Sequana Medical — New funding to support clinical progression

Sequana Medical (BRU: SEQUA)

Last close As at 19/07/2024

2.95

0.14 (4.98%)

Market capitalisation

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Research: Healthcare

Sequana Medical — New funding to support clinical progression

Sequana Medical has raised €15.8m through a private placement of new shares and subscription rights. Roughly 4.445m new shares were issued at €3.55/share, increasing the number of shares outstanding by 18.7%, along with 1.111m subscription rights exercisable at €5.1/share for up to five years as of 30 October 2023. The financing proceeds will be used to support clinical development and the regulatory advancement of Sequana’s two core programmes, the implantable alfapump device in patients with recurrent and refractory ascites (RRA), and its direct sodium removal (DSR) 2.0 programme for diuretic-resistant congestive heart failure (CHF). Management expects the funding to extend the company’s cash runway from mid-2023 into Q124. After revising our model and expenditure assumptions, we obtain a pipeline rNPV valuation of €334.1m (vs €344.3m previously).

Written by

Pooya Hemami

Analyst - Healthcare

Healthcare

Sequana Medical

New funding to support clinical progression

Funding update

Pharma and biotech

2 May 2023

Price

€3.33

Market cap

€93m

$1.1/€

Pro forma estimated net cash (€m) at 31 March 2023 (including April 2023 equity financing)

10.4

Shares in issue (including the additional 4.45m shares issued as part of the fund raise)

28.2m

Free float

45%

Code

SEQUA

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(32.3)

(39.9)

(48.0)

Rel (local)

(32.6)

(39.0)

(44.5)

52-week high/low

€7.4

€3.1

Business description

Based in Belgium, Sequana Medical develops products to treat diuretic-resistant fluid overload, a frequent complication of liver disease and heart failure. Its proprietary alfapump and DSR approaches aim to provide significant clinical and quality-of-life benefits in these fluid overload conditions.

Next events

Start MOJAVE US Phase I/IIa study for DSR 2.0

Q223

Alfapump PMA submission to US FDA

H223

Analyst

Pooya Hemami OD MBA CFA

+1 646 653 7026

Sequana Medical is a research client of Edison Investment Research Limited

Sequana Medical has raised €15.8m through a private placement of new shares and subscription rights. Roughly 4.445m new shares were issued at €3.55/share, increasing the number of shares outstanding by 18.7%, along with 1.111m subscription rights exercisable at €5.1/share for up to five years as of 30 October 2023. The financing proceeds will be used to support clinical development and the regulatory advancement of Sequana’s two core programmes, the implantable alfapump device in patients with recurrent and refractory ascites (RRA), and its direct sodium removal (DSR) 2.0 programme for diuretic-resistant congestive heart failure (CHF). Management expects the funding to extend the company’s cash runway from mid-2023 into Q124. After revising our model and expenditure assumptions, we obtain a pipeline rNPV valuation of €334.1m (vs €344.3m previously).

Year
end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21

0.4

(24.4)

(1.36)

0.0

N/A

N/A

12/22

0.9

(30.9)

(1.37)

0.0

N/A

N/A

12/23e

0.7

(26.3)

(0.93)

0.0

N/A

N/A

12/24e

1.7

(28.1)

(0.99)

0.0

N/A

N/A

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

Improved headroom to advance assets

Sequana still intends to submit a US premarketing approval (PMA) application for the alfapump in RRA in H223, which we estimate could lead to US market launch in H224. Given recent positive CHIHUAHUA data, the company plans to initiate the US MOJAVE Phase I/IIa study for DSR 2.0 in Q223. Management estimates it will spend €7.5m on allocated alfapump development during FY23–24 and €6.5m on DSR 2.0 between FY23 and FY25. Sequana announced some cost-reduction initiatives, including decelerating the MOJAVE study (which should push the top-line readout to 2025 vs prior H224 guidance), but it expects to still report data from the open-label non-randomized cohort by end-2023, a potential catalyst for a re-rating.

Runway further supported by loan terms’ amendment

Sequana also reported certain amendments to existing loan agreements with Kreos Capital (€10m, July 2022) and PMV Standaardleningen, Belfius Insurance and Sensinnovat BV (combined €6.7m, July 2020). These amendments enable the deferral of repayment timelines due before March 2024 (offset by an increase in fees), although full repayment remains due in September 2025.

Valuation: Updated for new financing

We have rolled our estimates forward and adjusted for forex ($1.10/€ vs $1.07/€ previously), a more gradual initial North American alfapump roll-out and the equity financing. 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.

Financials and strategic considerations

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).

Valuation

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.

Exhibit 1: Sequana Medical rNPV assumptions

Product contribution

Indication

Stage

NPV (€m)

Probability of success

rNPV (€m)

rNPV/ basic share (€)

Launch year

Sales in 2032 (€m)

alfapump in North America (net of R&D and SG&A costs)

Refractory and recurrent ascites and malignant ascites

Pivotal studying ongoing

263.6

80%

210.9

7.48

H224

189.9

alfapump in Europe and ex-NA regions (net of SG&A costs)

Refractory and recurrent ascites and malignant ascites

Commercial/ marketed

(1.5)

100%

(1.5)

(0.05)

2013

1.0

DSR 2.0 (short-term DSR)

Fluid overload in heart failure

Human feasibility studies

806.9

25%

190.7

6.77

2028

347.1*

Corporate costs

(66.0)

100%

(66.0)

(2.34)

Total

1,003.0

334.1

11.85

Pro-forma net cash (31 March 2023) excluding lease liabilities

10.4

10.4

0.37

Total equity value

1,013.3

344.5

12.22

Basic shares outstanding (000s) (following April 2023 equity offering)

28,192

Outstanding warrants and share options (000s)

2,722

Fully diluted shares outstanding (000s)

30,914

Source: Edison Investment Research. Note: *Reflects estimate of projected royalty revenue to Sequana Medical rather than end-market commercial sales.

