Nuevolution — Pipeline and partnerships continue to strengthen

Nuevolution’s business model embodies continuous revenue generation and risk mitigation, executed through a ‘multiple shots on goal’ approach to drug development. Underpinning this is the internally developed DNA-encoded drug discovery platform, Chemetics, which comprises compound libraries (of up to 40 trillion molecules) that have been designed to rapidly select drugs for an array of ‘tough-to-drug’ targets. The ability to attract Almirall and Amgen into signing deals has acted as validation of Chemetics and a mark of quality for Nuevolution’s pipeline. Transitioning its pipeline assets into the clinic will be further validation of this approach and Nuevolution is currently well positioned to achieve this.

Fuelled by Nuevolution’s Chemetics technology, the company has a number of late-stage preclinical assets, alongside more than 10 earlier-stage programmes (varying from hit identification to hit optimisation). Exhibit 1 highlights Nuevolution’s pipeline, which is set to deliver multiple inflection points over the coming 12-18 months.

In July 2018, Amgen exercised its right to opt in on the first of at least three undisclosed programmes (multi-target collaboration across oncology and neuroscience) and has assumed responsibility for all further costs incurred by both parties. Should Amgen exercise its option to license a candidate from this programme before the end of Phase I, Nuevolution will receive an initial licensing fee of at least $10m, clinical and commercial milestone payments (of up to $410m in total depending on project success) and subsequent royalties on sales if commercialised. In the second oncology programme, Nuevolution is testing compounds to determine target engagement and mechanisms of action, while the third programme (undisclosed disease focus) is in hit optimisation and expected to reach cellular proof-of-concept by year end.

The Almirall RORγt inhibitor programme is likely to enter the clinic in 2019 and will trigger the start of payments to Nuevolution, which could increase to €172m in development and regulatory milestones (€270m in tiered commercial sales milestones will also be available if the product is commercialised). The timing and design of any clinical trial is ultimately Almirall’s decision and we await further information on these elements.

Apart from the Almirall and Amgen partnerships, Nuevolution forecasts that it will be able to enter into another partnership before year end. This could take the form of either out-licensing a pipeline asset (similar to the Almirall out-licensing of the RORγt inhibitor) or a research collaboration (similar to the Amgen deal). In addition to the Almirall and Amgen partnerships, Nuevolution has already formed partnerships with other mid- and large-cap industry peers (including Novartis, Janssen, GSK, Boehringer Ingelheim and Merck & Co), and we are confident that Nuevolution can achieve another deal. However, this could be finalised outside Nuevolution’s stated time period.

RORγt plays a role in the maturation of T helper 17 cells (TH17) leading to the secretion of the pro-inflammatory cytokines including interleukin-17A (IL-17A), which mediates for the production of additional pro-inflammatory components and, ultimately, tissue inflammation. Inhibiting RORγt has been a strategy employed by Nuevolution and others to develop drugs that counteract the dysregulation underlying a range of autoimmune disorders, with significant interest focusing on developing agents capable of treating psoriasis (PsO) and psoriatic arthritis (PsA).

As per the out-licensing agreement signed in December 2016, progression of Nuevolution’s asset into Phase I trials is subject to Almirall’s discretion. With the Phase II failure of Allergan’s RORγt inverse agonist AGN-242428 (due to undisclosed safety reasons and written off in Q118), along with the Phase I suspension of AstraZeneca’s asset AZD0284 (due to preclinical findings), the delays in reaching this milestone are presumably due to Almirall ensuring that it has identified any liabilities and that the attrition of competitor compounds is not endemic to the mechanism of action (ie RORγt inhibitor). We expect Phase I initiation to occur in 2019, which should trigger a milestone payment to Nuevolution. In the long term, the deal could provide up to €172m in development and regulatory milestones, and €270m in commercial sales milestones, in addition to tiered royalties on future net sales.

