Sequana Medical — New funding to support clinical progression

We note that the effective price per share of the equity issue (€3.55 per share), without considering the attached subscription rights, reflected a 29.8% discount to the 24 April closing price of €5.06/share. In our view, this reflects particularly challenging market conditions for development-stage or early commercial-stage life sciences companies such as Sequana, despite material positive operational successes for the company in the past year, including positive primary efficacy endpoint data for alfapump in the North American POSEIDON pivotal study, positive SAHARA data for the DSR 1.0 product in diuretic-resistant CHF patients with persistent congestion, and positive preclinical GLP and CHIHUAHUA study data for the second-generation DSR 2.0 product candidate.

Sequana indicated in its financing pre-announcement that it is undertaking measures to reduce costs, including decelerating further progression of the MOJAVE study, which aims to enrol CHF patients with persistent congestion. We interpret its planned MOJAVE deceleration as meaning that the company will take more time to analyse and report data from the study’s open-label non-randomized cohort (planned enrolment of three patients), before proceeding with the randomized cohort (a total of 30 patients planned for enrolment including 20 to be randomised to DSR 2.0 on top of usual care and 10 to usual care alone). On 2 May 2023, the company reported that the US FDA had cleared its Investigational New Drug (IND) application for DSR 2.0 for the treatment of CHF. IND clearance enables the company to start the MOJAVE study in Q223 as planned. It expects the first patient to be enrolled in Q223 and data from the non-randomized cohort is anticipated by the end of 2023.

The company believes that interim efficacy data from these patients will likely be able to demonstrate proof-of-concept and provide an early indicator of the DSR 2.0’s potential efficacy in reducing congestion, given the very significant effects already shown for the first-generation product (DSR 1.0) in the SAHARA and RED DESERT studies. While we note that the sample size of the non-randomized cohort (n=3) is small, the company had already reported in SAHARA that all 10 evaluable patients from that study ‘safely, effectively and rapidly eliminated the persistent congestion and achieved euvolemia within one week of commencing intensive DSR therapy’. Hence, the non-randomized cohort of MOJAVE may provide a strong efficacy signal in terms of reducing congestion and restoring euvolemia. If this is the case, results from the non-randomized cohort may provide a meaningful clinical validation of the DSR 2.0 product and its method of administration (through a peritoneal catheter), which may provide the opportunity for a re-rating of the shares ahead of the company’s next fund-raising need window (we expect the company will likely seek additional funding in H124). Altogether we expect that top-line efficacy data from the randomized cohort will be reported in 2025, as opposed to prior guidance of H224. We believe the company also plans to report interim data on the randomized cohort, which may provide indications of efficacy prior to the top-line readout.

Sequana also signalled that it is delaying the establishment of a new production facility for the US alfapump programme, but this postponement should not affect the company’s planned US launch activities (assuming FDA approval) given its existing supply chain infrastructure and access to commercial production are still expected to meet US requirements. The company’s existing production facility in Switzerland is capacity-constrained to 1,000 units per year (which would reflect c €25m in annual revenue) and hence the rationale for an expanded production site would be to meet longer-term demand. We note that we do not expect alfapump volumes to approach 1,000 units per year until FY27. The company estimates it will take 2.0–2.5 years from identification to being ready and FDA-authorized for commercial production and hence we expect Sequana will likely wait for a more favourable funding environment (potentially in FY24–25) before working to expand its alfapump production capabilities. As it relates to its European alfapump commercial activities, the company indicates it is moving to a more ‘reactive’ than ‘proactive’ commercial stance, which we believe suggests it will reduce its alfapump-related marketing costs for the European market.

Given the above we have made some adjustments to our forecasts. We have reduced our FY23 and FY24 R&D expenditure estimates for MOJAVE and the DSR 2.0 programme and have deferred such costs into FY25. For alfapump in RRA in the North American market, we have pushed our launch expectation to H224 (vs mid-2024 previously) and we now also expect that the initial North American sales and marketing roll-out and sales growth ramp for the first 12–18 months will be more modest than previously assumed, although our peak North American alfapump sales forecasts are essentially unchanged. We now assume FY24 and FY25 North American alfapump sales of $1.1m and $5.5m, respectively, versus our prior assumptions of $2.4m and $10.2m.

We have also updated our financial model to reflect the €15.8m financing and updated forex rates ($1.10/€ vs $1.07/€ previously). For the DSR 2.0 programme, we are maintaining our estimate for a potential 2028 launch, but we believe there could be scope for our commercial timing forecasts to be pushed back, pending future capital availability and allocation decisions. Our previous forecasts already reflected relatively modest future alfapump sales gains for Europe, but we have now reduced our sales and marketing expenses for the region and have reduced our European alfapump sales growth forecasts to a long-term growth rate of 5% (vs 10% previously).

Altogether, we now assume the company’s operating cash burn rates for FY23 and FY24 will be €26.2m and €27.3m, respectively, versus our prior forecasts of €27.3m and €28.3m, respectively.

Sequana finished FY22 with €18.9m in gross cash and €16.7m in debt (including €4.5m in short-term borrowings and the drawing of a €10m loan from the Kreos financing facility in H222), excluding €0.9m in lease liabilities. After including the €15.8m April financing, we estimate a pro forma (at 31 March) gross cash position of €22.9m and a net cash position of €10.4m. Our local currency operating expense forecasts are essentially unchanged, as described in our prior note. We now expect the company’s funds on hand to be sufficient for it to maintain operations into Q124.

Given the April 2023 financing, we now expect the company will require an additional €105m, versus €120m previously, over the next few years until it starts to generate sustained positive operating cash flows (which we continue to expect in H128). As per our usual policy, we model all future fund-raising requirements as illustrative debt. We note the company has signalled it is assessing whether partnerships or licensing arrangements can be entered regarding its alfapump or DSR products to support their development or commercialisation. The company indicates that ‘no concrete plans are on the table’ but we believe that, given the current challenging fund-raising environment, the company may be more amenable to entering commercial transactions or licensing arrangements at earlier product development stages (we previously anticipated the company would await the reporting of MOJAVE interim data on the randomized cohort before considering commercial arrangements for the DSR 2.0 product).

We have rolled our estimates forward and adjusted for forex ($1.10/€ vs $1.07/€ previously) and the equity financing. Given the above changes, we now obtain a pipeline rNPV of €334.1m versus €344.3m previously. After adding €10.4m pro forma Q123e net cash (ex lease liabilities), we obtain an equity valuation of €344.5m or €12.22/share (€11.14 fully diluted given options outstanding), versus €14.59/share (€13.09 fully diluted) previously.

As a sensitivity, our equity valuation per basic share would be adjusted to €7.53/share if we assume that our total assumed future funding need (€105m) is met through equity issuances at the current share price (c €3.33/share).