Pixium Vision — Update 7 January 2016

Pixium Vision is a French medical device company that aims to provide vision to the profoundly blind with a retinal implant, Iris. Iris is an epi-retinal implant that transforms light into electrical pulses to stimulate the retinal nerve ganglion cell layer, thereby giving the patient crude vision. The second-generation Iris implant (Iris 150) was introduced and has received approval for human trials. Patients will be implanted in H116 with Iris 150 to ensure equivalent safety, tolerability and visual acuity with Iris 49. Iris 150 contains more electrodes, which gives a possibility of increased visual acuity. The Iris 49 allowed patients to see lights and crude large shapes, while Iris 150 could allow improved vision of smaller shapes.

Iris is expected to be the second product to market behind Argus II by Second Sight. We believe that improved cameras, software, increased number of electrodes, an easier surgical implantation and the proposed ability to explant and upgrade the device will give Iris a competitive advantage compared with Argus II. Pixium is simultaneously developing a sub-retinal implant, Prima, which delivers the electrical impulses to a more natural location in the retina. By exciting the retina at the location of damaged photoreceptors, there is potential for higher-quality vision than the epi-retinal implants because there is natural propagation and regulation of the signal through the inner retinal network.

Pixium recently announced EU approval to begin implanting the second generation of its Iris device. The original device contained 49 electrodes, while the new device contains 150. The electrodes sit on the light-sensitive part of the eye and stimulate the nerve fibres to send visual signals into the brain. An increased number of electrodes provides the ability to give more precise stimulation, which it is hoped will translate into finer visual acuity.

A case study of one patient receiving Argus and Argus II indicates that an increased number of electrodes may improve visual acuity. The University of Southern California implanted one patient with the original Argus (Second Sight) 16 electrode implant 11 years ago. This year the patient’s second eye was implanted with the Argus II, which contains 60 electrodes. The patient reported that he “was able to immediately see what it took the original device two years to let me see” in the eye with Argus II compared to Argus I.1 While no masked, comparative trials exist to validate this observation, it is encouraging that the Iris 150 may provide improved quality of vision. Given the inability to mask observers with this device and the less stringent regulatory requirements of medical devices in contrast to pharmaceuticals, Pixium is not likely to require a large comparative study of the Iris 49 and Iris 150. The Iris 150 patients in H116 will need to show similar safety and visual acuity allowing recognition of large shapes. Pixium has positive safety and efficacy data from eight patients implanted with the Iris 49. These data have been submitted for CE mark and Pixium expects the CE mark to apply to the Iris 150 upgrade. The EU may require data specifically for the Iris 150 but, given the similarity of the devices, we believe this will be minimal. Currently, both Iris 49 and Argus II allow patients to see shapes and crudely navigate a room, although they cannot recognise faces. Iris 150 could allow crude facial recognition.

In parallel to the epi-retinal Iris implant, Pixium is continuing preclinical development of Prima, which is a sub-retinal implant. The natural anatomy of the retina has the photoreceptors in the outer retinal layers transforming light stimuli into electrical signals. RP and AMD both culminate with photoreceptor disruption in the outer retina leading to vision loss. The Prima implant is situated under the retina in the more natural position to create the stimuli. This enables bipolar cells of the inner retina to be stimulated and propagate the stimulation to the retinal nerve ganglion layer in a more natural mechanism. The sub-retinal placement also allows for easier surgical fixation of the implant. Prima is a modular design carrying several thousand electrodes and uses an optical delivery of information to the implant. It is powered by a wireless photovoltaic approach, which eliminates the need for trans-scleral wires and allows the eye to remain intact, compared with the permanent wires required by Iris and competitors. In a recent report in Nature,2 the Prima implant showed good safety, tolerance and highly localised responses in the retinal degeneration rat model. The corresponding visual acuity may be improved over the epi-retinal models and may even reach 20/250 in humans, or crude facial recognition. First-in-human (feasibility) trials are planned for H216.