Nuevolution retains the rights to pursue other indications, primarily focusing on ankylosing spondylitis (AS) with inflammatory bowel disease (IBD) as a secondary indication. Scaling up its internal lead candidate in Q118 has enabled further preclinical work to commence (formulation and regulatory safety). Several back-up compounds have also been identified and are currently being investigated to compare efficacy and toxicity profiles. The programme is expected to be clinically ready in 2019 and further clinical development will depend on funding or potential partnerships. While separate in its development, the programme is likely to be heavily influenced by the outcome of the Almirall RORγt programme.

In conjunction with the RORγt inverse agonist (inhibitor) programmes, Nuevolution’s Chemetics platform has also enabled the identification of agonists (activators) that have potential applications in (immun)oncology, where the same mechanisms underlying autoimmune conditions can be amplified to bolster the immune response to tumours. Lycera is currently running a Phase I/IIa trial investigating a RORγt agonist LYC-55716 in patients with solid tumours and a Phase Ib trial investigating a combination with Keytruda (pembrolizumab) in patients with non-small cell lung cancer (NSCLC). Nuevolution is still in a discovery phase, optimising compounds that are being tested in a mouse breast tumour model to demonstrate proof of concept. To our knowledge, few RORγt agonists exist in preclinical or clinical development. We expect interest in the space to pick up if clinical data from Lycera are positive.

Nuevolution’s second lead internal programme is focused on the first bromodomain (BD1) of the bromodomain and extra-terminal domain (BET) family of proteins, which play an important role regulating genes involved in both cancer and inflammation. The company has prioritised atopic dermatitis and/or psoriasis as its lead indication, while fibrosis (IPF and scleroderma) and systemic lupus erythematosus are secondary indications. In H217, Nuevolution demonstrated in vivo efficacy for some of these compounds in multiple inflammatory mouse models, including a psoriasis/atopic dermatitis model (IL-23 induced ear edema), a collagen-induced arthritis model (IL-17) and a fibrosis model. In H118, Nuevolution reported selecting two compounds as pre-candidates, which are undergoing final studies before progressing to candidate nomination, which we would expect to occur in 2019.

Working downstream of RORγt and targeting IL-17A directly is a proven strategy for treating moderate to severe psoriasis (PsO), psoriatic arthritis (PsA) and AS, with anti-IL-17A monoclonal antibody therapies approved across all these indications including Novartis’s Cosentyx and Eli Lily’s Taltz. Several other antibody therapies acting against other pro-inflammatory cytokines (IL-23 and TNFα) are also approved as treatments. Although costly, injectable biologic agents have revolutionised the treatment of these chronic inflammatory conditions and generate significant revenue streams, as highlighted in Exhibit 2.

Small molecules generally have four key advantages over biologics: the ability to target intracellular components (potential to reach novel targets), cheaper cost of production (lower pricing), oral or topical dosing (improved compliance vs injectable) and shorter half-life (important if side effects need to be controlled). While offering important practical advantages, novel small molecule drug candidates have high efficacy hurdles to meet, while ensuring low toxicity profiles. Oral, small molecule PDE4 inhibitors (which indirectly reduce pro-inflammatory cytokine levels) do to some extent address this, with Celgene’s Otezla (apremilast) approved to treat moderate to severe PsO and PsA since 2014, generating $1.3bn from global sales in 2017. Favourable dosing means Otezla is currently positioned as a prior therapy to antibody-based treatments. However, a low to moderate efficacy of Otezla means patients invariably progress to antibody-based therapies.

We note that comparisons of trial data should be made with caution, as variability in patient demographics, disease states, treatment regimens and mechanisms of action could all skew any observations. However, studying the registration clinical trials for Cosentyx and Otezla highlights a difference in efficacy for treating patients with moderate to severe psoriasis. The number of patients achieving PASI-75 (75% reduction in the Psoriasis Area and Severity Index score) is significantly greater with Cosentyx (81.6% after 12 weeks) compared to Otezla (33.1% after 16 weeks). Small molecule IL-17A inhibitors, topical or orally dosed, will aim to bridge this efficacy gap.

