Oryzon Genomics — Update 9 December 2016

During the poster session at ASH, Oryzon presented more granular data from the positive Phase I/IIa trial. The study included different subsets of relapsed or refractory (RR) acute leukaemia patients treated with ORY-1001, lysine specific demethylase 1 (LSD1) inhibitor. The dose escalation Part 1 (Phase I) included 27 patients treated for 28 days. Part 2 (Phase IIa) was an extension arm with an additional 14 patients with the goal of establishing initial efficacy results and a PK/PD profile.

Interim favourable safety data has already been announced and the final data did not reveal any negative surprises. The most common likely drug-related side effects included low blood platelet count (16.7%), neutropenia (6.7%), fatigue (6.7%), changes in taste (6.7%) and petechiae (6.7%). Our main focus was on initial efficacy signs, which were measured in 14 patients included in the extension arm, of which one dropped out. Since specific subtypes of acute leukaemia are especially susceptible to LSD1 inhibition, the extension arm included patients with mixed lineage leukaemia (MLL; n=6), other MLL gene rearrangement or mutation (n=4) and acute erythroid leukemia (AML M6; n=4). The main findings included:

Although the study was small and the focus was on safety, the efficacy findings can be interpreted as showing potential in acute leukaemia. Notably, impaired differentiation of the leukaemic blasts is at the core of the pathophysiology of the disease. ORY-1001’s ability to induce the differentiation of blasts (turn them into normal blood cells) demonstrates it does what it was designed for.

Roche now has sole responsibility of developing ORY-1001 (Roche’s ID RO7051790; also known as RG6016) in preferred indications and recently it initiated the first clinical trial in extensive-stage disease SCLC (ED SCLC). The trial is an open-label, multi-centre study with an estimated 70 ED SCLC patients to be treated with ORY-1001. Safety/toxicity is the primary endpoint, while secondary endpoints will include primary efficacy (overall survival, progression-free survival, objective response) and PK/PD data. The estimated completion date is H219, in line with our original assumption.

When asked about Roche’s further steps in leukaemia at the analyst and investor meeting organised by Oryzon on 5 December, Roche’s representative explained that it will further analyse the findings in the Phase I/IIa and how these could translate into clinical benefit. Furthermore, current treatments of leukaemia are based on combinations primarily and Roche has already tested ORY-1001 in combination with multiple drugs in preclinical trials. We take this as a confirmation that Roche is interested in progressing ORY-1001’s development for leukemia, but likely in an optimal combination to accommodate current clinical practice. The timelines, however, remain unclear at this stage.

Recently Oryzon presented preclinical proof-of-concept of ORY-2001 in MS, which we described in our previous report. MS is an autoimmune disease that attacks and destroys neurons in the central nervous system in variable degrees and causes significant physical disability. The hallmark of MS is episodic relapses that occur months or years apart and affect various anatomic locations. Around 400 thousand people are diagnosed with MS in the US each year and around 85% of those have a relapsing-remitting course of the disease, which is in contrast to the progressive type, when symptoms gradually get worse over time rather than appearing as relapses (‘Multiple Sclerosis’, Medscape).

Classical management of acute relapses can include systemic corticosteroids, plasma exchange and symptomatic drugs; however, the mainstay of treatment is disease-modifying agents for MS (DMAMS) with the goal of reducing the frequency of relapses and slowing progression. There are a number of DMAMS in the market currently (Exhibit 1) ranging from established to innovative options. The choice of the drug very much depends on circumstances (as opposed to rigorous algorithms) including patient lifestyle, tolerance, adverse effects and the experience of the healthcare provider. Despite the number of available treatment options, MS is still an unmet medical need. If left untreated, more than 30% of patients will develop significant physical disability usually within 20-25 years. Although DMAMS were shown to slow the disability progression within the duration of the trials, long-term effects are still not known. Life expectancy in MS patients is lowered only slightly, but quality of life is heavily affected, with 50-60% patients dying of secondary MS complications such pulmonary or renal causes (Medscape).

EvaluatePharma estimates that the MS market will be worth $23bn in 2022, fragmented with no drug significantly outstanding. While ORY-2001 will still need to prove its clinical efficacy, a unique mechanism of action among MS drugs is one differentiating feature. We note that on average an MS drug in the top 10 is expected to generate sales of $1.9bn by 2022.

We value Oryzon at €250m or €8.8/share, up from €156m or €5.5/share. The main changes include the addition of the MS indication for ORY-2001, an increase in the success probability from 8% to 12% in SCLC and an increase in the probability in AML to 20%. The latter is slightly more conservative that our standard 30-40% probability for an asset in Phase II, which is justified given that Roche is evaluating the optimal combination for further development. We had already included SCLC in our valuation and make no significant changes to our original R&D assumptions, except for increasing the probability of success from 8% to 12%, which is in line with other Phase I projects in Oryzon’s pipeline. The most significant change is the addition of the MS indication using a success probability of 20%. This is higher than other Phase I projects in Oryzon’s pipeline and also higher than the industry’s average, however, a recent study published by Gasperis-Brigante et al. found that between 1998 and January 2015 cumulative success rates (from Phase I to Phase III) for MS trials are as high as 27% compared to 10% industry’s average. We note that according to our calculations a non-risk adjusted NPV for this early stage project is €345m.

We now include the MS indication in our valuation. Once the currently ongoing Phase I trial with healthy volunteers, ORY-2001 will be ready for Phase II trials with potentially three indications: AD, MS or HD. Oryzon is yet to decide on the latter one, while AD and MS were confirmed to be targeted in Phase II trials. Whether these will run in parallel or sequentially depends on the prioritisation and any partnering interest, in our view. For the time being, we include MS run in parallel with similar R&D assumptions to those we included in our AD model (more details are in our initiation report). Namely, we assume that Oryzon will be able to partner ORY-2001 after Phase II and the partner will cover all development and marketing costs from this point. Before that we include a cost of €20m for the Phase II trial. Our partnering assumptions include a fairly typical deal structure, including an upfront payment, development and sales-related milestones, in addition to royalties on global sales. We assume a total deal value of €426m, which is the average of five licensing deals in MS area over past five years (EvaluatePharma). This includes a €32m upfront payment, while the rest is split for development-related milestones of €131m with the remainder as sales-related and tiered up to 18% royalty rates on global sales. Our revenue model is based on a top-down approach and we use the average sales of top 10 MS drugs of $1.9bn as a benchmark, which is reached seven years after the launch in 2026.

We keep our financial forecasts unchanged following our last update after the Q316 results. Although we have included Phase II funding costs in our model starting from 2018, this will depend on Oryzon’s strategy and whether it will invest in this stage or will seek to partner. We forecast a comfortable 2016 year-end cash position of €29.5m (cash and term deposits classed as other current assets) and net cash of €2.0m (including term deposits). In total, during the past 12-18 months Oryzon has managed to attract more than €32m in new funding from various sources including debt at attractive commercial terms. In addition, the company has a history of efficient use of available public grants, which could provide further non-dilutive financing.