Pixium has developed a good track record of safety and efficacy using the Iris 49 implant. Eight patients have now been implanted and tolerated the implant well, reporting that it delivers vision capable of recognising lights, some shapes and large objects. This is similar to the Argus II implant from Second Sight.

With the clinical trial approval for Iris 150, Pixium will begin implanting the second-generation product in Q116. Data will be compiled with the Iris 49 data. In parallel the Prima sub-retinal implant will continue to be progressed through preclinical and feasibility studies in 2016, and we do not expect CE mark submission until at least 2017.

If granted CE mark, Iris 150 would likely be rolled out in phases throughout the EU. There are approximately 30 sites in the EU that will be targeted for implanting the Iris 150. Our assumptions are for peak sales of Iris in the EU and US of €109m in 2020, assuming a peak market penetration in profoundly blind RP patients of 15%.

Pixium continues to make progress towards restoring sight in profoundly blind patients. The approval of the Iris 150 for clinical trials is a big step forward, representing 3x the number of electrodes compared to the Iris 49. The improvement in visual acuity over the Iris 49 is unknown at this point, but we expect to find out in Q116 when the first patients begin to receive the Iris 150. If the visual acuity is improved, it will represent an advantage over the Argus II, currently on the market in the EU, and will be encouraging for the forthcoming trials of Prima, a modular concept allowing configurations with several thousand electrodes.

Successful trials in Iris 49 and the approval of trials in Iris 150 have mitigated some of the developmental and regulatory sensitivities for Pixium. There is still sensitivity with regard to Prima development and we should have more insight once Prima begins human trials in 2016. There is regulatory sensitivity pending the outcome of the recently submitted Iris CE mark application.

Iris is potentially the second implant to market and offers significantly more electrodes than the Argus II implant. Trials in Q116 will provide insight on how the Iris 150 compares to Argus II.

Even with success of the Iris and the potential commercialisation in 2016, there will be additional capital requirements in 2017 to continue the commercialisation of Iris and development of Prima. We do not account for this potential dilution in our model.

Using a risk-adjusted NPV model with a 12.5% discount rate, we value the company at €130.42m or €10.27 per fully diluted share. We have maintained our previous 40% likelihood of achieving projected peak sales of €109m in the EU and US markets. If EU CE mark approval is granted, the risk adjustment for Iris will likely be revised. Our fundamental assumptions including market penetrations, timing to market, peak sales and cost of goods sold remain unchanged. However, the valuation reflects the new cash position announced in October 2015 of €28m. This decreases our valuation from €10.51 to €10.27 per share.

Prima is modelled for both RP and AMD indications, as it seems to be more amenable to AMD than the Iris implant. With the product still in preclinical trials, we assigned a 10% likelihood of success in each indication. Given the large market for Prima in AMD, if feasibility studies are positive and the risk adjustment increased, there is significant upside potential in our model. If Prima fails, we would expect the company to trial Iris in the AMD population and possibly mitigate the risk of complete failure in that market.

Pixium does have a conceptual programme for cortical brain stimulation, which we will learn more about in the future. At this point we will not include this in our valuation of the company given the very early stage of development. However, in the future this could add significant value to the company.

Pixium had €28m in cash at the end of Q315. The company receives the French Research Tax Credit, which is a cash payment of 30% of eligible research spending each year. With a burn rate of approximately €20m per year, Pixium is capitalised through the next set of inflection points. We anticipate those inflection points at CE mark approval in 2016 and Prima first-in-man trials in 2016. We do not expect Pixium to be cash flow positive until at least 2019, most likely 2020. R&D expenses may increase as Prima begins development, and we model overall R&D expenses at €22m for 2016, increasing to €28m in 2017. Our model anticipates the need for a €40m funding requirement by 2018 to reach profitability in 2019. For illustrative purposes only, we have added this requirement to long-term debt. Note that our financial and valuation models do not include the potential dilution impact of future equity offerings.