Nicox — No surprises as NCX-470 Phase III trials advance

Nicox recently reported FY20 results that were generally in line with our forecasts in terms of product sales-related royalty revenue and PBT, and slightly ahead in terms of free cash flow and normalised operating profit. The largest variance is with respect to licence milestones and other revenue, which came in at €10.5m vs our €6.5m forecast. This is due to the company recognising a larger proportion than we expected of its €15m March 2020 payment from Ocumension (its Chinese market partner for NCX-470) as revenue in H220. In March 2020, the two parties amended their agreement such that Ocumension immediately paid Nicox €15m (in place of up to €36.25m in milestones from the original agreement), gained additional rights to NCX-470 for Korea and South-East Asia and agreed to pay 50% of the costs of the Denali study. €14m of this payment had been categorised as deferred revenue in the H120 financials (with €1m booked as H120 revenue), and in H220 the company recognised €9.5m of this payment as revenue.

Product sales-related licensing revenue (primarily royalties from Bausch + Lomb from the sale of Vyzulta in the US and other approved markets, and to a lower extent Zerviate US royalties from Eyevance) came in at €3.89m (+10.8% y-o-y), generally in line with our €3.93m estimate. Cost of sales, which reflects royalties on Vyzulta sales that Nicox must itself pay to Pfizer, were also in line with our forecasts at €1.5m. We continue to expect Vyzulta royalties to increase in upcoming quarters as the product gains market share given its currently unique dual IOP-lowering mechanistic approach based on applying a nitric oxide (NO)-donating molecule to an established prostaglandin F2α analogue (PGA) drug. In February, Vyzulta was approved in South Korea, the ninth market to approve the drug, joining the United States, Argentina, Canada, Colombia, Hong Kong, Mexico, Taiwan and Ukraine. Vyzulta has been commercialised in the United States, Canada, Argentina and Hong Kong.

Operating expenses (R&D expenses net of tax credits, plus G&A costs) were €18.7m, slightly above our €18.4m estimate, and the overall normalised EBIT loss was €5.8m, a lower loss than expected given the higher licence milestone revenue described above. Net financial expenses were €4.4m, well ahead of our forecast, but much of this was due to a €3.4m forex charge. The normalised PBT loss of €10.2m was in line with our forecast. In addition to €1.3m in intangible amortisation, normalised 2020 figures (PBT, EBIT) differ from reported amounts due to exceptional items, primarily the €6.9m loss following the divestment of Nicox’s holdings in VISUfarma. Cash management was better than expected as the free cash flow loss was €5.4m, ahead of our forecast of a €6.8m loss.

NCX-470 is based on the company’s proprietary NO donating platform, which combines an NO-donating molecule with an analogue of established PGA drug bimatoprost, thereby providing an additional mechanism for the drug to reduce IOP. Bimatoprost is recognised as a more recent and more potent PGA molecule in terms of IOP-lowering efficacy than latanoprost, the underlying PGA molecule within Vyzulta (latanoprostene bunod). Nicox announced that its Chinese partner, Ocumension, received approval from China’s National Medical Products Administration (NMPA) to conduct the Chinese part of the ongoing NCX-470 Denali Phase III study of NCX-470 for the reduction of IOP in patients with open angle glaucoma or ocular hypertension. The Denali study was started in the US in November 2020, and like the Mont Blanc study, it is a three-month Phase III study assessing the safety and efficacy of NCX 470 ophthalmic solution, 0.1% versus latanoprost ophthalmic solution, 0.005%, and it will also include a long-term safety extension. The trial is financed jointly and in equal parts by Nicox and Ocumension and includes clinical sites in both the United States and China, with the majority of the patients to be recruited in the United States. The Denali trial and the ongoing Mont Blanc trial are designed to meet and fulfil the regulatory requirements to support New Drug Application (NDA) submissions in the United S. and China. Top-line Denali results are currently expected in Q422, and the company expects Mont Blanc results in H122. We continue to believe the Mont Blanc study results could be a key value inflection point for the company, as NCX-470, if approved, would be the first monotherapy glaucoma drug to demonstrate statistical superiority in Phase III to an existing approved PGA drug, which we believe would drive significant uptake as a first-line glaucoma drug.

