Several biosimilar products are likely to launch over 2019-20. Trials here would be prolonged as overall survival will need to be demonstrated by comparison to established products,

In AMD, VEGF-K could find a ready market if it proves as effective as Lucentis (ranibizumab). This is sold in the EU by Novartis, US$2.06bn in 2015 and by Roche in the US, 2015 sales of CHF1.5bn ($1.6bn). Eylea (aflibercept, Regeneron) had sales of US$2.68bn in 2015 in the US and, through Bayer, €1.23bn (US$1.4bn), up 62%. Trial readout in AMD is much faster than in cancer, although long-term studies will be needed in Phase III. However, any AMD product is still many years form market and Lucentis biosimilar products will also change the market dynamics after the patents expire over 2020-22.

The hypothesis that the disease is exacerbated in about 80% of lupus patients due to over production of interferon alpha leading to an interferon signature (IS) has received support from two large Phase II AstraZeneca studies. The use of IS in the IFN-K Phase IIb should reduce risk as a high IS profile is seen in about 87% of patients and other data indicate better outcomes in this group. However, the IS case is not yet fully established. To progress to Phase III, Neovacs intends to partner the project from 2018 using the Phase IIb data. The €5m Korean deal shows that the project can attract partners at a good value. Substantive Phase III trials will be required for the crucial US FDA approval. AstraZeneca’s Anifrolumab is in Phase III and these data may now appear about six months after Phase II IFN-K data. Hence, any IFN-K partner may delay a deal until the relative market potential can be assessed. IFN-K will require a different commercial strategy as it is a one-off treatment rather than a chronic therapy with reoccurring income.

Our valuation has been revised from August 2016 based on the following changes.

The revised pre-dilution value has been adjusted to €1.18 per share as against €1.29 per share in August 2016. Exhibit 4 shows the revised value, with the value as of August 2016 as a comparison.

There are 2.18m remaining share options with various expiry dates up to 2025; this includes founder options that could convert to 20,500 shares. In addition, in 2015 Neovacs issued 7.5m warrants linked to the 2015 US investment, which can convert to 2.83m shares by 1 July 2020. This gives 5.01m potential new shares if all are exercised.

In H116, Neovacs had minimal income. Reported costs rose to €8m, offset by a €1.2 m tax credit; this is paid in 2017, although the French government now pays some elements of tax credits in advance. We estimate operating costs for 2016 of about €16.8m. This implies a loss after tax credits of possibly €3.9m of about €12.6m. Cash flows are affected by working capital movements including the tax credit. In H1, we note that the CKD milestone of €1m reported in 2015 was received and that creditors increased overall by €1m. The remaining tax credit from 2015 of €1.8m was also received but this is partly balanced by a new tax credit due of €1.3m. These working capital movements gave an overall net cash gain of €2m.

Assuming €1m of the 2017 tax credit is received in advance in H216, the operating cash outflow in 2016 could be about €12m, as guided by management. Neovacs raised €8.2m gross from a rights tissue in June 2016. This gave €9.2m in cash and cash equivalents as of 30 June. We estimate that Neovacs will have an estimated €3.6m of cash in December 2016. Assuming that the cash burn rate falls in 2017 as the Phase IIb study enters the follow-up period, Neovacs may require a further €10m of funding in 2017. This now assumes that the €4m CKD milestones are paid in 2018. Any other deal upfront fees are now assumed to be received in the second half of 2018. Further funding needs will vary depending on the completion and value of partnering deals in 2018.