Opexa Therapeutics — Update 23 March 2016

Opexa has announced that it has embarked on a restructuring initiative to prioritize its spending towards completing the ongoing 190-patient Abili-T Phase II study of lead candidate Tcelna in secondary progressive multiple sclerosis (SPMS) and extending financial flexibility. The firm has reduced its overall headcount (35 to 40 people before the restructuring) by about 30% (approximately eight to 10 people) across all business areas (such as product manufacturing, quality control, administration, etc.), except those directly associated with the operations of ongoing Abili-T study. The reduction in some of the operational and manufacturing roles coincides with the nearing completion of the Abilit-T study, as the final patient dose was administered in late February. The employee reduction also included the firm’s CFO, Karthik Radhakrishnan. The current CEO (Neil K. Warma, CEO since 2008) will assume CFO responsibilities, as he did for several years before Mr. Radhakrishnan joined the firm in H113. Opexa estimates it will record a one-time severance-related charge of approximately $325,000 in Q116.

Opexa reported Q415 and 2015 results on 15 March 2016, with a net Q415 loss of $2.4m ($0.34 per share) and 2015 loss of $12.0m ($2.05 per share FD; $2.06 adjusted). The company’s 2015 operating cash flow was negative $10.5m, and 2015 R&D expense was $10.0m, down from $12.1m in 2014 due to a decreased need for clinical trial product manufacturing and investigator costs, associated with a decreasing number of patients requiring doses and monitoring, following their completion of study protocols. Opexa finished 2015 with a gross cash position of $12.58m and after netting out a $0.15m note payable, we measure the net cash position at $12.4m.

Following the announced restructuring and associated headcount reductions, Opexa extended its anticipated cash runway guidance into Q117, whereas its prior guidance was for its cash and liquid resources to meet its projected cash needs into Q416. The lengthened runway gives the company added flexibility to engage with Merck KGaA (which has an option to license Tcelna in MS until a pre-defined time on the release of Abili-T top-line data) or if required (ie if Merck does not exercise the option) with other parties, on the completion of the Abili-T study. Opexa has also refined the projected timeline for the completion of the Abili-T study into early Q416 (from H216, previously).

Opexa initiated the placebo-controlled (1:1 randomization) Abili-T study in fall 2012, completed recruitment in June 2014 and approximately 97% of expected patient visits have been completed to date. Patients receive two annual courses of Tcelna treatment consisting of five subcutaneous injections per year at weeks zero, four, eight, 12 and 24. The primary endpoint is the percentage of brain volume change (whole brain atrophy) at 24 months, and Expanded Disability Status Scale (EDSS) score changes and annual relapse rates (ARR) are included as secondary endpoints. Given that patient dosing has been completed, the headcount reductions and restructuring are not expected to negatively impact the Tcelna Abili-T study or the Tcelna program in any way. If study data are positive, Opexa management is confident it will be able to re-engage the related positions that were rationalized as part of the restructuring quickly enough not to negatively impact future development steps or add delays.

Following successful preclinical data reported in November 2015 for OPX-212 in a mouse model, Opexa had anticipated it could file an IND for this immunoregulatory candidate for neuromyelitis optica (NMO) in H116, and potentially start a Phase I/II human study in Q216. However, the firm recently indicated that it has encountered technical difficulties with OPX-212 development, particularly with regard to its manufacturing. The hydrophobic nature of some of the peptides associated with the protein fragments associated with NMO (intended to be targeted by the OPX-212 product) have created manufacturing difficulties. Management indicates that OPX-212 in NMO remains an active preclinical program for the company, and further OPX-212 development is planned and included within its revised financial outlook/runway guidance to Q117. However, the firm cannot confirm when or whether it expects the technical difficulties with OPX-212 manufacturing to be definitively resolved, and according to its 15 March press release, it “does not expect to provide guidance in the foreseeable future on any timetable with respect to its development of OPX-212 in NMO, but instead to report substantive milestones only when and if they occur.”

The challenges faced by Opexa in advancing its Immpath immunotherapy platform (the underlying basis for the Tcelna cell therapy program and OPX-212) towards Aquaporin 4 (AQP4) proteins implicated in NMO suggest the company could also face similar difficulties in adapting Immpath towards other autoimmune indications. One of Opexa’s longer-term goals is to seek opportunities for Immpath in other autoimmune or related diseases, and/or to out-license the platform for such areas. In our valuation, we have not included any consideration for the Immpath immunotherapy platform in other potential areas.

Our model assumes that if Abili-T results meet the primary endpoint (whole brain atrophy vs placebo), Merck KGaA will exercise its option to in-license Tcelna and will then fund all remaining development and commercialization activities in MS. Under a best-case scenario, a Phase III pivotal SPMS study could start in 2017, with potential approval and launch in SPMS in 2021.

For OPX-212, given the technical challenges reported with this program and the increased uncertainty as to whether it will reach human trials, we are pushing back our timeline assumptions by one year, and have lowered our probability of success estimate from 5.0% to 3.0%. We now assume a pivotal study in 2019 (vs 2018 previously) and launch in 2022 (vs 2021 previously). If Phase I/II study results are exceptional, there is the possibility for a breakthrough therapy and quicker approval timeline. Our peak sales forecasts are unchanged. Please refer to the 30 November 2015 initiation note for more detailed information on our Tcelna forecasts.

Given the restructuring, we reduced our corporate costs & expenses assumptions and near term R&D costs (as we expect a lower expenditure on OPX-212 in 2016 than previously). Whereas we previously forecast a 2016 cash burn rate of $16.1m (excluding the potential $25m upfront fee from Merck KGaA in the event of positive Abili-T data), we now expect an operating burn rate of $12.3m. Hence, given Q415 net cash of $12.4m, we are also modelling that the firm’s cash on hand will be sufficient to fund operations into Q117.

In addition, our model previously forecast that Opexa would raise $2.5m in equity in 2016 and $2.0m in 2017 as part of the $5m five-tranche milestone-based stock purchase agreement entered with a private investor in September 2015 ($0.5m was already raised; $4.5m remains outstanding). Given the OPX-212 difficulties cited above, we pushed back our forecasts for the timing of the proceeds from this line by one year ($2.5m in 2017 and $2.0m in 2018). We have also rolled our forecasts forward.

Given the above changes (positive effect of rolling forward forecasts and lowering SG&A costs, offset by reduced forecasts and probability for OPX-212), our rNPV is unchanged at $35.1m. After including $12.4m Q415 net cash, our equity valuation of $47.6m equates to $6.81 per share fully diluted.