Nicox’s US licensee for Zerviate (cetirizine 0.24% ophthalmic solution), Eyevance Pharmaceuticals (a subsidiary of Santen), in February entered into a partnership with Hikma Pharmaceuticals for the copromotion of the topical anti-allergy drug Zerviate, which was launched in the US in March 2020 (Zerviate sales data has not been disclosed). Hikma will be responsible for promoting Zerviate to US healthcare professionals working outside the eyecare (optometry and ophthalmology) sectors, with all sales continuing to be booked by Eyevance, on which Nicox will receive tiered royalties up to 15%. Hikma is a top-10 US generic pharmaceutical company with established US commercial operations and sales representatives, and is well-positioned to serve family physicians, allergists and paediatricians, who are estimated to account for c 40% of US prescriptions for branded ophthalmic allergy products. We view the Hikma arrangement as a positive development for the US Zerviate commercialisation and potential future licence revenue to Nicox and we maintain our current Zerviate estimates. While the ocular allergy market is very competitive, with many products (including some OTC) offering effective combination antihistamine (H1 blocker) and mast cell stabilization properties, we believe that Eyevance’s resources, as well as primary care physicians’ familiarity with cetirizine, should allow the product to generate US peak sales of $41m in 2030.

Under Nicox’s licensing agreement with Eyevance, Nicox is eligible for up to $37.5m in milestones payable on Eyevance achieving pre-defined sales targets, with $30m triggered by annual sales of at least $100m.

The company finished FY20 with €47.2m in cash and equivalents and €18.0m in short- and long-term debt, resulting in €29.3m net cash (excluding €1.1m in lease liabilities). Following FY20 results, we have not changed our overall R&D assumptions but have slightly reduced our G&A expense forecasts, resulting in lower cash burn rate assumptions in FY22 and beyond. We have also updated our US forex assumptions (to $1.19/€, from $1.23/€ previously). Following these changes, we now obtain a risked net present value (rNPV) of €322.4m, up from €303.7m previously. After adding €29.3m in net cash, we obtain an equity value of €351.7m, or €9.48 per share.

In terms of cash runway, Nicox in January 2021 amended its bond financing agreement with Kreos Capital, introducing a one-year period of interest-only payments on the outstanding principal starting on February 2021, and an extension of the overall maturity by six months to July 2024. As of February 2021, €16.1m of Nicox’s outstanding debt is with Kreos Capital, and €2m is in the form of an unsecured credit agreement with Société Générale and LCL, guaranteed by the French State, which was granted in August 2020 as part of one of the French state’s COVID-19 measures to support domestic business operations.

The company indicates that this one-year interest-only period for the Kreos debt should provide c €5.5m of additional financial flexibility, if needed, for investment in development activities in 2021. The interest rate of the bonds remains unchanged as a result of this amendment. Nicox granted Kreos Capital 100,000 share warrants (equivalent to 0.27% of outstanding share capital).

We continue to model that Nicox royalty revenue, primarily from Vyzulta, will help offset the company’s G&A and R&D costs in the coming years. Altogether, we model operating cash burn rates (excluding net interest and financing costs) of €15.9m in 2021 and €16.6m in 2022, versus our prior estimates of €15.8m and €17.7m, respectively. We continue to estimate Nicox’s funds on hand should allow Nicox to maintain operations into H222, although depending on licence revenues (particularly from Vyzulta), the runway could potentially stretch even further. We continue to model a €10m fund-raise in 2022, followed by an additional €10m in 2023 and €20m in 2024 (all fund raisings modelled as illustrative debt). Following NCX-470 launch in 2024, we do not expect Nicox will require additional capital as its royalty streams plus NCX-470 sales should enable it to start achieving consistent positive operating income starting in FY25.