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).

Exhibit 2: Financial summary

€’000s

2018

2019

2020

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,029

971

963

371

923

673

1,738

Cost of Sales

(158)

(198)

(202)

(77)

(205)

(135)

(348)

Gross Profit

871

773

761

294

718

538

1,390

General & Administrative

(8,206)

(7,102)

(6,738)

(7,177)

(8,927)

(9,741)

(14,983)

Net Research & Development

(5,816)

(7,652)

(11,835)

(16,935)

(20,416)

(16,000)

(12,050)

Operating profit before exceptionals

(13,150)

(13,981)

(17,813)

(23,818)

(28,625)

(25,203)

(25,643)

EBITDA

 

 

(13,070)

(13,737)

(17,506)

(23,409)

(28,313)

(24,500)

(25,083)

Depreciation & other

(81)

(244)

(307)

(409)

(312)

(703)

(560)

Operating Profit (before amort. and except.)

(13,150)

(13,981)

(17,813)

(23,818)

(28,625)

(25,203)

(25,643)

Exceptionals including asset impairment

74

18

41

1,205

530

0

0

Operating Profit

(13,077)

(13,964)

(17,771)

(22,613)

(28,095)

(25,203)

(25,643)

Net Interest

(883)

(878)

(1,178)

(608)

(2,282)

(1,124)

(2,446)

Profit Before Tax (norm)

 

 

(14,033)

(14,859)

(18,991)

(24,426)

(30,907)

(26,327)

(28,089)

Profit Before Tax (FRS 3)

 

 

(13,960)

(14,841)

(18,949)

(23,221)

(30,377)

(26,327)

(28,089)

Tax

(24)

(136)

(157)

(393)

(387)

0

0

Profit After Tax and minority interests (norm)

(14,057)

(14,995)

(19,148)

(24,819)

(31,294)

(26,327)

(28,089)

Profit After Tax and minority interests (FRS 3)

(13,983)

(14,977)

(19,106)

(23,614)

(30,764)

(26,327)

(28,089)

Average Number of Shares Outstanding (m)

10.0

12.3

15.3

18.2

22.8

28.2

28.3

EPS - normalised (€)

 

 

(1.41)

(1.22)

(1.25)

(1.36)

(1.37)

(0.93)

(0.99)

EPS - normalised and fully diluted (€)

 

(1.41)

(1.22)

(1.25)

(1.36)

(1.37)

(0.93)

(0.99)

EPS - (IFRS) (€)

 

 

(1.40)

(1.22)

(1.25)

(1.30)

(1.35)

(0.93)

(0.99)

Dividend per share (€)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

242

829

772

1,814

2,936

2,502

2,359

Tangible Assets

184

765

705

1,732

2,850

2,416

2,273

Investments in long-term financial assets

58

63

67

82

86

86

86

Current Assets

 

 

3,099

8,522

13,441

12,890

23,089

7,699

10,504

Short-term investments

0

0

0

0

0

0

0

Cash

1,318

5,586

11,016

9,600

18,875

7,413

9,649

Other

1,782

2,935

2,425

3,290

4,214

287

855

Current Liabilities

 

 

(18,727)

(5,315)

(5,966)

(7,180)

(15,149)

(10,086)

(10,250)

Creditors

(6,654)

(4,855)

(5,966)

(7,180)

(10,666)

(5,603)

(5,767)

Short term borrowings

(12,073)

(459)

0

0

(4,483)

(4,483)

(4,483)

Long Term Liabilities

 

 

(3,374)

(3,110)

(8,135)

(8,312)

(13,030)

(13,030)

(43,030)

Long term borrowings

(2,582)

(2,261)

(7,473)

(7,325)

(12,193)

(12,193)

(42,193)

Other long term liabilities

(792)

(849)

(662)

(987)

(837)

(837)

(837)

Net Assets

 

 

(18,760)

926

113

(788)

(2,154)

(12,915)

(40,417)

CASH FLOW

Operating Cash Flow

 

 

(8,987)

(17,596)

(15,791)

(22,786)

(24,822)

(25,060)

(24,901)

Net interest and financing income (expense)

(883)

(878)

(1,178)

(608)

(2,282)

(1,124)

(2,446)

Tax

(5)

(9)

(36)

(222)

(378)

0

0

Net Operating Cash Flow

 

 

(9,875)

(18,482)

(17,005)

(23,616)

(27,482)

(26,184)

(27,346)

Capex

(39)

(106)

(138)

(326)

(677)

(269)

(417)

Acquisitions/disposals

0

0

0

0

0

0

0

Financing (net of costs)

2

26,165

19,000

22,771

28,420

14,991

0

Dividends

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

Net Cash Flow

(9,912)

7,576

1,857

(1,171)

261

(11,462)

(27,763)

Opening net debt/(cash)

 

 

0

13,337

(2,866)

(3,543)

(2,275)

(2,199)

9,263

HP finance leases initiated

0

0

0

0

0

0

0

Other

(3,425)

8,627

(1,179)

(97)

(337)

0

0

Closing net debt/(cash)

 

 

13,337

(2,866)

(3,543)

(2,275)

(2,199)

9,263

37,027

Lease debt

N/A

504

387

760

916

916

916

Closing net debt/(cash) inclusive of IFRS 16 lease debt

13,337

(2,362)

(3,157)

(1,515)

(1,283)

10,179

37,943

Source: Company reports, Edison Investment Research


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General disclaimer and copyright

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