Directly targeting the IL-17A protein/protein interaction (PPI) with a small molecule is no easy feat because of the large flat protein structures involved. Enabled by Nuevolution’s Chemetics platform, hit identification utilised one of Nuevolution’s 40 trillion compound collections to identify three series amenable to lead optimisation based on their synthetic tractability and good lead-like properties (MW <500, IC50 <100nM, LLE >5). Structural elucidation of these inhibitors bound to IL-17A protein has highlighted distinct mechanisms of binding across series, which increases Nuevolution’s chances of developing small molecule candidates. Furthermore, in vivo proof-of-concept work has demonstrated efficacy comparable to an anti-IL-17A antibody for one of the lead assets (NUE), when dosed subcutaneously in a collagen-induced arthritis mouse model (Exhibit 4).

A look at the small molecule IL-17A inhibitor competitor space (Exhibit 5) shows that Nuevolution’s programme is well positioned to deliver first-in-class clinical candidates. We would anticipate clinical readiness for a topical-based therapy in 2020/21 and an oral-based therapy in 2021/22 due to the tiered complexity of ensuring the safe and efficacious systemic free exposure required for an oral drug. Bearing in mind Nuevolution’s current strategy to mitigate its risk through a ‘multiple shots on goal’ approach, we forecast that an agreement akin to the Almirall deal could be possible for the IL-17A programme.

We value Nuevolution at SEK22.8/share (SEK1,127m) vs SEK21.0/share (SEK901m) previously.

We have rolled forward our model, updated for end-June cash (SEK161.7m) and updated foreign exchange rates. Updating exchange rates, particularly in relation to the Almirall deal, has had a positive impact on our valuation. However, we note that the May 2018 capital fund-raise has diluted the per share value.

Our valuation of SEK1,127m, including net cash of SEK158.0m, is based exclusively on a risk-adjusted model of the future milestones we expect from the Almirall (SEK11.4 per share), Amgen (SEK7.8 per share) and Janssen (SEK0.4 per share) deals (ie excluding any value from the technology itself, other pipeline assets and excluding future deal opportunities), using a 12.5% discount rate. We have not ascribed value at this point to the unique platform and multiple candidates at an early stage of preclinical development. Consequently, we see potential upside as further deals are made and/or assets move into clinical development.

For further information on how we value Nuevolution, please see our outlook report, Pipeline and strategic execution drives prospects, published on 15 March 2018.

For the first six months of 2018 (H118), revenues of SEK8.8m (H117: SEK7.4m) were solely from the technology access agreement with Janssen and primarily driven by a licence fee payment of SEK6.3m received in Q118 for an undisclosed anti-infective target.

R&D costs fell to SEK49.9m (H117: SEK54.6m) due to a reduction in patent and contract research organisation (CRO) expenses. With several assets nearing preclinical development, we would expect these R&D costs to rise in H218 (unless these are out-licensed sooner).

SGA increased to SEK16.5m (H117: SEK11.5m) due to one-off costs from the Nasdaq Stockholm main market up-listing in Q218. H118 losses were partially offset by Danish R&D tax credits of SEK3.7m; net loss was SEK53.5m (H117: SEK56.3m).

The up-listing to the Nasdaq Stockholm main market in June 2018 has broadened Nuevolution’s access to both institutional and international investors and will aid its growth into a multi-asset clinical company. Gross proceeds of SEK110.0m (SEK104.0m net) from the issue of 6.7m shares (SEK16.50 per share) in May 2018 resulted in a net cash position of SEK158.0m at end June 2018, which should enable a cash runway into late-2019 if no additional revenues from milestones are received. While it is inherently difficult to predict revenues from further deals, we forecast significant near-term revenues from the Amgen and Almirall deals. The cash runway into late 2019 is not dependent on expected milestone payments in the period.

While Nuevolution has changed its financial year end to 31 December (from 30 June), we retain a 30 June year-end in our model for historic numbers, but have altered our forecasts to take into account the new year end. Once Nuevolution has reported a full year under the new format, we will update our historic financials.